Appendix 7: ATO Minute No: 480/2003
ATO Minute No: 480/2003
To: |
Gerry Antioch, Treasury |
From: |
Brett Peterson |
Copies To: |
Rona Mellor, ATO. Deirdre Gerathy, Treasury. |
BSL: |
Small Business |
Date: |
16 October 2003 |
Section: |
|
Your reference: |
Our reference: |
2003/07889 | |
Reply Date: |
N/A |
Contact Phone No: |
02 6216 1185 |
Contact Officer: |
Brett Peterson |
Contact Fax No: |
06 6216 2599 |
Subject: |
Definition of Charity | ||
Purpose
1. I am writing to provide a response to questions posed by the Board of Taxation’s Charities Definition Working Group in relation to the practical application of the definition of a charity and related issues.
Action
2. Responses are attached for your information.
Brett Peterson
Assistant Commissioner
Small Business
RESPONSES TO REQUEST FROM CHARITIES DEFINITION WORKING GROUP ON THE PRACTICAL APPLICATION OF THE DEFINITION OF A CHARITY AND RELATED ISSUES
THE TAX OFFICE APPROACH TO DETERMINING CHARITABLE PURPOSE/ADMINISTERING ENDORSEMENT GUIDELINES
1. The Charities Definition Inquiry Report cites, at p102, Draft Taxation Ruling TR 1999/D21 in relation to determining the purpose of a particular charitable fund or institution.
2. In relation to charitable funds, the draft ruling states that the ‘purpose of a charitable fund is found by reference to the terms of its constituent documents’. This approach is considered appropriate for funds (as opposed to institutions) as they are mainly restricted in their activities to managing trust property and making distributions.
3. On the other hand the approach to determining the purpose of charitable institutions is necessarily broader as institutions have more scope for undertaking a range of activities in fulfilling their charitable purpose(s). For this reason the draft ruling, as cited by the Inquiry Report, states that, ‘finding an institution’s sole or dominant purpose involves an objective weighing of all its features.’ This includes consideration of constituent documents, any legislation governing operation, activities, history and control, policies and plans, administration and finances.
4. The endorsement process is administered on the basis of the application of the law to all the facts/features in each case - on the merits of each case. No one feature by itself will be necessarily conclusive. Consideration of all relevant information is necessary to understand whether the institution, at the relevant time, is established predominantly for charitable purposes. Determination of the dominant purpose is a question of fact. This means taking into consideration all relevant information including stated objects, activities and financial information in order to assess the organisation’s entitlement to endorsement. Determining the main purpose by reference to the activities, or giving undue emphasis to the activities, is not appropriate, as activities by themselves will not reflect the dominant purpose.
5. The appropriateness of such a balanced approach is illustrated by the High Court’s decision in Royal Australasian College of Surgeons v FC of T (1943) 68 CLR 436, where the issue was whether the college was a scientific institution. To determine the dominant purpose, the Court considered the objects in the constituent documents and also its activities.
6. It is not envisaged that there will be any change to this process under the proposed law. An organisation’s entitlement to charitable status will remain a matter of considering all the relevant facts and applying the law to those facts, in a fair and consistent manner.
7. The Tax Office approach has been, and remains, open and direct in our dealings. We document and publish our views on the application of the law through our publications and public rulings and on the web.
Does the Tax Office approach differ from the common law?
8. The Tax Office approach is to apply the law, as we understand it to be, in a fair and consistent manner. In the absence of specific legislative direction on issues concerning the definition of a charity, we are obliged to follow the common law interpretation.
What weight does the tax office give to constituent documents in comparison to other criteria?
9. Draft Taxation Ruling TR 1999/D21 sets out the Tax Offices’ views about the circumstances in which an organisation will be found to be charitable and how to determine whether the dominant purpose is charitable.
10. No single factor is taken as a sole indicator of the dominant purpose. Finding an organisation’s dominant purpose is a matter of objectively weighing up all of its features, including its objects, activities, finances, etc. But, no organisation whose constituent documents fail to reflect a dominant charitable purpose would be endorsed.
What guidelines does the tax office provide charities to enable them to determine whether they have a charitable purpose?
11. The Tax Office has documented and published its views on the law and its application in various publications and on the web. They include the Income tax guide for non-profit organisations and Draft Taxation Ruling TR 1999/D21 as well as factsheets and information on the web that assists organisations to work out whether they are charities. We would be please to provide a person to take the Working Group through the range of material provided, and available on the web, if that would be useful.
