The ATO has issued TR 2015/1 which discusses two special conditions that certain types of “exempt entities” under Div 50 of ITAA 1997 must satisfy in order for their ordinary and statutory income to be exempt from income tax. The two conditions are:
(1) the entity must comply with all of the substantive requirements in its governing rules (governing rules condition), and
(2) the entity must apply its income and assets solely for the purpose for which it is established (income and assets condition).
These conditions are independent of each other and breaching either one will mean the entity will not be exempt from income tax.
Appendix 2 to the ruling lists the types of exempt entities that are covered by the ruling.
Governing rules condition – The ruling considers the meaning of “governing rules” of an entity to be the rules that direct what the entity, and those that control it, are required and permitted to do.
To determine what constitutes the governing rules of an entity, one must consider all of the various sources in which governing rules may be found. The written documents under which an entity was formed will usually be the main source of the entity’s governing rules. There may also be other sources (such as relevant legislation) that comprise or supplement an entity’s governing rules.
It is important to identify the governing rules, so as to identify an entity’s “substantive requirements”. A set of governing rules, the ruling states, is divided into substantive requirements and procedural requirements. The “substantive requirements” of an entity’s governing rules define the rights and duties of the entity, while procedural rules are those by which such rights and duties are applied and enforced. The substantive requirements include rules that give effect to the object or purpose of the entity, relate to the non-profit status of the entity, relate to the winding up of the entity and require financial records to be kept.
In order for an entity to be exempt from income tax for all of an income year, it must (among other things) satisfy the governing rules condition at all times during that income year.
Income and assets condition – The ruling also discusses various aspects of the income and assets condition. In determining whether an entity satisfies the income and assets condition, the following questions are relevant:
- what is the “purpose for which the entity is established”, and
- has the entity applied its income and assets solely for that purpose?
“Purpose for which the entity is established” – Various factors are to be considered when determining the purpose for which an entity is established, such as its objects as set out in the constituent documents, its activities after formation, up to the time at which the income and assets condition is applied, and any legislation governing its operation.
An entity may have more than one purpose, and may also have a purpose that is incidental or ancillary to the purpose for which it is established.
Again, the entity must satisfy this condition at all times during an income year to be exempt throughout the year. If an entity changes its purpose, the entity must consider from that point in time whether it is applying its income and assets solely for its new purpose.
Application of entity’s income and assets – The ruling also clarifies the meaning of “apply” its income and assets “solely” for the purpose for which the entity is established. All of the entity’s income and assets must be used for the purpose and it must be used exclusively for that purpose.
The Commissioner accepts that the income of an entity will still be “applied” for the purpose for which the entity is established if the entity’s profits are accumulated, provided that the accumulation is consistent with the purpose for which the entity is established.
This condition may still be satisfied despite a one-off misapplication of part of the income or assets of an entity, other than for the purpose for which the entity is established, or if the amount misapplied is immaterial.
Date of Effect: The ruling applies to income years commencing both before and after its date of issue.
TR 2015/1 was issued in draft form as TR 2014/D5.
This Ruling, released [on Wed 25.2.2015], outlines the special conditions that various entities listed in Div 50 of the ITAA 1997 must satisfy for their ordinary and statutory income to be exempt from income tax.
It considers 2 of the special conditions the entities must satisfy, namely:
- that the entity must comply with all of the substantive requirements in its governing rules, and
- that the entity must apply its income and assets solely for the purpose for which the entity is established.
The Ruling notes that the governing rules condition and the income and assets condition are independent special conditions that must be satisfied in order for an entity’s ordinary and statutory income to be exempt under Div 50, and breach of either or both of the conditions will mean that an entity’s ordinary and statutory income will not be exempt.
It does not consider other special conditions in Div 50.
Among other things, the Ruling applies to registered charities, scientific institutions, public educational institutions, funds established to enable scientific research, societies associations or clubs established for the encouragement of science, societies, associations or clubs established for community service purposes, employee associations or employer associations, and funds contributing to other funds (ancillary funds).
Date of effect – it applies both before and after its date of issue.
[LTN 37, 25/2/15]