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2010-2011-2012
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (SPECIAL CONDITIONS FOR NOT-FOR-PROFIT
CONCESSIONS) BILL 2012
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Restating and standardising the special
conditions for tax concession entities ........................... 5
Index ..................................................................................................... 39
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
FATF Financial Action Task Force
ITAA 1997 Income Tax Assessment Act 1997
OAGDS Overseas Aid Gift Deductibility Scheme
The Commissioner Commissioner of Taxation
Wycliffe Wycliffe Bible Translators
World Investments Federal Commissioner of taxation of the
Commonwealth of Australia v Word
Investments Limited (2008) 236 CLR 204
1
General outline and financial impact
Restating and standardising the special conditions for tax
concession entities
The Tax Laws Amendment (Special Conditions for Not-for-profit
Concessions) Bill 2012:
· re-states the `in Australia' special conditions for income tax
exempt entities, ensuring that they generally must be
operated principally in Australia and for the broad benefit of
the Australian community (with some exceptions);
· standardises the other special conditions entities must meet to
be income tax exempt, such as complying with all the
substantive requirements in their governing rules and being a
`not-for-profit' entity (with some exceptions);
· standardises the term `not-for-profit', replacing the defined
and undefined uses of `non-profit' throughout the tax laws;
and
· codifies the `in Australia' special conditions for DGRs
ensuring that they must generally operate solely in Australia,
and pursue their purposes solely in Australia (with some
exceptions, such as overseas aid funds and some
environmental organisations).
Date of effect: The Bill commences from Royal Assent, and applies to
determine whether an entity is entitled to be income tax exempt or remain
income tax exempt for income years following Royal Assent, and to
determine whether an entity is entitled to be a deductible gift recipient or
remain a deductible gift recipient for income years following
Royal Assent.
Changes to the fringe benefits tax provisions apply to fringe benefits tax
years of tax following Royal Assent.
Proposal announced: The Government announced in the
2009-10 Budget that it would amend the `in Australia' special conditions
in Division 50 of the Income Tax Assessment Act 1997 to ensure that
Parliament retains the ability to fully scrutinise those organisations
seeking to pass money to overseas charities and other entities.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Financial impact: The Bill has a nil revenue impact. However, it does
protect large amounts of revenue that would otherwise be forgone.
Human rights implications: This Bill does not raise any human rights
issue. See Statement of Compatibility with Human Rights -- Chapter 1,
paragraphs 1.170 to 1.189.
Compliance cost impact: Low.
4
Restating and standardising the special
conditions for tax concession entities
Outline of chapter
1.1 The Tax Laws Amendment (Special Conditions for
Not-for-profit Concessions) Bill 2012 restates and standardises the special
conditions for tax concession entities.
1.2 In particular, the Bill restates the `in Australia' special
conditions by ensuring that:
· income tax exempt entities generally must be operated
principally in Australia and for the broad benefit of the
Australian community; and
· deductible gift recipients generally must be operated solely in
Australia and for the broad benefit of the Australian
community.
1.3 The Bill also standardises the definition of `not-for-profit' across
the tax laws and implements Recommendation 1 of the 2001 Report of the
Inquiry into the Definition of Charities and Related Organisations by
adopting the term `not-for-profit' in place of `non-profit'.
Context of amendments
1.4 Traditionally, entities cannot be income tax exempt unless they
are operated principally in Australia, are prescribed as exempt in the
Income Tax Assessment Regulations 1997 or are a deductible gift
recipient.
1.5 While both income tax exempt entities and deductible gift
recipients are subject to `in Australia' special conditions, they are subject
to different thresholds (with the `in Australia' conditions for deductible
gift recipients applying a stricter test).
1.6 Recent court decisions have raised doubts about the proper
application of both of these tests.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Income tax exempt entities
1.7 The purpose of the introduction of `in Australia' special
conditions for income tax exempt entities, which took effect from
1 July 1997, was to address tax avoidance arrangements which could use
charitable trusts and certain other not-for-profit organisations to shift
untaxed funds overseas.
1.8 Subsequently, the `in Australia' special conditions have also
operated to minimise the risk of income tax exempt entities being used for
terrorist financing and money laundering, and to ensure the proper
operation of not-for-profit entities and their use of public donations and
funds.
1.9 The key principle used by the Australian Taxation Office (ATO)
in determining whether a charity was eligible for endorsement included
that a charity, its expenditure and the purpose of its activities be defined in
terms of their location in Australia.
1.10 Recently, the High Court of Australia, in Federal Commissioner
of Taxation of the Commonwealth of Australia v Word Investments
Limited (2008) 236 CLR 204 (Word Investments) found that charities are
considered to be pursuing their objectives principally `in Australia' if they
merely operate to pass funds within Australia to another charity that
conducts its activities overseas.
1.11 This finding was inconsistent with the Commissioner of
Taxation's (the Commissioner) interpretation and with the clear policy
intent underlying the special conditions. Prior to the High Court's
decision a charitable institution needed to meet two requirements to be
exempt from income tax: first, it must have a physical presence in
Australia and, second, to the extent it has a physical presence in Australia,
it must incur its expenditure and pursue its objectives principally in
Australia.
1.12 A broad interpretation of `physical presence' had been adopted
-- all that was required was for an organisation to operate through a
division, sub-division or the like in Australia. The structure of the
institution was immaterial as was whether it had its central management
and control or principal place of residence in Australia. `Physical
presence' did not apply where an institution merely operated through an
agent based in Australia.
1.13 An institution had, however, to the extent of its physical
presence in Australia, only to incur its expenditure and pursue its
objectives `principally' in Australia. Therefore, it may incur its
expenditure and pursue its objectives outside Australia to a lesser extent.
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Restating and standardising the special conditions for tax concession entities
Where there was some doubt whether the `in Australia' special conditions
were satisfied it became necessary to examine each institution's individual
circumstances.1
1.14 In Word Investments, once the Court had accepted that Word
Investment's charitable purposes could be fulfilled by it making payments
to other charitable institutions, the High Court's conclusion was that Word
pursued its objectives principally in Australia by making payments to
those institutions in Australia, even if the other institutions ultimately
expend those funds outside Australia.
1.15 Ignoring minor overseas activities, the intent of the original law
was only to allow a charity to be able to pass funds to an overseas charity
that was endorsed as a deductible gift recipient (operating a developing or
developed country relief fund), or an entity specifically prescribed in the
regulations. The High Court's decision on Word Investments highlighted
that the law is not achieving those objectives.
1.16 Consequently, charities can now be found to be pursuing their
objectives principally `in Australia' if they merely pass funds in Australia
to another charitable entity that conducts its activities overseas.
1.17 Similar rules apply to other tax concession entities; however,
stricter rules apply to charitable funds. Charitable funds can only claim
income tax exemptions where they provide money, property and benefits
solely to charities based in Australia.
Deductible gift recipients
1.18 The deductibility of gifts to public charitable institutions
`in Australia' was first introduced in section 18 of the Income Tax
Assessment Act 1915.
1.19 The phrase `in Australia' occurred in three separate contexts in
the original section: income from all `sources in Australia'; expenses
`actually incurred in Australia' and institutions `in Australia'.
1.20 In The Alliance Assurance Co Ltd v Federal Commissioner of
Taxation (1921) 29 CLR 424, the High Court held that the limitation
`actually incurred in Australia' in section 18 as a matter grammatical
construction, did not apply to the phrase `all losses and outgoings' and
probably only applied to the concept of expenses.
1 Explanatory Memorandums to the Taxation Laws Amendment Bill (No. 4) 1997 and
Taxation Laws Amendment Bill (No. 7) 1997.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.21 As a result of the Alliance Assurance decision, the deduction
provision was slightly reworded and included as section 23 in the
Income Tax Assessment Act 1922, allowing `gifts ... to public charitable
institutions in Australia if the gifts are verifiable to the satisfaction of the
Commissioner'.
1.22 The Explanatory Memorandum to the Bill that became the
Income Tax Assessment Act 1922 notes that the amendment was for the
purpose of limiting deductions to those actually incurred in Australia
which is interpreted as meaning `decided upon in Australia by the
controlling authority, although the actual expenditure might be made
outside Australia' and also included expenditure actually made in
Australia.
