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Charities & Not-For-Profits Law in Australia

In Australia Tax Concession Requirements Reviewed

Posted in Compliance, General, Governance, Tax Exemptions & DGR Status

Summary – The Assistant Treasurer has issued a further Exposure Draft on proposed legislation restating and standardizing special conditions for tax concession charities including Map of Australiathe “In Australia” conditions.

The Assistant Treasurer has now released a further Exposure Draft of legislation restating and standardising special conditions for tax concession entities and, in particular, refining the “In Australia” special conditions.

Under the current law, tax concession charities and deductible gift recipients have different requirements concerning their obligations to operate “In Australia” to access tax concessions.

The latest Exposure Draft attempts to ensure that:

  • income tax exempt entities generally must be operated principally in Australia and for the broad benefit of the Australian community; and
  • deductible gift recipients (DGRs) generally must be operated solely in Australia and for the broad benefit of the Australian community.

The Exposure Draft also standardises the definition of “Not-For-Profit” across Commonwealth legislation replacing the previous “non‑profit” expression.

The latest Exposure Draft is a considerable improvement on the first Exposure Draft but there are still some issues of significance.  We offer the following observations:

  • The revised definition of “Not-For-Profit Entity” is in our view acceptable and allows for Not-For-Profits (NFPs) to distribute or transfer assets to owners or members operating for a similar purpose or in payment for reasonable expenses.
  • The commentary issued by the Assistant Treasurer allows a charity to donate to another charity regardless of their individual charitable purposes (paragraph 1.77).  This statement is not included in the legislation and, in our view, should be.
  • To date, the use of funds which were donated (whether the donor is entitled to a tax deductible receipt or not) could be disregarded in determining whether the entity operated principally in Australia and was entitled to endorsement as a tax concession charity.  This broad provision has now been limited to the use of donations which do not attract tax deductions.
  • The disregarding of use of donated monies or Government Grants is subject to conditions which have not yet been identified.  It is important that these are understood and we suggest that a draft regulation should be issued at this time. At paragraph 1.69 Treasury indicates what some of those requirements might be but in our view it is important that the sector has greater certainty about these at this stage.
  • Tax exempt entities must comply with all the “substantive requirements” contained in its governing rules.  The Assistant Treasurer’s commentary provides an insight into the expression “substantive requirements” but it is our view that these provisions should be incorporated in the legislation or by way of regulation.
  • Tax exempt entities must use income and assets solely for the purpose for which the entity is established and operated.  There is no provision for any flexibility for incidental or minor activities which may not satisfy that requirement. This should be relaxed in our view.
  • Entities which are both endorsed as DGRs as a whole entity and which also might conduct overseas aid funds which are DGRs, may find that their overseas aid fund disentitles the organisation as a whole to endorsement because that activity would prejudice the organisation’s overall operations “In Australia”.  In our opinion, this should be addressed.
  • There is provision for exemptions under regulation for some foreign tax exempt entities and entities that operate and pursue purposes principally outside Australia.  Those organisations currently listed in these categories will continue to be entitled to this exemption but new entities who are impacted by the change requirements will need to apply for prescription. The Exposure Draft indicates that this would only occur “in exceptional circumstances”.
  • Where a tax exempt entity pays money to another entity which is tax exempt then it is necessary to trace the use of those funds to determine whether the first tax exempt entity can satisfy the conditions about operating and pursuing its purposes in Australia.  There needs to be greater clarity about the extent of this tracing.
  • In our view an exemption should be considered for an entity incurring significant expenditure overseas which results in a benefit in Australia.  For example, an entity might engage in research overseas where the relevant academics are located, but the result of that research will be used in and be beneficial in Australia. This overseas element may jeopardise the tax status of an entity which would otherwise be entitled to endorsement as a tax concession charity or a deductible gift recipient.

Submissions on the revised Exposure Draft need to be lodged by close of business on 11 May 2012 and should be sent to NFPReform@treasury.gov.au.

In this briefing, we have summarised some of the major impacts that we have identified in the latest Exposure Draft.  Should you require any specific advice on how these proposals may impact upon your organisation and/or should you wish assistance in preparing a submission to Treasury, please do not hesitate to contact Bill d’Apice.