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Edited version of private advice
Authorisation Number: 1051678421434
Date of advice: 13 May 2020
Ruling
Subject: Capital gains tax
Question
Will section 11-5 of the Income Tax Assessment Act 1997 (ITAA 1997) operate to disregard any capital gain or capital loss made by the entity on the transfer of assets to a registered charity?
Answer
Yes
This ruling applies for the following periods
1 July 20XX to 30 June 20XX
The scheme commences on
1 July 20XX
Relevant facts and circumstances
The entity is a not-for-profit association that has been self-assessing as income tax exempt since it commenced operations. It is an exempt entity for the purpose of Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997).
The entity is now defunct and has merged with a charity registered with the ACNC.
The entity plans to wind up and transfer its assets to the registered charity for its charitable purpose.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-20(1)
Income Tax Assessment Act 1997 section 11-1
Income Tax Assessment Act 1997 section 11-5
Income Tax Assessment Act 1997 Division 50
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 108-5
Reasons for decision
CGT event
A capital gain or loss can only result if a CGT event happens (section 102-20 of the ITAA 1997).
CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). A 'CGT asset' is defined in section 108-5 of the ITAA 1997 and includes any kind of property.
There is a disposal of a CGT asset if a change of ownership occurs from one entity to another entity. Accordingly, the transfer of assets to the registered charity will lead to CGT event A1 happening to the CGT assets of the applicant entity.
Exempt Income
Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income and/or statutory income is exempt income if a provision of the Act makes it exempt.
Section 11-5 of the ITAA 1997 lists entities that are exempt no matter what kind of ordinary or statutory income they have.
Therefore, an income tax exempt entity will not have a CGT liability in respect of disposals of its assets.
Application to your circumstances
There is a CGT event, but because the entity has self-assessed as income tax exempt under Division 50 of the ITAA 1997 all of the income is exempt income. Therefore, as an income tax exempt entity it will not have a CGT liability in respect of the transfer of its surplus assets to the registered charity.