Court Decision Points the Way to DGR Category Simplification

Once it is accepted that the judgement of the Full Court of the Federal Court of Australia in matter of Commissioner of Taxation v Hunger Project Australia (2014) extends to fundraising, the landscape for taxation deductibility arguably can be simplified, writes Dr Matthew Turnour, Director of the Australian Charity Law Association.

On 15 June 2014 Prof Myles McGregor Lowndes set out an analysis of the judgement of the Full Court of the Federal Court of Australia in matter of Commissioner of Taxation v Hunger Project Australia [2014].[1]

This note does not recite the summary of that judgment but relies upon Prof McGregor-Lowndes analysis in developing arguments for broad based tax reform of DGR categories.

As many readers know, I have argued for many years that there is a clearly identifiable, broad, class of organisations that seek to bring people at a disadvantage (people in need of benevolence) to a point where they are able to enjoy the basics of life as others do. I suggest that this class of organisations 'Deal with Disadvantage'.[2]

Once the Full Court’s statement that the 'ordinary meaning or common understanding of a public benevolent institution' is accepted, and it is accepted that it extends to fundraising, the landscape for taxation deductibility arguably can be simplified.[3]

The question, that I suggest is now opened for debate, is whether it is possible to bring into one category, for the purposes of income tax deductibility, all entities that ‘Deal with Disadvantage’ whether they:

• are funds or institutions;
• are direct or indirect providers;
• are domestically or internationally focussed; or
• are engaged in the areas of health, welfare or both.

The wording for the class will require some careful drafting. One way of approaching the subject might be to follow the United Kingdom framework but further limit it. In the UK all charities are afforded the closest approximate to deductibility, which is Gift Aid.

Here we might limit deductibility only to charities that are for the ‘relief of poverty’ (or the equivalent heads under the Charities Act 2013). An alternative might be to develop the thinking behind the ACNC’s Interpretation Statement of Justice Perram’s reasoning in the judgement at first instance in Hunger Projects case.

That Statement requires that deductibility be available only where there are evident concrete objects of benevolence – not general, undirected or abstract objects.[4]  Whatever approach is taken I suggest that this broad deductible class would include at least the following types of entities that are presently DGRs:

• Public Benevolent Institutions;
• Health promotion charities;
• Harm prevention charities;
• Necessitous circumstances funds;
• Disaster relief funds; and possibly
• Overseas aid Funds.

Such a simplification would be of enormous assistance to the sector and is arguably well overdue.

The business sector is enjoying the benefits of the root-and-branch tax reform from the 1980s and 1990s but the voluntary sector is still waiting. The Productivity Commission Report of 2010; The Contribution of the Not for Profit Sector noted that there had been some reform “over the past decade … aimed at encouraging a greater level of giving in Australia, especially by high income and wealthy individuals” and that “coinciding with these reforms, there appears to have been an increase in philanthropic giving in Australia”.[5]

It also noted that the “scope of eligible charitable activities [entitled to DGR status] is relatively narrow in Australia” by international comparisons.[6] Legislative simplification would be a logical next step in the reform process which to date has tended to respond by piecemeal, incremental additions. A recent example being the extension of DGR status to all state and territory government bodies that coordinate volunteer fire brigades and state emergency services, and the fund that supports them.

Finally, an important point illustrated by the Hunger Projects case and noted by the Full Court is that international charities are a relatively new phenomenon.[7] They able to choose where they locate. The Australian entity, Hunger Projects Australia, was simply a fundraiser for the parent in New York. We do not want to encourage our charities to move to tax advantageous jurisdictions. We do not want to discourage international charities from relocating here. Gary Banks of the Productivity Commission, in an analysis of what made some Australian reform successful and others not, observed that successful reforms began with regard to Australia’s international competitiveness.[8]  

We must take account of what is happening in relation to deductibility or its equivalent internationally, particularly in the UK, USA and Canada, if we wish our reforms to be successful. In a context where the Government is already looking at reform of the ‘in Australia’ limitations on DGRs and plans to amend those laws for PBIs a broader remit for this reform agenda to look at the classes as a whole may now be quite timely.

A broad simplifying reform, which also positioned Australia to be more internationally attractive to charities, may appeal to a government committed to red tape reduction and private philanthropic encouragement.

About the Author: Dr Matthew Turnour is the Managing Director of Neumann & Turnour Lawyers and chair of the Queensland Law Society’s Subcommittee for the Not-for-profit Sector. He is also a Director of the Australian Charity Law Association and a member of the Australian Charities and Not-for-profits Commission’s Professional User Group.

[1] Myles McGregor Lowndes (2014) Court Rules PBI Directness Test Incorrect available at https://probonoaustralia.com.au/news/2014/06/court-rules-pbi-directness-test-incorrect

[2] Matthew Turnour (2009) Beyond Charity Outlines of a Jurisprudence for Civil Society at 330 ff available at http://eprints.qut.edu.au/31742/

[3] It must be remembered that at this stage there may be an appeal to the High Court of Australia so these comments might not stand. That does not affect, though, the reform suggestions advanced here.

[4] Australian Charities and Not-for-profits Commission (2014) Commissioner’s Interpretation Statement: The Hunger Project case at [18] to [22]. Available at http://www.acnc.gov.au/ACNC/Publications/Interp_HungerProject.aspx.

[5]  Productivity Commission (2010) Contribution of the Not-for-profit Sector Appendix G 2-3

[6]  Productivity Commission (2010) Contribution of the Not-for-profit Sector Appendix G 6

[7] Commissioner of Taxation v Hunger Project Australia [2014] FCAFC 69 at [39]

[8] Gary Banks (2010) Successful reform: past lessons, future challenges Keynote address to the Annual Forecasting Conference of the Australian Business Economists, Sydney, 8 December 2010 at 8. Available at http://www.pc.gov.au/speeches/gary-banks/successful-reform