Transcript Slide 1

SCHOOLS : DONATIONS & BEQUESTS
Paul Ingram, Partner, Minter Ellison
5303123
The starting point
•Schools run on a NFP basis are generally
charitable, but are generally not Deductible
Gift Recipients (DGRs)
•How can they access DGR status?
Topics to be covered
•Deductibility – general principles
•Accessing DGR status
•Managing your gifts
•NFP reform
1. Deductibility – general principles
Deductibility
•Tax legislation provides for deductibility of
two different things:
• Gifts
• Contributions
What is a gift?
•Made voluntarily
• Not for consideration
• Not pursuant to, or in discharge of, a legal
obligation
•Gifts arise by way of benefaction
• DGR advantaged without significant detriment
(eg. onerous conditions, or obligations to pass
on to a third party)
What is a gift? (cont.)
•No material benefit or advantage received by
donor in return
• Sponsorship is not a gift
• Charity dinners
•Anti-avoidance rules
• Section 78A of ITAA 1936
Tax Treatment of Gifts
•Tax rules differ depending on:
• Subject matter of the gift
• Money
• Property
• Whether the gift is made:
• Inter vivos (‘Donations’)
• By Will (‘Bequests’)
Taxation: gifts to DGRs
Money
Property
Donations
(inter vivos)
Bequests
(by Will)
Deductible
Not deductible
Deductible
Not deductible
CGT payable
CGT exempt
(subject to certain rules)
(unless under CGP)
Contributions
•Since 1 July 2004, you can get a deduction
for contributions (money or property) made:
• In return for a right to attend or participate in
certain “fund-raising events”
• Fetes, balls, gala shows, dinners, performances &
similar events
• Because you were the successful bidder at a
charity auction
Contributions
•But some important limitations
• Only individuals can claim
• Cash contributions must exceed $150
• Valuation rules re property contributions
• Benefit received must not exceed the lesser of
$150 or 20% of value of contribution
• Only get deduction for the difference between
amount of contribution and benefit received
Contributions
•The lesser of $150 and 20% test causes
some real problems
• Too low?
• Valuations/receipts
2. Accessing DGR status
Accessing DGR status
•Schools and school “foundations” are
generally not DGR
• No relevant DGR category
• Gifts to schools/foundations unlikely to be
deductible
•Need to set up specific funds
• Building funds
• Scholarship funds
Building funds
•Item 2.1.10
• Public fund established and maintained solely for
providing money for the acquisition, construction
or maintenance of a building used, or to be
used, as a school or college…
Building funds
•Building
• Range of structures
• Recent ATOID re covered outdoor learning areas
• But not outdoor courts and pools, or carparks
• Fixtures
• Air conditioning
• Solar hot water systems
• Carpets
Building funds
•Building used as a school or college
• Used for a purpose which is connected with the
curriculum of the school
• Old ruling TR96/8 was a bit restrictive
• Eg. Sports facilities
• But more recent documents are pretty broad
Building funds
•Multi-purpose buildings
• Acceptable if primary and principal use is as a
school or college
• More than 50% of time (eg. Hall used for school
purposes each weekday, but as a place of worship
on weekends)
• Complexity if part used as school, other parts not
Building funds
•What can the BF pay for?
• Purchase of land (where definite plans to build)
• Construction expenditure and associated finance
costs
• Capital improvements and maintenance
• Fixtures
• Reasonable costs of running the fund
Building funds
•BF must be used exclusively as above
• Money must be kept separate from other money
of school
• Be careful re “multi-purpose” fundraising
Building funds
•BF can be established in two different ways:
• Internal fund
• Separate trust
•Some compulsory clauses either way
Scholarship funds
•Item 2.1.13
• Public fund established and maintained solely for
providing money for scholarships, bursaries or
prizes to which section 30–37 applies
Scholarship funds
•Requirements under section 30-37
• May only be awarded to Australian citizens or
permanent residents
• Open to individuals or groups throughout
Australia, a State or Territory, or a region of at
least 200,000 people
Scholarship funds
•Requirements (cont.)
• Must promote the recipient’s education in:
• An approved Australian course
• An educational institution overseas, by way of
study of a component of an approved Australian
course
Scholarship funds
•Requirements (cont.)
