– New draft different again to previous versions; would come into force immediately
– Key elements of the new draft
– Donor charities to track any offshore use of funds by recipients which do not share the same tax status
– New conditions for ‘disregarded’ amounts: using funds overseas must be justified on basis of utility
– DGR entities
– Make a submission
New draft different again to previous versions; would come into force immediately after becoming law
Last week, the Federal Government released a new Exposure Draft of the ‘in Australia’ amendments for public comment. This relates to the requirement that charities operate ‘in Australia’ in order to obtain and maintain tax exemption and tax deductible gift recipient (DGR) status.
Importantly, the draft makes it clear that the legislation would come into effect immediately after becoming law.
Changes to the law in this area were first flagged by the former Labor Government in 2009, and were the subject of two draft Acts under the previous Government. The resultingTax Laws Amendment (Special Conditions for Not-for-Profit Concessions) Bill 2012 was scrutinised by two Parliamentary Committees in September 2012 before lapsing during the change of government. The current Government indicated in December 2013 that it intended to progress the amendments.
Submissions on the new Exposure Draft are open until 7 April 2014.
Key elements of the new draft
Regarding tax exempt charities, the draft legislation requires that a charity must ‘operate principally in Australia’ and ‘pursue its purposes principally in Australia’. There is no guidance in the draft Act itself as to what ‘operate’ means, but the draft Explanatory Memorandum suggests that regard could be had to 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 or volunteers are located; and who is directly and indirectly benefiting from its activities.’ [paragraph 1.59]
This varies from the current test, which focusses on where a charity pursues its objectives and incurs it expenditure. If the proposed amendments take effect charities will need to ensure they continue to satisfy the new test.
Donor charities to track any offshore use of funds by recipients which do not share the same tax status
The draft legislation particularly focusses on payments between income tax exempt or DGR charities and other entities. It contemplates charities being required to trace funds they give to other entities which do not share the same tax status (whether income tax exemption or DGR) to ensure that the funds are not transferred overseas.
Funds sent overseas by another body will be treated as if they were sent by the donor charity itself. This may effect whether the donor charity continues to satisfy the ‘in Australia’ requirement.
If the draft Act becomes law in its current form, it would be advisable for charities to document their arrangements for passing funds to other entities, including related entities, that operate overseas. It may be appropriate to put agreements in place which explicitly require that funds be used in Australia. In certain circumstances, charities may also need to consider keeping a track on the proper usage of those funds to avoid being penalised for the operations of other bodies.
New conditions for ‘disregarded’ amounts: using funds overseas must be justified on basis of utility
Similar to the existing regime, the draft legislation also proposes that the use of certain amounts (including gifts and government grants) may be disregarded in determining whether a charity satisfies the ‘in Australia’ requirements.
A new requirement is however that in order to disregard these amounts, the charity must now comply with new conditions, including a requirement that the use of the money outside Australia is ‘effective in achieving the entity’s purposes’ and that the charity ‘effectively interacts and coordinates the conduct of the activity’ with its international partners.
In light of the centuries-honoured practice of the common law courts in determining what is charitable at law by reference to the ‘purposes’ of an entity, this would appear to be a divergence to a focus upon a charity’s achievements, as opposed to its intentions. These standards are separate from and in addition to the requirements for operating an overseas aid fund (where relevant).
DGR entities
The proposed amendments also impose stricter requirements on DGRs, requiring that they be established solely, operate solely and pursue their purposes solely in Australia. DGRs would also be required to trace funds given to other entities in a manner similar to the proposed obligations for income tax exempt charities (outlined above).
Make a submission
If you or a charity you are involved in is interested in making a submission to the Government in relation to the new draft legislation, you can find the relevant details here.
We are assisting organisations in making submissions to Treasury. If you are interested in engaging our firm to prepare submissions for you, please contact us before 4pm on Friday 21 March 2014.
Contact person:
Mark Fowler, Director
(07) 3837 3600
mfowler@ntlawyers.com.au
DISCLAIMER: This update contains general information only and should not be considered legal advice. You should always obtain legal advice for your specific circumstances before relying on general information.