I am pleased to announce that yesterday';s meeting of the Prime Minister';s Community-Business Partnership (PMCBP) put the finishing touches on two new tax initiatives to encourage greater corporate and personal philanthropy in Australia. These initiatives are based on the work of the PMCBP';s Taxation Working Group, chaired by David Gonski.
The initiatives confirm the leadership provided by the Partnership in making Australia';s taxation system friendlier to individuals and companies who want to give.
New Averaging Provision for Donations of PropertyThe first measure will make it more attractive for individuals or businesses to donate property by allowing income tax deductions for all donations of property to deductible gift recipients to be spread over five years.
This measure builds upon the package announced in March 1999 that allows, among other things, the apportionment of deductions for certain gifts to cultural, environmental and heritage organisations.
Extending eligibility to all deductible gift recipients will encourage property donations for other worthwhile activities such as health, medical research and education. Apportionment, or allowing income tax deductions to be spread over five years, will assist potential donors of property who might otherwise be unable to realise the full benefit of the income tax deduction in a single year.Donations of property valued at more than $5,000, as determined by the Commissioner of Taxation, will qualify. The new arrangements will apply from 1 July 2002 and involve an estimated revenue cost of $2 million in the first year, rising to $10 million per year from 2007-08 onwards.
Guidelines for Private Charitable FundsThe Government has also taken a further significant step to encourage private philanthropy, with the release today of guidelines for Prescribed Private Funds, which will become a new form of charitable trust enjoying tax deductibility for donations made to it. These guidelines will be followed up with a model trust deed, to be released early next week. The establishment of Prescribed Private Funds was part of the package announced in March 1999.
These new trusts will provide businesses, families and individuals with greater flexibility to start their own trust funds for philanthropic purposes. Funds that comply with the guidelines and the model trust deed will be prescribed in Regulations as gift deductible entities under the Income Tax Assessment Act 1997. This means that donations made to the funds will attract tax deductions.
This measure will open up a new vehicle for private philanthropy, similar to that existing in the United States, so that families and individuals can donate to a trust of their own, which then disburses funds to a range of other gift-deductible recipients. By creating opportunities for private philanthropy, the Government is building up the social coalition, in which government, business, community organisations and individuals work together on social issues.
The guidelines released today specify the criteria by which private funds will be prescribed in the regulations as gift deductible. They also prohibit any payments from the funds that directly or indirectly benefit the donor to the fund.
Limits will apply to the accumulation of money within the fund, such that investment income can only be accumulated at a rate equivalent to the CPI, with the rest disbursed to public philanthropic funds. In addition, funds will be required to provide a simple annual return to the Tax Office outlining the source of funds, and the payment of funds to various gift-deductible public funds as well as the extent and recipients of management fees.
These guidelines will ensure that tax deductibility will only be given where private charitable funds are used for the purposes for which they are intended – providing money for philanthropic purposes. The guidelines and model trust deed strike the right balance between maintaining the integrity of the tax system, at the same time as providing tax incentives for private giving.
30 March 2001
GUIDELINES FOR PRESCRIBED PRIVATE FUNDS
1.
These guidelines are intended to provide assistance in relation to:
the new philanthropy measures relating to prescribed private funds;
the application process and how an application to be a prescribed private fund should be made; and
what requirements need to be met for establishing a prescribed private fund for philanthropic purposes.
Background 2.
To implement the Government';s response to the report on philanthropy in Australia by the Business and Community Partnerships Working Group on Taxation Reform dated 26 March 1999, the Government announced income tax measures to encourage greater corporate and personal philanthropy in Australia. 3.
Those measures included, amongst other things, amendments to the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to:
allow concessional taxation treatment for prescribed private funds. They will not be required to seek donations from the public, but otherwise will be subject to the same requirements applying to public funds, with the exception of the requirement for control by a committee, a majority of whom have a degree of responsibility to the general community (see the guidance on this below); and
allow deductions to taxpayers for gifts to prescribed private funds made on or after 1 July 1999. 4.
The result is that individuals and corporations are able to establish funds for philanthropic purposes without advertising for public contributions. It is envisaged that this measure will encourage greater philanthropy. What is a prescribed private fund? 5.
The term prescribed private fund is defined in subsection 995-1(1) of the ITAA 1997 to be a fund that is prescribed by the Income Tax Assessment Regulations 1997 (ITAR 1997) but does not include a fund that is declared in writing by the Treasurer not to be a prescribed private fund. 6.
Where a prescribed private fund no longer complies with the necessary requirements, the Treasurer may declare in writing that the fund is not a prescribed private fund. From the date of declaration, donations to that fund will no longer be tax deductible. 7.
