Edited version of private advice

Authorisation Number: 1052101489629

Date of advice: 24 March 2023

Ruling

Subject: Special conditions under section 50-50 of the ITAA 1997

Question

Will the Company meet the special conditions under section 50-50 of the Income Tax Assessment Act 1997 (ITAA 1997) once it enters into the Arrangement?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 202X

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

1.            The Company is a registered charity under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act) and is endorsed as income tax exempt.

2.            The Company's purpose is considered charitable by the ACNC.

3.            The objects for which the Company was established are set out in its Constitution.

4.            Pursuant to its Constitution, the Company must pursue charitable purposes only and must apply its income and property in promoting these purposes.

5.            Pursuant to its Constitution, the Company has all the powers of an individual and a body corporate, but the powers of the Company are ancillary to and exercisable only to pursue the Objects.

6.            Pursuant to its Constitution the income and property of the Company, from wherever it is derived, must be applied solely towards the promotion of the Objects.

7.            Pursuant to its Constitution, no portion of the income or property of the Company may be paid directly or indirectly, by way of dividend, bonus or otherwise, to its members.

8.            Pursuant to its Constitution, the business of the Company is to be managed by or under the direction of the directors.

9.            The Company owns a building.

10.          The Company is proposing the development of commercial space (the Arrangement). This will involve both the development of buildings (the Project) and the refurbishment of its currently owned building, which is adjacent to the Project site.

11.          The Company intends to retain a portion of the space for lease income. The Company will retain ownership of the land holdings to ensure that the charitable purpose will continue to be supported.

12.          The forecast net proceeds and lease income will be used to fund the Company and its operational requirements in accordance with its Objects.

13.          Development funding will be provided under a Facility Agreement with warranties to the Lender that the Company will not contravene its Constitution or powers of its directors and will comply with its character as a not-for-profit entity.

14.          The Company does not have, and the Arrangement will not cause it to have in any relevant income year, any physical presence or activities outside Australia. Likewise, the Arrangement will not cause the Company to incur any expenses outside Australia.

15.          In its ruling application, the Company has stated that:

•                     net proceeds and lease income will be repatriated to fund the Company and its operational requirements and future strategic innovations and services. To this end all proceeds will be retained on its balance sheet for the purpose of investment to meet its various missions.

•                     any income derived from leasing activities and any capital received from the sale or disposition of any part of the Property will be applied exclusively to satisfy the debt paid to it by the Lender under the Financing (in accordance with the Agreement), and also to fund its operations by generating significant cash and asset pools for the charity. No income or capital received will be paid to any person including its members, other than as payment in return for goods, services, borrowed money or leased premises.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 50-A

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 subsection 50-50(1)

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

Income Tax Assessment Act 1997 subsection 50-50(2)

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 Subdivision 50-B

Reasons for decision

All legislative references in these reasons for decision are to the ITAA 1997 unless otherwise stated.

Question

Will the Company meet the special conditions under section 50-50 once it enters into the Arrangement?

Summary

The Company has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. The Company will continue to comply with all the substantive requirements in its governing rules throughout the duration of the Arrangement and apply its income and assets solely for the purpose for which it was established. Consequently, the Company will satisfy the special conditions under section 50-50.

Detailed reasoning

1.             Section 50-1 provides that the ordinary and statutory income of the entities covered in the tables in Subdivision 50-A are exempt from income tax.

2.             Item 1.1 of section 50-5 includes a registered charity as an entity that is exempt from income tax subject to certain special conditions, including the special conditions in subsections 50-50(1) and (2).

Subsection 50-50(1)

3.             Subsection 50-50(1) states:

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).

4.             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.

5.             The Company has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. No part of the Arrangement will alter this circumstance. The Company will therefore satisfy the condition in paragraph 50-50(1)(a).

Subsection 50-50(2)

6.             Subsection 50-50(2) states:

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.

Comply with all the substantive requirements in its governing rules

7.             Regarding the special conditions in paragraph 50-50(2)(a), Taxation Ruling TR 2015/1 - Income tax: special conditions for entities whose ordinary and statutory income is exempt (TR 2015/1) states in 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?

8.           Paragraph 9 in 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.

9.             TR 2015/1 elaborates at paragraph 18 that the substantive requirements of an entity's governing rules are those that:

•                give effect to the object or purpose of the entity

•                relate to the non-profit status of the entity

•                set out the powers and duties of directors and officers of the entity

•                require financial statements to be prepared and retained

•                set out the criteria for admission as a member of an entity

•                require an entity to maintain a register of members, and

•                relate to the winding-up of the entity.

10.          The Company's Constitution contains all these rules and will continue to comply with them during the course of the Project, since net proceeds and lease income will be repatriated to fund the Company's operational requirements and future strategic innovations and services. To this end all proceeds will be retained on the balance sheet for the purpose of investment by the Company to meet its various missions.

11.          Specifically, the Company has stated that any income derived from leasing activities and any capital received from the sale or disposition of any part of the Property will be applied exclusively to satisfy the debt paid to it by the Lender under the Financing (in accordance with the Agreement), and also to fund its operations by generating significant cash and asset pools for the charity. No income or capital received by the Company will be paid to any person including its members, other than as payment in return for goods, services, borrowed money or leased premises.

12.          Further, the Company will warrant to the Lender under the Agreement that neither the execution of the relevant Finance Documents nor the carrying out by it of the transactions does or will contravene the constitution or the powers or duties of its directors.

13.          The Commissioner accepts that the Company will comply with all the substantive requirements in its governing rules throughout the duration of the Arrangement as described. Therefore, the condition in paragraph 50-50(2)(a) will be satisfied.

Apply its income and assets solely for the purpose for which the entity is established

14.          Regarding the special condition in paragraph 50-50(2)(b), paragraph 22 in TR 2015/1 states:

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

15.          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?

16.          Paragraph 24 in 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.

17.          The Company's purpose or object is set out in its Constitution, as per its Objects.

18.          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.

19.          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.

20.          Paragraph 31 in TR 2015/1 states:

... 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.

21.          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.

22.          In the present case, and as per the reasoning above, any income derived from leasing activities and any capital received from the sale or disposition of any part of the Property will be applied exclusively to satisfy the debt paid to it by the Lender under the Financing (in accordance with the Agreement), and also to fund its operations by generating significant cash and asset pools for the charity. No income or capital received by the Company will be paid to any person including its members, other than as payment in return for goods, services, borrowed money or leased premises.

23.          Further, the activities in carrying out the Arrangement will involve applying borrowed funds for the purposes of the building refurbishment, as well as deriving rental income, deriving revenue or capital gains upon disposal of parts of the Property, and applying that income or capital solely to:

•                     satisfy the debt paid to the Company by the Lender under the Financing

•                     enable it to carry out its objects, and

•                     ensure its ongoing financial viability and future-proof its social activities by generating significant cash and asset pools for the charity.

24.          The Company will be applying income to acquire and develop assets which in turn will generate future income to be directed towards its purposes. It is therefore considered that the Company will be applying its income and assets solely for the purpose for which it was established. Therefore, the condition in paragraph 50-50(2)(b) will be satisfied.

25.          Since the requirements in paragraphs (a) and (b) will be satisfied, subsection 50-50(2) will be satisfied.

Conclusion

26.          As the requirements of subsections 50-50(1) and (2) will be satisfied, the special conditions for item 1.1 at section 50-50 will be satisfied.