Edited version of private advice

Authorisation Number: 1051766038598

Date of advice: 15 October 2020

Ruling

Subject: Exempt entity

Question 1

Under the proposed scheme will there be a taxable capital gain under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) by Trust X?

Answer

No

Question 2

Under the proposed scheme will the income derived by the proposed Trust A be exempt from income tax under section 11-5 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The proposed scheme is described in the documents accompanying the application for private ruling and form part of these facts. In summary, the proposed scheme is:

The Trustees of Trusts X and Y have decided to seek orders of the Supreme Court to amalgamate the holdings of Trusts X and Y by allowing the Trustees to hold the property of the trusts under the terms of the proposed Trust A.

The Trustees will seek Court orders that Trust X be varied. Under the proposed scheme Trust X will be renamed and will be known as Trust A.

Trust Y will be wound up and the property of Trust Y will be transferred to the Trustees of Trust A.

Trust X is currently registered as a charity with the Australian Charities and Not-for-Profits Commission (ACNC) and is endorsed by the Commissioner of Taxation as a registered charity that is exempt from income tax under Division 50 of the ITAA 1997.

Assumptions

The court will make orders in respect of the proposed scheme that Trust X as varied will continue as Trust A.

The court orders will not result in the Trust A ceasing to be registered as a charity with the ACNC.

Trust A satisfies the special condition in section 50-50 of the ITAA1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 11-5

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 102-5

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

Under the proposed scheme there will not be a taxable capital gain under section 102-5 of the ITAA 1997 by Trust X.

Detailed reasoning

Section 102-5 of the ITAA 1997 states that assessable income includes net capital gains.

However, although an amount is included in assessable income under a provision of the ITAA, it may be made exempt under another provision. Exempt income can be divided into two main classes:

·         ordinary or statutory income of entities that are exempt no matter what kind of ordinary or statutory income they have, and

·         ordinary or statutory income of a kind that is exempt.

Section 11-5 of the ITAA 1997 lists entities that are exempt no matter what kind of ordinary or statutory income they have. A 'registered charity' which is endorsed as exempt from income tax by the Commissioner of Taxation (item 1.1 of section 50-5 of the ITAA 1997) is listed as an exempt entity in section 11-5.

A 'registered charity' is an entity that is registered as a charity by the ACNC under the Australian Charities and Not-for-profits Commission Act 2012 (subsection 995-1(1) of the ITAA 1997).

Trust X is registered with the ACNC as a charity and it is endorsed by the Commissioner of Taxation as a registered charity as described in item 1.1 of section 50-5 of the ITAA 1997. Trust X is therefore an exempt entity as described in section 11-5 of the ITAA 1997. The income of Trust X is exempt from income tax regardless of whether it is ordinary or statutory income, therefore any capital gains made by Trust X are exempt.

Question 2

Summary

The income derived by Trust A will be exempt from income tax under section 11-5 of the ITAA 1997.

Detailed reasoning

Section 11-5 of the ITAA 1997 lists entities that are exempt no matter what kind of ordinary or statutory income they have. A 'registered charity', as provided for in section 50-5 of the ITAA 1997, is listed in section 11-5 as an exempt entity.

Sections 50-1 and 50-5 of the ITAA 1997 provide that the ordinary and statutory income of a 'registered charity' (item 1.1 of section 50-5) is exempt from income tax if it satisfies the applicable special conditions. The special conditions are contained in sections 50-50 and 50-52 of the ITAA 1997.

Section 50-52 of the ITAA 1997 states that a registered charity will not be exempt unless it is endorsed as exempt from income tax by the Commissioner of Taxation under Subdivision 50-B of the ITAA 1997.

Section 50-50 of the ITAA 1997 states a registered charity is not exempt from income tax unless it satisfies at least one of the conditions in paragraphs 50-50(1)(a) to (d) and it satisfies subsection 50-50(2). As is most applicable, paragraph 50-1(1)(a) requires that a registered charity must have a physical presence in Australia and, to that extent, incur its expenditure and pursue its objects principally in Australia. Subsection 50-50(2) requires that a registered charity must comply with its own substantive governing rules and apply income and assets to the purpose for which the entity was established.

Under the proposed scheme the income derived by Trust A will be exempt from income tax if it is registered with the ACNC as a charity and is endorsed by the Taxation Commissioner as a registered charity as described in item 1.1 of section 50-5 of the ITAA 1997.