The Australian Taxation Office has now released the final version of its ruling on the ‘in Australia’ tests for DGRs and tax exempt entities. There is a different test for DGRs than for tax exempt entities.
For DGRs, there is a requirement that the fund, authority or institution be 'in Australia'. The term 'in Australia' is not defined in the DGR legislation.
The ATO states that to be in Australia the DGR must be established or legally recognised in Australia and it must make its operational or strategic decisions mainly in Australia.
The test is not concerned with the locations of particular assets or transactions. Therefore, DGRs with purposes and beneficiaries located outside Australia can still satisfy the 'in Australia' requirement if the operational or strategic decisions are made mainly in Australia.
An institution that makes operational decisions in Australia may be 'in Australia', even though its strategic decisions are made overseas. Similarly, an institution that makes strategic decisions in Australia may be 'in Australia', even though its operational decisions are made offshore. Therefore, if a DGR has directors both in Australia and overseas, it may be important for a majority of directors to be in Australia when decisions are made.
Tax Exempt Entities
For charities and most other income tax exempt entities to remain tax exempt, they must pass one of four tests. For most organisations, the only test they can pass is the 'in Australia' test. This test requires the entity “to have a physical presence in Australia and to that extent, incurs its expenditure and pursue its objectives principally in Australia”.
None of the terms used in the test are defined in the Tax Act. Therefore, the ruling considers the meaning of the four key aspects of the test.
The ATO considers an entity to have a physical presence in Australia if it is legally established in Australia. It will employ assets or people in Australia to conduct its operations.
Expenditure in Australia
The ATO states that expenditure is incurred in Australia where the decision to pay is made in Australia and payment occurs from an Australian source, such as an Australian bank account.
Expenditure includes distributions and grants. Distributions to another Australian entity are considered to be in Australia even if that other entity then uses the funds overseas.
Note that in determining whether this test is passed, the entity can disregard amounts received as a gift or from government grants.
Objectives in Australia
An entity pursues its objectives in Australia if it seeks to realise its purposes in Australia, whether that is by making distributions to other entities or by supplying goods or services in Australia. Again gifts and government grants can be excluded.
Where an organisation is incurring its expenditure may be an indication of where it is pursuing its objectives. However, it is not decisive. The ATO includes an example of an organisation paying the fees and travel expenses of Australian subcontractors providing training in China. It states the organisation is pursuing its objectives outside Australia.
Principally is considered to be more than 50%.
The ATO ruling contains a number of examples that may assist in determining whether your organisation or DGR meets the relevant in Australia test. A copy of the ruling can be found at https://www.ato.gov.au/law/view/document?docid=TXR/TR20196/NAT/ATO/00001/a>.
If you have any concerns about whether your entity is meeting the in Australia requirement and what action you take, please contact us to discuss your situation.