1.23 The 1932-34 Ferguson Royal Commission on Taxation
considered deductibility of gifts and donations to charitable institutions.
The Royal Commission recommended in its third report that a deduction
be allowed for gifts of one pound and upwards made during the year of
income to charitable institutions which carry on their functions within the
jurisdiction of the taxing authority.2 In this event, the Commonwealth
would allow deductions to a charitable institution in Australia, and each
State would allow donations to similar institutions within the State. A
provision was drafted by the Royal Commission to give effect to the
recommendation, containing the requirement that there be an allowable
deduction for gifts to certain funds, authorities or institutions in Australia.
1.24 The Conference of Commonwealth and State Commissioners of
Taxation to discuss the recommendations of the 1934 Royal Commission
on Taxation3 considered the recommendations concerning gifts, and the
draft provision.
2 See paragraph 617 and 618 of the Report of the Royal Commission 1934.
3 Report of the Conference of Commonwealth and State Commissioners of Taxation to
discuss the recommendations of the 1934 Royal Commission on Taxation held in
Melbourne on 8th, 12th and 23rd August 1935.
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Restating and standardising the special conditions for tax concession entities
1.25 The Report of Proceedings for the Melbourne Conference in
1935 questioned whether it was intended that deductions to a public fund
would include contributions to funds raised in other countries, as in the
case of an earthquake in Japan. The Victorian Commissioner of Taxation
indicated that contributions to World Funds should not be allowed.
1.26 The New South Wales Commissioner of Taxation drew attention
to the fact that the NSW equivalent provision included a requirement that
a public fund must be established for the relief of persons `in the State'
who were in necessitous circumstances. The Commonwealth
Commissioner of Taxation noted that the Federal law covered only
charitable institutions in Australia, and drew attention to the words `in
Australia' in the Commonwealth draft. However, the Conference
resolved to adopt the NSW drafting.
1.27 In 1935, the gift deductibility provisions were moved to a
separate provision in section 78 of the Income Tax Assessment Act 1936.
1.28 This provision allowed gifts of the value of one pound and
upwards paid to certain `funds, authorities or institutions in Australia' to
be deductible.
1.29 The Explanatory Memorandum to the Income Tax Assessment
Bill 1935 notes that the words `in Australia' were added in order to make
the intention of the law clear (as a result of the resolution of the State and
Commonwealth Commissioners of Taxation noted above).
1.30 The gift deduction provisions remained in section 78 and were
extensively amended over the years (the majority of the amendments were
technical, to include, replace or remove named institutions or funds to the
lists of deductible gift recipient, such as the addition of the United Nations
Appeal for Children in 1948), before finally being rewritten in 1993.
1.31 An amendment was included in the Income Tax Law
Amendment Bill 1981 to allow a deduction for gifts to certain overseas
aid organisations, with the explanatory memorandum stating `one
extension will introduce a scheme to authorise deductions for gifts to
certain public funds maintained for the relief of persons in developing
countries'.
1.32 The current gift deductibility provisions are located in
Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997).
1.33 The Commissioner has advised the Government that while the
policy is clear, there is considerable doubt as to whether the law is
achieving the objectives of `in Australia'.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.34 The changes to income tax exempt entities were announced in
the then Assistant Treasurer's 2009-10 Budget Media Release No. 043.
The release stated "that the Government will amend the `in Australia'
requirements in Division 50 of the Income Tax Assessment Act 1997 to
ensure that Parliament retains the ability to fully scrutinise those
organisations seeking to pass money to overseas charities and other
entities."
1.35 The Government issued two public exposure drafts on
4 July 2011 and 17 April 2012 and has revised the amendments in
response to stakeholder feedback.
Summary of new law
1.36 Income tax exempt entities must operate and pursue their
objectives principally in Australia unless they are deductible gift
recipients (which are subject to separate requirements) or are prescribed in
the regulations as exempt from these special conditions.
1.37 The new law reverses the effect of the decision that charities and
other income tax exempt entities can direct funds to overseas projects
outside the current policy intent and reinstates the principles underlying
the current integrity rules.
1.38 The new law replaces the existing special conditions that are
linked to the various exempt entity categories with a new consolidated and
standardised provision clearly articulating the `in Australia' special
conditions.
1.39 If an entity pursues its purposes by conducting activities that
directly advance those purposes -- the entity is not entitled to be income
tax exempt unless it operates principally in Australia.
1.40 Where an entity provides money or property (to further its
purpose) to other entities that are not entitled to be income tax exempt, the
use of those funds by those other entities should be taken into account
when determining whether or not the entity giving the money has met the
`in Australia' special conditions. This addresses the recent court decision
and ensures that tax exempt entities cannot avoid the special conditions by
having other entities use its funds to undertake activities it itself cannot
undertake.
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Restating and standardising the special conditions for tax concession entities
1.41 This will require an income tax exempt entity to satisfy itself
about how the entity it has given money or property to is using these
funds, and ensures that the use of these funds is included when
determining that the entity is pursuing purposes that are principally in
Australia.
1.42 If an entity gives money to another income tax exempt entity to
further its purpose, the money does not need to be traced, as the receiving
entity will itself have met the in Australia special conditions (including
being expressly exempt).
1.43 This ensures that any tax concessional money stays within the
exempt entity framework and gets used principally in Australia for the
broad benefit of Australians, and is not being passed on through entities
and then spent overseas outside of the authorised categories.
1.44 Entities prescribed in the regulations are exempt from the `in
Australia' special conditions and are considered on a case-by-case basis.
To be eligible to be considered for prescription, these entities must be
either overseas not-for-profit entities exempt from foreign tax in their
resident country, or be resident in Australia and operate and pursue their
objectives principally outside Australia.
1.45 Entities prescribed in the regulations in the current law will be
grandfathered.
1.46 The new law also codifies the `in Australia' special conditions
for deductible gift recipients so that the core principle for income tax
exempt entities is applied similarly to deductible gift recipients but with a
differing (stricter) threshold test, ensuring that deductible gift recipients
need to operate solely in Australia (unless expressly exempt).
1.47 If a deductible gift recipient provides property or benefits to a
non-deductible gift recipient entity to further its purpose, the spending of
the entity's funds should be taken into account when determining whether
or not that entity meets the `in Australia' special conditions for deductible
gift recipients.
1.48 This will remove doubt about the operation of the current law
that has been the subject of recent litigation.
1.49 Restating the `in Australia' special conditions will provide
support to the anti-avoidance measures in the tax law which limit income
tax exempt entities expending money offshore and ensure tax supported
funds remain in Australia.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.50 As a member of the Financial Action Task Force (FATF) (an
inter-governmental body dedicated to combating money laundering and
terrorist financing), Australia has agreed to comply with FATF
recommendations. FATF Special Recommendation VIII (SR VIII)
requires FATF members to `combat the misuse of NPOs (non-profit
organisations, that is, not-for-profit organisations) for the purpose of
terrorism financing'. In FATF's last review of Australia's progress, it
found that Australia was only partially compliant with SR VIII.
1.51 The `in Australia' special conditions provide additional
measures to address possible abuse of not-for-profit entities for the
purposes of money laundering and terrorist financing, and ensure the
proper operation of not-for-profit entities, their use of public donations
and funds, and the protection of their assets. By limiting the use of
monies to specified areas, in conjunction with greater regulatory
requirements, this ensures those monies are expended appropriately and in
a manner consistent with the eligibility for tax concession status.
Comparison of key features of new law and current law
New law Current law
The `in Australia' special conditions The `in Australia' special conditions
are standardised and apply are contained in various sections
consistently across different throughout Division 50 of the Income
categories of income tax exempt Tax Assessment Act 1997. Each of the
entities. special conditions applies to different
The new law uses `operates' and classes/categories of income tax
`pursues its purposes' based tests exempt entity in a similar way but with
rather than the existing `expenditure' some minor differences. The
based test in order for a wider range differences mostly reflect differences
of circumstances to be considered. in entities eligible under particular
categories.
