When does an ancillary fund ‘provide' a ‘benefit'?

The ATO has released a draft tax determination - TD 2025/D3. This determination clarifies the ATO's views of the meaning of 'provision of benefits' and to 'provide any benefit, directly or indirectly' for ancillary funds.

• Topics: Not-for-profit, Tax and revenue

Introduction

The ATO's release of tax determination TD 2025/D3, has clarified how both public and private ancillary funds 'provide benefits' under the Taxation Administration (Private Ancillary Fund) Guidelines 2019 (Cth) and the Taxation Administration (Public Ancillary Fund Guidelines) 2022 (Cth) (Guidelines) to eligible deductible gift recipients (DGR) and related entities.

Specifically, the ATO has considered the meanings of:

• the 'provision of ... benefits' under subsection 15(4) of the Guidelines
• to 'provide any benefit, directly or indirectly' under subsection 22(3) of the Guidelines.

The meaning of 'benefit'

The Guidelines do not provide a definition for 'benefit'. However, the case of Vasudevan v Becon Const [2014] VSCA 14 at [23] defines benefit to include 'an advantage, a profit, or a gain'. Ancillary funds will not be limited to the payment of money or the transfer of property in providing benefits and instead a 'benefit' can be anything that puts a DGR in a better position.

The ATO notes that a benefit under subsection 22(3) may not qualify as a benefit under subsection 15(4). While a word in a statute will usually have the same meaning across sections, the operation of subsection 22(3) is thought to be broader because the words 'directly or indirectly' indicate a wider scope of operation.

Provision of benefits under subsection 15(4)

Under subsection 15(1), ancillary funds are required to make annual distributions that meet or exceed the prescribed minimum amount.

Distributions under subsection 15(4) constitute a benefit when provided to a DGR by the fund. Any benefit received by a DGR 'must be directly allowed, conferred, given, granted or performed'. These distributions need not be a transfer of cash or property; rather, they must represent an 'advantage, profit or gain' that is objectively ascertainable and is capable of having a market value.

Benefits that do not immediately confer an advantage on the DGR must provide a legal right to that DGR, allowing the advantage or gain to be conferred later. The benefit may be contingent on conditions being satisfied. Ancillary funds will not be considered to provide a benefit to a DGR if the benefit is given at arm's length.

Under subsection 15(4), if an ancillary fund makes a legally non-binding promise of future payment to a DGR, it will not be a 'distribution' under the subsection. Such a promise only creates an expectation or possibility, which would not amount to a 'benefit' under the Guidelines.

Valuation of benefits under subsection 15(4)

Determining whether an ancillary fund has complied within the minimum annual distribution requirement of subsection 15(4) involves considering the distribution's 'market value' under objective circumstances.

The market value of the benefit must represent the net benefit that the DGR receives, not the gross benefit, and must:

• be determined as if held by the DGR
• exclude the value of any consideration the DGR provides
• take into account any conditions attached to the benefit.

Provision of benefits under subsection 22(3)

Subsection 22(3) of the Guidelines is an integrity provision that prohibits funds from providing direct or indirect benefits to related entities. It places a positive duty on the fund's trustee to ensure that related entities do not receive any such benefit.

However, a fund's trustee are not prohibited (under paragraph 23(a) and (b)) from utilising the fund's income or capital to:

• 'pay or reimburse themselves for reasonable expenses incurred on behalf of the fund
• pay themselves fair and reasonable remuneration for their services in administering the fund.'

'Provide any benefit'

The word 'provide' in subsection 22(3) is defined inclusively, rather than exhaustively, under subsection 995-1(2) of the Income Tax Assessment Act 1997 (Cth). This definition includes any opportunity that places a related entity in an improved position or provides an advantage, even where the final outcome is uncertain. To constitute providing a benefit under this subsection, the benefit must be 'allowed, conferred, given, granted, or performed', which can occur under both informal and formal arrangements.

This subsection does not limit 'benefits' to financial gain; it may 'encompass any advantage or improvement of position'. Benefits may also arise when ancillary funds relieve related entities of obligations or liabilities, including arrangements with third party creditors or merely relieving the fund's burden.

An ancillary fund may be held to have provided a prohibited benefit if it grants 'a set of executory, and conditional rights' to a related entity, particularly where the value of those rights is not offset by the value of any corresponding consideration transferred to the fund. Additionally, an unvested right to pursue an advantage may also fall within this broad definition.

If a benefit falls under section 21 or subsection 22(1) (i.e. borrowing, grant of security, investment, loan, financial assistance or an uncommercial transaction), it may also be considered a benefit under subsection 22(3) if it advantages, profits or benefits a related entity. Where this occurs, penalties under subsection 22(3) may apply.

Funds may also provide benefits by omission, such as failing or refusing to require related entities to fulfil financial obligations, thereby allowing them to retain those funds.

Has the fund provided a benefit under subsection 22(3)?

The use of the phrase 'directly or indirectly' under subsection 22(3) expands the scope of 'provision of benefits'. Abenefit may be provided indirectly by the fund, benefitting a related entity even if that entity is not a party to the fund's transaction. This will ensure that any contributory action or inaction by the fund that creates a benefit will be captured, regardless of whether the benefit is provided directly or through a third party.

In determining the quantum of the benefit, the ATO will consider the value that has been provided directly or indirectly by the fund to its related entity. Any relevant circumstances will be considered when determining this amount or value.

Conclusion

This taxation determination will take effect when the final determination is issued. However, it is important to note that the ATO has proposed that the determination could apply to transactions occurring both before and after this date. It will not apply to taxpayers where it conflicts with the terms of a dispute settlement agreed with the ATO before the determination's issue.

This draft determination provides clarity on when funds will be considered as having provided a benefit under the Guidelines. Ancillary funds must carefully review their practices to ensure that they align with this guidance, particularly given the proposed retrospective application and the significant consequences for breaches under the subsections.

If you would like to discuss any of the matters contained in both this article and TD 2025/D3, please contact Carly Ashwood.