The Federal Court has recently ruled that there is no requirement for a public benevolent institution to provide direct relief to people in need. Its interpretation of the expression 'public benevolent institution' theoretically has the potential to expand eligibility well beyond traditionally accepted boundaries. At an immediate and practical level, the decision raises the question of how far regulators will accept that the boundaries of indirect provision of relief can be stretched. Special Counsel Glenys Hodges and Associate Scott Lang report on the implications of this significant development in the law of charities.
How does it affect you?
- Some existing charities may now be eligible to apply to the Australian Charities and Not-for-profits Commission (ACNC) for registration as a public benevolent institution (PBI) subtype and will then be eligible to be endorsed by the Commissioner of Taxation for the fringe benefits tax (FBT) exemption and, if they meet the 'in Australia' condition, as a deductible gift recipient (DGR).
- Charities similar to The Hunger Project Australia (HPA), whose main purpose and activities are to raise funds to support their related or associated entities that directly support people in need, should now be accepted as a PBI. Charities who support those related or associated entities in other ways now might also be accepted as PBIs.
- Charities who think they might now be accepted as a PBI should consider if it they could take any steps to strengthen, or better evidence, their relationships and associations with other relevant entities in order to improve their prospects of success in being accepted as a PBI.
- Existing PBIs who have until now restricted their activities in order to meet the directness requirement could explore new opportunities to deliver their services more efficiently and cost effectively through relationships and associations with other entities.
- Charities who have until now undertaken some benevolent activities but not as their main purpose due to the restrictions of the directness requirement, may now find it worthwhile to redefine their objectives and refocus their activities in order to qualify as a PBI.
- A charity that is not 'an institution which is organised, or conducted for, or promotes the relief of poverty or other distress' but nevertheless believes it is a PBI in the contemporary understanding of that expression, should consider putting its case to the ACNC. There seems to be little to lose and much to gain.
In the decision of Commissioner of Taxation v The Hunger Project Australia,1 the Full Court of the Federal Court held that:
- whether a particular institution is a PBI depends on the common or ordinary understanding of the expression at the relevant time; and
- the expression includes an institution which is organised, or conducted for, or promotes the relief of poverty or other distress, and the fact that an institution does not itself provide that relief but does so via related or associated entities is no impediment to it being a PBI.
Currently, the ACNC determines whether a charity is a PBI for the purposes of eligibility to access federal tax concessions. Two significant tax concessions are available to a charity registered by the ACNC as a PBI subtype, namely:
- DGR status (meaning that taxpayers can claim an income tax deduction for the value of donations made to the PBI); and
- exemption from FBT on all meal entertainment, car parking fringe benefits and entertainment facility leasing expenses provided to employees, as well as exemption from FBT on up to $30,000 worth of other fringe benefits provided to each of its employees.
PBIs are also eligible for various exemptions and concessions in relation to state and local taxes, such as stamp duty, land tax and rates.
The 'in Australia' condition for DGR status
To be eligible for DGR status, a registered PBI must also meet the special condition that it is 'in Australia'. The Commissioner of Taxation's interpretation of this condition is that a PBI:
must be established, controlled, maintained and operated in Australia and its benevolent purposes must be in Australia. Because the purpose of public benevolent institutions is to provide direct relief to persons in need, this will mean that the relief will be provided to people located in Australia.2
This interpretation was made in the context that the directness requirement applied and has not been updated since the HPA decision. Arguably, by analogy to the Word Investments case,3 a PBI should meet the 'in Australia' condition if all the related or associated entities that it supports are located in Australia, even if the people in need that it indirectly supports are overseas. However, that case was about the differently worded 'in Australia' special condition for income tax exemption. It is unlikely that the Commissioner would accept that approach in relation to the DGR special condition.
Earlier this year, the Federal Government released exposure draft legislation to restate and clarify the 'in Australia' special conditions for income tax exempt entities and DGRs.4 If that legislation is enacted, it would put beyond doubt that only PBIs whose benevolent relief is distributed only to persons in Australia will be eligible for DGR status.
Currently there is no 'in Australia' special condition applying to the eligibility of a PBI for the FBT exemption and none are proposed in the exposure draft legislation. Perhaps the HPA decision will place that on the political agenda.
The expression 'public benevolent institution' is not defined in any relevant legislation and does not have any technical legal meaning but takes its ordinary meaning. In the leading 1931 case of Perpetual Trustee Co Ltd v Federal Commissioner of Taxation,5 the High Court held that, in ordinary English usage, a PBI is an institution organised or conducted for, or which promotes the relief of, poverty, sickness, destitution, helplessness or other distress.
