Charitable Purpose and Tax Concessions

Will the new funding measures that your charity is proposing to implement impact on your current tax concessions asks Guy Brandon, tax consulting partner at HLB Mann Judd.

Your charity is still making a difference but it is getting harder, much harder. Funding is drying up. The government and private sector funding “pie” appears to be getting smaller in size and being sliced into more pieces.

You are looking at other means to support the good work you are doing. But will the new funding measures you are proposing (or have commenced) impact on the hard earned tax concessions?

The answer is – it depends. There is no clear-cut answer and is specific to your circumstances.

The Australian Taxation Office has provided some guidance:

•       Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities

That ruling also makes reference to a number of High Court (Central Bayside [2006], Word Investments [2008], and Aid / Watch [2010]) and Federal Court judgements (Navy Health [2007], and Victorian Women Lawyers [2008]).

• Though not binding on the Commissioner of Taxation (commissioner), there are a number of Private Binding Rulings available to review to give an idea of the commissioner’s considered view on specific issues.

Have you asked, or thought of asking (if you have, you are not alone):

• Are the previously proposed laws for taxing commercial activities for not-for-profit organisations still “on the cards”?

• How much cash (be it a dollar or per cent amount) may I generate when compared to my current venture / institution (read charitable purpose) before putting my tax concessions at risk?

In respect of the first question:

• In the 2011/12 federal budget, the federal government announced a number of reforms in relation to the not-for-profit (NFP) sector including changes to the taxation of NFP’s commercial activities. On 14 December 2013 the government announced that it would not proceed with the previous proposal to tax NFPs on their unrelated commercial activities. However, it stated that it would consider alternatives. In the federal budget 2014/15 and the acting assistant treasurer’s media release More Progress in Restoring Integrity in the Tax System dated 13 May 2014, the government further announced that it considered alternatives to the proposed taxation of unrelated commercial activities are not required at this time.

In respect of the second question:

• From a review of the commissioner’s considerations (including rulings and determinations), the loss of (or the ability to obtain in the first instance) charity status turns more on concepts rather than by amounts or percentages.

• The commissioner states the institution’s only, or its “main or predominant or dominant” purpose must be charitable. This is seen as the “sole purpose test”, as a charitable institution cannot have an independent non-charitable purpose (regardless of how minor that independent non-charitable purpose may be).

• A purpose is the “main or predominant or dominant” purpose of an institution if any other purpose the institution has is no more than incidental or ancillary to that purpose.

• A purpose is “‘incidental or ancillary” to a charitable purpose if it tends to assist, or naturally goes with, the achievement of the charitable purpose. It does not mean a purpose that is minor in quantitative terms.

•  A purpose is “independent” rather than incidental or ancillary if it is an end in itself, or of substance in its own right or is not intended to further a charitable purpose.

Critically, purposes which are not charitable

• The purpose is to confer private benefits eg

• distributions to owners or members
• benefits for members
• benefits for individual entities that may not be members of an organisation
• incidental or ancillary private benefits

(Note: the existence of private benefits that are merely incidental or ancillary to a public benefit will not by itself affect the classification of a purpose as charitable).

• The purpose is commercial
  • a purpose of carrying on a business or commercial enterprise to generate a surplus where that purpose is an end in itself is not charitable.
  • however, commercial or business-like activities can be compatible with a charitable purpose.

An institution undertaking commercial or business-like activities can be charitable if its sole purpose is charitable and:

• it carries on a business or commercial enterprise to give effect to that charitable purpose
• it carries on a commercial enterprise to generate surpluses in order to further that charitable purpose
• the commercial activities directly carry out the charitable purpose
• the commercial operations are merely incidental to the carrying out of the charitable purpose.

There may be a more fundamental way to look at this issue. It is clearly a mindset rather than just looking to specific amounts or percentages:

• Whilst the “controlling minds” of the entity continue to view the financial results of the new venture as facilitating (or impeding) the overall charitable purpose carried on by the entity then arguably the entity remains a charity.
• At that point (by word or by deed) the controlling minds view the financial results of the overall charitable purpose as facilitating (or impeding) the new venture carried on by the entity then arguably the entity ceases to be a charity as the new venture has become an end in itself.

Finally…

This type of article can only ever aid in the discussion not resolve the issue.

Prior to launching into a new venture to increase funding for the entity, ask yourself could this impact the concessional tax status of the entity?  If it could, will the additional funding more than offset the loss of the concessional status (and having regard to other ongoing obligations).

If you are not sure and it will have a material impact, then seek assistance from your tax adviser. This may require a request for a Private Binding Ruling from the Commissioner of Taxation to obtain clarity for your specific circumstances.

About the author: Guy Brandon is a tax consulting partner at HLB Mann Judd (WA), call 08 9227 7500 or email GBrandon@hlbwa.com.au.