Australia: Update on the "In Australia" test

Last Updated: 20 May 2012

A new draft Bill has now issued following the withdrawal late in 2011 of the first drafting.

For Income Tax Exempt Entities

The new definition of "In Australia" states that if an entity pursues its objectives by conducting activities that directly advance those purposes – the entity is not entitled to be income tax exempt unless it operates principally in Australia.

If, as part of its operations, an entity gives money or property (to further its purpose) to other entities that are not income tax exempt, the use of those funds by the other entity will be taken into account when determining whether or not the donor entity has met the "In Australia" special condition (ie a look through test). One of the conditions of the "In Australia" test for all income tax exempt entities is that the entity must comply with its substantive governing rules, ie continue to pursue the purposes that are expressed.

How will the test affect a religious order which sends funds to their overseas branches?

There has been a change from an expenditure test to an activity based best.

The new test would require that:

  • The local order undertakes its activities in Australia.
  • Has property in Australia.
  • Is managed from Australia.
  • Is resident in Australia.
  • Has employees in Australia and
  • Incurs its expenditure principally in Australia.

The regulator will look to these indica to determine if the "In Australia" test has been met and the entity can send funds overseas without any risk to its local income tax exemption.

For those religious orders whose central administration is overseas and whose main presence in Australia may be for the purpose of remitting funds back to their "mother house", income tax exemption may not be available: it may be necessary for such local groups, as a minimum, to incorporate an Australian body and otherwise have a clear presence in Australia, to prevent being taxed.

The new test, however, does not apply to any distributions overseas, made by local charities, of funds received as government grants, bequests or money gifted from donors where a tax deduction has not been provided. To benefit from that exemption, the local charity must:

  • have strong governance arrangements in place for the proper monitoring of how the money is used overseas;
  • establish that this is an effective use for the local entity's purposes; and
  • establish there has been full compliance with Australian and foreign laws, international treaties and the high reputation of Australia's not for profit sector

The new "In Australia" test modifies the concept of a not for profit entity by now allowing that entity to distribute any surpluses to members provided those members' purposes are similar. A distribution from one charity to another charity is considered "similar": For example, a charitable entity involved in the work of "provision of support services eg insurance or human resources" is not precluded from making a distribution to an entity involved in the "advancement of education".

For Deductible Gift Recipients (DGR)

The test is stricter than for income tax exempt entities because the DGR must:

  • operate solely in Australia; and
  • pursue its purposes solely in Australia.

Overseas aid funds and developed country relief funds are exempt from this test.

Fund entities on the Register of Environmental Organisations are also exempt.

There is also a look through test for a DGR which gives property or benefits to a non-DGR to further its purposes: how the non-DGR spends those funds will be taken into account to determine whether the DGR meets the "operates solely in Australia" special condition.

Franking Credits

Eligibility for franking credits will need to satisfy the new "In Australia" test, ie an activities based test with the organisation needing to prove it operates and pursues its purposes, (rather than simply its expenditure) principally in Australia.

FBT Rebate

Eligibility for Fringe Benefits Tax rebates or exemption must also now satisfy the new "In Australia" test. It will be necessary for FBT concession recipient charities to establish that their objectives must be pursued principally in Australia.

Glossary Terms

ABN: Australian Business Number

ACNC: Australian Charities and Not-For-Profit Commission

ASIC: Australian Securities and Investments Commission

ATO: Australian Tax Office

DGR: Deductible Gift Recipient

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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