• Must be awarded on merit, or for reasons of
equity
• Merit can include non-academic criteria
• But only where sufficiently connected with the educational
objectives
• Equity
• Socio-economic disadvantage
• Disability and other special needs
Scholarship funds
•SF can either:
• Provide money directly to participants
• Provide money to another organisation which
pays the scholarships, bursaries, prizes
Scholarship funds
•SF can be established in two different ways:
• Internal fund
• Separate trust
3. Managing your gifts
Managing your gifts
•The specific DGR funds can be managed by
the school board
•But if you want separate control
• Appoint a dedicated committee; or
• Provide for management by a separate entity
(eg. a foundation)
Using a foundation
•If you do use a separate foundation, you
need to consider income tax exemption
• School is probably income tax exempt
• But the foundation will only be tax exempt if it is
endorsed under Div 50
• Charitable institution
• Charitable fund
Using a foundation (cont.)
•Income tax exemption is straightforward if
Building/Scholarship Fund is established as a
separate trust
• Trust gets endorsed as a charitable fund
• Trustee (the foundation) does not need its own
endorsement, unless has its own funds
Using a foundation (cont.)
•But if the Building/Scholarship Fund is just
an internal fund of the foundation, some care
needed
• ATO view that organisations which just manage
funds are not ‘institutions’, and are therefore not
‘charitable institutions’
Using a foundation
•ATO have not really attempted to push this
view to date
• Many school foundations are currently endorsed
as charitable institutions
• Difficult to argue that a foundation set up as an
incorporated body, with its own board and at
least some fundraising and other activities is not
an ‘institution’?
Responsible persons
•Building/Scholarship Fund must be controlled
or administered by persons or institutions
having a degree of responsibility to the
community as a whole
• Need a majority of the board/committee to be
‘Responsible Persons’
Responsible persons
•Definition pretty broad – includes:
• School principals
• Clergymen
• Solicitors and other professionals
• Politicians
• Order of Australia recipients
Drafting of donations and bequests
•Conditional gifts are a potential problem
• TD 2004/23 and recent private rulings
• Donor may lose deduction!
•Avoid creating a trust
• Requires its own tax endorsements!
• Expression of intent only
• Words negating any trust
Accounting issues
•The Building and Scholarship Funds need to
be kept separate from each other, and from
other funds of the school/foundation
• Separate bank account for each
• Clear accounting procedures
• Section 382-15 of the TAA 1953
Governance
•Prudent steps
• Have someone on the board/committee who is
familiar with ATO requirements
• Prepare a manual for board/committee members
• Have a standing item to review that manual,
and compliance with ATO requirements generally
4. NFP reform
What’s happening?
•Amendment of ‘in Australia’ requirements
•New ruling re charities: TR 2011/4
•Proposed:
• Profits from ‘unrelated commercial activities’
• New national NFP regulator
• Statutory definition of ‘charity’
Unrelated commercial activities (UCAs)
•First aspect
• Proposal is to tax profits derived from UCAs of
charities, where those profits are not directed
back to their altruistic purpose
• ATO seems to be worried about accumulation of
such profits
Unrelated commercial activities (UCAs)
•Second aspect
• If carry on UCAs, you won’t have access to DGR,
FBT or GST concessions in support of those
activities
• Concern that this may force many NFPs to
restructure
• Restructure costs
• Ongoing costs
Unrelated commercial activities (UCAs)
•What commercial activities are related?
• Activities that are only for the sake of, or in aid
of, or in furtherance of, the charitable purpose
• School using its hall to run bingo two afternoons a
week
• School operating a tuck shop, including sale of
uniforms, textbooks etc
Unrelated commercial activities (UCAs)
•Even if activities are unrelated, there will be
some important exceptions
• Passive investments
• Small scale activities
• Chocolate fundraising, school fetes
•Existing commercial activities will be
grandfathered (at least for a while)
Unrelated commercial activities (UCAs)
•Where has the proposal got to?
• Rules supposed to apply from 1 July 2011
• Consultation paper (27 May 2011)
• Remains to be seen whether Government will
defer the start date
New national NFP regulator
•Australian Charities & Not-for-profit
Commission (ACNC) to start 1 July 2012
• Will take over some ATO roles
• Will eventually play a role in
• Standardised regulation/reporting
• Harmonisation with State concessions
•Public information portal by 1 July 2013
Statutory definition of ‘Charity’
•Common law definition seen as vague and
perhaps a bit outdated
• Attempt at statutory definition in 2003 largely
failed
• Labour Government wants to have another go
(from 1 July 2013)
Statutory definitions of ‘Charity’
•Consultation paper released on 28 October
2011
• Are the three main heads of charity – religion,
education and poverty – still appropriate?
• Lobbying should be ok
• Submissions close 9 December 2011