Insight into DGR Taxation Ruling 2019/6
In December 2019 Taxation Ruling 2019/6 was finalised – which sets out the Commissioner’s view on what the phrase ‘in Australia’ means in Divisions 30 and 50 of the Income Tax Assessment Act 1997. These divisions relate to whether certain entities are eligible to be Deductible Gift Recipients and whether the income of certain NFPs is tax exempt.
The DGR ‘in Australia’ condition refers to the condition that a fund, authority or institution be in Australia to be entitled to DGR endorsement or in order to be tax exempt.
When will an entity be ‘in Australia’ for DGR purposes?
A fund, authority or institution will be ‘in Australia’ where Australia can be described as its real location considering its legal form and substance. This concerns their location as an entity or organisation, rather than the physical presence of assets or transactions. This requires Australia to be the focal point of the entity, in a legal or organisational sense.
A fund, authority or institution will satisfy the requirement of being in Australia, where:
- It is established or legally recognised in Australia (that is, being registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act), Corporations Act 2001, A New Tax System (Australian Business Number) Act 1999 (ABN Act), or being an incorporated association in a State or Territory); and
- it makes operational or strategic decisions mainly in Australia.
What is a fund?
For the purposes of the DGR in Australia condition, a ‘fund’ is an arrangement where a stock of money or pecuniary resources is held or managed in accordance with a trust deed or similar instrument such as a set of fund rules. A fund would be established in Australia through a will or instrument of trust settled in Australia, or by another legally recognised entity in Australia which holds and operates the fund, or additionally by obtaining an ABN or registering as a charity. It is also important to note that the DGR in Australia condition does not require funds to have purposes or beneficiaries located in Australia.
What is an authority?
For the purposes of the DGR in Australia condition, an ‘authority’ is an agency or instrument of government, established to exercise control or execute a government function in the public interest. An authority will be established or legally recognised in Australia by way of a statute created by the Commonwealth, State or Territory government.
What is an institution?
For the purposes of the DGR in Australia condition, an ‘institution’ is an establishment, organisation or association instituted for the promotion of some object, especially one of public or general utility. Such a body is called into existence to translate a defined purpose into a living and acting principle. An institution could be established or legally recognised in Australia through registration under the Corporations Act 2001, incorporation under State or Territory legislation, registration as a charity under the ACNC Act or registration under the ABN Act. The location of decision making is determined on the basis of where the powers are mainly exercised.
Where decision makers are ordinarily located in more than one place, their decisions would be in Australia where the balance of decision-making power usually lies in Australia. It is also important to note that an institution that makes operational decisions in Australia may be in Australia, even though its strategic decisions are made offshore.
When will an entity be ‘in Australia’ for income tax exemption purposes?
The Division 50 in Australia condition refers to the special condition that certain entities have a physical presence in Australia and, to that extent, incur their expenditure and pursue their objectives principally ‘in Australia’, in order to be tax exempt. Apart from the exceptions which will be explored shortly, the following entities must satisfy the Division 50 in Australia condition:
- Registered charities
- Scientific institutions
- Public educational institutions
- Public hospital and hospitals carried on by a society or association
- Societies, associations or clubs established for the encouragement of science
- Societies, associations or clubs established for community service purposes
- Societies, associations or clubs established for the encouragement of animal racing, art, a game or sport, literature or music, and
- Societies, associations or clubs established for musical purposes
The Division 50 in Australia condition contains 2 requirements:
- ‘physical presence in Australia’; and
- ‘incurs expenditure and pursues objectives principally in Australia’.
The elements of each requirement will be explored in detail below.
In the context of the Division 50 in Australia condition, an entity has a ‘physical presence’ in a place where it employs assets or people to conduct its range of physical operations. The entity may be legally established in Australia, or conduct its operations through a division, subdivision or branch in Australia. However, an entity would not have a physical presence in Australia merely because it operates through an agent based in Australia. It is important to note that where an entity has a physical presence in Australia and also overseas, only the expenditures incurred, and objectives pursued which are attributable to that entity’s physical presence in Australia are examined.
Incurs expenditure and pursues objectives principally in Australia
For the purposes of the Division 50 in Australia condition, an entity ‘incurs expenditure and pursues objectives principally in Australia’ if it meets all requirements. An entity does not incur expenditure in Australia merely because the expenditure relates to a physical presence of the entity in Australia. The require connection will ordinarily exist where the decision to pay is made in Australia, and payment is to occur from an Australian source such as an account held with an Australian financial institution. The place where an entity ‘pursues its objectives’ requires a characterisation of the entity’s activities, based on the facts in each case. An entity does not pursue its objectives in Australia merely because it undertakes some its activities in Australia, rather it does this in the place where it seeks to realise its purposes, whether by making distributions to other entities or supplying goods or services in the course of its operations. An entity’s objectives are not subject to its expenditure incurrence in Australia. However, the expenditure incurred by an entity may be an indication of where its objectives are being pursued. For instance, an entity may pursue its objectives in Australia by making a distribution to a receipt located in Australia or purchasing goods or services for, or for the purposes of consumption in Australia. On the other hand, an entity may pursue its objectives outside Australia by making a distribution to a receipt located outside of Australia or purchasing goods or services for, or for the purposes of, consumption outside of Australia.
To maintain Division 50 income tax exemption, an entity must continue to satisfy the Division 50 in Australia conditions. If an entity chooses to incur expenditure relating to the pursuit of its objectives primarily outside of Australia in a given income year, it may be inferred that it no longer incurs its expenditure and pursues its objectives principally om Australia.
If an entity receives any distributions ‘as a gift’, by way of grant or from a DGR operated by an entity, these are disregarded in determining whether an entity incurs expenditure and pursues objectives principally in Australia (referred to as disregarded amounts). This means that where an entity distributes disregarded amounts offshore, this will not be affected whether it satisfies the Division 50 in Australia condition. For these purposes, ‘as a gift’ is considered to be defined as circumstances which involve an element of benefaction. This covers money or property, as well as receipts from fundraising by raffles, dinners, auctions, jumble sales, the purpose of which are to benefit the entity in a material sense. This excludes any amounts received from commercial activities or contracts for services. For these purposes, ‘government grants’ include payments made by government to entities for specific purposes, whether or not the entity is placed under an obligation to ensure that the grant is applied for those purposes but does not include payments made by government by way of a fee for services. For the purposes of the Division 50 in Australia condition, an entity must determine the extent to which a distribution is sourced from an amount received as a gift, by way of government grant or from a DGR. The entity can choose to appropriate distributions from a particular source, provided it maintains records which clearly identify each source, and such a treatment is not inconsistent with any conditions attached to the gift or grant.
In order to be entitled to the refund of franking credits for a franked distribution that it receives during an income year, a registered charity or DGR must be at all times during that year, having a physical presence in Australia and to that extent, incurs its expenditure and pursues its objectives principally in Australia. For these purposes, the terms maintain the same meaning as that in the Division 50 in Australia condition.
Exemptions to the In Australia requirement
An entity does not need to meet the Division 50 in Australia condition if the entity itself meets the qualifying conditions to be a DGR, including the DGR in Australia condition. It is vital to note that an entity that merely controls a fund which is a DGR is not a DGR itself and so may still need to meet the Division 50 in Australia condition.
Additionally, an entity does not need to meet the Division 50 condition if it is a prescribed institution, society, association or club located outside Australia and exempt from income tax in the country in which it is resident; or if it is a registered charity that is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and purses its objectives principally outside Australia.