Focus: Statutory definition of 'Charity' still to commence 1 January 2014
23 December 2013
In brief: The Federal Government has announced its intention to repeal legislation that introduces a statutory definition of 'charity' for the purposes of Commonwealth legislation. However, a Bill recently introduced to delay the commencement of the legislation failed to pass the Senate before Parliament rose for 2013, so the statutory definition will still commence on 1 January 2014. If and when the Government will be able to achieve its intention to repeal the legislation is currently unknown. Special Counsel Glenys Hodges (view CV) and Lawyer Scott Lang report on the legislation, and the impact it will have on charities and prospective charities.
- How is 'charity' defined under the common law?
- How is 'charity' defined under the Charity Act?
- How the statutory definitions will apply
- New charity subtypes
- Income tax exemption of ancillary funds
- Government's future course
How does it affect you?
- The Charities Act 2013 (Cth) (the Charity Act) and Charities (Consequential Amendments and Transitional Provisions) Act 2013 (Cth) will commence on 1 January 2014.
- With effect on 1 January 2014, the statutory definitions of 'charity', 'charitable' and 'charitable purposes' contained in the Charity Act will be included in the Acts Interpretation Act 1901 (Cth) and therefore apply to those words whenever they are used in Commonwealth legislation but not specifically defined in that legislation, including legislation relating to income tax, GST and fringe benefits tax concessions.
- From 1 January 2014, the Australian Charities and Not-for-profits Commission (the ACNC) will apply the statutory definitions when determining whether to register an entity as a charity and whether a registered charity is still eligible to remain registered.
- The statutory definitions will apply to all registered charities, whether registered before or after 1 January 2014.
- Charities already registered will continue to be registered and if the effect of the new definitions is that a charity is no longer entitled to be registered as a charity, the charity has a duty to notify the ACNC.
- The Charity Act amends and expands from seven to 14 the categories of subtypes under which a charity may (but need not) be registered by the ACNC. There are transitional provisions dealing with reallocation of current subtypes to the new subtypes.
- From 1 January 2014, the income tax exemption item currently available to ancillary funds that are not registered charities will no longer exist. The endorsement of existing ancillary funds under that item is preserved.
Until the passing of the Charity Act, there had been no statutory definition of 'charity' in Australia, at either the Commonwealth or State and Territory level. The meaning of the terms 'charity', 'charitable' and 'charitable purpose' (including when used in legislation) have been determined by the courts under the common law. Broadly speaking, the common law holds that to be considered a 'charity' or 'charitable', an entity is required to show that it:
- is not-for-profit;
- has a charitable purpose; and
- is for the public benefit.
Under the common law in Australia, charitable purposes are required to come within the 'spirit and intendment' of the Preamble to the Statute of Charitable Uses 1601, 43 Eliz 1, c 4 (commonly known as the Statute of Elizabeth). Over time, the various purposes listed in the Preamble have been collapsed into four 'heads of charity' (or purposes that are considered charitable), namely:
- relief of poverty, age or impotence;
- advancement of education;
- advancement of religion; and
- other purposes beneficial to the community. The courts recognise new categories of charitable purpose under this fourth head where the new purpose is within the spirit and intendment of the Preamble to the Statute of Charitable Uses.
The common law will continue to be the basis for determining if an entity is charitable for the purposes of the laws of the Australian States and Territories, such as for the purposes of State Duties Acts or Payroll Tax Acts. None of the States or Territories have indicated an intention to amend their legislation to apply the Commonwealth statutory definition for any purposes.
The statutory definitions largely codify and restate the existing common law principles regarding the meaning of the words 'charity', 'charitable' and 'charitable purposes'.
Four stage test
Under the Charity Act, an entity is 'charitable' if it is a 'charity'. An entity is a 'charity' if it satisfies four requirements, namely:
- it is a not-for-profit entity;
- all of the entity's purposes are charitable and for the public benefit (or are ancillary or incidental to and in furtherance or in aid of such purposes);
- none of the entity's purposes are disqualifying purposes; and
- the entity is not an individual, political party or government entity.
The term 'not-for-profit entity' is not defined.1 Consequently, its meaning will be taken from the common law and there is no change to the existing law in this regard.
Charitable purposes for the public benefit
This requirement is the most significant change introduced by the Charity Act. It broadly follows the approach of the common law in:
- preserving the charitable purpose and public benefit requirements; and
- determining an entity's purpose from its governing rules, activities and other relevant matters.
However, it significantly expands and elaborates on the types of charitable purposes (in particular, the fourth type other purposes beneficial to the community) and expands the rules for determining whether a purpose is for the public benefit.
