How are the definitions of charities affected by the new tax system?

Income Tax Exempt Non-profits and Endorsement of Charities

Written by the ATO

Issue

The New Tax System requires the endorsement of charities as Income Tax Exempt Charities or Deductible Gift Recipients. How are the definitions of charities and income tax exempt non-profits affected by the introduction of The New Tax System?

Principle

The Endorsement of Gift Deductible Recipients and Income Tax Exempt Charities (ROGATE) is income tax legislation that requires Income Tax Exempt Charities (ITEC) and Deductible Gift Recipients (DGR) to gain endorsement from the ATO. In order to gain endorsement as either an ITEC and/or DGR entities need to have an Australian Business Number (ABN).

The ATO has produced three publications that provide substantial guidance to the non-profit sector on the definitions of non-profits and charities.

  • The Clubpack should be used by organisations that believe they are income tax exempt non-profits.
  • The Charitypack should be used by organisations that believe they are ITECs
  • The Giftpack should be used by organisations that believe they are DGRs.

The term "charitable" has the same meaning for GST as it has for income tax.

Purposes are considered to be charitable if they benefit the community, or some section of it, through:

  • the relief of poverty or sickness or the needs of the aged
  • the advancement of education
  • the advancement of religion, or
  • other purposes beneficial to the community.

Poverty, sickness and the needs of the aged

Relieving poverty, sickness and needs arising from old age are charitable. Examples of organisations likely to be charitable under this test are hospitals and nursing homes, relief agencies, disaster response organisations, youth and women's refuges, drug rehabilitation, refugee welfare centres, soup kitchens, organisations that supply low cost furniture, clothing, and housing to the poor.

Education

The advancement and promotion of education are charitable. Charitable organisations for the advancement of education include schools, colleges, universities, research and scientific institutes, scholarship trusts, school building funds and parents and friends associations.

Religion

The advancement of religion is charitable. Charitable organisations for the advancement of religion include churches, synagogues and other religious congregations, seminars, religious orders, organisations for building or repairing religious buildings, maintaining clergy spreading religious doctrine and practice.

Other Purposes Beneficial to the Community

Charitable activities for other purposes that may be beneficial to the community include:

  • preserving defence and public order
  • relieving stress due to natural disasters
  • providing community facilities such as a museum, library, hall, garden or fire service
  • promoting art and culture such as through music and drama
  • promoting health, for example through educating the public about disease
  • protecting animals
  • scouts

Organisations that are not charitable include:

  • organisations carried on for the profits of their members
  • organisations carried on for their members' common interests, such as professional or trade groups
  • community service organisations that have significant membership purposes, such as traditional service clubs, sporting, recreational and social clubs.

In respect to GST s38-220 and s38-250 of the GSTA provides the principles for GST-free supplies for religious services and the non-commercial activities of charitable institutions, trustee of charitable funds and gift deductible entities.

Specific Questions and Answers

  1. Does the common law definition of charities include all organisations which have income tax exemption or only some of them?

    No, not all income tax exempt organisations are charities. There are other categories of exempt entities, for example, sporting bodies, which are not charitable.

    Generally organisations which satisfy the common law definition of charities are income tax exempt as charities. Where organisations are unsure of their status they should obtain a ruling from the ATO to clarify this issue.

  2. Which of those organisations listed in Section 50-5 of the Income Tax Assessment Act (1997) are included?

    Item 1.1 of section 50-5 of the ITAA 1997 provides that charitable institutions are tax exempt entities. Organisations exempt from income tax under section 50-5, other than item 1.1, may also be charitable under the common law definition, and hence also satisfy item 1.11. See the policy intent for the definitions of charity and charitable institution.

    1Section 50-5 lists seven types of income tax exempt charities: charitable institution, religious institution, scientific institution, public educational institution, fund established for public charitable purposes by will or instrument of trust, fund established to enable scientific research to be conducted by or in conjunction with a public university or public hospital or society, association or club established for the encouragement of science.

  3. Is the definition of charities the same definition as that used by the Industry Commission in its Inquiry into Charitable Social Welfare Organisations, which refers to section 23 of the ITAA of 1936?

    Section 50-5 replaces Section 23 of the ITAA 1936 without changing the concepts of Section 23. "Charitable institution" has the same meaning in section 50-5 of the ITAA 1997 as it had in section 23 of the ITAA 1936.

  4. Can the common law definition used in the Explanatory Memorandum be clearly defined in law so it is not open to debate and interpretation?

