The Federal Government focuses on the not-for-profit sector

The Federal Government earmarked the not-for-profit (NFP) sector for a number of reforms over the next couple of years in its 2011-12 Federal Budget announced on 10 May 2011.

In this tax alert, we outline the measures announced by the Federal Government and how the sources that the Federal Government have announced will form the basis of consultations on setting a statutory definition of ‘charities’.

What this means for you

As part of the 2011-12 Federal Budget announced on Tuesday 10 May, the Federal Governement proposed the  following measures:

  • Introduce a statutory definition of ‘charities’ which will apply across all Commonwealth agencies and laws from 1 July 2013.  
  • From 1 July 2011, the NFP tax concessions will only apply to profits generated by unrelated commercial activities directed back to a NFP entity carrying out altruistic work.  From this date, NFP’s will pay income tax on profits from unrelated commercial activities that are not directed back to their altruistic purposes.
  • Establish the Australian Charities and Not-for-profits Commission (ACNC) an independent statutory agency that will determine the legal status of groups seeking charitable, public benevolent institution and other NFP benefits for all Government agencies.  To be established and ready for operation by 1 July 2012.

These measures appear to reflect recommendations made in the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations (2001 Charities Report). 

Statutory definition of ‘charity’

The Federal Government will consult on a statutory definition of ‘charity’ with the States and Territories which will be introduced from 1 July 2013. The Federal Government also indicated in their media release that the new statutory body, the ACNC, will re-assess the charitable status of entities on the basis of the new statutory definition.

The statutory definition of ‘charity’ will be based on the 2001 Charities Report, and will take into account findings of recent judicial decisions such as Aid/Watch Incorporated v Commissioner of Taxation [2010] HCA 42 (Aid/Watch Case).  The Aid/Watch Case recently extended the common law definition of ‘charity’ to include further types of advocacy-based organisations.

The former Howard Government was the last government that attempted to introduce a statutory definition of ‘charity’.  This review resulted in the release of the 2001 Charities Report.

The then Federal Government released a draft Charities Bill 2003 and asked the Board of Taxation to consult with the charity sector on the proposed statutory definition.  On 11 May 2004, the attempt to introduce a statutory definition of ‘charities’ was abandoned and the then Treasurer announced that the common law definition of charities would continue to apply.

Key recommendations of the 2001 Charities Report|

The 2001 Charities Report distinguishes between altruistic entities and other NFP entities, such as mutual entities.  ‘Altruistic entities’ were defined to include benevolent charities, charities and altruistic community organisations.

The 2001 Charities Report recommended a ‘charity’ be defined as an entity having a dominant purpose or purposes that are charitable, altruistic and for the public benefit.  In the case where an entity had other purposes, those purposes were required to be in aid, ancillary or incidental to the dominant purpose or purposes of the charity.  Activities that were illegal, contrary to public policy, or promoted a political party or a candidate for political office were not considered to be within the scope of ‘charity’.

The 2001 Charities Report stated that a charity’s structure should not affect its status. However, while a charity could include a body corporate, corporation sole, any association or body of persons whether incorporated or not, or a trust, it could not include an individual, partnership, superannuation fund, political party or a government or government body.

The 2001 Charities Report defined the term, ‘charitable purposes’ quite broadly as:

  • The advancement* of health, which without limitation includes:
    • The prevention and relief of sickness, disease or of human suffering;
  • The advancement* of education;
  • The advancement* of social and community welfare, which without limitation includes:
    • The prevention and relief of poverty, distress or disadvantage of individuals or families;
    • The care, support and protection of the aged and people with a disability;
    • The  care, support and protection of children and young people;
    • The promotion of community development to enhance social and economic participation;
    • The care and support of members or former members of the armed forces and the civil defence forces and their families;
  • The advancement* of religion;
  • The advancement* of culture, which without limitation includes:
    • The promotion and fostering of culture; and
    • The care, preservation and protection of the Australian heritage;
  • The advancement* of the natural environment; and
  • Other purposes beneficial to the community, which without limitation include:
    • The promotion and protection of civil and human rights; and
    • The prevention and relief of suffering of animals.
    • (* Advancement is taken to include protection, maintenance, support, research, improvement or enhancement)

As stated above, it is the intention of the Federal Government to model the statutory definition of ‘charity’ on recommendations made in the 2001 Charities Report.  Only time and consultation with the States and Territories will tell whether the Federal Government will overcome the difficulties faced by the former government and introduce a statutory definition of ‘charity’ by 1 July 2013.  It does appear that some entities currently enjoying the status of a ‘charity’ may lose this once a statutory definition is introduced.

Restricting tax concessions

From 1 July 2011, NFP entities will now be required to identify profits earned from unrelated commercial activities that are not directed to their altruistic purposes and pay tax on these profits.  This is consistent with the treatment proposed by the 2001 Charities Report.

The use of tax concessions to further the altruistic works of an NFP even where the activity is conducted commercially will not be affected.  Examples of such activities include not-for-profit hospitals, op-shops that sell second-hand household items and clothing (at discounted prices to those in charitable need), NFP child care centres, and businesses whose purpose is to provide meaningful employment to disabled persons.  Small-scale and low-risk activities (for example lamington drive fundraisers, school fetes and leasing out of church halls) will not be affected.

In the media release, the Federal Government stated that NFP entities will not be able to access the fringe benefits tax (FBT) exemptions or rebate, goods and services tax (GST) concessions, or deductible gift recipient support in relation to their unrelated commercial activities.

Existing unrelated commercial activities will not be affected by these measures.  However, new unrelated commercial activities that commence after 7:30pm (AEST) on 10 May 2011 will be caught by these changes.  The following activities will not be affected by the changes and may continue to apply the tax concessions:

  • NFP entities that entered a government service delivery contract as at 10 May 2011; and
  • The 50,000 National Rental Affordability Scheme allocations.

Prima facie it should follow that expenses NFPs have incurred in deriving profits from unrelated commercial activities should be deductible however the methodology to allocate expenses to these areas will present difficult issues for NFPs.  The amending legislation will need to be sited before any definite conclusions can be reached on how the amendments limiting access to tax concessions will operate in practice.

The Federal Government will be consulting on transitional measures that will phase out the availability of tax concessions to NFPs pre-7:30pm (AEST) 10 May 2011 unrelated commercial activities.

We will advise as details of these measures are released.

For any queries regarding the aspects of the Charities measures please contact Steve Fitzsimons here.