If an entity pursues its purposes by
conducting activities that directly Government policy on determining
advance those purposes -- the entity whether a charity is eligible for
is not entitled to be income tax endorsement includes that an entity, its
exempt unless it operates principally expenditure and the purpose of its
in Australia. activities is defined in terms of the
entity's location in Australia and the
The spending of the monies given to extent to which it incurs its expenditure
other entities to further an entity's and pursues its objectives principally in
purpose must be included when Australia.
considering whether the donating
Following recent judicial decisions,
entity `operates' and `pursues its
charities are considered to be pursuing
purposes' in Australia.
their objectives principally `in
Australia' if they merely operate to
pass funds within Australia to another
charity that conducts its activities
overseas.
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Restating and standardising the special conditions for tax concession entities
Detailed explanation of new law
1.52 The new law:
· re-states the `in Australia' special conditions for income tax
exempt entities, ensuring that they generally must be
operated principally in Australia and for the broad benefit of
the Australian community with some exceptions -- see
paragraphs 1.53 to 1.122.
· standardises the other special conditions entities must meet to
be income tax exempt, such as being a `not-for-profit' entity,
with some exceptions.
· standardises the term `not-for-profit', replacing the defined
and undefined uses of `non-profit' throughout the tax laws --
see paragraphs 1.103 to 1.118.
· codifies the `in Australia' special conditions for deductible
gift recipients so that the core principle for income tax
exempt entities is applied similarly to deductible gift
recipients, but with the existing stricter threshold -- see
paragraphs 1.123 to 1.151.
Income tax exempt entities
1.53 In order to become income tax exempt, an entity must usually:
· operate principally in Australia;
· pursue its purposes principally in Australia;
· comply with all the substantive requirements in its governing
rules (paragraphs 1.94 to 1.102);
· apply income and assets solely to pursue the purposes for
which it was established; and
· be a not-for-profit entity (paragraphs 1.103 to 1.118).
[Schedule 1, item 38, subsection 50-50(1)]
1.54 Entities that do not meet the first two dot points (`in Australia'
special conditions) can instead be either prescribed in the
Income Tax Assessment Act Regulations 1997 (see paragraphs 1.119 to
1.122) or be endorsed as a deductible gift recipient (subject to separate
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
requirements, see paragraphs 1.123 to 1.151). A prescription in the
regulations is a policy decision, not an administrative decision.
1.55 The new law re-states the policy intent and centralises the
`in Australia' special conditions for income tax exempt entities, ensuring
that they generally must be operated principally in Australia and for the
broad benefit of the Australian community with some exceptions.
[Schedule 1, items 25 to 40]
Principally in Australia
Activity based entities
1.56 If an entity pursues its purposes by undertaking activities, it
must operate principally in Australia and pursue those purposes
principally in Australia to qualify as income tax exempt (the `in Australia'
special conditions). [Schedule 1, item 38, subsection 50-50(2)]
1.57 While no one factor is conclusive, in determining whether an
entity is `operating in Australia' and `pursing its purposes principally in
Australia' the Commissioner is expected to consider all surrounding
circumstances including factors such as where the entity incurs its
expenditure; where it undertakes its activities; where the entity's property
is located; where the entity is managed from; where the entity is resident
or located, where its employees are located; and who is directly and
indirectly benefiting from its activities.
1.58 `Principally' means mainly or chiefly. Less than 50 per cent is
not considered principally.
1.59 By substituting the existing `expenditure' based test with an
`operates' and `pursues its purposes' based test, a wider range of
circumstances can be considered.
1.60 This will enhance the integrity of the rules, better reflect the
policy intent and bring the test into better alignment with the test applied
to deductible gift recipients.
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Restating and standardising the special conditions for tax concession entities
Example 1.1: Expenditure versus operates test
An organisation is established as a Bible college in Australia, and runs
weekly lessons for children in Australia.
The organisation fundraises in Australia, but purchases much of the
supplies and equipment (such as religious books) from overseas.
Whilst this organisation may not have met the expenditure test in the
previous law, depending on the other facts and circumstances of the
organisation (such as possible assets and employees in Australia, and
management control in Australia), the entity may now meet the
`in Australia' special conditions.
1.61 To be operating principally in Australia, an entity will be
expected to be an Australian resident or have a sufficient connection and
presence in Australia (a comparison can be drawn with the test for
determining the existence of a permanent establishment).
1.62 Generally, the test for residency of a non-individual entity is the
location of the entity's central management and control.
Example 1.2: Operating principally `in Australia'
A sporting program designed to foster team building skills is
established by a husband and wife team in Australia.
The program holds various sporting clinics at schools throughout
Victoria during school holidays. The clinics are funded through the
fundraising initiatives organised by the husband and wife. After a few
years the pair decides to expand the reach of the program and so they
set up a Brazilian division. The overseas division is run by locals who
are employed by the Australian division. They receive managerial
oversight from the Melbourne branch. Local sporting premises are
rented by the Australian division and it also supplies all the equipment
from Australia.
There is no fundraising activity in Brazil, and thus the Brazilian
division is wholly dependent on the income it receives from the
Australian division. At the end of the most recent financial year,
60 per cent of income was directed towards Australian based activities,
with the remaining 40 per cent directed towards Brazilian activities.
On balance, the program meets the `in Australia' special conditions.
Even though 40 per cent of all monies are sent overseas, significant
expenditure is incurred in Australia. Further factors considered include
that Australian students are still benefiting from the activities of the
program and thus there are direct and indirect benefits to the Australian
community.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Example 1.3: Operating principally `in Australia'
A literary society is set up in Australia to promote indigenous writing,
both in Australia and abroad. The entity operates out of and is
managed from Melbourne. Most of its expenditure is directed towards
donating books to local schools and libraries. Occasionally it incurs
expenditure purchasing books from other indigenous culture
organisations overseas.
The society will meet the `in Australia' conditions. The occasional
overseas expenditure will not prevent this criteria being met. While no
one factor is determinative, the society is overall principally pursuing
its purposes in Australia and is principally operating in Australia
because it is managed in Australia, most of the expenditure is
benefiting Australians and any assets and employees are in Australia.
Example 1.4: Global organisation funding overseas divisions
A Chinese religious society is set up in Beijing and establishes
branches worldwide. Five such branches are set up in Australia. The
branches are run by Australians and employ Australian religious
instructors. The centres fundraise and collect donations for local
events and activities as well as the international centres.
Head management in Beijing describes how the divisions are to be run,
in a financial and administrative sense.
The religious society operates for the benefit of those that attend the
religious seminars. It is estimated that approximately 500 people
attend the seminars held by each branch. Each year, approximately
40 per cent of all income derived is sent back to Beijing, with
60 per cent used in Australia.
On balance, the Australian branches will not meet the `in Australia'
conditions. Whilst more than half of all income is kept in Australia,
the head office exercises such a high degree of control over the
Australian branches that the entity cannot be said to be operating
principally in Australia. Moreover, relatively few Australians are
benefiting from the activities of the Australian branch and there is a
lack of flow-on indirect benefit to the wider community.
Example 1.5: Overseas control
An entity which manages assets to provide educational scholarships to
disadvantaged young people around the world, based in Canada,
wishes to start providing scholarships to Australian citizens, to study
both in Australia and abroad.
The scholarships will pay a weekly amount to the recipients to go to an
Australian university or an overseas university.
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Restating and standardising the special conditions for tax concession entities
The organisation sets up a local Australian division (as a separate
entity) with two employees who vet applications and choose recipients.
However, the central management and control of the whole
organisation remains located overseas.
Although most of the money from the scholarships will be going
overseas (by being paid weekly to Australian citizens studying
overseas), the scholarships are benefiting Australians, and the
organisation has a subsidiary located in Australia, with Australian
employees.
It is likely that on balance the Australian branch of the organisation
will meet the `in Australia' special conditions. Although central
management and control remains overseas, the amount of expenditure,
operations and beneficiaries located in Australia could satisfy the
special conditions.
1.63 An organisation does not have a sufficient connection with
Australia if it is present in Australia only through an agent, or it merely
owns investment property in Australia.
1.64 However, what assets the organisation has in Australia are a
consideration for the special conditions.
1.65 A further factor to consider is what employees the organisation
has in Australia.
