Edited version of private advice

Authorisation Number: 1051832523126

Date of advice: 18 June 2021

Ruling

Subject: Division 50 of the Income Tax Assessment Act 1997

Question

Is money received from the employment of gift funds characterised as a gift for the purposes of section 50-75 of the Income Tax Assessment Act 1997 (ITAA 1997), and therefore disregarded for the purposes of paragraph 50-50(1)(a) of the ITAA 1997?

Answer

Unless any amount earned can be traced directly to a pre 1 July 1997 gift amount, the exemption under Section 50-50 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) would not apply with respect to that amount.

This ruling applies for the following periods:

For a number of years commencing in the year ending 31 March 20XX

The scheme commences on:

In the year ending 31 March 20XX

Relevant facts and circumstances

The Charity Trust was established by trust deed prior to 1 July 1997.

The Charity Trust has received funds as gifts.

The Charity Trust also generates funds through investment income.

If it is not practicable and reasonable to use the capital and income for the purposes solely within Australia, the trustees are authorised under the trust deed to apply the whole or part of the capital or capital and income for the same purposes outside Australia.

Over the years the trust funds have been applied both in Australia and overseas.

The Charity Trust satisfied the 'physical presence in Australia' special condition required by subsection 50-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997) from 1 July 1997 to 2 December 2012 and subsection 50-50(1) of the ITAA 1997 from 3 December 2012.

The Charity Trust may choose not to distribute money received as a gift until a future year.

Where the Charity Trust does not distribute money received as a gift until a future year, in the time between the receipt of the gift in one year and the distribution of the gift in a subsequent year, the Charity Trust may receive money by way of interest earned on the gift amount or through return on investment of the gift.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-75

Income Tax Assessment Act 1997 section 50-50

Income Tax (Transitional Provisions) Act 1997 section 50-50

Reasons for decision

Division 50 of the ITAA 1997 instructs that the ordinary and statutory income of certain entities is exempt from income tax subject to certain conditions being met.

According to the table set out in section 50-5 of the ITAA 1997 registered charities are income tax exempt entities where the special conditions set out in sections 50-50 and 50-52 of the ITAA 1997 are met.

Section 50-50 of the ITAA 1997 special conditions

The special condition referred to in the table in section 50-5 of the ITAA 1997 requires that a registered charity has a physical presence in Australia and to that extent, incurs its expenditure and pursues its objectives principally in Australia. Paragraph 50-50(1)(a) states:

50-50(1)(a)

Special conditions for item 1.1

(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)  ...

...

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

In determining whether the requirements of paragraph 50-50(1)(a) are met, section 50-75 of the ITAA 1997 provides that distributions of any amount received by the charity as a gift (whether of money or other property) are disregarded. Section 50-75 of the ITAA 1997 states:

50-75

Certain distributions may be made overseas

(1)  In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded.

(2)  In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount from a fund that is referred to in a table in Subdivision 30-B and operated by the institution, fund or other body are to be disregarded.

Is money received because of a gift itself characterised as a gift for the purposes of section 50-75 of the ITAA 1997

You may choose not to distribute money received as a gift until a future year.

Where you choose not to distribute money received as a gift until a future year, during the time between the receipt of the gift in one year and the distribution of the gift in a subsequent year, you may receive money because of the gift by way of interest earned on the gift amount or through return on investment of the gift.

As discussed above, in determining whether the requirements of paragraph 50-50(1)(a) of the ITAA 1997 are met, section 50-75 of the ITAA 1997 provides that distributions of any amount received by you as a gift are disregarded.

Meaning of the word 'gift'

The term 'gift' is not defined in the ITAA 1997 and therefore takes on its ordinary meaning.

Taxation Ruling TR 2005/13 Income Tax: Tax deductible gifts - what is a gift (TR 2005/13) provides the following guidance:

12. The term 'gift' is not defined in the ITAA 1997. For the purposes of Division 30 of the ITAA 1997 the word 'gift' has its ordinary meaning.

13. Rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features:

-        there is a transfer of the beneficial interest in property;

-        the transfer is made voluntarily;

-        the transfer arises by way of benefaction; and

-        no material; benefit or advantage is received by the giver by way of return.

