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SCHOOLS : DONATIONS & BEQUESTS

Paul Ingram, Partner, Minter Ellison

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

Donations(inter vivos)

Bequests (by Will)

MoneyDeductible Not deductible

Property Deductible(subject to certain rules)

Not deductible

CGT payable(unless under CGP)

CGT exempt

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