1.66 The pursuit of purposes in Australia can include things done
offshore if they are only a means of pursuing those purposes.
Example 1.6: Pursuing purposes by offshore means
QUU Charity, which is a resident of Australia, and operates 60 per cent
in Australia, had decided to send some employees to an offshore
conference to aid their efficiency for the Australian purposes.
This would be considered `pursuing purposes in Australia' and will not
result in QUU failing the `principally in Australia' test.
1.67 The extent of the entity operating and pursuing its purposes
principally in Australia will depend on the amount of relative monies and
activities that are in Australia relative to the whole organisation.
1.68 All the factors relevant to the special conditions need to be
considered to whether overall, on balance, an entity could be considered
to be operating `in Australia' and thus meet the special conditions.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Example 1.7: Overseas control
An overseas aid agency is established in France and has a division in
Australia. French staffers are sent over to Australia to manage the
Australian office. The French agency purchases a building within the
city and organises the Australian fundraising activities from there. The
Australian branch conducts fundraising activities in Australia and uses
the funds to support Australian aid initiatives within Australia.
Ten per cent of all monies are sent back to the head office in France
each year, to go towards the costs of international administration.
The Australian branch will not meet the in Australia test. This is
because it is a branch and has not been set up as a separate Australian
entity and therefore given the entities overall activities, it is not
operating principally or pursuing its purposes principally `in
Australia'.
If, however, an entity is established or incorporated in Australia to
undertake the branch's activities then the entity would meet the `in
Australia' special conditions as, on balance, the fact that the
organisation owns assets, conducts fundraising, employs Australian
individuals and spends money in Australia would likely lead to it
meeting the `in Australia' special conditions.
1.69 However, certain distributions may be made overseas and
disregarded when considering whether an entity meets the `in Australia'
special conditions relating to income tax exempt entities.
1.70 These are distributions received by way of government grant and
distributions received as a gift (money or other property) that is not tax
deductible. [Schedule 1, item 38, subsection 50-50(5)]
1.71 In order for such gifts to be disregarded, the entity must ensure
that they meet any requirements set out in the regulations, if there are any
requirements. [Schedule 1, item 38, subsection 50-50(5)]
1.72 These requirements are expected to include such things as:
· the entity must demonstrate that any activities undertaken
outside Australia and the use of any money or property
outside Australia is effective in achieving the entity's
purpose;
· the entity must comply with all Australian and foreign laws,
Australia's international treaty obligations, and uphold the
high reputation of Australia and it's not-for-profit sector
when sending money overseas; and
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Restating and standardising the special conditions for tax concession entities
· the entity must show it has in place current and appropriate
governance arrangements for the proper monitoring of any
overseas activities undertaken by both it and any in-country
partners to ensure that any money and property is being used
in an proper and effective manner.
1.73 There is no equivalent exemption for deductible gift recipients.
Conduit not-for-profit entities
1.74 If an entity provides money, property or other benefits to another
entity that is not an income tax exempt entity, the use of the money,
property or other benefits by the recipient (or any other entity) must be
taken into account when determining whether the entity satisfies the `in
Australia' special conditions. [Schedule 1, item 38, subsection 50-50(4)]
1.75 As such, if an income tax exempt entity wishes to provide
money to another entity to further its purpose, if the entity is not income
tax exempt, the income tax exempt entity must satisfy itself about how the
entity it has donated money, property or other benefits to uses this
property, and take account of the use of this money and property for the
purposes of determining whether it is operating principally in Australia.
1.76 When an entity gives money to another entity, it will generally
give the money for a particular purpose or cause, and the entity will know
where this purpose or cause is intended to be carried out.
Example 1.8: Taking account of money provided to other entities
Thoughtful Church received a non-tax deductible donation of $20,000.
The Church provides $5,000 to a project in outback Australia. The
money is provided to build a library.
The Church confirms that the library is being built in regional
Australia, and that building has commenced.
This would be adequate in confirming that the funds provided are spent
in Australia.
Example 1.9: Taking account of money provided to other entities
Myra Charity receives donations and income of $10,000 in an income
tax year. They are not a deductible gift recipient.
Myra provides $8,000 to West Charity. West Charity is located in
Australia. However, the money is provided to build a school in Africa.
West Charity passes the money to its local partner in Africa, and
building commences.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Myra Charity would not meet the `in Australia' special conditions, as it
is not operating principally in Australia, and incurring its expenditure
principally in Australia. Although Myra provides the $8,000 to an
entity in Australia, Myra must consider the use of this money offshore
when considering whether it is meeting the `in Australia' special
conditions.
1.77 The requirement should present no greater an obligation on
entities than already exists under charity law and the existing ATO
endorsement framework.
1.78 If an income tax exempt entity gives money to another income
tax exempt entity, the receiving entity will itself have met the
`in Australia' special conditions and be operating principally in Australia,
or be expressly exempt. An entity therefore does not need to take account
of the eventual use of these funds by the donee entity.
Example 1.10: Taking account of money provided to other entities
Jones Charity is a not-for-profit entity operating for the relief of
poverty.
Floods hit a certain area, and many people are forced from their homes.
Jones Charity gives a portion of its funds to a tax exempt charity local
to the area of the floods. This entity is income tax exempt.
Jones charity does not need to trace the final use of the funds, as the
entity it has provided the money to is itself income tax exempt, and
Jones Charity has confirmed this by checking the Australian Business
Register.
1.79 This fixes the problem that arose in Word Investments, that
entities are considered to be pursuing their objectives principally
`in Australia' if they merely operate to pass funds within Australia to
another charity that conducts its activities overseas, and ensures that tax
exempt entities cannot avoid the special conditions by having other
entities use its funds on activities it itself cannot undertake.
1.80 In Word Investments, the entity distributed its money to
Wycliffe Bible Translators, which then expended the money offshore. If
an entity such as Word Investments now provides money to another
entity, it must consider the location of the final spending of this money
when determining whether it is operating and pursuing its purposes solely
in Australia. The money Word Investments provided to Wycliffe was sent
overseas, so Word Investments would need to consider the amounts of
money provided to entities such as Wycliffe (which are ultimately spent
offshore) when considering whether it is operating and pursuing its
purposes principally in Australia.
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Restating and standardising the special conditions for tax concession entities
1.81 If Word Investments provides all its funds to Wycliffe, who
continues to pass these funds overseas, Word Investments will no longer
be considered to be operating and pursuing their purposes solely in
Australia, and will not be income tax exempt.
1.82 In addition, if Wycliffe Bible Translators do not operate
principally in Australia (because they pass all fund offshore), they will no
longer be entitled to be income tax exempt.
1.83 This test works to ensure that the core test (as described in
paragraph 1.55 above), that requires an entity to operate and pursue its
purposes principally in Australia, takes account of all relevant
circumstances and cannot be avoided by having another entity conduct
activities that the primary entity cannot do itself.
1.84 For example, an entity that advances its charitable purposes by
undertaking commercial activities with the purpose of generating
surpluses that are donated to another entity with similar charitable
purposes must consider the charitable spending of the donated funds when
determining if it meets the `in Australia' special conditions.
1.85 For a charity to make a gift, it would need to ensure that the
entity receiving the donation had similar or identical purposes. If it did
otherwise, the entity making the donation could no longer itself be
considered exempt.
1.86 Similar purposes would include a charity giving to another
charity, regardless of their individual charitable purposes. However, a
charity gifting money to an entity established for the encouragement of
sport, for example, or an entity established for the encouragement of sport
gifting money to an entity established for the promotion of agriculture,
would not be considered similar purposes.
1.87 This, however, should not be read as preventing a charity from
utilising a different not-for-profit as a means to carry out or give effect to
its charitable purpose. For example, a charity may be able to give to a
sporting group for the purposes of a program introducing disabled people
to learn the benefits of exercise.
Example 1.11: Unrelated commercial activities for charitable
purposes
Putter Ltd runs a commercial bread business, with the objective of
helping the poor (and donating all profits to SWS, a charitable
company who run homeless shelters around Australia and Asia).
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
SWS do not operate principally in Australia, as around 75 per cent of
any funding goes to aiding shelters in the Asian region.
