Edited version of private advice

Authorisation Number: 1051589487666

Date of advice: 4 October 2019

Ruling

Subject: Income tax exemption

Question 1

Will the proposed Deed of Amendment cause the registered charity (the Charity) to lose its status as an income tax exempt entity under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the answer to Question 1 is Yes, will any or all of CGT events A1, E1 and E2 in sections 104-10, 104-55 and 104-60 of the ITAA97 respectively occur upon the execution of the Deed of Amendment to effect the proposed amendments to the terms of the Will?

Answer

Not ruled upon as the Charity will maintain income tax exempt entity status.

This ruling applies for the following periods:

Years ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Background

1. The deceased (the Deceased) passed away on XX date. Probate was later granted to three executors (the Executors) on XX date.
2. Under the Deceased's Will, the Charity was established, with the Executors as its trustees (the Trustees). The terms of the Charity Rules are governed by the Will (the Trust GoverningRules).
3. The administration of the Deceased's estate has ended and the Charity has been established. There are capital assets held in the Charity including listed securities and real estate.
4. The Charity has been endorsed for charity tax concessions and a Notice of endorsement was issued by the Commissioner on XX date.
5. The Charity has also received charity status with the Australian Charities and Not-For-Profits Commission (ACNC).
6. A clause of the Will provides that the trustee may revoke, add to or vary the terms of trust in the Schedule to facilitate the proper administration of the Charity, subject to certain conditions including complying with tax legislation and ensuring the income and capital of the Charity is not paid or applied for any other purpose other than those permitted under the provisions of the Will.
7. Under the Will:
   1. The net income of the Charity is to be determined in accordance with generally accepted accounting concepts;
   2. The Trustees are able to determine and apply the net income of the Charity for the benefit of any of the Eligible Entities (as defined in the Will) to the exclusion of the other or others in such shares or proportions as the Trustees may determine, in their absolute discretion;
   3. If the Trustees have not made a determination in respect of the net income by the end of the relevant financial year, the net income is to be distributed between the Eligible Entities in the Default Proportions (as defined in the Will);
   4. The Trustees may apply up to 50% of the capital of the Charity remaining at the end of the relevant financial year for the benefit of any of the Eligible Entities in such shares or portions as the Trustees may determine, in their absolute discretion.
8. To assist with ease of administration of the Charity, advisors for the Charity have requested that the Trustees:
   1. Dispense with the requirement to have a mandatory audit of the Charity as outlined in the Will; and
   2. Be enabled to accumulate net income as an accretion to the capital of the Charity.
9. A Deed of Amendment has been drafted in light of the above two points.
10. You have advised the ACNC of the amendments to the Charity's Rules. The ACNC has verbally advised that the changes should not cause the Charity to lose Registered Charity status but they were unable to issue binding advice.
11. The following attachments were provided with the request for private ruling and their content also form part of the facts:

·        Copy of the probated Will of the Deceased as at XX date.;

·        The Charity's Governing Rules, governed by the Will;

·        Endorsement documents for tax concessions issued by the Commissioner of Taxation;

·        Copy of ACNC Charity Register Summary; and

·        Deed of Amendment of the Charity's Governing Rules (Draft Version).

Assumption(s)

It is assumed that the changes to the Charity's Governing Rules in the proposed Deed of Amendment will not change:

·        The status of the Charity as a "charity" as defined under the Charities Act 2013; and

·        The Charity's entitlement to remain registered as a charity by the ACNC.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 paragraph 50-50(1)(a)

Income Tax Assessment Act 1997 paragraph 50-50(2)(a)

Income Tax Assessment Act 1997 paragraph 50-50(2)(b)

Income Tax Assessment Act 1997 section 50-52

Income Tax Assessment Act 1997 subsection 50-52(1)

Income Tax Assessment Act 1997 Subdivision 50-B

Income Tax Assessment Act 1997 section 50-105

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 Division 50

Reasons for decision

Question 1

Summary

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the ordinary and statutory income of the entities covered in the tables in Subdivision 50-A are exempt from income tax.

Item 1.1 of section 50-5 of the ITAA 1997 includes a registered charity as an entity that is exempt from income tax subject to certain special conditions. The special conditions are included in sections 50-50 and 50-52 of the ITAA 1997.

Paragraph 50-50(1)(a) provides that an entity covered by item 1.1 (a registered charity) is not exempt unless the entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

Section 50-50 of the ITAA 1997 states as follows:

50-50(1) An entity covered by item 1.1 is not exempt from income tax unless the entity:

(a)   has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b)   is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c)   is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

(d)   is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia;

and the entity satisfies the conditions in subsection (2).