Based on that decision and subsequent case authorities, the Commissioner of Taxation has interpreted the meaning of PBI to include a requirement that, generally, the PBI must provide 'its aid and services directly to people in need of benevolent relief.'6 The ACNC continued to apply the directness requirement in its regulatory guidance when it took over responsibility for determining PBI status for the purposes of federal tax concessions.
HPA is a not-for-profit company limited by guarantee whose constitution provides that its exclusive object is the relief of poverty, sickness, suffering, destitution and helplessness, particularly in developing countries. HPA is a member of a global network of entities operating under the name 'The Hunger Project', under which partner entities in the developed world raise funds for distribution to program entities in the developing world. A global office in New York administers the network and coordinates both partner and program entities. HPA is a partner entity and its most substantial activity is raising funds in Australia for distribution to program entities. Its direct charitable activities are negligible. The relationship between partner entities is governed by a global chartering agreement.
HPA was endorsed as a charitable institution for income tax exemption and other tax concessions and, in 2010 (before the commencement of the ACNC), it applied to the Commissioner of Taxation to be endorsed as a PBI for the FBT exemption. The Commissioner refused the application and HPA's subsequent objection on the ground that HPA did not provide benevolent relief directly to people in need. HPA commenced proceedings in the Federal Court which were funded under the Commissioner of Taxation's test case funding program.
Decision at first instance
Justice Perram held that:7
- no binding authority required a PBI to dispense benevolent relief directly;
- the ordinary meaning of 'public benevolent institution' did not require the direct provision of benevolent relief;
- the legislation in which the expression 'public benevolent institution' is used does not show a legislative intention that benevolent relief must be dispensed directly; and
- to impose a 'directness' requirement would be contrary to the reasoning of the High Court in the Word Investments case, where it was held that a fund-raising entity with charitable objects that distributed all its profits to a charitable institution could itself be a charitable institution, there being no relevant difference between a charitable institution and a PBI in this regard.
Consequently, Justice Perram held that HPA was a PBI because its principal object of relieving hunger and its involvement in the relief of hunger is concrete, being achieved by its close relationships with, and distribution of funds to, the Hunger Project entities in developing countries. The Commissioner appealed this decision.
Upheld on appeal
In a unanimous joint judgment, the Full Federal Court dismissed the Commissioner's appeal and upheld Justice Perram's reasoning.
The Appeal Court noted that (as accepted by the Commissioner) in the absence of a statutory definition or technical legal meaning, the expression 'public benevolent institution' must be given its ordinary meaning and stated that:
- while past judicial statements can often assist in working out the meaning of a word or expression, the common understanding of the meaning of a word or expression may change over time; and
- in construing the ordinary meaning of the expression 'public benevolent institution' in the context of a particular institution, the focus should be on the substance of the objectives and activities of the organisation, not its organisational structure.
On the basis of this reasoning, the Appeal Court held:
In our opinion, whilst 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….
The ordinary contemporary meaning or understanding of a public benevolent institution is broad enough to encompass an institution, like HPA, which raises funds for provision to associated entities for use in programs for the relief of hunger in the developing world. The fact that such an institution does not itself directly give or provide that relief, but does so via related or associated entities, is no bar to it being a public benevolent institution. Such an institution is capable of being considered to be an institution organised or conducted for the relief of poverty, sickness, destitution and helplessness.
The Commissioner of Taxation decided not to appeal the decision.8
The ACNC has issued guidance based on its view of the law set out in the HPA case.9 It describes the new HPA-type of PBI as one that has:
- concrete objects of benevolent relief with a beneficiary group recognisably in need of benevolent relief;
- clear mechanisms for delivering the benevolent relief; and
- a relationship of collaboration and a common public benevolent purpose, which may be shown in a number of ways such as through organisational structure, shared planning and processes. The focus is on the substance of the objectives and activities, rather than form.
The ACNC has also updated its factsheet, Public benevolent institutions and the ACNC, along similar lines.
The Australian Taxation Office has indicated that it will adopt the decision and reasoning of the court and consider necessary amendments to Taxation Ruling TR2003/5.10
A potentially expanding meaning of 'public benevolent institution'
The HPA decision strongly makes the point that the expression 'public benevolent institution' takes its ordinary, contemporary meaning, which can change over time.
We now know that the expression includes an institution that is organised, or conducted for, or promotes the relief of poverty or distress. The courts in this case gave no guidance as to other types of institution that might now be a PBI in contemporary understanding. Given that modern dictionaries define 'benevolent' (and also 'eleemosynary', another word used in these cases) as 'charitable', theoretically the expression could, in contemporary understanding, mean (or, over time, come to mean) something almost as wide as the expression 'charitable institution'.
