Edited version of your written advice

Authorisation Number: 1051466332184

Date of advice: 17 December 2018

Ruling

Subject: Public ancillary fund (PuAF)

Questions and answers

1. Can The Company claim a deduction under Division 30 of the ITAA 1997 if it donates a sum of money to the PuAF?

Yes, provided all the requirements of Division 30 are met.

2. Will the capital gains tax provisions apply as a result of the gift of money made by The Company to the PuAF?

No.

3. Can The Company claim a deduction under Division 30 of the ITAA 1997 if it donates property to the PuAF??

Yes, provided all the requirements of Division 30 are met.

4. Will the capital gains tax provisions apply to the gift of property to the PuAF?

Yes.

5. Will the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Scheme?

No.

This ruling applies for the following period(s)

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on

1 July 2018

Relevant facts and circumstances

1. The Company is an unlisted public company limited by guarantee.

2. The Company is a taxable non-profit organisation.

3. The Company currently has a number of members.

4. The Company has a board of directors.

5. The Company derives income from shares in public companies listed on the Australian Stock Exchange and residential rental properties.

The Scheme

6. Change the Memorandum under the Articles of Association (MAA) of The Company to provide for the making of donations as an object which the company may pursue.

7. The Company will then establish a Public Ancillary Fund (PuAF).

8. A new company will be formed as corporate trustee (Trustee Company) of the PuAF.

9. The PuAF will seek and obtain registration with the Australian Charities and Not-for-profits Commission (ACNC).

10. The PuAF will seek and obtain endorsement as a Deductible Gift Recipient (DGR) under Section 30-120 of the Income Tax Assessment Act 1997.

11. The Company will donate money to the PuAF.

12. The Company may donate property, including real property to the PuAF.

The PuAF

13. The Company directors will be the directors of the Trustee Company of the PuAF.

14. The objective behind establishing the PuAF is to enable The Company to donate to a more contemporary and diverse range of charities that are approved DGRs and to attract new members and directors.

15. The PuAF will operate under the Public Ancillary Fund Guidelines 2011.

16. Majority of the PuAF directors will be ‘responsible persons’ within the definition of the Public Ancillary Fund Guidelines 2011 paragraph 14.

17. The PuAF will operate as a not-for-profit entity.

18. The PuAF will adopt the model trust deed.

19. The PuAF will apply for the necessary licences to enable fundraising under State law.

20. Members of the public will be invited to contribute to the PuAF.

Relevant legislative provisions

Section 177A of the Income Tax Assessment Act 1997

Section 177C of the Income Tax Assessment Act 1997

Subsection 30-15 of the Income Tax Assessment Act 1997

Section 30-120 of the Income Tax Assessment Act 1997

Section 30-248 of the Income Tax Assessment Act 1997

Subdivision 30-DB of the Income Tax Assessment Act 1997

Division 30 of the Income Tax Assessment Act 1997

Reasons for decision

Division 30 of the Income Tax Assessment Act 1997

A donation to a DGR will be tax deductible to the donor if it is a ‘gift’ in the form of money or property. There are different rules for different types of gifts.

A donor can be an individual, company, trust, partnership or other type of taxpayer.

Division 30 of the ITAA 1997 sets out the rules governing deductions for certain types of gifts. The word ‘gift’ is not defined in the tax legislation and therefore takes on its ordinary meaning. Generally, for a payment or transfer of property to be considered a gift, it must:

● be made voluntarily; that is, there is no obligation to make the payment or transfer, nor can the donor specify what is to be done with the payment or transfer of property, and

● the donor cannot receive a material benefit in return.

The table in subsection 30-15(2) of ITAA 1997 sets out:

● the types of recipients that can receive deductible gifts or contributions;

● the types of gifts or contributions that can be deducted; and

● how much can be deducted for each type of gift or contribution.

Generally, donors are entitled to claim a deduction for certain gifts made to a DGR where the following criteria are met:

● the payment is a gift,

● the gift is covered by one of the gift types in the table in subsection 30-15(2) of the ITAA 1997, and

● any gift conditions in subdivision 30-A and subdivision 30-B of the ITAA 1997 are satisfied.

The amount of the deduction that can be claimed will depend on the type of gift.

