Are you sure your income is tax exempt?

The Australian Taxation Office has recently released TR 2015/1, which sets out the Commissioner of Taxation’s view on what particular special conditions not-for-profit entities must fulfil in order to be exempt from income tax. A copy of the Final Ruling can be found here. It follows the release last year of Draft Ruling 2014/D5.

Conditions

The Final Ruling considers two of the special conditions that a not-for-profit entity must satisfy. The first relates to an entity’s governing rules. The second relates to an entity’s income and assets. These special conditions were introduced by Tax Laws Amendment (2013 Measures No. 2) Act 2013. More specifically, the two special conditions require a not-for-profit entity to:

1. comply with all the fundamental requirements in its governing rules; and
2. apply its income and assets only for the purpose for which the entity is established.

The Final Ruling came into effect on 25 February 2015 but is applicable to income years prior to this year. Some changes have been made in the Final Ruling, which are discussed below.

Incidental or ancillary purpose

Firstly, those within the sector who made submissions were concerned that the Draft Ruling did not address incidental or ancillary purposes. The Final Ruling has gone someway to remedying this concern, with the legally binding section stating that ‘the income and asset condition will not be breached merely due to an entity having an incidental or ancillary purpose.’ However, whether a purpose is incidental and ancillary to the main purposes or whether it constitutes a separate purpose altogether remains a question of interpretation. In answering this question, past practice suggests that the ATO will rely on reconstructing the entity’s constitution and analysing the entity’s activities.

Accumulations

An area of concern raised in submissions (and within the sector more generally) has been the ATO’s view of accumulations. The legally binding section of the Final Ruling states that ‘an entity that accumulates most of its income over a number of years will need to show on a year by year basis that the accumulation is consistent with the purpose for which the entity is established.’ Entities that are in decline, religious organisations and foundations should ensure that they are able to explain how they satisfy this condition.

Applied funds ‘solely’ to the purpose

Thirdly, the ATO’s understanding of applying funds for a ‘sole’ purpose is very narrow. The non-legally binding section of the Final Ruling explains that only ‘immaterial’ or ‘occasional, unrelated misapplications’ of charitable funds will not breach the provisions.

Queries?

If you have specific questions about how the Final Ruling will affect your not-for-profit organisation, call us on (02) 9267 9800 or u%D2%B9%AF%D3%8E%A8%B9%96%C6%D5X%C4%A1%D6%D4%B2v.

Subscribe to our newsletter Not-for-Profit Law Notes