Application of charities business exemption explained
IR has issued two draft QWBA’s on application of the charities business exemption contained within section CW 42 of the Income Tax Act 2007 (‘the Act’).
The first QWBA is referenced PUB00359a, with the title – Charities business exemption – when must it be used. The commentary considers when a charity needs to apply section CW 42 as opposed to section CW 41 in respect of determining the exempt income status or not of income the charity has derived during the year.
As presently drafted – “A charitable entity must use the business income exemption test in s CW 42 to work out whether income it derives from a business is exempt if:
- the charitable entity is carrying on the business; or,
- another charitable entity (the operating entity) is carrying on the business “for, or for the benefit of” the charitable entity (the controlling entity).”
The commentary then confirms that a business will be carried on by an operating entity for, or for the benefit of a controlling entity if all the rights to the income and capital of the business held by the operating entity are held for the benefit of the controlling entity.
The remainder of the draft QWBA comments primarily on the scenario of the business being carried on by a separate charitable entity (which may or may not be owned by the “parent” charitable entity – e.g., a charitable trust wholly owning an operating company which itself is a registered charity) and concludes with some narrative of how to treat the different sources of income (business and other income), applying either section CW 41 or section CW 42 accordingly.
The deadline for comment on PUB00359a is 1st February 2021.
The second QWBA is referenced PUB00359b, with the title – Charities business exemption – business carried on in partnership. Slightly shorter in length than PUB00359a, the primary focus of the QWBA, is whether the fact that a charity may carry on the business in partnership with a non-charity, may then negate the charities ability to claim the section CW 42 business income exemption.
The present view provided by the draft QWBA, is that section CW 42 remains available to the charity, because the income and capital of the business is allocated in accordance with each partner’s partnership share. Consequently, each taxpayer to the partnership, then separately determines the application of the Act to its share of the business income.
In this last regard, the reader is then referred to the first QWBA, from the perspective of whether the business income is derived directly or indirectly (via a separate operating charitable entity) by the charity considering the section CW 42 exemption.
As with the first draft QWBA, PUB00359b also has a comment deadline of February 1st
Hard forks and airdrops – confused yet?
If you have clients who dabble in the cryptoasset space, then the above terms potentially do not create a somewhat blank expression on your face when you hear them.
Well IR (along with numerous taxing authorities around the globe) is certainly in catch-up mode as the use of cryptoassets and distributed ledger technology (blockchain) becomes increasingly common, and taxpayers seek clarification from the Revenue as to the tax treatment of various types of cryptoasset transactions and arrangements.
In this regard, IR has recently released Issues Paper 14 – Income tax – tax treatment of cryptoassets received from blockchain forks and airdrops.
When it comes to cryptoassets transactions and arrangements, the starting point to remember I would suggest, is that at this point in time, there are no special tax rules – so it’s just working with what you already know in terms of revenue recognition concepts, expense deductibility criteria etc.
The biggest challenge I find, is getting your head around the new terminology and understanding exactly what is the nature, or character, of the ‘thing’ your client has, or is about to, receive, and then how to place a value on that ‘thing’ in order to reflect an amount in the tax return.
The Issues Paper refers to a ‘hard fork’ as a change to protocol code, to in essence create a new version of the blockchain and therefore a new ‘token’, which operates under the rules of the amended protocol while the original token continues to operate under the existing protocol – as simple as learning you’re ABC’s isn’t it.
An ‘airdrop’ is the other new term for me, and no, it has nothing to do with sharing photos on your mobile phone! In the world of cryptoassets, an airdrop is the distribution of tokens without compensation, i.e., for free, generally undertaken with a view to increasing awareness of a new token, particularly amongst ‘influencers’, and to increase liquidity in the early stages of a new token project.
Issue Paper 14 has three focus areas:
- The tax consequences of receiving cryptoassets from a blockchain hard fork or airdrop.
- The tax consequences of disposing of cryptoassets received from a hard fork or airdrop.
- The cost of the cryptoassets for deductibility purposes.
In conclusion, very briefly, as the Issues Paper is 55 pages in length:
- The receipt of new cryptoassets from a hard fork or airdrop will not be income to the recipient in many cases. However, the receipt of new cryptoassets may be income of the recipient if they:
- have a cryptoasset business (such as a dealing or mining business),
- have a profit-making undertaking or scheme involving acquisitions of airdropped or forked cryptoassets,
- receive airdropped cryptoassets as payment for services provided, or
- receive airdropped cryptoassets on a regular basis such that the receipts have the hallmarks of income.
- have a cryptoasset business (such as a dealing or mining business),
- Whether amounts received from disposing of these cryptoassets are taxable depends on the person’s circumstances – cryptoasset business, section CB 3 or CB 4 considerations.
- No deductions are generally available for the cost of the cryptoassets received from a hard fork or an airdrop, as the person has not incurred any expenditure in acquiring them. However, transaction fees incurred may be included as part of the cost of acquiring such cryptoassets.
The deadline for comment on IRRUIP14 is 1st February 2021.
If you blinked, you would have missed it!
For those of you yet to come to terms with the Taxation (Income Tax Rate and Other Amendments) Act 2020 (No 65 of 2020) Bill introduced to Parliament on 1st December 2020, the age old saying of ‘you snooze, you lose’ rings true, considering the Bill passed under urgency and received Royal assent on the 7th December.
As I highlighted in AWIR last week (refer back if you want all the goss), the Act sees:
- A new top personal income tax rate of 39%
- Increased disclosure requirement for trusts
- Increased Minimum Family Tax Credit threshold for the 2020–21 tax year, and
Clarification that Inland Revenue can request information solely for tax policy development purposes.