Putter Ltd would not be considered to be income tax exempt if it
distributes all surplus funds to SWS, as Putter Ltd would not be
considered to be operating principally in Australia, given that SWS
expend about 75 per cent of all funds overseas
While Putter Ltd operates in Australia, and has staff in Australia, the
spending of the money for charitable purposes occurs primarily
overseas, even though SWS operates in Australia.
For Putter Ltd to be income tax exempt, they would only be able to
give a portion of their income to SWS, so that overall, they are
considered to be operating principally in Australia. The rest of the
money would need to be donated and spent within Australia, to further
their charitable purpose of helping the poor.
Example 1.12: Passive investment activities for charitable purposes
SmithJones operates a passive investment income fund in Australia,
with Australian staff, with the objective of helping abandoned animals.
SmithJones donates all of their returns to BlackBrown, who also have a
purpose of helping abandoned animals. BlackBrown in established
and set up in Australia.
However, BlackBrown donates all money they receive in a particular
year to an entity overseas, for spending on abandoned animals. This
entity was not listed in the regulations as income tax exempt in
Australia. The donation includes the money gifted from SmithJones.
SmithJones do not meet the `in Australia' special conditions.
Although they donated all surplus funds to an organisation located and
operating in Australia, the gifted funds were ultimately spent overseas.
SmithJones would be expected to know what the final charitable
spending of the funds they donated to BlackBrown is, and include the
spending when considering whether they meet the `in Australia'
special conditions.
1.88 If an entity pursues its purposes through a combination of direct
activities and donations to other similar entities, one or both elements of
the test respectively need to be applied to the respective `activities' of the
entity.
1.89 Restating this element of the test overcomes the High Court's
decision in Word Investments by applying an adjusted test to entities that
pursue their purposes by merely passing funds to other entities.
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Restating and standardising the special conditions for tax concession entities
Exceptions from the `in Australia' special conditions
1.90 Entities categorised as primary and secondary resources, and
tourism are exempt from the `in Australia' special conditions. In order to
be income tax exempt they must be not-for-profit entities (see
paragraphs 1.103 to 1.118 below).
1.91 Government and most Government related entities are also
exempt from the `in Australia' special conditions, but must meet the other
special conditions attached to exempt entities.
1.92 Entities that would otherwise fail the `in Australia' special
conditions can be income tax exempt by being listed in the regulations,
provided they meet the other special conditions required to be an income
tax exempt entity and the qualifying conditions for prescription -- see
paragraphs 1.119 to 1.122.
1.93 A decision to prescribe an entity in the regulations is a policy
decision that would be made only in exceptional circumstances.
Governing rules and established purposes
1.94 Registered entities must apply their income and assets solely for
the purpose for which they are established. [Schedule 1, item
38, paragraph 50-50(3)(b)]
1.95 Endorsement of entities as exempt from income tax under a
general category is decided firstly by reference to the entities stated
purposes and objectives.
1.96 For established entities, some reference can be had to the entities
actual activities to determine whether those activities demonstrate the
pursuit of alternative or inconsistent purposes and objectives. The
operations of the entity are important, and can be used to determine the
purposes for which an entity is established.
1.97 However, this can create some difficulty for the ATO because
`inappropriate conduct' may not always manifest pursuit of an alternate
purpose but nonetheless should result in an entity no longer being entitled
to endorsement.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.98 For this reason, a special condition generally imposed on exempt
entities is that they operate only in a manner consistent with their
substantive governing rules and purpose. Therefore, while an entity's
governing rules and purposes may initially determine their eligibility for
endorsement/eligibility for an income tax exemption, they are expected to
operate in a manner consistent with those rules and purposes to remain
eligible. [Schedule 1, item 38, paragraph 50-50(3)(a)]
1.99 Requiring an exempt entity to comply only with their
substantive governing rules and purposes allows an entity to keep its
income tax exempt status for minor procedural irregularities, such as an
absence of quorum at a meeting or missing a required lodgement date.
Breaches of procedural irregularities will not, of themselves, affect an
entity's continued entitlement to income tax exempt status.
1.100 Substantive governing rules are those rules of core importance to
the operation of the entity and would include those related to an entity's
object and purpose and those relating an entity's not-for-profit status.
1.101 This requirement applies equally to the income tax exempt
categories that are not the subject of the endorsement rules. However,
because the entity is not endorsed, the Commissioner will consider the
same issues if he decides to issue an assessment for income tax payable
because the entity is not considered to be income tax exempt.
1.102 New law confirms the Court's interpretation in Commissioner of
Taxation v. Bargwanna [2012] HCA 11, relating to whether a charitable
trust is applied for the purposes for which it was established.
Not-for-profit
1.103 To be a Not-for-profit entity, an entity must:
· be an entity that is not carried on for the profit or gain of its
owners or members, neither while it is operate nor upon
winding up; and
· under an Australian law, foreign law or the entity's
governing rules, it is prohibited from distributing, and does
not distribute, its profits or assets to its owners or members
(whether money, property or other benefits), neither while it
is operating nor upon winding up, unless the distribution is
made to another not-for-profit entity with a similar purpose,
or it is genuine compensation for services provided to, or
reasonable expenses incurred on behalf of, the entity.
[Schedule 1, item 44, subsection 995-1(1)]
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Restating and standardising the special conditions for tax concession entities
1.104 A not-for-profit entity is generally an entity with a community
or social purpose. It is an entity that is not operating for the profit or gain
of its individual members, whether these gains be direct or indirect. This
applies both while the entity is operating and when the entity winds up.
1.105 Additionally, a not-for-profit entity is one that does not provide
any private benefit, directly or indirectly, to a related party such as a
trustee, member, director, employee, agent or officer of a trustee, donor,
founder, or to an associate of any of these entities (other than reasonable
remuneration for services provided or re-imbursement of related costs).
1.106 The Commissioner has generally accepted an entity as being
not-for-profit where its constituent or governing documents or the
operation of law (for example, a statute governing the organisation)
prevent it from distributing profits or assets for the benefit of particular
people -- both while it is operating and when it winds up. Any surplus
made by an entity must be directed towards carrying out the entity's
purposes.
1.107 However, the fact that a not-for-profit entity may make a profit
does not negate its not-for-profit status so long as any surplus is applied to
the not-for-profit purposes of the entity and the profit does not accrue to
the benefit of identifiable members either directly or indirectly.
1.108 Despite the general prohibition, a not-for-profit entity can
distribute surpluses and assets to other not-for-profit entities (even if those
entities are owners or members) if the purpose of those entities is similar
and the distribution is intended to help the not-for-profit achieve its
purpose.
1.109 Distribution takes the broader dictionary definition, not the
definition defined in the ITAA 1997.
1.110 A not-for-profit entity can also make distributions for genuine
compensation for services provided to, or reasonable expenses incurred on
behalf of the entity. For example, a not-for-profit entity could distribute
to a member for the purposes of a stipend for the member's services as a
minister.
1.111 Income tax exempt entities are generally required to be
not-for-profit as the tax concession is intended to support activities that
have a broad public benefit.
1.112 Trade union and employee associations are exempt from being
not-for-profit entities, but must still meet the other special conditions
required of exempt entities. [Schedule 1, item 38, paragraph 50-51(1)(a)]
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.113 Public education institutions (table item 1.4 of section 50-5 of
the ITAA 1997) and public hospitals (table item 6.1 of section 50-30 of
the ITAA 1997) are exempt from being not-for-profit entities, but must
still meet the other special conditions required of exempt entities.
[Schedule 1, item 38, paragraphs 50-51(1)(b) and (c)]
1.114 Many of these institutions will be government entities, and
therefore cannot be not-for-profit; however, they should nevertheless be
tax exempt.
1.115 The current law uses the term `non-profit' in both a defined and
undefined sense throughout the tax law.
1.116 The new law standardises the definition of not-for-profit,
replacing the various definitions of `non-profit' currently used throughout
the tax laws, and applies it consistently across the tax laws. [Schedule 1,
items 3, 4, 6, 11, 12, 35, 46 to 107, 111, 118 to 121 and 126 to 165]
1.117 Recommendation 1 of the 2001 Report of the Inquiry into the
Definition of Charities and Related Organisations suggested changing the
term `non-profit' to `not-for-profit' for the reasons set out in the report.