    It is not intended to include the common law definition in the GST Act or indeed the Income Tax Assessment Act. Legislating the common law definition could not resolve the interpretational issues.

  5. Does the definition of "charitable institution" used in the GST legislation cover ex-service organisations?

    The policy intent and principle explaining the definition of charitable institutions is outlined under the major issue policy intent. It states that organisations whose activities include community service that have significant membership purposes, such as traditional service clubs, sporting, recreational and social clubs are not charitable. It is intended that the term "charitable" have the same meaning for GST as it does for income tax. The Charity pack is a very useful document in helping organisations review their status as an income tax exempt charity.

    Generally, ex-service organisations are not regarded as charitable institutions. However, if such an organisation sets up, say, a separate fund administered by a trustee to be used in caring for the dependants of deceased ex-service comrades, then the fund would be regarded as a charitable institution.

  6. Will community care services not funded by Government which provide support to older people and people with disabilities - such as assistance with transport, housework, shopping, meal preparation, social support, counselling, information and advocacy be considered charitable institutions for the purpose of GST?

    7. The term 'charitable' has the same meaning for GST as it has for income tax. The definition of charitable is provided above under the major issue policy intent. It is likely that an organisation providing community care would satisfy the charitable purpose of 'relieving poverty, sickness and the needs arising from old age'. Where an organisation is unsure of its status as a charity it should obtain a ruling from the ATO to clarify the issue.

    Privately funded community care services are GST-free if they are provided to one or more aged or disabled people and they are of a type specified by item 2.1 of Part 2 of Schedule 1 to the Quality of Care Principles made under the Aged Care Act 1997. Such care services are daily living activities assistance and include assistance with bathing, eating, personal hygiene and respite care.

  1. Can an organisation be a DGR without being a registered charity?

    2. YES

    To be a DGR:

    • an organisation must have an ABN
    • it must be a fund, authority or institution referred to in the gift provisions of the Act, or it must operate such a fund, authority or institution
    • it must operate a gift fund

    Environmental organisations are approved by the Department of the Environment. They are entered on the Register of Environmental Organisations.

    Donations to the gift fund of approved organisations are deductible.

    To be a charitable institution, the organisation must:

    • Have an ABN
    • Be an establishment, organisation or association that is instituted to advance or promote charitable purposes.

    A charity is an entity established for altruistic purposes that the law regards as charitable. Charitable purposes are the relief of poverty, the relief of the needs of the aged, the relief of sickness or distress, the advancement of religion, the advancement of education and other purposes beneficial to the community. Entities that are predominantly involved in sporting, recreational or social purposes, political lobbying or promotional purposes, or that are carrying on the functions of government are not charities.

    It is possible that an organisation is a DGR, but does not fit the definition of a charitable institution, because, for example, it is predominantly involved in lobbying.

    If an organisation is a charitable institution, it is entitled to endorsement if it meets at least one of these tests:

    • It has a physical presence in Australia
    • It is a deductible gift recipient
    • It is prescribed by law

    For environmental organisations this means:

    They are DGRs (either as an entity, or on behalf of a fund they operate)

    They can be considered as ITECs, but must meet the requirements of section 50-5.

  1. Under what circumstances will the Commissioner conduct a review of charitable status?

    2. Section 30-170 of the ITAA 1997:

    (1) The Commissioner may revoke the endorsement of an entity if:

    (a) the entity is not entitled to be endorsed; or

    (b) the Commissioner has requested the entity under section 30-155 to provide information or a document that is relevant to its entitlement to endorsement and the entity has not provided the requested information or document within the time specified in the request; or

    (c) the entity has contravened Subdivision 30-CA (which requires the entity to ensure that certain things are stated in any receipts it issues for certain gifts).

    Note: Section 30-125 sets out the conditions for an entity to be entitled to be endorsed.

    (2) The revocation has effect from a date specified by the Commissioner (which may be a date before the Commissioner decided to revoke the endorsement).

    (3) However, if the Commissioner revokes the endorsement because the entity is not entitled to it, the Commissioner must not specify a date before the date on which the entity first ceased to be entitled.

    (4) The Commissioner must give the entity written notice if the Commissioner revokes its endorsement.

    (5) The Commissioner may give the notice by way of electronic transmission. This does not limit the ways in which the Commissioner may give the notice.

    Section 30-175: If the entity is dissatisfied with the revocation of its endorsement, the entity may object against the revocation in the manner set out in Part IVC of the Taxation Administration Act 1953.

    Note: That Part provides for review of the revocation objected against.