Court Rules PBI Directness Test Incorrect

A Federal Court decision in the case of The Hunger Project Australia v Commissioner of Taxation is set to change the outcomes for many charities previously denied Public Benevolent Institution status, writes Myles McGregor-Lowndes, Director of The Australian Centre for Philanthropy and Nonprofit Studies at QUT.

The Full Court of the Federal Court has handing down its decision in the case of The Hunger Project Australia v Commissioner of Taxation unanimously rejected the Commissioner of Taxation’s narrow interpretation of what constitutes direct relief for purposes of being a public benevolent institution (PBI).

The significance of this case should not be underestimated. With four judges all agreeing that the ATO misinterpreted the law, many charities previously denied PBI status and its concomitant FBT exemptions should now be able to gain it.  

Complaints about the ATO directness test for PBI status have been consistently made over the past 20 years by the sector, practitioners, academics all amply evidenced in all the major sector inquiries.  The classic definition used by the ATO of a Public Benevolent Institution is:

“a non-profit institution organised for the direct relief of such poverty, sickness, suffering, distress, misfortune, disability, destitution, or helplessness as arouses compassion in the community”.

And direct is explained as:

“The provision of direct relief may be achieved through the work of the employees or volunteers of the organisation itself or through its agents.”

The ATO interpretation was wrongly deduced from cases in the 1930s and early ‘80s and many charities have been denied tax concessions over the years that could have put such concessions to good use alleviating poverty and misery. To rub salt into the wound, many could not receive foundation grants because they were denied this tax status.

This is compounded by the Industry Commission 1995 report, Charitable Definition Inquiry 2001 and Productivity Commission 2010 all making comment on the problems with the ATO’s interpretation of the definition of PBI, providing  recommendations that have been ignored by governments of all colours.

The ATO view of the meaning of ‘direct’ was strongly dismissed by a decision of Perram J in The Hunger Project Australia v Commissioner of Taxation [2013] FCA 693. The Hunger Project Australia (HPA) is an ACNC registered charitable Not for Profit company limited by guarantee, which is part of a global network of entities that operate under the name ‘The Hunger Project’.

The principal objective of The Hunger Project is the relief of global hunger. The activities of HPA are mainly directed at raising funds which are then disseminated to Hunger Project members in the developing world. It is those entities that directly perform charitable acts to relieve hunger rather than HPA itself.

The Commissioner of Taxation (the Commissioner) contended that an entity that merely engaged in fundraising activities and did not materially perform charitable works directly for the benefit of the public was not a public benevolent institution.

At first instance the primary judge rejected the Commissioner’s contention and found that HPA was a public benevolent institution even though it was predominantly engaged in fundraising.

This finding was upheld on appeal. The appeal judgment indicated that:

“there is no single or irrefutable test or definition, the ordinary meaning or common understanding of a public benevolent institution includes (to adapt the words of Starke and Dixon JJ in Perpetual Trustee) an institution which is organised, or conducted for, or promotes the relief of poverty or distress.  To adapt the words of Priestley JA in ACOSS, such an institution conducts itself in a public way towards those in need of benevolence, however that exercise of benevolence may be manifested.”

So what might happen next?

• The ATO has 28 days to decide whether to try a seek leave to appeal the decision to the High Court.  If there is an appeal many will await the High Court before making a decision to make an application to become a PBI.
• Should the decision stand, the government faced with the prospect of increased taxation expenditure for the two main tax expenditures generated by PBIs may seek to legislate to restrict PBI status. In 2013-14, gift deductibility costs $1,150 million and FBT exemption $1,340 million. Both in the top 30 tax expenditures for the whole of the commonwealth government.
• The inquiries mentioned above have made some well considered recommendations about PBIs and gift deductibility, particularly the Productivity Commission and Charity Definition Inquiry which should not be lost in any policy development.
• Some may pursue an application for PBI status as quickly as possible to take advantage of any ‘grandfathering’ that may accompany a Commonwealth government decision to alter the taxation legislation in response to this or a possible High Court decision.

We know that over one in three applications for DGR status was rejected or withdrawn between 2004-2010 from an ANAO audit report. An unknown number of the over 61,000 registered charities could join the current 9,000 PBIs and access donation deductibility and FBT exemption.  

For those considering changing their status, note that the ANAO study also found that applications prepared by professionals had a 75 per cent chance of being successful whereas ‘do it yourself’ applications had a 50 per cent success rate.

The ACNC Commissioner has with commendable speed issued an interpretation statement of the initial case (with the appeal noted) and should be read here.

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

Federal Court of Australia, Full Court, Edmonds, Pagone, Wigney JJ, 13 June 2014

An ACPNS  summary of the case at: https://wiki.qut.edu.au/display/CPNS/Taxation+cases

About the Author: Myles McGregor-Lowndes is Director of The Australian Centre for Philanthropy and Nonprofit Studies, QUT, a member of the ACNC Advisory Board and ATO‘s Not-for-Profit Advisory Group.