With the exception that they need not seek and receive contributions from the public, and control requirements, prescribed private funds have the same characteristics of ancillary funds described in item 2 of the table to section 30-15 of ITAA 1997. They will have to comply with all the other requirements of a public fund. Particularly, it is important for a prescribed private fund to ensure that any benefit bestowed is bestowed only on other funds covered by Subdivision 30-B of the ITAA 1997, and not provided to other charitable, community service or similar organisations or individuals. 8.
The legal requirement that a prescribed private fund be 'maintained' does not require the fund to be continually operative or established for an indefinite period, but rather that the fund must, not only at its establishment but throughout its existence, comply with the terms of the law. Consequently, prescribed private funds can include those which have the object of channelling funds to public funds established in relation to isolated acts of relief, including public funds for the relief of one individual or family or a community adversely affected by a natural disaster. That is, a prescribed private fund can be established to provide money, property or benefits to or for a fund which is established for a limited time, provided that fund has deductible gift recipient status. How are applications made and dealt with? 9.
An application for prescribed private fund status is an administrative process. All applications are made to Government - but must in the first instance be lodged with the Australian Taxation Office (ATO). All applications are to be in writing. 10.
Applications by, or on behalf of, funds seeking to be prescribed should be lodged at the branch office of the ATO in the locality in which the fund is established. Where the fund is to operate in more than one State or Territory, the application should be lodged at the ATO branch office in the locality in which the fund or body is principally controlled. 11.
If the ATO considers that the fund satisfies the legislative requirements in item 2 of section 3015 of the ITAA 1997, and the fund has safeguards present to ensure its sole purpose and the maintenance of that sole purpose are pursued, the application will be forwarded to Government for consideration. Applications that are fatally flawed will not be referred for Government consideration but will be returned by the ATO. 12.
A full and complete application including all relevant information and documentation should be provided in the first instance to avoid delays. Information required includes a copy of the private fund';s establishing will or declaration of trust, any application forms for assistance, policies, financial statements and details of day to day activities (if applicable). An application that does not provide all the necessary information may be considered to be an application without sufficient claims to being prescribed, and cannot be progressed by the ATO. 13.
The checklist at Attachment A should be completed and accompany the application. 14.
The Government's decision will be made by the Minister responsible for tax law administration matters. What are the requirements to be met? 15.
There are broadly three sets of requirements which must be met. They are:
the specific legislative requirements in item 2 of section 30-15 of the ITAA 1997. That is, the fund must be established and maintained under a will or instrument of trust solely for the required purpose, etc.;
the public fund requirements established and promulgated by the ATO from time to time, with the exception that the public need not be invited to contribute to the fund, and the requirement for control by a committee, a majority of whom have a degree of responsibility to the general community, need not be met. These requirements are presently set out in Taxation Ruling TR 95/27. A gift fund must be maintained; and
the integrity assurance measures outlined below. These measures recognise the particular circumstances of prescribed private funds. 16.
These requirements ensure that there are administrative and legal frameworks in place which will safeguard property and moneys donated to the fund and, as far as possible, ensure that tax deductible donations are used for an appropriate approved purpose. 17.
An outline of a trust deed which meets the requirements is at Attachment B. Integrity assurance measures 18.
The purpose of the following measures is to ensure that funds, which have been subject to concessional tax treatment are directed to the achievement of philanthropic ends. 19.
For the purposes of these guidelines the term 'associate' has the same meaning as it is given in subsection 78A(1) of the ITAA 1936. It should be noted that the term has an extended meaning and where a gift is made by will, it includes beneficiaries of the estate, associates and relatives of such beneficiaries. Control of the prescribed private fund 20.
The controlling body of the fund must include at least one person who is a 'responsible person', as described in Taxation Ruling TR 95/27 (relating to public funds). That is, a person who has a general responsibility to the community. Additionally, the responsible person must not be associated with the donor/settlor in anything other than a professional capacity. 21.
The founding documents of the fund must reflect this requirement. Benefit to donor/settlor 22.
The founding documents of the fund must prohibit the making of any benefit, direct or indirect, to the trustee (including any of its members or directors), the donor/settlor or to any associate. No part of the trust fund or the income may be paid, transferred or distributed directly or indirectly, by way of bonus, fee or otherwise, to the trustee, any of its members or directors or to a person or in a manner which would constitute a related party transaction pursuant to the provisions of the Corporations Law, assuming that the trust was a public company thereunder. 23.