Gifts to Deductible Gift Recipients – ancillary funds (item 2 of the table in subsection 30-15(2) of the ITAA 1997)

Item 2 sets out the requirements for a gift made to an Ancillary Fund. The gift must satisfy all of the special conditions for the relevant item.

The main types of tax-deductible gifts are:

● money ($2 or more),

● property valued by the Commissioner at more than $5,000,

● property (including trading stock) purchased during the 12 months before the gift was made,

● shares (valued at $5,000 or less, and acquired at least 12 months before the gift was made), and

● an item of trading stock disposed of outside the ordinary course of business.

The following gifts are not deductible:

● gifts of money less than $2,

● gifts of property not mentioned above,

● gifts of services,

● testamentary gifts,

● payment where the donor receives a material benefit, and

● membership subscriptions.

Donors may be able to make an election to spread the deduction for a period of up to five years.

Subdivision 30-DB of the ITAA 1997 allows taxpayers to elect to spread deductions for gifts over a period of up to five income years. Section 30-247 of the ITAA 1997 allows the election to be made for gifts covered by item 2 of the table in section 30-15 of the ITAA 1997, provided the gift is made after 1 July 2003.

Section 30-248 requires an election to start in the year the gift was made, be in the approved form and be made before the taxpayer lodges their income tax return for the income year in which they made the gift. The election must specify the percentage of the deduction the taxpayer will deduct in each of the income years. The donor may make a written variation to any percentage to be claimed for tax returns that have not yet been lodged. The variation must be in the approved form and be made before lodging the first tax return top which the variation applies.

Capital Gains Tax

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT assets are defined in section 108-5 and relevant to this ruling, includes any kind of property. Money in the form of legal tender is not a CGT asset (Taxation Determination TD 2002/25). Therefore, the CGT provisions will not apply to the donation of money by The Company to the PuAF.

You will make a capital gain or a capital loss if a CGT event happens. Section 104-5 of the ITAA 1997 lists the types of CGT events that may happen on disposal of an asset. The donation of property to the PuAF will be a disposal of an asset, and depending on the circumstances, the most likely CGT event will be CGT event A1.

Part IVA of the Income Tax Assessment Act 1936

To the extent that The Company claims a deduction for donations to a DGR endorsed PuAF pursuant to Subdivision 30 of the ITAA 1997, Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to deny the claim.

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances where a tax benefit is obtained in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained.

The definition of scheme in subsection 177A(1) of the ITAA 1936 is very broad and applies to any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct.

In The Company’s case, the Scheme comprises of the following steps:

1. amendments to The Company’s objects in the MAA;

2. establishment of a PuAF controlled by The Company board members;

3. obtaining endorsement of the PuAF as a DGR; and

4. donating money and assets to the PuAF.

A tax benefit is defined in subsection 177C(1) of the ITAA 1936. Subsection 177C(1)(b) provides that a taxpayer may be found to have obtained a tax benefit if they entered into or carried out a scheme that results in an allowable deduction that would not have been allowable, or might reasonably be expected not to have been allowable to the taxpayer in relation to a year of income if the scheme had not been entered into or carried out.

When considering what might reasonably be expected to have occurred in the absence of the scheme, the alternative must represent a reasonable alternative to the scheme in the sense that it could reasonably take the place of the scheme (section 177CB). As The Company’s objective is to donate to a more contemporary and diverse range of charities that are DGRs and to attract new members and directors, it is considered that a ‘do nothing’ scenario is not a reasonable alternative to the scheme.

A reasonable alternative is considered to be for The Company to amend its objects to enable donations to be made to a more contemporary and diverse range of charities, but not establish the PuAF. Provided those charities are DGRs, The Company will still be entitled to a tax deduction in relation to the donations. That is, the scheme does not provide a benefit that would not otherwise be available and accordingly there is no tax benefit in connection with the scheme.

ATO view documents

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts – What is a gift

Taxation Ruling TR 95/27 Income tax: Public funds

Taxation Determination TD 2002/25 Income Tax: capital gains – is Australian currency a CGT asset under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) if it is used as legal tender to facilitate a transaction?

Other references (non ATO view)

Public Ancillary Fund Guidelines 2011.

Practice Statement Law Administration PSLA 2005/24 Application of General Anti-Avoidance Rules.