Tax Office Ruling on ‘Charity’ Creates Uncertain State of Limbo

The Australian Tax Office has delivered a new ruling on its view of charities following recent court decisions, forcing it to deliver an interim definition of ‘charity’. For some in the Not for Profit sector the ruling creates an uncertain state of limbo.

The ruling comes as the Federal Government is about to release a consultation paper to the Not for Profit sector on the key issues around a statutory definition of ‘charity’ set to be implemented early in 2012.

The new Australian Taxation Office Ruling TR 2011/4 sets out the Commissioner’s view on:

• features that distinguish a charitable institution from a charitable fund;
   
• circumstances under which an institution or fund will be considered charitable;
   
• determining whether the purpose of an institution or fund is charitable; and
   
• Recent court decisions in numerous cases such as Word Investments, Aid/Watch, Central Bayside and Victorian Womens Lawyers.

Pro Bono Australia spoke to Tax Director at Moore Stephens Melbourne, Stephen O’Flynn about the ATO’s interim definition and the uncertainty for some Not for Profit organisations.

O’Flynn says that it has been a good move by the ATO to deliver the ruling despite the upcoming sector discussions for a new definition.

O’Flynn says the ATO has sought to provide certainty for taxpayers on these issues and it is expected that the ruling will not adversely affect charities.

He says some charities have decided to push ahead with seeking charitable status despite the timing while other Australian charities will remain in limbo.

O’Flynn says in his discussions with the ATO their current view is that any future definition will expand on this current definition of charity.

He says the problem will be how the final legislation – to be introduced to “Better target tax concessions for Not for Profits” -operates to tax the activities that support charitable purposes but are not altruistic.

He says it will take smart and clever drafting by Treasury to not inadvertently impact the Not for Profit sector in an adverse way. 

O’Flynn has summarised the key points in the ATO’s latest ruling (TR2011/4):

• For a purpose to satisfy the technical legal meaning of “charitable”, it must fall within one of the four heads of charity; the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community. Furthermore, it must be for the public benefit. TR 2011/4 provides that where the charity falls within one of the first three heads, there will be a rebuttable presumption that the charity is for the public benefit. However, for “other purposes beneficial to the community” the public benefit must be affirmatively established;
   
• TR 2011/4 states that the objects or objectives in the constituent documents of an institution and its activities which give effect to those objects will be the main factors used in determining whether the entity has a charitable purpose. Furthermore, it is essential that the entity is not only established for charitable purposes, but it is maintained (i.e. its ongoing activities) for that purpose;
   
• Following the High Court’s decision in Word Investments, the ATO confirms the following:
  • An institution can be charitable even if its activities are not intrinsically charitable as long as the activities are carried on in furtherance of the institution’s charitable purpose;
     
  • A “charitable institution that endeavours to make a profit from its activities can still be charitable if it’s profit making goal is only in aid of it’s charitable purpose”;
     
  • If an entity’s sole purpose is charitable and it carries on a business or commercial enterprise to give effect to that charitable purpose, the entity may still have a charitable purpose. It is not necessary for the activities themselves to be intrinsically charitable;
     
  • The fact that an entity can distribute surpluses to owners or members will not deter an entity from being charitable as long as the distribution of funds to its owners or members is in furtherance of its charitable purposes;
     
• A structure with a small and exclusive membership that is controlled by family members and friends and undertakes limited activities is not an institution. It may however still be a charitable fund;
   
• Following from the High Court’s decision in Aid/Watch, political purpose can be considered charitable if it generates public debate with a view to influence legislation, government activities or government policy in respect of one or more of the four categories of charity;
   
• Following the decision in Central Bayside, where the sole purpose of an institution is charitable, neither the fact that its services have the effect of helping to achieve government policy objectives nor the fact that it relies heavily on government funding will detract it from being characterised as charitable;
   
• An entity that accumulates funds can still be charitable as long as the accumulated funds are being accumulated in order to increase the funds available to effect the entity’s charitable purpose.

O’Flynn says overall the ruling is a positive outcome as it consolidates the various courts decisions and expands the ATO’s initial view on charitable purpose.

He says the additional examples included in TR 2011/4 are also welcomed as additional assistance to taxpayers in determining whether their entities are charitable.

He says however, it is essential to review the Ruling and determine if a NFP entity’s particular circumstances satisfy the definition of charitable as determined by the Commissioner in this current Ruling.

He says unfortunately, whilst a number of these concepts have to some extent now been solidified through TR 2011/4, the sector will have to watch closely the proposed changes to the statutory definition of charity and other Not for Profit changes.

To download a copy of the ATO Ruling, click here [PDF version available].