On 20 August 2014, the ATO published the above draft Tax Ruling.

The ruling applies to entities that are mentioned in column 2 of Division 50 of the Income Tax Assessment Act 1997, generally known as 'Exempt Entities' including registered charities, scientific institutions, public educational institutions, community service organisations, employee associations, trade unions, public hospitals, not-for-profit hospitals, racing, cultural or sporting associations.

Any tax exempt entity must meet certain special conditions. There are two new special conditions that the Ruling considers:

  • compliance with all the substantive requirements in its governing rules; and
  • application of its income and assets 'solely' for the purposes for which the entities are established.

Governing Rules Special Condition
At paragraph 12, 'the substantive requirements in an entity's governing rules are those that define the rights and duties of the entity', compared with 'the procedural rules by which those rights and duties are applied and enforced'. The most obvious substantive requirements are those giving effect to the object or purpose, the non-profit status of the entity (i.e. that no distribution of profit is allowed for members), the winding up provision (that on a winding up, the surplus must be distributed to another like entity) and financial records obligations.

Income and Assets Condition
This rule requires:

  • examination of 'purposes for which the entity is established'
  • whether the entity has applied its income and assets solely for that purpose.

The constituent document is studied but also activities after its formation become relevant. What does 'solely' mean – a one-off insignificant expenditure outside the sole purpose could be excused.

There are various examples cited in the Ruling, including a case where profits from commercial activities are used to further an entity's purpose but is not a breach of the income and assets condition, even though the objects of the group are 'to do all things necessary for the purpose of advancing the Soul Worship Group's religious views'.

The Group establishes an opportunity shop in the inner city location, with profits to be directed to the religious activities of the Group – i.e. Sunday school classes, Bible classes, community gatherings for religious discussions, religious books and articles. The commercial activity is found to be consistent with the application of the Group's assets and income solely for the purpose for which it was established.

And, cases where external regulatory provisions not part of the governing Rules, so they don't need to be observed, for example, beach side table tennis club hosts an event but fails to get a liquor licensing authority although it serves alcohol. There is no breach of the governing rules because the liquor licensing law is imposed by an external statutory authority.

Comment on the draft ruling is due by 26 September 2014. Some members of the not-for-profit sector might consider that the two special conditions are unnecessary and will submit that they should be repealed.

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.