Treasury has released the eagerly awaited
second draft of the ‚in Australia‛ special
conditions legislation. We report on how this
will restrict Australian NFPs doing altruistic
work overseas.
Also trustees of charitable trusts should take
note of the High Court decision in Bargwanna
– the first High Court decision on charities in
some time to favour the Commissioner of
Taxation.
Lastly, the Council of Australian Governments
(‚COAG‛) has formed an NFP Working Group
to coordinate harmonisation efforts across the
country.
The Federal Budget will be handed down on 8
May 2012. We will let you know if there are
any significant announcements.
Suhanya Mendes
Editor
‚in Australia‛ second draft
legislation
The Government has released a second draft of legislation it intends to
introduce. The legislation sets out the special conditions that will have to
be met by income tax exempt entities and DGRs to qualify for tax
concessions.
We voiced our concerns regarding the first draft legislation in our July 2011
NFP Alert and circulated our submission to Treasury.
We are heartened that most of the concerns we had appear to have been
addressed by the exposure draft, but we still have a number of concerns
which are listed further below.
Income Tax Exempt Entities including
charities
The following table lists the current and proposed conditions for income tax
exempt entities that are not prescribed in the regulations and are not DGRs:
Page 1
Charitable institutions
and religious
institutions must:
Have a physical
presence in
Australia;
Incur expenditure
principally in
Australia; and
Pursue objectives
principally in
Australia.
Most income tax exempt entities
(including charities) must:
Operate principally in Australia; *
Pursue purposes principally in
Australia;*
Be a ‚not-for-profit entity‛;
Comply with all the substantive
requirements in the entity’s governing
rules; and
Use its income and assets solely for
the purpose for which the entity is
established and operated and for
which it is entitled to be exempt from
tax.
* the extent to which the entity gives to
non tax exempt entities and the
recipient’s use of the funds overseas must
be taken into account.
Libby Klein is a Principal at Moores Legal
and Head of the Not for Profit
Workgroup.
Libby’s expertise in governance, tax and
structuring of not-for-profits has been
applied to numerous publications and
she regularly presents seminars and
briefings to boards of not-for–profit
organisations. She works with clients
across the NFP spectrum, from
philanthropic and benevolent funds to
social enterprises and health, community
and educational organisations.
Fiona Thomas has been with Moores
Legal for over 15 years.
She advises commercial and community
organisations and has particular
expertise in the areas of not-for-profit
taxation, governance and structuring.
Fiona is a member of School and Church
governance bodies.
<from page 1>
Deductible Gift Recipients
Similarly for DGR funds, authorities or institutions that are not ancillary funds or
public entities like the Australiana Fund, the conditions are as follows:
Our concerns
The following are our main concerns:
1. The ‚Look-through test‛
If an entity (‚the first entity‛) gives to another entity in Australia (‚the
second entity‛), the use of the funds by the second entity is taken into
account in the calculations for the first entity fulfilling the in Australia test.
It is difficult to envisage how this will work in practise and will probably
require a careful tracing and documentation of the ultimate use of funds.
2. Spending overseas for Australian benefit
It appears that at least one casualty of the new ‚in Australia‛ test will be
Australian Scholarship funds for overseas study. Expenditure for such a
purpose will be overseas although money will ‚change hands‛ in Australia
when the Scholarship is awarded. However the look through test will
require inclusion of any money spent overseas such as tuition and
accommodation to be traced and clawed back into the calculation for the
‚in Australia‛ test.
<continued over>
Page 2
The DGR fund authority or
institution must ‚be in
Australia‛.
The DGR fund, authority or institution
must:
Be established in Australia;
Operate solely in Australia; *
Pursue its purposes solely in
Australia; *
There are exceptions for overseas aid
and environmental organisations,
and allowances for minor or
incidental overseas activities.
* the extent to which the entity
gives to non DGRs and the recipient’s
use of the funds overseas must be
taken into account.
<from page 2>
3. Prescription
In the past, religious missions, churches and other religious organisations have been able to apply for
prescription in the income tax regulations to qualify for charitable status even if they would not qualify under
the in Australia test. The Explanatory Memorandum says that prescription from now will be a policy decision
allowed in ‚exceptional circumstances‛. This will be no comfort to bona fide organisations who intend to make
an application for prescription or to those who might already be prescribed.
4. Excluded Gifts
In the past any gifts made to an income tax exempt entity were not taken into account in the calculation to
apportion overseas spending. Now only non-deductible gifts will be. Accordingly this will severely limit any
Australian DGR undertaking any overseas operations.
We would be happy to provide specific advice about how the reforms may impact on your organisation.
Treasury is seeking feedback on the exposure draft by Friday 11 May 2012. The legislation is expected to be
introduced into Parliament in the middle of this year, with a view to it commencing from Royal Assent.
Suhanya Mendes
Lawyer
Near enough is not good enough for
charitable funds
The decision of the High Court in Bargwanna will send a shiver down the collective spines of trustees of charitable
trusts. A strict approach will be applied in determining whether charitable funds are administered for charitable
purposes. Minor indiscretions may not be tolerated.
Background
In Commissioner of Taxation v Bargwanna [2012] HCA 11, the trustees established a charitable fund.
However the trustees were at fault for a number of reasons:
1. Monies from the fund were paid into an interest offset account to offset the interest on the trustee’s personal
home loan;
2. Monies were paid into the accountant’s business trust account and mixed with other funds in his trust fund; and
3. The monies in the trust fund did not earn any interest.
In 2004, the trustees made an unsuccessful application to the ATO for endorsement as a charitable fund.
