Charities Should Review Governing Rules Following Tax Ruling

All registered charities should review their governing rules following the release of a Draft Special Conditions Ruling on? Income Tax by the Australian Tax Office, according to law firm, Makinson d'Apice Lawyers.

In August the ATO released draft ruling TR 2014/D5 regarding the proposed application of special conditions inserted by the Tax Laws Amendment (2013 Measures No. 2) Act 2013 requiring that:

• A charity  must comply with all the substantive requirements in its governing rules (Governing Rules Condition); and

• A charity must apply its income and assets solely for the purpose for which the entity is established (Income and Assets Condition).

According to law partner Bill d'Apice the ruling is important for a number of reasons.

“It clarifies the special conditions and how they will be applied (and can be adhered to) with more certaintyand as the ruling is retrospective, any disentitlement to an income tax exemption may be retrospective,” d’Apice said.

“While an entity is in breach of either or both of the special conditions, its ordinary and statutory income will not be exempt from income tax.”

He said it clarifies what will happen in the event of breach of the special conditions and simultaneous failure to comply with the ACNC governance standards, and which authority will act depending on the circumstances.

The ruling applies to a number of income tax exempt entities (but not all) which are listed at Section 50 of the Income Tax Assessment Act 1997 (ITAA).

These entities include:

• 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;

• trade unions;

• public hospitals;

• hospitals carried on by a society or association;

• 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 substantive requirements in a charity’s governing rules include the rights and duties of the organisation such as those:

• that give effect to the object or purpose of the entity;

• relating to the Not for Profit status of the entity;

• relating to the winding-up of the entity; and

• that require financial records to be kept.?

“All registered charities should review their governing rules and identify the substantive requirements of their governing rules,” d’Apice said.

“If a breach or misapplication is identified the charity should immediately take steps to rectify the situation and a notification to the Commissioner of Taxation may be required.”

Charities can make a comment in relation to the ATO ruling. Submissions should be forwarded to Jeremy Khaw of the Australian Taxation Office at Jeremy.Khaw@ato.gov.au by 26 September 2014.