1.118 The new law adopts this recommendation.
Regulation-making power
1.119 Overseas entities, or entities which are resident in Australia but
operate and pursue their objectives principally outside Australia, which do
not meet the `in Australia' special conditions, but do meet the other
special conditions to become income tax exempt (they are not-for-profit
entities, and comply with all their substantive governing rules, and apply
their income and assets solely to pursue the purposes for which they are
established) may be prescribed in the regulations as income tax exempt
entities in special circumstances. [Schedule 1, item 38,
paragraphs50-51(2)(c) and(d)]
1.120 This power is intended to be applied only in exceptional
circumstances, at the discretion of the Governor-General in Council. The
Governor-General is expected to consider matters such as whether the
entity will be providing a broad benefit to the Australian community, the
national interest, tax system integrity, the risk of the entity being utilised
for money laundering or terrorist financing and any other relevant
considerations. This power is subject to Parliamentary scrutiny, by way
of disallowance.
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Restating and standardising the special conditions for tax concession entities
1.121 However, an entity may not be prescribed if the entity is a
foreign resident and it is not exempt from foreign income tax in the
country in which it is resident. This ensures that Australia does not extend
a concession to an entity that does not receive such a concession in its
home jurisdiction. If the entity was not required to be exempt from
income tax in the country which it is resident, the outcome would be that
Australia gives up its taxing rights over the entity's Australian sourced
income to a foreign jurisdiction.
1.122 In prescribing an entity, the Governor-General may set
conditions for the exemption to order to ensure the exemption is not
misused.
Deductible gift recipients
1.123 Deductible gift recipients (or entities endorsed as deductible gift
recipients for the operation of a fund, authority or institution, to the extent
that they operate that fund, authority or institution) are exempt from the
`in Australia' special conditions for income tax exempt entities in
Division 50 of the ITAA 1997 because deductible gift recipients are
subject to a separate test. [Schedule 1, item 38, paragraphs 50-51(2)(a) and (b)]
1.124 The new law codifies the `in Australia' special conditions for
deductible gift recipients so that the core principle for income tax exempt
entities is applied similarly to deductible gift recipients but with a
differing (stricter) threshold test. [Schedule 1, items 1, 2 and 22,
subsection 30-15(2), section 30-18 and paragraph 31-10(2)(a)]
1.125 Standardising the core elements of the special conditions will
minimise compliance costs on deductible gift recipients and simplify the
tax framework applying to not-for-profit entities.
1.126 The `in Australia' special conditions for deductible gift
recipients are set out in Division 30 of the ITAA 1997.
1.127 Deductible gift recipients must:
· operate solely in Australia; and
· pursue their purposes solely in Australia.
[Schedule 1, item 2, subsection 30-18(1)]
1.128 `Solely in Australia' is to be interpreted as requiring deductible
gift recipients to be established and operated only in Australia (including
control, activities and assets) and must have their purpose and
beneficiaries only in Australia.
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.129 The majority membership of an Australian subsidiary by an
overseas entity will not of itself contravene the `in Australia' requirement.
Example 1.13: Pursuit of purposes
A public museum is incorporated in New Zealand and has a branch in
Australia.
It is not `in Australia'. It cannot be endorsed as a deducible gift
recipient.
Example 1.14: Pursuit of purposes
A fund is set up and operates in Australia. It makes its donations for
the construction of schools run by a religious institution in Europe.
The fund is not `in Australia'. It cannot be endorsed as a deductible
gift recipient unless covered by an exempt category.
1.130 A deductible gift recipient does not fail the `operating solely in
Australia' and `pursuing purposes solely in Australia' if the overseas
activities are merely incidental to the operation and pursuit of the entity's
purposes in Australia, or the overseas activities are minor in extent and
importance when considered with reference to the operations and pursuit
of an the entity's Australian activities. [Schedule 1, item 2, subsection 30-18(2)]
Example 1.15: Minor and incidental activities
A large public museum operating in Australia has a large permanent
collection of artwork in Australia, as well as collections which tour
around Australia.
The museum has made an arrangement to send temporarily, a
collection of artwork overseas, along with an individual who is an
expert in the collection era, in return for receiving a temporary
exhibition of artwork from overseas.
This would be considered to be incidental when considered with
reference to the museum's operations and pursuit of purposes in
Australia, and the museum would not lose its deducible gift recipient
status.
Example 1.16: Minor and incidental activities
A public benevolent institution is set up in Australia to help
Australians suffering from cancer. Part of the treatment it provides
involves travel to Canada.
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Restating and standardising the special conditions for tax concession entities
Example 1.17: The institution would still meet the `in Australia'
special conditions.: Minor and incidental activities
A public benevolent institution provides medical assistance to children
in Australia with a particular disability but, to a minor extent, it also
brings children from other countries to receive treatment in Australia.
The institution would still meet the `in Australia' special conditions.
Example 1.18: Minor and incidental activities
A youth orchestra undertakes an overseas tour for one week to
undertake performances.
This tour would be considered merely incidental to the pursuit of the
purposes of the orchestra in Australia.
The orchestra would still meet the `in Australia' special conditions.
Example 1.19: Minor and incidental activities
A visual arts organisation which is a deductible gift recipient tours
Australia with exhibitions and undertakes no overseas activities for
three years.
The following year they undertake a tour overseas which lasts three
months.
This tour would be considered minor and incidental when considered
with reference to the organisation's operations and pursuit of purposes
in Australia, and the visual arts organisation would not lose its
deducible gift recipient status.
Example 1.20: Minor and incidental activities
An orchestra is a deductible gift recipient. In one year, it undertakes
over 100 concerts in Australia attended by over 200,000 people, as
well as some educational activities and workshops.
The orchestra undertakes an overseas tour comprising of 10
performances, attended by 18,000 people.
This overseas tour would be considered to be incidental when
considered with reference to the orchestra's operations and pursuit of
purposes in Australia, and the orchestra would not lose its deducible
gift recipient status
1.131 Entities that are deductible gift recipients under the category of
`international affairs' are exempt from the deducible gift recipient `in
Australia' special conditions. [Schedule 1, item 2, subsection 30-18(5)]
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.132 This includes entities which are specifically listed under the
`international affairs' category. Organisations that are specifically listed
in other sections of Division 30 must continue to meet the `in Australia'
special conditions.
1.133 These deductible gift recipients include overseas aid funds,
developed country relief funds and similar deductible gift recipients where
their activities are clearly intended to be undertaken overseas. This is in
recognition that although some organisations are not operating in
Australia, it is considered that they nonetheless further Australia's
overseas aid objectives and therefore contribute to Australia's broad
public benefit.
1.134 Entities in this category are granted assistance through the
Overseas Aid Gift Deductibility Scheme (OAGDS). Consistent with
Australia's broader overseas aid program, the OAGDS is aimed at
development initiatives which aim to improve the wellbeing of whole
communities.
1.135 The OAGDS has appropriate integrity requirements in place to
ensure that this taxpayer funded concession is directed to the causes that it
was donated for, and not at risk of being misdirected to inappropriate and
unauthorised operations. These integrity requirements are supported by
special administrative arrangements because of the difficulties associated
with monitoring activities undertaken outside of Australia.
1.136 In addition, entities on the Register of Environmental
Organisations, which the Secretary to the Environment Department
authorises as being exempt from the `in Australia' special conditions, may
also undertake overseas activities. This reflects the need for a number of
environmental organisations to operate more broadly in order to affect
change that will be of benefit to the Australian public. However, in order
to ensure the integrity of the deductible gift recipient regime, an
exemption from the `in Australia' conditions will be limited to certain
entities listed on the register. [Schedule 1, items 2 and 14, subsections 30-18(7)
and 30-280(1)]
1.137 The Secretary to the Environment Department must make his or
her decision about granting an exemption based on the requirements
detailed in the regulations. [Schedule 1, item 2, subsection 30-19(1)]
1.138 These requirements are expected to include such things as:
· the entity must demonstrate a genuine need to conduct
activities overseas in order to further its purpose;
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Restating and standardising the special conditions for tax concession entities
· the entity must demonstrate that those activities undertaken
outside Australia are effective in achieving its purpose;
· if the entity has an in-country partner, the entity must
demonstrate that it effectively interacts and coordinates
activities with its in-country partner;
· the entity must comply with all Australian and foreign laws,
Australia's international treaty obligations, and uphold the
high reputation of Australia and it's not-for-profit sector; and
· the entity must show it has in place current and appropriate
governance arrangements for the proper monitoring of any
overseas activities undertaken by both it and any in-country
partners to ensure that any money and property is being used
in an proper and effective manner.