Section 50-75 of the ITAA 1997 uses the phrase 'as a gift' where it provides that distributions of any amount received by the charity as a gift, whether by money or other property, are to be disregarded.

In relation to the operation of section 50-75 of the ITAA the explanatory memorandum to Taxation Law Amendment Bill (No 4) 1997 states:

The 'Activity test' - gifts

5.40 Voluntary payments of money such as donations, tithes, plate money and the like or transfers of property from one person to another are generally not income in the hands of the recipient. Broadly speaking, these payments or transfers constitute a 'gift' where they are made without legal obligation, by way of benefaction and without any advantage of a material character being received in return. However, a payment or transfer of property may constitute income in the hands of the recipient notwithstanding that it is a gift.

5.41 The test as to whether a gift is income in the ordinary sense of the word is whether it is made in relation to some activity or occupation of the donee of an income producing character. Therefore, the character of the receipt in the hands of the recipient becomes the determinative issue in each particular case in deciding whether the 'gift' constitutes income.

5.42 Accordingly, gifts received by either Australian or offshore organisations which are not made in relation to some activity of the organisation of an income producing character will not constitute income in the hands of the organisation and will not be assessable.

5.43 These gifts will be disregarded when determining whether an organisation incurs its expenditure and pursues its objectives principally in Australia and, therefore, can be applied overseas without affecting an organisation's income tax exempt status. Government grants may also be applied offshore without affecting the tax exempt status of organisations. Flow chart 1 provides an explanation of this measure.

...

5.69 The legislation is silent about whether an institution has to monitor the source of the funds that it applies overseas - ie. whether they are obtained from income or from gifts. While it would be expected that an institution would have strict procedures in place to account separately for government grants and/or approved fund moneys under section 78, money is fungible and it loses its particular identity when combined with other money.

5.70 In these circumstances it would be reasonable to assume, that with the exception of government grants and section 78 fund moneys, money applied overseas would be applied firstly from "gifts" and that the "activity test" would only need to be applied if the total funds applied overseas exceeded the sum of the gifts and donations received.

In addition, the explanatory memorandum to the Taxation Laws Amendment Bill (No 3) 1998 states:

The "Activity test" - gifts

3.17 Accordingly, gifts received by either Australian or offshore entities which are not made in relation to some activity of the entity of an income producing character will not constitute income in the hands of the entity for the purposes of the activity test.

3.18 In addition, for the purposes of the activity test, receipts from fund raising by means of raffles, dinners, auctions, jumble sales and the like by non-commercial or non-business organisations will be treated as amounts "in the nature of gifts". However, where a donor is likely to obtain a tax deduction (eg, for advertising) the material advantage obtained would disqualify the donation as a gift in the hands of the recipient.

3.19 All of these "gifts" will be disregarded when determining whether an organisation incurs its expenditure and pursues its objectives principally in Australia or whether a charitable trust pursues its charitable purposes solely in Australia and, therefore, can be applied overseas without affecting an entity's income tax exempt status. Government grants may also be applied offshore without affecting the tax exempt status of entities.

Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities (TR 2019/6) summarises the explanatory memorandums and provides the following guidance from the Commissioner on the meaning of the phrase 'as a gift' in the context of section 50-75 of the ITAA:

Disregarded amounts - certain distributions may be made overseas

74. In determining whether an entity incurs expenditure and pursues objectives principally in Australia, section 50-75 disregards any distributions that the entity makes out of amounts (disregarded amounts) received:

-                 'as a gift'

-                 ...

...

76. For the purposes of section 50-75, the phrase 'as a gift' is considered to refer to circumstances which involve an element of benefaction. This covers money or property which is a 'gift' in the ordinary meaning of the word, as well as receipts from fundraising by raffles, dinners, auctions, jumble sales, the purpose of which are to benefit the entity in a material sense. It excludes amounts received from commercial activities or contracts for services.

...

79. Section 50-75 requires an entity to determine the extent to which a distribution is sourced from an amount received as a gift, by way of government grant or from a DGR. For these purposes, the entity can choose to appropriate distributions from a particular source, provided it maintains records which clearly identify each source, and such a treatment is not inconsistent with any conditions attached to the gift or grant (see Example 12 of this Ruling).