Subsection 50-50(2) states as follows:

50-50(2) The entity must:

(a)   comply with all the substantive requirements in its governing rules; and

(b)   apply its income and assets solely for the purpose for which the entity is established.

The Charity is currently a charity registered with the ACNC effective as 1 June 2017. For the purposes of this Ruling, the assumption is made that the proposed changes to the Charity's Governing Rules will not alter this status with the ACNC.

The Charity satisfies paragraph 50-50(1)(a) of the ITAA 1997 as it has a physical presence in Australia and incurs its expenditure and pursues its objective of distributing its income to Australian Charities, in Australia. The terms of the Governing Rules under the Will clearly state this.

Regarding the special condition of paragraph 50-50(2)(a) of the ITAA 1997, Taxation Ruling

TR 2015/1 - Income tax: special conditions for entities whose ordinary and statutory income is exempt (TR 2015/1) states at paragraph 8:

Three questions must be considered to determine whether an entity satisfies the governing rules condition:

·                 What are the 'governing rules' of the entity?

·                 What are the 'substantive' requirements in the entity's governing rules?

·                 At what time must the entity comply with all of the substantive requirements in its governing rules?

Paragraph 9 of TR 2015/1 states:

The 'governing rules' of an entity are those rules that authorise the policy, actions and affairs of the entity. That is, governing rules of an entity consist of the rules that direct:

·                 What the entity is required and permitted to do, and

·                 What those, who control the entity, are required and permitted to do in respect of the entity.

TR 2015/1 elaborates at paragraph 18 that the substantive requirements of an entity's governing rules are those that define the rights and duties of the entity and which include rules such as those that give effect to the object or purpose of the entity, relate to the non-profit status, powers and duties of the directors and other officers, sets out the criteria for member admission, and relates to the winding up of the entity. The Charity's Governing Rules contains all these rules.

Regarding the time that an entity is to follow the substantive requirements, TR 2015/1 states that it has to be at all times throughout the year. The Charity follows the substantive requirements of its constitution at all time during the year.

Regarding the special condition in paragraph 50-50(2)(b) of the ITAA 1997, Taxation Ruling TR 2015/1 states at paragraph 22 that:

The income and assets condition requires an entity to 'apply its income and assets solely for the purpose for which the entity is established'.

Two conditions must be considered to determine whether an entity satisfies the income and assets condition, namely

·        what is the purpose for which the entity is established; and

·        has the entity applied its income and assets solely for the purpose for which the entity is established?

Paragraph 24 of TR 2015/1 explains the "purpose for which the entity is established" as follows:

The purpose for which the entity is established is determined by a consideration of all of the features of the entity. The main factors to be considered are the objects in the entity's constituent documents, and the activities of the entity after its formation, up to the time at which the income and assets condition is applied. Other factors include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity.

In the case of the Charity, its purpose or object is stated in its Governing Rules, namely donating its income to the Eligible Entitles as listed in the Governing Rules.

The second part of the income and asset condition, namely whether the entity has applied its income and assets solely for the purpose for which it is established, must also be satisfied.

Paragraph 30 of TR 2015/1 explains the meaning of 'apply' as follows:

The requirement that an entity must 'apply' its income and assets means that an entity must make use of all of its income and assets, solely for the purpose for which the entity is established.

Paragraph 31 of TR 2015/1 states that:

... An entity may use some of its income to acquire assets which, in future, will produce income for its purpose or purposes, and may accumulate some of its income for later distribution.

However, the income and assets must exclusively or only be applied for the purpose for which it is established and this test is applied continuously throughout the income year.

In the present case, the Charity intends to distribute an amount of its income to Eligible Entities as determined by its Trustee. It intends to amend its Governing Rules to allow its trustee to accumulate some of the income as an accretion to the Charity's capital as the Charity Trustee determines. In accordance with example 10 in TR 2015/1 and paragraph 31 quoted above, accumulation of some of the Charity's income is not considered as a breach of the income and assets condition provided that accumulation of income is applied to its objects and purpose in the future.

Subsection 50-52(1) of the ITAA 1997 contains the other special condition for entities stated in item 1.1 of section 50-5 of the ITAA 1997. It requires that an entity covered by item 1.1 must be endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997.

On XX date, the Charity was endorsed as a tax exempt entity by the Commissioner under section 50-105 of the ITAA 1997 with effect from 1 July 20XX.

Therefore, since the Charity satisfies all the conditions of item 1.1 of section 50-5 of the ITAA 1997, it will continue to maintain its tax exempt status irrespective of the proposed administrative amendments to its Governing Rules.

Question 2

Not ruled upon.