1.139 A fund, authority or institution may apply to the Administrative
Appeals Tribunal for review of a decision to make or not make a
determination to operate overseas. [Schedule 1, item 2, subsection 30-19(2)]
1.140 This ensures appropriate integrity requirements are in place to
ensure that the deductible gift recipient concession is directed to the
causes that it was donated for, and not at risk of being misdirected to
inappropriate and unauthorised operations.
1.141 Deductible gift recipient includes both entities that are
themselves deductible gift recipients and entities that are deductible gift
recipients because they operate a public fund.
1.142 However, these conditions only apply to the portion of the entity
or public fund that is endorsed as a deductible gift recipient. Similarly,
the part of the entity that is a deductible gift recipient is disregarded when
applying the income tax exemption special conditions.
1.143 If an organisation subject to the `in Australia' special conditions
operates a fund, authority or institution that is covered by the
`international affairs' category or the group of Register of Environmental
Organisations allowed to operate overseas, the organisation need only
consider its operations, ignoring the approved overseas component, when
assessing the entity against the special conditions. [Schedule 1, item 2,
subsection 30-18(6)]
1.144 For example, an entity may be a public benevolent institution
(PBI), which is a deductible gift recipient, but operate an overseas aid
fund covered by the international affairs category. In this case, only the
overseas aid fund should be exempt from the `solely in Australia'
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
requirements. The PBI portion of the organisation should still be able to
be a deductible gift recipient, subject to the `solely in Australia'
requirements.
Example 1.21: Solely `in Australia'
An entity is endorsed as a charitable institution in Australia. It
operates a public fund which is as a deductible gift recipient under the
Register of Cultural Organisations.
Only the funds relating to the public fund are required to meet the
deductible gift recipient `in Australia' special conditions, not the entire
entity.
The charitable entity is required to operate principally `in Australia' in
order to be income tax exempt. This consideration does not include
funds related to the deductible gift recipient portion of the
organisation.
1.145 If a deductible gift recipient gives money to another entity to
further its purposes, the deductible gift recipient must look through the
entity it has given money to and consider the final use of this money,
property or benefits when considering whether it meets the `in Australia'
special conditions. [Schedule 1, item 2, subsection 30-18(3)]
1.146 This ensures that entities cannot be considered to be pursuing
their objectives solely `in Australia' if they merely operate to pass funds
within Australia to another charity that conducts its activities overseas.
1.147 A fund, authority or institution established and maintained
solely for the purpose of providing money for scholarships, bursaries or
prizes to which section 30-37 of the ITAA 1997 applies needs only to be
established in Australia, and does not need to operate solely in Australia,
or pursue its purposes solely in Australia. This is consistent with the
current law. [Schedule 1, item 2, subsection 30-18(4)]
1.148 The scholarships, bursaries or prizes can only be awarded to
Australian citizens or permanent residents for pre-approved courses, and
are monitored and properly assessed. The overseas component of the
scholarship is by way of study of a component of certain courses only, so
while it is likely that the overseas portion would be considered an activity
which is merely incidental to the operations and purposes of the entity, or
minor in extent and importance when considered with reference to the
operations and purposes of the entity, this removes any doubt about the
outcome.
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Restating and standardising the special conditions for tax concession entities
1.149 The new law provides a regulation-making power to allow
certain medical research institutions to be listed in the regulations.
Medical research is an international collaboration activity. Listed
organisations will be required to be deductible gift recipients prior to the
commencement of this Bill. Listed medical research institutes will still be
required to be established in Australia, but will be exempt from the
remainder of the `in Australia' special conditions. [Schedule 1, item 23,
section 30-18 of the Income Tax (Transitional Provisions) Act 1997]
1.150 A review will be undertaken within three years to examine
options for the development of a permanent deductible gift recipient
category for medical research institutions that undertake a significant part
of their activities overseas.
1.151 The new law also specifically lists in the `international affairs'
category the Australian Chamber Orchestra Pty Ltd
(ABN 45 001 335 182) and the Sydney Dance Company
(ABN 59 002 707 897), which are designated international touring
organisations. The overseas activities of these organisations must remain
under 25 per cent of their overall activities. These specific listings will be
reviewed in three years' time. [Schedule 3, items 1 to 3, subsection 30-80(2) and
section 30-315]
Application and transitional provisions
1.152 The measure commences from Royal Assent, and applies to
determine whether an entity is entitled to be income tax exempt or remain
income tax exempt for income tax years following Royal Assent.
[Schedule 1, subitem 166(1)]
1.153 Any changes to the fringe benefits tax provisions apply to fringe
benefits tax years following Royal Assent. [Schedule 1, subitem 166(2)]
1.154 Any regulations made under the existing legislation will remain
in force as if made under the new law until they can be re-made. Entities
listed in the regulations prior to commencement of this measure will be
transitioned, and hence unaffected by the changes. [Schedule 1, item 167]
1.155 Entities endorsed under subsection 123E(1) of the
Fringe Benefits Tax Assessment Act 1986 (endorsement as a charitable
institution) prior to commencement of this measure will be grandfathered,
and hence unaffected by the changes unless they later begin to fail the
conditions of endorsement. [Schedule 1, subitem 167(3)]
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
1.156 The measure applies to determine whether an entity is entitled to
be a deductible gift recipient or remain a deductible gift recipient for
income years following Royal Assent. [Schedule 1, subitem 166(1)]
1.157 The specific listings of the Australian Chamber Orchestra Pty
Ltd and the Sydney Dance Company apply to gifts made following Royal
Assent. [Schedule 3, item 4]
1.158 In regard to the standardisation of the definition of
`not-for-profit' entity, if the Commissioner currently treats an entity as a
not-for-profit entity but that entity no longer qualifies as being a
not-for-profit entity due to the changes, that entity will continue to be
treated as a not-for-profit entity for 12 months from Royal Assent to allow
the entity sufficient time to amend its governing rules. [Schedule 1, subitems
166(3) and (4)]
Consequential amendments
1.159 The new law replicates the arrangements allowing the
Commissioner to check the status of specifically listed deductible gift
recipients, and extends it to entities prescribed in the regulations as
income tax exempt even though they fail the `in Australia' special
conditions. [Schedule 1, item 45, Section 353-30 in Schedule 1 to the Taxation
Administration Act 1953]
1.160 The Commissioner may require an entity prescribed in the
regulations to give him or her information relevant to the entity's status as
a prescribed entity.
1.161 This allows the Commissioner to review whether a prescribed
entity continues to be eligible to be income tax exempt, reflecting the
Commissioner's current power to review the eligibility of specifically
listed entities.
1.162 This provision does not remove the privilege against
self-incrimination.
1.163 The Commissioner is to review and advise the Minister if the
entity is or is not operating consistently with the obligations imposed on
its listing. [Schedule 1, item 45, subsection 353-30(2) in Schedule 1 to the Taxation
Administration Act 1953]
1.164 The conditions for eligibility for a refund of franking credits to
certain not-for-profit entities currently mirror the existing `in Australia'
special conditions in Division 50 of the ITAA 1997. The new law
replicates the Division 50 changes for the refund of franking credit rules
34
Restating and standardising the special conditions for tax concession entities
for not-for-profit entities by cross referencing the newly restated special
conditions. [Schedule 1, item 43, section 207-117]
1.165 The definition of `overseas charitable institution' in the Income
Tax Assessment Act 1936 references a section now brought within the
standardised new special conditions, and the reference is updated
accordingly. The section refers to the previous `in Australia' special
conditions, referring to a foreign resident institution, the income of which
would be exempt from section 50-5 if the institution had a physical
presence in Australia and incurred its expenditure and pursued its
purposes principally in Australia. This will now reference the new `in
Australia' special conditions. [Schedule 1, item 42, section 121C of the Income
Tax Assessment Act 1936]
1.166 Section 65J of the Fringe Benefits Tax Assessment Act 1986 sets
out the categories of employers that are able to access a fringe benefits tax
rebate. These employers include religious institutions, public education
institutions and charitable institutions.
