Australia: Revised Exposure Draft - "In Australia" - Special Conditions for tax concession entities

Last Updated: 22 April 2012
Article by Stephen O'Flynn

In July last year Treasury sought feedback on the In Australia special conditions for tax concession entities.

We are pleased that the Government has listened to the feed-back provided by the NFP sector and advisors and on 17 April 2012 released a revised exposure draft for comment. (Click here for link to the revised exposure draft)

The revised ED is a significant improvement from the prior exposure draft and we note that the Government has attempted to address all of our major concerns. In particular the latest exposure draft:

  • expressly allows NFPs to transfer profits or assets between NFP entities with similar purposes as well as make payments for genuine compensation for services provide to, or reasonable expenses incurred on behalf of the not for profit even if those NFPs are owners or members. The previous draft did not allow any of these payments to be made to members, even if the members were themselves NFP entities.
  • only requires a tax exempt entity to comply with all substantive requirements in their governing rules. The previous draft required compliance with all the requirements in the governing rules. A tax exempt entity will not lose its tax exempt status for a minor or insignificant breach of its governing rules.
  • requires tax exempt entities to operate principally in Australia and pursue their purposes principally in Australia. There are some exceptions including:
    • grandfathering any entities currently prescribed in the regulations under section 50-50
    • deductible gift recipients (as they have a stricter sole purpose test (that allows some activities that are incidental and minor), international affairs organisations and certain environmental organisations
    • entities that are to be prescribed in regulations
    • allowing certain funds received from government or non-deductible donations to be excluded from principally in Australia calculations
  • Clarifies that public educational institutions and public hospitals are not required to be not for profit entities to obtain tax exempt status (section 50-51(1)(b))

The main issues arising from the revised exposure draft legislation are:

  • there is still a strict requirement for the use of income and assets solely for the purpose for which the tax exempt entity was established. There is no leeway for minor or insignificant breaches.
  • Still some technical wording that could be improved in the draft to ensure, beyond doubt, that the policy intent to allow distributions to tax exempt parents without the loss of tax exempt status is achieved. The way the legislation is currently drafted will require all subsidiary entities to review their constitutions to ensure that their objectives are similar to their parents.
  • Where a tax exempt entity gives money or property to another entity, that is not a tax exempt entity, the use of the money by the recipient is to be taken into account when the tax exempt entity determines whether they operate principally in Australia. This will place a greater burden on tax exempt entities to trace the use of funds that they provide to non-tax exempt entities, than is currently the case.
  • anyone looking to establish a new entity to undertake / fund charitable activities overseas will not be able to obtain income tax exempt status unless their activities or the entities that they donate to are conducted principally in Australia unless they fall into one of the excluded categories mentioned above. Therefore, there will be some organisations that may consider applying to be named in the regulations to ensure a continuation of their tax exempt status.
  • Most DGRs have a stricter 'In Australia test' that requires the DGR to be established in Australia, operate and pursue its purposes solely in Australia. The DGR will also have to look through any entity that it provides money to determine the final use of the money under of the sole purpose test.

Any comments on the Exposure Draft are required to be submitted to Treasury by 11 May 2012. Moore Stephens will be making a submission and we welcome any comments you may have for inclusion in our submissions.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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Authors
Stephen O'Flynn
 
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