This will mean that the documents will at least prohibit:
the conferring of a benefit, direct or indirect, on the donor/settlor or any associate (for example sale and purchase arrangements for property, and arrangements covering access to, use, maintenance and disposal of property);
the making of loans or similar arrangements back to the donor/settlor or any associate, whether at interest or not;
the investment in anything but authorised trustee investments which are not structured in a way so as to benefit directly or indirectly the donor/settlor, or any associate ( for example a loan back to, or purchase of shares in, a donor, associate, etc.); and
the investment in anything but authorised trustee investments which are not structured in a way so as to benefit directly or indirectly the trustee (including a director or shareholder in the trustee company), or any associate. Accumulation of money in the prescribed private fund 24.
An amount of money originally settled on the fund may be retained indefinitely. 25.
Other income of the fund comprising donations, gifts, government grants and other voluntary transfers of property may be accumulated, but not indefinitely. Indefinite accumulation of funds does not involve an application of funds for the intended philanthropic purpose. However, it is also recognised that accumulation of funds can, in some circumstances, be desirable and appropriate. Where accumulation of funds beyond a portion of income, discussed below, is intended, a plan and rationale must be provided to the ATO at the time of making an application. That information must be updated whenever such plans change. 26.
The founding documents of the fund may allow accumulation of other income (that is, income not including donations, gifts, government grants and other voluntary transfers of property referred to above) to an extent which maintains the real value of the capital of the fund, based on the Consumer Price Index figure for the previous financial year. In other words, the amount of other income retained must be limited to an amount which maintains the capital value on hand at the start of the financial year in line with the All Groups Consumer Price Index for the previous financial year. Exceptional circumstances 27.
In sufficiently exceptional circumstances the Government may consider prescription of funds that do not strictly meet the integrity assurance requirements outlined above. Does a prescribed private fund need to be endorsed as a deductible gift recipient? (Division 30-BA, ITAA 1997) 28.
A prescribed private fund is not required to be endorsed. A prescribed private fund should obtain an ABN, and to assist transparency agree to be placed on the Australian Business Register (ABR) with an indication that it is a deductible gift recipient (DGR). Does a prescribed private fund need to be endorsed as an income tax exempt charity? (Division 50-B, ITAA 1997) 29.
Yes, if it is desired that the income of the fund be exempt from income tax. A prescribed private fund is considered to be the type of fund described in item 1.5B of subsection 50-5 of the ITAA 1997. Such funds are exempt from income tax provided they satisfy the special conditions set out in subsections 50-52 and 50-60. Subsection 50-52 requires endorsement by the Commissioner of Taxation as set out in Division 50-B. Prescribed private funds should apply for an ABN and apply for endorsement pursuant to subsection 50-115. Annual information return30.
Funds will be required to provide a simple annual return to the ATO from the end of the 2001/02 year and after. Details will be promulgated by the ATO.
Dated: March 2001.
Attachment A
CHECKLISTApplication for prescribed private fund
Name of Fund……………………………………………………………………………...
ABN(if known)……………………………………………………………………………..
Name and address of Trustee………………………………………………….………
Names of persons controlling/administering the fund …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………The following questions must all be answered YES for a private fund to qualify as a deductible gift recipient if they are a prescribed private fund. Explanations of these requirements are found in the guidelines. Place a tick in each box if the requirement is met.
*Does your fund have all the characteristics of a public fund except for the requirement to seek and receive donations from the public? *Does the will or instrument of trust impose the requirements for control of the fund set out in the guidelines? *Was the fund established under a will or instrument of trust? *Does the will or instrument of trust prohibit the conferring of a benefit including distributions of corpus or any other trust property on the donor, any associate, etc., as outlined in the guidelines? *Does the will or instrument of trust prohibit any lending to the donor or any associate whether at interest or not? *Does the will or instrument of trust prohibit investing in anything but authorised trustee investments which are not structured in a way so as to benefit directly or indirectly the donor or any associate? *Does the will or instrument of trust prohibit investing in anything but authorised trustee investments which are not structured in a way so as to benefit directly or indirectly the settlor, trustee (including a director or shareholder in the trustee company) or relatives of such persons? *Except for the original sum settled, does the will or instrument of trust prohibit the accumulation of income of the fund in each financial year beyond the amount calculated in accordance with the guidelines? *Does the will or instrument of trust prohibit the accepting of property where there is an agreement to allow the donor or an associate (as defined in sec 78A(1) of ITAA36) to use or access the property or there is some other condition, agreement or understanding as to how it is to be used, maintained or disposed of? *Does the will or instrument of trust allow you to invest gift money only in ways that an Australian law allows trustees to invest trust money? *Does the will or instrument of trust require you to only provide money, property or benefits to DGRs or to establish DGRs? *Do you act solely to carry out these purposes? *If the will or instrument of trust allows you to help DGRs which have gift conditions, can you only help them for purposes allowed by the gift conditions?