Edited version of your written advice

Authorisation Number: 1051441582415

Date of advice: 16 October 2018

Ruling

Subject: The transfer of assets between not for profit entities

Question

Will the transfer of any of the assets or property of NFP1 to NFP2 cause any of the transferors to derive any assessable income?

Answer

No.

This ruling applies for the following period:

1 July 20XX – 30 June 20XX

Relevant facts and circumstances

Background

NFP1 is currently established as an unincorporated association and the governing council of NFP1 has determined to incorporate and to transfer all assets and property held for the benefit of NFP1 to a newly incorporated company, NFP2 Limited.

NFP1 and NFP2 are:

(a) registered as charities with the Australian Charities and Not-for-Profits Commission (ACNC);

(b) endorsed by the Commissioner as exempt from income tax on the basis that they are registered charities.

(c) endorsed by the Commissioner as deductible gift recipients; and

(d) endorsed by the Commissioner for GST concessions and the FBT rebate.

NFP1’s Assets

The property and assets of NFP1 are as follows:

(a) a freehold interest in land which is held by NFP3 on trust for NFP1 as beneficiary under the Trust Deed;

(b) the shares in an investment holding company, X Nominees, are held by certain individuals associated with NFP1 on trust for NFP1. This trust is not recorded in a written declaration. The only assets held by X Nominees are investment-related assets such as shares in ASX listed companies and interests in managed funds which are applied for the benefit of NFP1; and

(c) other assets, including contracts, cash and free-moving equipment (Other Assets) are held by members of NFP1 for the purposes of NFP1.

Incorporation

The governing council of NFP1 made the decision to incorporate such that the unincorporated association would be succeeded by NFP2, a new public company limited by guarantee.

NFP2 will not commence carrying on the activities of NFP1 until the Proposed Transaction (as set out below) takes place.

Proposed Transaction

The Proposed Transaction comprises each of the following three transfers:

(a) transfer of the Land to NFP2, including the transfer of any legal interest held by NFP3 and any beneficial interest held by NFP1;

(b) transfer of the shares in X Nominees, including the transfer of any legal interest held by the shareholders of X Nominees and any beneficial interest held by NFP1; and

(c) transfer of the Other Assets to NFP2, including the transfer of any legal interest held by the members of NFP1 and any beneficial interest held by NFP1.

The transferors will receive no (or nominal) money or other consideration for their transfer.

In the circumstances, it is anticipated that the Proposed Transaction will not be the subject of a contract or formal documentation except to the extent necessary to legally effect the relevant transfers, such as land and share transfer forms, or novations and assignments of contracts. The documentation has not yet been prepared.

Considerations

NFP1 is registered with the ACNC as a charity and is therefore a “registered charity” within the meaning of the ITAA 1997.

Further, NFP1 is endorsed by the Commissioner as exempt from income tax under subdivision 50-B of the ITAA 1997.

The total ordinary income and statutory income of NFP1 is therefore exempt from income tax.

NFP1 is an unincorporated association and is therefore incapable of owning and dealing with property in its own right. This means that, by its nature, the property and assets of NFP1 must be owned and dealt with by other persons of legal capacity.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 103A(2)(c)

Income Tax Assessment Act 1997 subdivision 50B

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 50-50

Income Tax Assessment Act 1997 section 50-52

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 paragraph 960-100(1)(e)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The transfer of any of the assets or property of NFP1 to NFP2 Limited will not cause any of the transferors to derive any assessable income.

Detailed reasoning

It is established that NFP1 is an unincorporated association. Therefore, it cannot be a legal entity and is incapable of being sued in its own right. However, it is an entity under tax law and treated as a company for income tax purposes.

It is further established above that NFP2 is a public company limited by guarantee. It was formed under the Corporations Act 2001 (Cth) and is defined by reference to its objectives and purpose.

Currently, NFP1 is the only operating entity of the two. It distributes its profits directly back into the organisation and the community. Upon taking over NFP1, NFP2 will do the same.

Both entities are registered ‘charities’ with ACNC and both have a tax concession status endorsing them to access tax concessions, GST concessions, FBT rebates, and both are income tax exempt. Furthermore, they are both endorsed as Deductible Gift Recipients (DGR).

Capital Gains consequences

As the organisation seeks to change status and transfer assets from an unincorporated entity to a public company, there will be CGT consequences.

CGT event A1 will happen because the newly incorporated company is not the same entity as the unincorporated association resulting in a change in the ownership (i.e. a disposal) of the assets from the unincorporated association to the incorporated company at a future date.

An unincorporated association has no separate or distinct existence apart from its members. It is a voluntary combination of persons with some object or purpose in common (Kibby v. Registrar of Titles and Another). Hence, an unincorporated association is not an entity at general law.

However, an unincorporated association is an entity for tax law purposes:

s995-1

entity has the meaning given by section 960-100.

s960-100(1)

entity means any of the following:

(a) …

(b) …

(c) …

(d) …

(e) any other unincorporated association or body of persons

(f) …

(g) …

(h) …

By comparison, NFP2’s formation and registration as a public company limited by guarantee under the Corporations Act 2001 (Cth) is an entity at general law and at tax law:

s995-1

public company means a company that is a public company (as defined by section 103A of the Income Tax Assessment Act 1936 (ITAA 1936)) for the income year.

s103A(2)

For the purposes of subsection (1), a company is, subject to the succeeding provisions of this section, a public company in relation to the year of income if:

(a) …

(b) …

(c) the company has not, at any time since its formation, been carried on for the purposes of profit or gain to its individual members and was, at all times during the year of income, prohibited by the terms of its constituent document from making any distribution, whether in money, property or otherwise, to its members or to relatives of its members; or

(d) …

The fact that the unincorporated association is a ‘company’ for income tax purposes and, the public company is also a ‘company’ for income tax purposes does not make them the same ‘company’ for income tax purposes.

Therefore, a change of ownership (i.e. a disposal) will happen on the transfer of the assets from the unincorporated association to the incorporated company. This will trigger an A1 CGT event (s104-10).

The Transfer

The members of the unincorporated association, in their relationship under the association’s constitution, constitute the unincorporated association.

The assets held in that relationship represent the assets held by the unincorporated association. Therefore, for the purposes of CGT event A1, the unincorporated association is the entity that owns the CGT assets and on their disposal is the entity that makes any resulting capital gain or capital loss.

Although the asset holders of the unincorporated association own the association’s assets at general law, it is the ownership of those assets by the unincorporated entity as a ‘company’ under tax law that is relevant for the purposes of CGT event A1. Therefore, the capital gains (or capital losses) are not made by the asset holders from the disposal of assets held by the unincorporated association. The capital gains (or capital losses) are made by the unincorporated association itself.

Conclusion

Section 50-5 lists a ‘registered charity’ at item 1.1 as an exempt entity if it satisfies the special conditions in ss 50-50 and 50-52.

Section 50-50 ensures the registered charity is connected to Australia and s 50-52 exempts the charity’s income tax if the charity is endorsed as exempt under Subdivision 50-B.

As NFP1 is a registered charity that is endorsed as exempt from income tax under Division 50-B, it is concluded any capital gains (or capital losses) accrued from the transfer of assets to NFP2 are exempt from income tax and no transferor will derive any assessable income from the transfer of the said assets.