On 13 August 2014, the Australian Taxation Office (ATO) issued draft taxation ruling TR 2014/D5 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2014/D5). TR 2014/D5 provides the ATO’s view on two special conditions for certain income tax exempt entities under Division 50 of the Income Tax Assessment Act 1997 (ITAA 97).

Click here to view draft ruling.

Under Division 50 of ITAA 97, various income tax exempt entities (including charities registered with the Australian Charities and Not-for-profit Commission (ACNC)) are required to:

  • comply with all the substantive requirements in their governing rules (governing rules condition); and
  • apply their income and assets solely for the purpose for which they were established (income and assets condition).

Refer to our article ‘Changes to the Essential Conditions for Tax Concession Entities’ in Charities Alert May 2014 for more information on the above conditions, click here.

In TR 2014/D5, the ATO provides guidance and some examples on its interpretation of these requirements, including on the following issues:

  • what are the ‘governing rules’ of the entity
  • what are the ‘substantive requirements’ in the entity’s governing rules
  • has the entity complied with all of the substantive requirements in its governing rules
  • what is the ‘purpose for which the entity is established’
  • has the entity applied its income and assets solely for the purpose for which the entity is established
  • relationship between the governing rules condition and the income and assets condition.

The ATO has considered the above issues applicable to entities of various structures, such as registered charities or not-for-profits that are companies limited by guarantee, companies limited by shares, incorporated associations, and trusts.

Although TR 2014/D5 is only a draft ruling, it is proposed that when the ruling is finalised, it will apply both before and after the date of issue of the final ruling.

Suggested action

Registered charities that are income tax exempt should review their compliance with the governing rules condition and income and assets condition, and take appropriate action to rectify non-compliance if necessary.

In particular, we consider registered charities should:

  • review their governing rules (eg constitutions, trust deeds, relevant legislation and rules including church laws);
  • consider whether all the substantive requirements of their governing rules are being complied with at all time (these are rules that authorise their policy, actions and affairs, eg their objects, requirements for non- profit status, requirements for winding up, and keeping of financial records).

If they are not being complied with, at all times, consider whether their governing rules or activities need to be varied, and if so, make necessary changes;

  • review their application of income and assets;
  • consider whether they are applying their income and assets solely for the purpose for which they are established at all times. If they are not being applied solely for the relevant purpose, make changes to the purpose or activities;
  • if there is any breach or misapplication of the governing rules condition and/or income and assets condition, consider what corrective action should be taken in relation to the breach or misapplication and by when. What notification needs to be provided to the Commissioner? The Commissioner may consider not taking compliance action in certain circumstances where the corrective action has been taken within a reasonable time and the Commissioner is notified (paragraph 160 of TR 2014/D5).

Charities failing to comply with these conditions risk losing their income tax exempt endorsements. The Commissioner of Taxation has the power to revoke these endorsements under s426-55 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953). The revocation of endorsements by the Commissioner may be retrospective. Under s426-55 of Schedule 1 of TAA 1953, the Commissioner may specify the effective date for the revocation. This date may be before the date of the decision of the Commissioner.