Statutory Definition of Charity
The Government is once again determined to introduce a statutory definition of “charity” applicable across all Commonwealth agencies from 1 July 2013.
In the absence of a statutory definition, whether an NFP is entitled to endorsement and the resulting tax concessions as a charity is determined by the application of laws developed over 400 years through judgments handed down in the Courts.
On 10 May 2011, the Federal Treasurer, Wayne Swan announced a range of budget measures which will have significant impacts upon activities of Churches, in some cases from 1 July 2011.The main announcements and their potential impacts on Churches are discussed in this article.
Readers may recall that the Howard Government looked to implement a statutory definition of charity in 2001. The project was abandoned.
There was one positive sign out of that process in that the Extension of Charitable Purposes Act 2004 was passed which did extend the meaning of “charity” by including additional groups which may have been on the borderline of entitlement to be endorsed as a charity. Importantly, one of those groups which were legislated to be charitable was “contemplative religious orders”.
Church bodies will need to closely monitor developments in this area and it is expected that the Government will issue a discussion paper shortly. It will be important to resist trends which have occurred in other jurisdictions where there have been questions raised about whether religious activities are “for the public benefit”.
Australian Charities and Not-For-Profits Commission
The Government will establish an Australian Charities and Not-For-Profits Commission (ACNC) which will operate from 1 July 2012.
Already, the Government has established an implementation task force chaired by Robert Fitzgerald who has previously been State President of St Vincent de Paul Society (NSW).
The ACNC will take responsibility for determining the status of the charities and Not-For-Profits (NFPs) and in that regard will take over the role of the Australian Taxation Office in endorsing church bodies as charities.
The ACNC will also be responsible for implementing a “report-once use-often” general reporting framework for charities and NFPs which if successful is likely to provide significant benefits to those in the sector who are required to report to a number of different Government agencies. Support by State agencies in accepting this form of report will provide even greater benefits to the sector.
The Government resolved to establish the ACNC despite submissions by Church bodies concerned about another form of regulation and its impact upon compliance costs.
It remains to be seen whether the ACNC will make life easier for Churches or add another level of complexity and administration.
New Income Tax Arrangements
The most controversial and challenging of all announcements was that the Government will impose income tax on unrelated commercial activities of Churches (and other NFPs) where surpluses are not applied for the altruistic purposes of those organisations. This new tax has been given the acronym UBIT (ie. Unrelated Business Income Tax).
Despite the fact that UBIT has come into effect from 1 July 2011 the basis upon which it will apply is still unknown.
It is only to apply to “new” unrelated business activity (that is, business activity commenced after the date of the budget ie 10 May 2011). UBIT on those “new” activities will apply from 1 July 2011 and eventually UBIT will apply to all charities and NFPs if the relevant legislation is passed in the environment of a hung parliament.
The Government has issued a Discussion Paper which is accessible at
http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2056
The Consultation Paper invites submissions.
Some areas of concern for Churches include:
- What will constitute commercial activities
- Is the sale of surplus Church property considered to be a property development and therefore a commercial activity?
- Is there a difference if the property was vacant land or if it was the sale of a disused Church for example?
- What is the position in relation to an activity which has two purposes, eg a school staff car park by day and a commercial car park by night?
- To what extent will the “passive investing” exemption apply?
- In what circumstance will a commercial activity of a Church be considered to be “unrelated”?
The Consultation Paper proposes three potential structures for conducting unrelated business activities by Churches. Each of these will involve some accounting and legal cost in the establishment as well as ongoing costs. Please refer to the article by Moore Stephens in this edition of Church Matters for an insight into some of the potential accounting issues.
The Consultation Paper contains some concerning examples of what may constitute a “new” activity, eg a significant change in the conduct of a pre-existing activity could convert it into a “new” activity and thereby attract UBIT.
These changes will not result in the Government obtaining any significant revenue and will come at a cost to the Church sector which will reduce funds available for charitable purposes.
The devil will be in the detail and we will keep you informed of developments.