Only time will tell how far the meaning of the expression might be extended in future in ways currently unforeseeable, by challenges from organisations with the resources and energy to run the gauntlet of regulators and the courts.
Identifying the parameters of the expanded meaning
In relation to the new HPA-type of PBI, that is, a charity which achieves its benevolent objects via related or associated entities (related entities), areas where further developments could foreseeably occur include:
- expansion to include activities other than fundraising; and
- clarification about the nature of the collaborative relationships with other entities, and any features of those other entities, that are necessary for them to qualify as a related entity.
The principal activity of HPA was fundraising. The courts did not mention any other types of activity that might qualify. The ACNC's updated factsheet states that a PBI may provide support via related entities in other ways such as sharing strategic planning, administrative or professional support services. These types of support must still deliver relief in concrete ways. The ACOSS case11 is an example of a charity whose advisory, informative, research and advocacy functions were found to be for the promotion of benevolence in general and not sufficiently concrete to quality as a PBI.
Related or associated entities
The judgments in the HPA case do not describe in detail the structural, legal or contractual relationships between the members of the Hunger Project global network or identify any particular factors that satisfied the court that the entities were related to, or associated with, HPA. This leaves room for a number of questions.
- HPA only pursued its objects within a single global network of organisations. Can a charity be a PBI if it is part of a number of separate collaborative relationships with different related entities and different benevolent objects, either at the same time or consecutively? In principle, the answer should be 'Yes'.
- In terms of the flow of funds or other support, must there be only one, or a limited number of related entities interposed in a clear line between the charity in question and the beneficiary group in need of benevolent relief or, can the funds or support be dispersed more broadly across the collaborating entities? In principle, as long as there is a sufficiently concrete link between the charity and people in need of relief who are the ultimate beneficiaries, the answer should be 'Yes'.
Possible actions on the FBT exemption?
To date, there has been no government response to the HPA decision. The expanded number of charities now eligible to be PBIs and the potential for future development of new categories of PBI may prompt moves towards reform, which could include the introduction of a statutory definition of 'public benevolent institution' (at state or federal level) and moves to reduce the generosity of the FBT exemption for PBIs.
Earlier this year, it was reported that Treasury was encouraging the Federal Government to introduce legislation to limit the FBT exemption for PBIs (among others) on the basis that it is too generous and represents a 'tax loophole', in particular the allowance for meals and entertainment expenses and the multiplication of the benefit for workers with more than one eligible employer.12 The report speculated that if the legislation was not introduced as part of the 2014-15 Budget (which it was not) it may be contained in the Federal Government's forthcoming White Paper on the Reform of Australia's Tax System, which is to be delivered by the end of 2015.
-  FCAFC 69 (13 June 2014).
- Taxation Ruling TR2003/5: Income tax and fringe benefits tax: public benevolent institutions .
- Commissioner of Taxation v Word Investments Ltd (2008) 236 CLR 204, in which Word Investments was held to meet the 'in Australia' special condition for exemption from income tax (now in section 50-50 Income Tax Assessment Act 1997 (Cth)) because all the entities to which it distributed were located in Australia, even though they carried out their charitable activities overseas.
- Exposure Draft of the Tax and Superannuation Laws Amendment (2014 Measures No. 3) Bill 2014 (Cth). Submissions closed on 7 April 2014 but have not yet been released.
- (1931) 45 CLR 224.
- Prior to the HPA decision, the Commissioner has acknowledged that provision of relief may be achieved through agents and, in some circumstances, by arrangement with other organisations: Taxation Ruling TR2003/5: Income tax and fringe benefits tax: public benevolent institutions  (ruling), - (explanation).
- The Hunger Project Australia v Commissioner of Taxation  FCA 693 (17 July 2013).
- Australian Taxation Office, Non-profit News Service No.0414 – Hunger Project update (17 July 2014).
- Commissioner's Interpretation Statement: The Hunger Project case (CIS 2013/01) (Version 2 – Amendment - 21 July 2014) [6.4]-[6.5].
- Interim Decision Impact Statement, Commissioner of Taxation v. Hunger Project Australia (8 August 2014).
- Australian Council of Social Service Inc v Commissioner of Payroll Tax (1985) 1 NSWLR 567.
- Fleur Anderson, 'Treasury targets FBT rorts by non-profits', The Australian Financial Review (Sydney), 17 April 2014, 6.