1.167 To ensure consistency and simplify the tax laws, these
provisions are being re-written to explicitly cross-reference back to the
income tax exempt entity provisions in the income tax laws. Therefore,
for an entity to receive a fringe benefits tax rebate, it must meet the
`in Australia' special conditions. [Schedule 1, items 108 to 110, 112 to 117, 122 to
125, subsections 65J(1) and 65J(5) of the Fringe Benefits Tax Assessment Act 1986]
1.168 Currently there is an implicit assumption that an employer listed
in the Fringe Benefits Tax Assessment Act 1986 will need to meet the
entity description under the income tax laws.
1.169 There are a number of specifically listed entities which were
approved to operate overseas but are not listed in the international affairs
category. The new law relocates these listings from their current place in
Division 30 to the `international affairs' category. [Schedule 1, items 5, 7 to
10, 13, 15 to 21 and 24, subsection 30-80(2) and section 30-315]
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Restating and standardising the special conditions for tax concession
entities
1.170 This Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
35
Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Overview
1.171 This Bill:
· re-states the `in Australia' special conditions for income tax
exempt entities, ensuring that they generally must be
operated principally in Australia and for the broad benefit of
the Australian community (with some exceptions);
· standardises the other special conditions entities must meet to
be income tax exempt, such as complying with all the
substantive requirements in their governing rules and being a
`not-for-profit' entity (with some exceptions);
· standardises the term `not-for-profit', replacing the defined
and undefined uses of `non-profit' throughout the tax laws;
and
· codifies the `in Australia' special conditions for DGRs
ensuring that they must generally operate solely in Australia,
and pursue their purposes solely in Australia (with some
exceptions, such as overseas aid funds and some
environmental organisations).
Human rights implications
Right to privacy
1.172 Article 17 of the International Covenant on Civil and Political
Rights (ICCPR) provides that no one shall be subjected to arbitrary or
unlawful interference with their privacy. Privacy guarantees a right to
secrecy from the public of private characteristics, actions or data.
1.173 Collecting, using, storing and sharing personal information
amount to interferences with privacy.
1.174 In order for an interference with privacy not be `arbitrary', the
interference must be for a reason consistent with the ICCPR and
reasonable in the particular circumstances.
1.175 `Reasonableness', in this context, incorporates notions of
proportionality to the end sought and necessity in the circumstances.
Generally, this means that provisions interfering with privacy should be
precise, that they should not give decision-makers too much discretion in
authorising interferences, and that they should provide proper safeguards
against arbitrary interference.
36
Restating and standardising the special conditions for tax concession entities
1.176 Section 353-30 provides that the Commissioner may require an
entity that is prescribed in the regulations to give him or her information
relevant to the entity's status as a prescribed entity. Such information
may include personal information, however, this is unlikely.
1.177 The information gathered must be relevant to the status of an
entity in its capacity as a prescribed entity. The information may be
necessary for determining whether an entity is still meeting the conditions
of its prescription.
1.178 The Commissioner must disclose to the Minister if there is a
change in the principal purpose of the entity, or the entity is not
complying with any rules or conditions that were required in order for the
entity to remain a prescribed entity. The Minister may only disclose
information provided by the entity (as requested by the Commissioner) for
a purpose relating to the entity's status as a prescribed entity.
1.179 As such, this provision would not be considered be `arbitrary'.
Presumption of innocence
1.180 Article 14 of the ICCPR provides that all persons shall be equal
before the courts and tribunals and everyone charged with a criminal
offence shall have the right to be presumed innocent until proven guilty
according to law.
1.181 This Article imposes on the prosecution of an offence, the
burden of proving the charge, guarantees that no guilt can be presumed
until the charge has been proved beyond reasonable doubt and ensures
that the accused has the benefit of doubt.
1.182 As per paragraph 30 of UN Human Rights Committee, General
Comment No. 32 (2004), this human right is normally engaged where
public authorities make public statements affirming the guilt of the
accused, shackle or keep defendants in cages during trials indicating that
they may be dangerous criminals or allow the media to show news
coverage that undermines the presumption of innocence.
1.183 It could be argued that where legislation places a legal burden on
the defendant, this may engage the right to a presumption of innocence
under Article 14 of the ICCPR.
1.184 Subsection 363-30(6) makes two defences available to persons.
This may require an entity to prove that it:
37
Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
· did not aid, abet, counsel or procure the act or omission
because of which the offence is taken to have been
committed; and
· was not in any way, by act or omission, directly or indirectly,
knowingly concerning in, or party to, the act or omission
because of which the offence is taken to have been
committed.
1.185 Information required under section 353-30 is necessary for
determining whether an entity is still meeting the conditions of its
prescription. This may affect the collection of revenue.
1.186 In tax provisions, the burden tends to fall on the taxpayer.
1.187 It is common amongst Commonwealth revenue regimes to place
the legal burden on the defendant where the defendant seeks to rely on an
exception or defence to the general prohibition on disclosure of
information (an offence-specific defence).
1.188 This is appropriate because the defendant (in these situations)
holds all of the evidence which is uniquely in their possession.
Conclusion
1.189 This Bill is compatible with human rights.
Assistant Treasurer, the Hon David Bradbury
38
Index
Schedule 1: Application and transitional provisions
Bill reference Paragraph number
Items 1, 2 and 22, subsection 30-15(2), section 30-18 and paragraph 1.124
31-10(2)(a)
Item 2, subsection 30-18(1) 1.127
Item 2, subsection 30-18(2) 1.130
Item 2, subsection 30-18(5) 1.131
Items 2 and 14, subsections 30-18(7) and 30-280(1) 1.136
Item 2, subsection 30-19(1) 1.137
Item 2, subsection 30-19(2) 1.139
Item 2, subsection 30-18(6) 1.143
Item 2, subsection 30-18(3) 1.145
Item 2, subsection 30-18(4) 1.147
Items 3, 4, 6, 11, 12, 35, 46 to 107, 111, 118 to 121 and 126 to 165 1.116
Items 5, 7 to 10, 13, 15 to 21 and 24, subsection 30-80(2) and section 1.169
30-315
Item 23, section 30-18 of the Income Tax (Transitional Provisions) 1.149
Act 1997
Items 25 to 40 1.55
Item 38, subsection 50-50(4) 1.74
Item 38, paragraph 50-50(3)(b) 1.94
Item 38, paragraph 50-50(3)(a) 1.98
Item 38, paragraph 50-51(1)(a) 1.112
Item 38, paragraphs 50-51(1)(b) and (c) 1.113
Item 38, subsection 50-50(1) 1.53
Item 38, paragraphs50-51(2)(c) and(d) 1.119
Item 38, paragraphs 50-51(2)(a) and (b) 1.123
Item 38, subsection 50-50(2) 1.56
Item 38, subsection 50-50(5) 1.70, 1.71
Item 42, section 121C of the Income Tax Assessment Act 1936 1.165
Item 43, section 207-117 1.164
Item 44, subsection 995-1(1) 1.103
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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012
Item 45, subsection 353-30(2) in Schedule 1 to the Taxation 1.163
Administration Act 1953
Item 45, Section 353-30 in Schedule 1 to the Taxation 1.159
Administration Act 1953
Items 108 to 110, 112 to 117, 122 to 125, subsections 65J(1) and 1.167
65J(5) of the Fringe Benefits Tax Assessment Act 1986
Item 167 1.154
Subitem 166(2) 1.153
Subitem 166(1) 1.152, 1.156
Subitems 166(3) and (4) 1.158
Subitem 167(3) 1.155
Schedule 3: Amendments consequential on the
establishment of the ACNC
Bill reference Paragraph number
Items 1 to 3, subsection 30-80(2) and section 30-315 1.151
Item 4 1.157
40