Edited version of private advice

Authorisation Number: 1051947568848

Date of advice: 8 February 2022

Ruling

Subject: Endorsed charity sale of property

Issue 1

Question 1 - Income Tax

Will the capital gain made from the sale of the Property be tax free under section 50-1 of the Income Tax Assessment Act 1997?

Answer

Yes.

Issue 2

Question 1 - GST

Would the sale of the Property by the Company be subject to GST?

Answer

Yes, the sale of the Property would be subject to GST.

This ruling applies for the following periods:

year ending 30 June 2022

year ending 30 June 2023

year ending 30 June 2024

The scheme commences on:

1 July 2021

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Company, was incorporated as a company and registered with ASIC.

The Company is:

•         a registered charity with the ACNC.

•         GST concession endorsed.

•         Income Tax exemption endorsed.

•         not a Deductible Gift recipient.

•         not a government school for GST purposes.

The Company members donated money to the Company to purchase a the Property.

A Title Search shows the Company hold title over land.

The Property has been used as a religious worship meeting hall from the time of its purchase. The Property has not been used:

•         to supply accommodation

•         by an entity other than the Company

•         to derive any income.

The Company is planning to sell the Property on a commercial basis at current market value. Once the property is sold, the Company will purchase another property to better serve its purpose. No Contract of Sale has been drafted at this time.

The consideration for which the property will be sold will not be less than 75% of the consideration provided to purchase the property.

The Company applies its assets and income solely for the purpose for which it was established.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997)

Section 50-1

Section 50-5

Section 50-47

Section 50-50

Section 50-52

Part 3-1

Part 3-3

A New Tax System (Goods and Services Tax) Act 1999

section 9-5

section 9-40

section 38-250

section 195-1

Reasons for decision

Issue1

Question1

Will the capital gain made from the sale of the Property be tax free under section 50-1 of the Income Tax Assessment Act 1997?

Summary

The capital gain on the sale of the Property will be tax free in accordance with section 50-1 as capital gains are statutory income.

Detailed reasoning

The "total ordinary income and statutory income" of a registered charity is exempt from income tax provided the special conditions in sections 50-47, 50-50, and 50-52 of the Income Tax Assessment Act 1997 (ITAA 1997) are met and continue to be met (sections 50-1 and 50-5).

Net capital gains are 'statutory income'. This is because they are not ordinary income but are included in assessable income by Parts 3-1 and 3-3 of the ITAA 1997.

As such, where an entity is a registered charity and is endorsed as a tax concession charity under Division 50 of the ITAA 1997, it will not be taxed on capital gains arising from the sale of property provided, at the time when the transaction occurs, the entity continues to satisfy the following special conditions:

•         The charity must be registered with the Australian Charities and Not-for-profits Commission under the Australian Charities and Not-for-profits Act 2012.

•         The charity must be endorsed by the Commissioner of Taxation as exempt from income tax.

•         The charity must meet at least one of the following three tests:

­   In Australia test - the charity has a physical presence in Australia, and to the extent of its Australian presence, its pursues its objectives and incurs its expenses principally in Australia.

­   DGR test - the charity is endorsed as a DGR.

­   Prescribed by law test - the charity is prescribed by name in the income tax regulations and one of the following applies:

o   It is located outside Australia and is income tax exempt in its country of residence.

o   It has a physical presence in Australia but incurs its expenditure and pursues its objectives principally outside Australia.

•         The charity must comply with all the substantive requirements in its governing rules.

•         The charity must apply its income and assets solely for the purpose for which it is established.

Application to your circumstances

The Company will not be taxed on capital gains arising from the sale of the Property as:

•         It is a registered charity with the ACNC

•         It is endorsed as exempt from income tax

•         It meets the 'In Australia test'. It has a physical presence in Australia, incurs its expenditure and pursues its objectives principally in Australia.

•         It complies with the substantive requirements in its governing documents.

•         It applies its income and assets solely for the purpose for which it was established.

All of the relevant special conditions have been met.

Issue2

Question1

Would the sale of the Property by the Company be subject to GST?

Summary

The sale of the Property will be subject to GST as it does not meet the requirement of a 'GST free' supply.

Detailed reasoning

Section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay the GST payable on any taxable supply that it makes.

An entity makes a taxable supply if:

(a)  The entity makes the supply for *consideration; and

(b)  The supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c)   The supply is *connected with the indirect tax zone; and

(d)  The entity is *registered, or *required to be registered

However, the supply is not a taxable supply to the extent that it is *GST-free or *input taxed (section 9-5 of the GST Act).

Definitions of asterisked terms can be found at section 195-1 of the GST Act.

Relevantly, section 38-250 of the GST Act provides:

(1) A supply is GST-free if:

(a)  the supplier is an * endorsed charity, a * gift-deductible entity or a * government school; and

(b)  the supply is for * consideration that:

(i)    if the supply is a supply of accommodation - is less than 75% of the * GST inclusive market value of the supply; or

(ii)   if the supply is not a supply of accommodation - is less than 50% of the GST inclusive market value of the supply.

(2) A supply is GST-free if:

(a)  the supplier is an * endorsed charity, a * gift-deductible entity or a * government school; and

(b)  the supply is for * consideration that:

(i)    if the supply is a supply of accommodation - is less than 75% of the cost to the supplier of providing the accommodation; or

(ii)   if the supply is not a supply of accommodation - is less than 75% of the consideration the supplier provided, or was liable to provide, for acquiring the thing supplied.

Application to your circumstances

In this case, the Company is an endorsed charity for GST purposes. The Property has not been used to supply accommodation. Additionally, the Property will be sold at current market value, and the consideration for which the Property will be sold will not be less than 75% of the consideration provided to purchase the Property.

As advised, the current property market value appears to be much higher than the consideration provided to purchase the property.

As such, in this case, the sale of the Property by the Company would not be GST-free under section 38-250 of the GST Act and, on the basis that the sale would not otherwise be treated as GST-free under another provision of the GST Act, it would be subject to GST.