<continued over>
Page 3
Suhanya Mendes provides advice on
governance, structuring and taxation issues for
Not for Profit organisations and individuals
with philanthropic objectives.
Suhanya has previously practiced in the Estate
Planning, Superannuation and Structuring
Group at Moores Legal and hence has an
understanding of Wills and bequests and their
impact on the Not for Profit sector.
Elizabeth Turnour provides structuring,
taxation and governance advice to Not for
Profit organisations and philanthropic
individuals. Elizabeth is passionate about the
contribution made to the community by the
Not for Profit sector.
Elizabeth is committed to assisting individuals
and organisations within the NFP sector to
achieve their goals
<from page 3>
High Court decision
The High Court decided in favour of the Commissioner. The above
instances of ‚maladministration‛ meant that the fund had not been
applied for charitable purposes – part of it had, but part had not. The
majority of the Court stated that ‚applied‛ does not mean ‚substantially
applied‛ or ‚on the whole, applied‛. While not all breaches of trust will
be fatal, in this case mixing trust funds and deriving a personal benefit
tipped the balance. The fact that the trustees were ignorant of the
breaches because their accountant actioned them was no excuse.
Key lessons
Trustees of charitable trusts should note:
near enough is not good enough. Minor misapplications of the fund
could lead to a loss of endorsement.
ensure any powers you seek to exercise are allowed under the trust
deed – get advice if you need to.
maintain separate accounts for each trust fund – mixing trust funds
with other funds is not allowed.
your obligations are personal – you cannot rely totally on the advice of
professional advisors.
every year you need to check that the fund still meets the endorsement
requirements.
Suhanya Mendes & Wendy Ooi
Lawyer and Legal researcher
Page 4
COAG progresses NFP reform agenda
This month, the Council of Australian Governments (COAG) has taken important steps in progressing the Federal
Government’s NFP reform agenda.
Moores Legal welcomes this move. The full benefits of the Federal Government’s extensive NFP reform agenda will
only be realised when the States and Territories come on board.
NFP Reform Working Group
On 13 April 2012, the Prime Minister and Minister for Social Inclusion jointly announced that the COAG has agreed
to the terms of reference and the 2011-2012 work plan of a new NFP Reform Working Group. The aim is to reduce
the regulatory burden on the NFP sector.
The NFP Reform Working Group is comprised of Treasury officials from the Commonwealth and each State and
Territory Government. The group will meet monthly, and ‘out of session’ for pressing matters.
Terms of reference
The NFP Reform Working Group will advise on:
the Commonwealth’s NFP reforms;
adoption by the States and Territories of the Commonwealth statutory definition of charity;
harmonisation of fundraising regulation;
harmonisation of the unrelated business income tax (UBIT); and
reviewing legal, governance and reporting regulation for the NFP sector, including regulations embedded in
service level agreements.
Moores Legal comment
Moores Legal awaits with interest the outcome of the group’s work. In particular, a harmonised approach to a
statutory definition of charity and fundraising regulation will be warmly welcomed by the sector. However these
two items are assigned a ‚medium‛ level priority in the group’s work plan, as compared to work on the UBIT and
regulation of the sector which are awarded ‚high‛ level priorities.
We are particularly alarmed by the apparent intention to encourage the States and Territories to introduce a form of
the UBIT. We have voiced our strenuous objections to introducing a UBIT at Commonwealth level, let alone at State
or Territory level.
We will watch on with interest to see how State and Territory Governments will respond.
Suhanya Mendes and Wendy Ooi
Lawyer and Legal researcher
Page 5
Page 6
We have a range of practitioners who are able to assist
with any minor queries or major issues you may have. If
you require further information, please contact a member
of our team.
Moores Legal is a law firm servicing companies and businesses, Not for Profit
organisations and individuals across Melbourne in the areas of Commercial
Law, Workplace Relations, Property Law, Not for Profit Law, Aged Care,
Elder Law, Estate Planning, Superannuation & Structuring, Dispute
Resolution, Family Law and Personal Injury Law.
Murray Baird
Principal
Not for Profits
Libby Klein
Principal
Not for Profits
Fiona Thomas
Senior Lawyer
Not for Profits
Suhanya Ponniah
Lawyer
Not for Profits
Elizabeth Turnour
Lawyer
Not for Profits
Andrew Sudholz
Principal
Property Transactions
Peter Andrew
Special Counsel
Employment & Schools Law
Andrew Simpson
Principal
Bequests & Estates
Aged Care Facilities
Nils Versemann
Senior Lawyer
Intellectual Property
Cecelia Irvine-So
Principal
Volunteer Law
Allan Swan
Principal
Estate Planning
DISCLAIMER: This Not for Profit Briefing is of a general nature only. Specific legal advice should be sought rather than relying on this Briefing.
Not for Profit Conference –
University of Melbourne
The Not for Profit Project at the University of Melbourne Law School is
hosting a conference entitled ‚Defining, Taxing and Regulating Not-for-
Profits in the 21st Century‛. The Conference will be held in Melbourne on
Thursday 19 and Friday 20 July 2012.
Elizabeth Turnour of Moores Legal will be presenting a paper at the
conference and Moores NFP team members will be present. More
information can be found via the website.