WOULD CHARITIES BE REQUIRED TO KEEP DETAILED RECORDS OF THEIR ADVOCACY ACTIVITIES IN RELATION TO SECTION 8 OF THE DRAFT CHARITIES BILL?
12. The concern that charities will face the additional burden of being required to keep detailed records of their advocacy activities is entirely misplaced. No additional records will be needed.
13. One of the features of the endorsement regime is self-review. It flows from the statutory requirement for organisations to inform the Tax Office if they cease to be entitled to endorsement. The Tax Office recommends that charities undertake self-reviews on a yearly basis or whenever there is a major change in the organisation’s structure or operations. We recommend, as part of their self-review, that organisations take into account their stated objects, activities, finances and so on. We also recommend that they document the review and its outcome. The Tax Office has provided a template for recording self-reviews in its publication Income tax guide for non-profit organisations.
14. The requirements of the proposed law, if enacted (including disqualifying purposes in the proposed clause 8) would become part of the matters for consideration during self-reviews, to the extent they are not already.
15. In the event that the Tax Office initiates a review of an organisation’s charity status, similar information to that required for self-review would be needed.
16. The Tax Office does not review and does not intend to review every endorsed charity’s status. For non-profit organisations, the Tax Office’s primary approach to managing the revenue system is ‘relationship management, combined with help and education services’ (Compliance program 2003-2004 at page 31). This approach is consistent with non-profit organisations being ‘highly compliant by nature’ but often with low levels of knowledge about the tax system.
17. Where particular risks are identified, the Tax Office undertakes help and audit programs as appropriate. Any programs are guided by the Taxpayers’ Charter and the Compliance Model. The Charter is about being open and fair in our treatment of people, within the framework set by the law. The Compliance Model emphasises the developing of appropriate and proportionate responses to compliance behaviour.
WOULD THE INCLUSION OF PARAGRAPHS 8(2)(a) AND (c) AS PROPOSED IN THE CHARITIES BILL CHANGE THE WAY THE TAX OFFICE ASSESSES WHETHER THE ADVOCACY ROLE OF CHARITIES IS MORE THAN ANCILLARY OR INCIDENTAL?
18. The courts, in relation to charities, have not developed prescriptive rules for deciding whether particular purposes are ancillary or incidental to charitable purposes. It is in an objective weighing of all the relevant facts of each individual case that lead to determination of the matter. Following the approach taken by the courts, the Tax Office has not sought to substitute or impose mechanical tests, activity tests, percentages, black-letter rules, and the like in relation to assessing whether particular purposes are ancillary or incidental to the dominant purpose of an organisation.
19. Our understanding of the Exposure Draft of the Charities Bill (and in this it appears to follow the Report of the Inquiry into the Definition of Charities and Related Organisations) is that it, too, does not adopt such tests or rules. Rather, the proposed section 8 uses the terms ‘purpose’, ‘ancillary’ and ‘incidental’. These terms have not been defined in the Bill and the context of their use – in that clause and in other clauses – does not indicate a meaning different to that which they otherwise bear. For this reason we expect they would have the meaning, sense and application currently in use and as may be determined by the courts in the future.
20. Accordingly, given that the existing law and the Charities Bill both operate in terms of charitable purpose(s) and of certain purpose(s) in so far as they are ancillary or incidental to charitable purposes, we do not see that there would be a difference in approach.
21. In terms of finding whether there are purposes of ‘advocating a political party or cause’ or ‘attempting to change the law or government policy’, the expressions ‘advocacy’ and ‘systemic advocacy’ are not determinative. Some advocacy purposes could be caught and other advocacy purposes fall outside. Indeed many sorts of advocacy purposes of peak bodies, welfare bodies and overseas aid organisations could be envisaged that would not be caught. For example, an overseas aid organisation may seek to conduct a fund raising drive for starving children overseas, and as a part of that activity, raise public awareness by distributing leaflets or writing letters to the newspaper.
Specific examples
22. The examples given are as follows:
a) Peak bodies that have assumed an advocacy and policy role on behalf of their members.
b) Welfare Rights Centres or Disability Advocacy bodies whose main objectives include systemic advocacy as well as advocacy on behalf of individuals.
c) Overseas aid organisations where advocacy is an integral part of their purpose and activities.
23. On the three examples given, in terms of the requirements of paragraphs 8(2)(a) and (c) of the Charities Bill, no definite conclusions can be drawn – due to insufficient information.
