Australia: Not for profit reforms to change governance and tax concessions for charities

Taxation and Revenue Alert - 5 Dec 2011
Last Updated: 6 December 2011
Article by Hannah Byrne

The Federal Government's package of not for profit reforms, proposed in the 2011 - 2012 Budget, introduces significant change in the not for profit sector.

The reforms:

  • establish a new statutory authority, the Australian Charities and Not for Profit Commission;
  • introduce a statutory definition of 'charity'; and
  • make changes to the tax concessions provided to not for profit entities to ensure the concessions are targeted only at activities that directly further a not for profit's altruistic purposes.

These reforms impact on all not for profit sector entities, including philanthropic foundations, research institutions, educational institutions, community service institutions, social housing organisations and child care services.

Here, special counsel Justin Byrne and solicitor Hannah Byrne outline aspects of the reforms that may have a considerable impact on not for profit entities.

What you need to know now

  • From 1 July 2012, the newly-formed Australian Charities and Not for Profit Commission (ACNC) will be responsible for regulating all not for profits for the purposes of governance, accountability and transparency.
  • Until a proposed new definition of 'charity' takes effect in July 2013, not for profit entities should continue to rely on the common law definition of charity and the Commissioner's view of what constitutes a charity when applying for tax concessions. The Commissioner recently released Taxation Ruling TR2011/4, which outlines the Commissioner's views on the meaning of 'charitable', 'charitable institution' and 'fund established for public charitable purposes'.
  • While not for profit entities with existing unrelated commercial activities will initially be able to continue these activities, they will need to be phased out over time. The transition period for this will be confirmed when legislation is introduced. All not for profit entities that begin (or have already begun) new unrelated commercial activities after 7.30pm (AEST) on 10 May 2011 should be aware that these activities will now be taxable under the new arrangements.

Establishing a new statutory authority

As part of the 2011 - 2012 Budget, the Government announced that a new independent statutory agency, the Australian Charities and Not for Profit Commission (ACNC), will be responsible for regulating all not for profits. An implementation taskforce has been established to ensure the ACNC is ready for operation by 1 July 2012.

Introducing a statutory definition of charity

The Commonwealth Treasury released a consultation paper on the definition of 'charity' in October this year. 

The current meaning of 'charity' and 'charitable purpose' is principally defined at common law and is largely based on the Preamble to the Statute of Charitable Uses (known as the Statute of Elizabeth) and the case of Commissioners for Special Purposes of Income Tax v Pemsel [1891 - 1894] (known as Pemsel's case).

Pemsel's case identified four categories or 'heads' of charitable purposes:

  1. The relief of poverty
  2. The advancement of religion
  3. The advancement of education
  4. Other purposes beneficial to the community

Changing the definition of 'charity'

The new definition will be based on the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations and the Charities Bill 2003, and will also take into account the findings of recent judicial decisions such as Aid/Watch Incorporated v Commissioner of Taxation and Commissioner of Taxation v Word Investments.

The Commonwealth Treasury's consultation paper reviews the core definition of charity contained in the Charities Bill 2003. Particular attention is given to the presumption of public benefit, and whether this should be changed under the new statutory definition.

At the moment, the common law applies so that entities within the first three heads of charity listed above are presumed to be providing a public benefit. Although this presumption exists, not for profit entities must still ensure that they have been established for the public benefit. The onus is then on the ATO to demonstrate that a charity does not provide a public benefit and is therefore not a charity.

It has been suggested that the presumption of public benefit should be overturned, and that a new public benefit test should be introduced, which would require those entities seeking approval as a charity to demonstrate that they are established for the public benefit.

Timeframe for changing the definition of 'charity'

Submissions on the consultation paper are due on 9 December 2011. The Government is expected to release exposure draft legislation for consultation in the first half of 2012, and then introduce draft legislation into Parliament by mid-2012. The new definition is set to apply from 1 July 2013.

Changing the tax concessions on 'commercial activities'

The Government's reforms include changing the tax concessions provided to not for profit entities to ensure the concessions are targeted only at activities that directly further a not for profit's altruistic purposes. In May of this year, the Assistant Treasurer released a consultation paper to seek public views on the possible ways to make this happen.

The consultation paper indicates that income tax concessions will only apply to profits generated by the unrelated commercial activities of not for profits if they are directed to the not for profit's altruistic purpose. This means that a not for profit entity will pay income tax on those profits that are not directed back to its altruistic purpose (that is, the earnings it retains in its commercial undertaking).

Small scale and low risk unrelated commercial activities, such as lamington drive fundraisers and school fetes, are not expected to be affected by the reforms.

Not for profits will also have no access to fringe benefits tax exemptions or rebates, goods and services tax concessions, or deductible gift recipient support related to their unrelated commercial activities.

Timeframe for changing the tax concessions

If an income tax exempt entity begins (or has already begun) a new unrelated activity after 7.30pm (AEST) on 10 May 2011, that activity will be taxable. Depending on the model adopted for the reforms and the scale of the activity, in many cases the activity may need to be operated in a separate entity.

Not for profit entities with existing unrelated commercial activities will initially be able to continue to use their tax concessions to support these activities, and will be required to comply with transition arrangements (which are yet to be finalised) to phase these activities out over time.

For more information on the Federal Government's package of not for profit reforms and the impact it will have on tax exempt entities, please contact HopgoodGanim's Taxation and Revenue practice.

© HopgoodGanim Lawyers

Gold Employer of Choice - ALB magazine, April 2010
Finalist, Brisbane Law Firm of the Year, ALB Australasian Law Awards 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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