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Proposed Changes to the “In Australia” Test

The ATO has issued a draft tax ruling on the “In Australia” test.

For a Deducible Gift Recipient (DGR), one change is that “purposes” and “beneficiaries” need not be in Australia, so long as the DGR is established or legally recognised here and operates here.

For non-DGR tax exempt charities, the draft ruling preserves the expected interpretation, which is that in order for tax exempt entities to retain their tax exemption they must incur their expenditure “principally” in Australia. Many charities have branches internationally and often generate income that is surplus to what is needed for Australian operations, and seek to send that surplus to their related operations overseas, especially in third world countries.

Some religious organisations are expected by their “head office” or
“motherhouse” to pay an annual “levy” to a central fund so that head office can disburse that surplus to other parts of a religious order in countries which are not self-sustaining.

A basic principle, which Australian tax exempt entities should understand, is that in determining what constitutes “principally” the old rule of thumb was that so long as no more than 50% of income generated in a particular financial year was sent overseas, then the Australian entity was still “principally” conducting its operations in Australia.

Now expenditure at a particular point in time is not determinative, but past and current conduct and future plans are relevant. The 50% test can still be used as a guide, but there is no fixed percentage prescribed in the legislation. In calculating what comprises annual expenditure the following sums would not be counted:

  1. any money that has been donated to a religious group as after tax dollars from the donors;
  2. any money that is received by a religious group as a government grant; and
  3. any bequests from deceased estates.

(To remain eligible for franking credits refunds, gifts or government grants are not disregarded).

Revenue that must be counted would be:

  1. investment revenue from financial or property investments;
  2. revenue recovered on the sale of a capital asset (for example sale of a significant property); and
  3. funds donated to any entities operated by the charity which have DGR status and for which a DGR receipt has been written.

Submissions on the ruling were made up until 8 August 2018

If you wish to have further information on the draft ruling please do not hesitate to contact us.

Josephine Heesh, Partner

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