The discussions in the explanatory memorandums and the principles set out in TR 2005/13 and TR 2019/6 do not support the proposition that income derived from the investment of gift funds is also a gift for the purposes of section 50-75 of the ITAA 1997. As discussed above, TR 2005/13 summaries the general characteristics provided by the courts to determine whether something is a gift. Those characteristics are that there is a voluntary transfer of the beneficial interest in property that arises by way of benefaction and no material benefit or advantage is received by the giver in return. Money derived from the investment of gift funds or interest earned on gift funds, does not have these characteristics.

The explanatory memorandums and taxations rulings focus particularly on the element of benefaction and include as examples of gifts, receipts from fundraising by raffles, dinners, auctions and jumble sales where the purpose of those fundraising events is to benefit the entity in a material sense. These examples clarify the general principles that must be considered when determining whether an amount given to the entity is a gift and do not appear to support an expanded interpretation of the meaning of the word 'gift' or the phrase 'as a gift' in the context of section 50-75 which states, 'distributions of any amount received ... as a gift (whether of money or other property) ... are to be disregarded.'

The Income Tax (Transitional Provisions) Act 1997

In relation to the requirements of section 50-75 of the ITAA 1997, special transitional rules exist that apply to funds established prior to 1 July 1997. These rules explicitly state that for these pre 1 July 1997 funds, amounts received before 1 July 1997, as well as amounts derived from those amounts received before 1 July 1997, are disregarded for the purposes of subdivision 50-A of the ITAA 1997.

Section 50-50 of the ITTPA 1997 states:

Charities established prior to 1 July 1997

Disregard the use of the following amounts in determining (for the purposes of Subdivision 50-A of the Income Tax Assessment Act 1997 whether a fund established before 1 July 1997 operates and pursues its purposes in Australia:

(a)  an amount received by the entity before 1 July 1997;

(b)  an amount derived from an amount mentioned in paragraph (a) or this paragraph.

As discussed above, the transitional rules explicitly state that for pre 1 July 1997 charities, amounts derived from amounts received by the entity before 1 July 1997 (including amounts that are derived from those amounts after 1 July 1997) are disregarded in determining whether the charity 'incurs its expenditure and pursues its objective principally in Australia'.

Section 50-50 of the ITTPA 1997 does not characterise the paragraph 50-50(b) amounts as gifts.

The transitional provisions do not apply to post 1 July 1997 charities.

Further, where gift amounts are received by pre 1 July 1997 charities, after 30 June 1997, only the gift amount is excluded from determining whether the charity 'incurs its expenditure and pursues its objective principally in Australia'. Amounts derived from gift amounts received after 30 June 1997 are not disregarded.

The limited scope of the transitional provisions both in relation to the fact that they apply only to pre 1 July 1997 charities and then only to amounts derived from gifts received by those charities before 1 July 1997 or from subsection 50-50(b), show clear legislative intent about the amounts that are to be taken into consideration.

Summary

The discussions in the explanatory memorandum and the principles set out in TR 2005/13 and TR 2019/6, read in conjunction with the ITAA 1997, do not support the characterisation of amounts received because of an earlier gift (i.e. pre 1 July 1997), as a gift, for the purposes of section 50-75 of the ITAA 1997.

The limited application of the ITTPA 1997 and the fact that money received because of a gift is not included in the section 50-75 wording indicates no legislative intent that these amounts be explicitly disregarded by section 50-75 of the ITAA 1997.

The 'concession' under the transitional provision suggests that for these pre 1 July 1997 charities, amounts received before 1 July 1997 and the amounts derived subsequently including post 1 July 1997, from the employment of the pre 1 July 1997 amounts are excluded from determining whether the charity 'incurs its expenditure and pursues its objective principally in Australia'.

Where amounts (i.e. gift amounts) are received by these pre 1 July 1997 charities post 30 June 1997 only the gift amount is excluded from determining whether the charity 'incurs its expenditure and pursues its objective principally in Australia'. For the reasons described above (see TR 2005/13) the amounts derived from employment of those gifted amounts are not also a gift because they were derived from the gift amount. They are a separate transaction and are to be taken into account in determining whether the charity 'incurs its expenditure and pursues its objective principally in Australia'.

So, unless any amount earned can be pegged directly to a pre 1 July 1997 gift amount, the exemption under the transitional provision would not apply with respect to that amount.