'Charitable purposes' are defined as:
- advancing health, including preventing and relieving sickness, disease or human suffering;
- advancing education (one of the four traditional heads);
- advancing social or public welfare, which expands the traditional head of 'relief of poverty, age or impotence' and includes:
- relief of distress and disadvantage of individuals and families;
- caring for and supporting the aged and disabled, children and young individuals;
- caring for, supporting and protecting children and young individuals, and, in particular, providing child care services; and
- a new category of assisting the rebuilding, repair or securing of assets after major disasters in prescribed circumstances;
- advancing religion (one of the four traditional heads);
- advancing culture, including promoting and fostering culture and preserving and protecting Australian heritage;
- promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;
- promoting and protecting human rights;
- advancing the security or safety of Australia or the Australian public, including promoting the efficiency of the Australian Defence Force;
- preventing or relieving the suffering of animals;
- advancing the natural environment;
- any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned above; and
- promoting or opposing a change to any matter established by a law, policy or practice in the Commonwealth, a State, a Territory or another country so long as the promotion or opposition is in furtherance, or aid, of any of the purposes mentioned above. This purpose recognises the High Court's decision in the AidWatch case,2 which held that generating public debate by lawful means about government policy is charitable, even if this involves agitating for legislative and political change.
Public benefit is defined as a purpose that would be of benefit to the public and available to the general public or a sufficient section of it. The rules regarding public benefit are complex, with many exemptions and presumptions.
Continuing the exemption first recognised by the Extension of Charitable Purpose Act 2004 (Cth),3 open and non-discriminatory self-help groups and closed or contemplative religious orders are exempt from the public benefit requirement.
The following purposes are presumed to be for the public benefit, in the absence of evidence to the contrary:
- preventing and relieving sickness, disease or human suffering (there is no such presumption under the common law);
- advancing education;
- relieving the poverty, distress or disadvantage of individuals or families;
- caring for and supporting the aged or individuals with disabilities (there is no such presumption under the common law); and
- advancing religion.
Otherwise, a purpose is for the public benefit if:
- its achievement would be of benefit to the public; and
- the benefit is available to the general public or a sufficient section of it. However, this element does not need to be satisfied in two circumstances:
- Where the purpose is relieving the necessitous circumstances of one or
more individuals in Australia. This wording seems to indicate an intention
to continue the common law exemption that purposes for the relief of poverty
of particular individuals or private groups of individuals (such as family
relations or employees) are charitable, despite not being open to the public
Somewhat confusingly, the Explanatory Memorandum states that such entities 'are widely considered anomalous in contemporary Australia and such a purpose is no longer likely to satisfy a public benefit requirement.4 However, these words are contrary to the express words of the Charity Act and later sections of the Explanatory Memorandum.
- Where the purpose is directed to Indigenous individuals5 and the entity receives, holds or manages benefits related to native title or other traditional rights of ownership, occupation, use or enjoyment of land. This is no such exception under the common law.
Whether the achievement of a purpose would be of benefit to the public requires consideration of all relevant matters, including all identifiable tangible and intangible benefits and identifiable detriments from the achievement of the purpose to members of the public or a section of the general public. The Explanatory Memorandum states that if, on balance, the purpose is more detrimental than beneficial, it is not for the public benefit.
Whether the benefit is available to the general public or a sufficient section of it also requires consideration of all relevant matters, including:
- relationships between the entities or persons to whom the benefit of the purpose is directed (the higher the level of inter-relationships, the less likely the purpose is for the public benefit);
- comparison of the numerical size of the section of the general public to whom the benefit of the purpose is directed and the numerical size of the section of the general public to whom the purpose is relevant (the greater the disparity between the two, the less likely the purpose is for the public benefit); and
- whether any benefits, which will not be available to the general public or a sufficient section of the general public, will be provided to the founders, owners, members, trustees, employees, officers, agents of or donors to the entity or 'associates' (meaning partners, children, other relatives, trustees of trusts benefiting the person and companies controlled by the person) that are not charities in their own right. If such benefits are available, it is unlikely that the purpose will be considered for the public benefit. The Explanatory Memorandum states that this would generally prevent entities that provide benefits exclusively to their members from being charities.
This requirement codifies the existing common law. It provides that an entity cannot be a charity if one of its purposes is the purpose of:
- promoting or engaging in activities that are unlawful or contrary to public policy (including the rule of law, constitutional government, public safety and national security); or
- promoting or opposing a political party or candidate for political office (but this does not prevent distributing information or advancing debate about the policies of such bodies or persons).
Not an individual, political party or government entity
This requirement also codifies the existing common law. 'Government entity' is defined by reference to the existing definition used in tax laws6 and means:
- Commonwealth, State and Territory government departments;
- Commonwealth and foreign government agencies; and
- other entities established under a law of a State or Territory equivalent to Commonwealth government agencies that are prescribed by regulation to be a 'government entity'.
However, there is a specific exception to the government entity disqualification; namely, that, if the purpose of a fund includes providing money, property or benefits to, or for the establishment of, a government entity that would be a charity if it were not a government entity, then in determining whether the fund has a charitable purpose, the government entity is treated as not being a government entity. This is different from the common position where having a government entity as a potential beneficiary always disqualifies a fund from being a charity.
