The ATO has released draft Taxation Ruling TR 2018/D1 (Draft Ruling) clarifying the Commissioner’s view on the provisions of the Income Tax Assessment Act 1997 (ITAA 1997) that require certain charities which are endorsed for income tax exemption, or which are deductible gift recipients (DGRs), to have a connection to Australia in order for their income to be exempt or for tax deductible donations to be made.
In 2008, the High Court in Commissioner of Taxation of the Commonwealth of Australia v Word Investments Limited  HCA 55 determined that a charity may be pursuing their objects principally ‘in Australia’, even where they merely pass funds within Australia to another charitable organisation that conducts its activities overseas.
Following this, the Federal Government announced in its 2009-10 Budget that it would tighten up the ‘in Australia’ requirements of Division 50 of the ITAA 1997, to limit the effect of the High Court’s decision, in terms of charities carrying out overseas activities.
Following several rounds of public consultation and exposure draft legislation, the Government released the Tax Laws Amendment (Special Conditions for Non-for-profit Concessions) Bill 2012 (Bill). The Bill sought to restate the ‘in Australia’ rules for income tax exempt charities and codify the ‘in Australia’ rules for DGRs.
The Bill was ultimately set aside by the Assistant Treasurer due to significant public opposition to the measures, which were seen by many as giving rise to an unreasonable restriction on DGRs conducting legitimate activities outside Australia, such as visits to foreign medical institutions or participating in international cultural or sporting events.
Instead, the ‘in Australia’ requirement would be dealt with through an administrative response, from both the ACNC and the ATO.
The ACNC has responded with its governance and compliance guidelines for charities conducting activities and operations overseas (see: http://www.acnc.gov.au/ACNC/FTS/Charities_operating_overseas.aspx)
The Draft Ruling represents the ATO’s response and has been drafted with the intent of addressing the Government’s concerns surrounding the ‘in Australia’ requirements.
The Draft Ruling deals with the following provisions of the ITAA 1997:
- the condition that certain DGRs be ‘in Australia’ before a gift or contribution to them is tax deductible (DGR Australia Condition) in paragraph (a) of column 4 in item 1 of the table in section 30-15
- the condition that certain entities have a ‘physical presence in Australia’ and to that extent, incur its expenditure in Australia and pursue its objectives in Australia before their income is exempt from tax (ITEC Australia Condition) in paragraphs 50-50(1)(a), 50-55(1)(a) and 50-70(1)(a) and
- the condition that a registered charity or DGR have a ‘physical presence in Australia’ before they qualify for a refund of franking credits (Franking Credit Condition) in section 207-117.
DGR Australia Condition
- A DGR will satisfy this condition if it is established or legally recognised in Australia and operates in Australia.
ITEC Australia Condition
- An entity will have a ‘physical presence’ where it conducts its physical operations, whether as a separate legal entity or through a branch/division.
- All of the operations and objectives of the entity must be identified and then compared to the extent to which the entity operates in Australia (ie wholly or partly through a branch/division).
- An entity will be found to pursue its objectives and incur its expenditure in Australia if it is the type of entity that incurs expenditure in that way. This involves considering past, present and future activities of the entity.
Franking Credit Condition
- ‘Physical presence’ takes the same meaning as discussed in relation to the ITEC Australia Condition.
Submissions for the Draft Ruling are open until 10 August 2018.