The statutory definitions will apply to all registered charities, whether registered before or after 1 January 2014. Charities already registered will continue to be registered and if the effect of the new definitions is that a charity is no longer entitled to be registered as a charity, the charity has a duty to notify the ACNC. However, as the statutory definition codifies the common law meaning of 'charity', there should be no situations in which an entity that satisfied the common law charity requirements will not also satisfy the statutory definition.
The Charity Act amends and expands from seven to 14 the categories of subtypes under which a charity may (but need not) be registered by the ACNC.
The 14 new charity subtype items are:
- advancing health (new).
- advancing education (formerly item 2): the former subtype automatically becomes this subtype.
- advancing social or public welfare (includes former item 7, provision of child care services, which automatically becomes this subtype).
- advancing religion (formerly item 3): the former subtype automatically becomes this subtype.
- advancing culture (new).
- promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia (new).
- promoting or protecting human rights (new).
- advancing the security or safety of Australia or the Australian public (new).
- preventing or relieving the suffering of animals (new).
- advancing the natural environment (new).
- purpose beneficial to the general public and analogous to the other charitable purposes (similar to former item 4).
- advancing public debate (new).
- health promotion charity (formerly item 5): the former subtype automatically becomes this subtype.
- public benevolent institution (formerly item 6): the former subtype automatically becomes this subtype.
Charities that are registered, or have a pending application for registration, on 1 January 2014 as the former subtype items 1 (relief of poverty, sickness or the needs of the aged) or 4 (another purpose beneficial to the community) will not automatically be allocated one of the 14 new subtypes. They have until 30 June 2015 to request the ACNC to be registered, backdated with effect to 1 January 2014, as one of the new subtypes. In the meantime, they will not have a subtype.
Charities that are registered, or have a pending application for registration, on 1 January 2014 as any of the other five former subtypes, will be automatically allocated an equivalent new subtype with effect on 1 January 2014.
From 1 January 2014, the current income tax exemption item specifically for public and private ancillary funds that are permitted to make contributions to deductible gift recipients (DGRs) that are not charitable7 will no longer exist.
Funds endorsed under that item before 1 January 2014 will remain eligible for the exemption while they continue to satisfy the pre-existing criteria applicable to that item. Existing public and private ancillary funds that are not endorsed as exempt from income tax before 1 January 2014, and new public and private ancillary funds, will only be eligible for endorsement for exemption from income tax if they are a registered charity, which means their trust deed must only permit contributions to DGRs that are charities.
This change does not affect existing public or private ancillary funds endorsed for income tax exemption as a registered charity, including those originally endorsed as charitable funds that were transitioned to the registered charity exemption category on 3 December 2012.
The Federal Government has announced its intention to repeal the definition of 'charity' and remove the ACNC's registration and regulatory enforcement powers. It proposes that these powers would be returned to the ATO, leaving the ACNC as a charities and not-for-profits centre of excellence focused on assisting charities to comply with the regulatory requirements of tax laws administered by the ATO (including by conducting research, publishing information and giving one-on-one assistance to charities).
As a starting point, it introduced the Social Services and Other Legislation Amendment Bill 2013 (Cth) (the Bill), which was intended to delay the commencement of the definition of 'charity' until 1 September 2014, to allow the Federal Government time to consult with the not-for-profit sector on how best to transition to the Government's preferred style of regulation.
While the Senate's failure to pass the Bill means that the statutory definitions of 'charity' will commence on 1 January 2014, the future of those definitions and the role of the ACNC remains unclear.
The Opposition and the Greens oppose the repeal of the definition of 'charity' and any diminution of the ACNC's registration and regulatory enforcement powers. Those parties control the Senate until 1 July 2014, so it is unlikely that the Government will be able to progress its reform agenda until after that date. Then, the outcome remains uncertain, as the Government will be required to negotiate with the independent Senators, whose positions are largely not yet known.
- A definition of 'not-for-profit entity' that was to be included in the Income tax Assessment Act 1997 (Cth) and apply for the purposes of all Commonwealth legislation was included in the Tax Laws Amendment (Special Conditions for Not-for-Profit Concessions) Bill 2012 (Cth) that was introduced to the Federal Parliament but never passed.
- Aid/Watch Inc v Commissioner of Taxation (2010) 241 CLR 539.
- The Extension of Charitable Purpose Act 2004 (Cth) is repealed with effect on 1 January 2014.
- Explanatory Memorandum to the Charities Bill 2013 (Cth) and Charities (Consequential Amendments and Transitional Provisions) Bill 2013 (Cth) [1.76]. See also [1.86] and [2.37], but compare [1.87].
- Defined as an individual who is (a) a member of the Aboriginal race of Australia; or (b) a descendant of an Indigenous inhabitant of the Torres Strait Islands.'
- The definition of 'government entity' is in s41 of A New Tax System (Australian Business Number) Act 1999 (Cth).
- Item 4.1 in section 50-20 of the Income Tax Assessment Act 1997 (Cth).
- Glenys HodgesSpecial Counsel,
Ph: +61 7 3334 3377
- Nicky FriedmanHead of Pro Bono & Community Programs,
Ph: + 61 3 9613 8338
You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.