24. The application of sub-section 8(2) is predicated on there being a purpose. For example, while an organisation might hire employees, and do so on a regular and recurrent basis using a substantial part of its budget in paying them, it would be unlikely that in the charity context it could be described as having a purpose of hiring and employing employees. More likely these activities would be merely a means of carrying out some purpose like, for example, educating children or propagating the Gospel.
25. So, while an organisation might often have meetings with government ministers and bureaucrats and prepare memoranda to influence them, more information about the relationship of these activities to the purpose(s) of the organisation would be needed to determine whether the organisation had a purpose of doing such things, or that doing these things was merely ancillary or incidental to the organisation’s charitable purpose(s).
HOW DOES THE TAX OFFICE CURRENTLY GIVE EFFECT TO THE COMMON LAW
The interpretation of the terms ‘ancillary’ and ‘incidental’
26. The concepts of ‘ancillary’ and ‘incidental’ are not new in this area.
27. The Tax Office view, explained in Draft Taxation Ruling TR 1999/D21 and based on court decisions in relation to charities, does not seek to apply prescriptive rules for deciding whether particular purposes are incidental or ancillary to the main or dominant charitable purpose(s). It is a matter of weighing up all relevant features to assess whether certain purposes are ancillary or incidental.
28. The presence or scale of particular activities, such as advocacy activities, is not in itself an indication or confirmation that those activities form a purpose in their own right or that they form the main or dominant purpose of an organisation. While an organisation might engage in advocacy activities, these activities may be the means by which the main or fundamental charitable purpose(s) of the organisation are achieved.
Have any income tax exempt charities lost their status as a result of an examination of their advocacy role?
29. I am unaware of any recent, specific cases where endorsement has been revoked on the basis of an organisation’s role in advocacy.
30. Whether the status of an income tax exempt charity should be revoked would be determined by their loss of entitlement to status. This can occur either by the organisation itself advising the Tax Office that it no longer qualifies for entitlement or by a review initiated by the Tax Office. A decision in these cases would be on a case-by-case basis and determined on the merits of each case.
31. The initial endorsement process, in the year 2000, saw thousands of applications received and processed over a few months, which meant that if an organisation had previously been recognised by the Tax Office as having a particular status, endorsement was granted, in the absence of any contrary evidence. However, if organisations believe that they are no longer entitled to income tax exempt charity status due to their advocacy role, or the Tax Office receives information which, upon further examination, confirms the advocacy role as dominant, it is likely that the status will be revoked. Any such action would ordinarily be taken after the organisation has been notified of the impending revocation.
How does the tax office apply or view decisions such as the ACF and Public Trustee cases that appear to support a significant advocacy role as legitimate?
32. We believe that the above cases are essentially consistent with the Tax Office view. The ACF decision is considered to confirm the Tax Office’s approach with regard to the determination of the dominant purpose of an organisation. In this case, it was held the ACF was established for the purposes of public benefit and any objective or strategy that may be described as political was ancillary or incidental.
33. The Public Trustee decision is different as the issue was whether a trust was established for charitable purposes in view of the fact that the beneficiary had mixed objects - charitable and political. It was held that the beneficiary’s charitable objects could be separated from its political objects, and the political objects disregarded, pursuant to the Charitable Trusts Act 1993, so as to confirm the charitable intention of the testator in making the bequest. In any case, the beneficiary was considered to be carrying out activities directed to advancing charitable objects through means which sought to influence public opinion, that is, the ‘political’ purposes were in aid or furtherance of the charitable purpose. Pragmatically, it is unsurprising that a court would generally prefer to uphold a charitable bequest.
34. The Tax Office seeks to apply the law in a fair and consistent manner with a view to aligning endorsement to entities that are actually entitled. The Tax Office view with regard to the law and its practices are well documented and published. This is in keeping with our approach of being open and fair in our treatment of people and working with the community to understand the law and our mutual obligations and responsibilities. But, we do challenge decisions that are, in our view, anomalous, and we do advance issues for judicial clarification (often with test case funding going to the affected organisation).
DOES THE TAX OFFICE BELIEVE THE CHARITIES BILL PROVIDES IT WITH GREATER CLARITY IN ITS ROLE AS THE CURRENT ADMINISTERING AGENCY?
35. .No significant greater clarity is provided.
36. The proposed Bill makes express the range of matters that might amount to charitable purposes. But, the difficulty of administration is the determination of the existence, or not, of the relevant purpose. The proposed Bill, in codifying the existing law, leaves in place all of the existing administrative difficulties.
37. ‘Judgment calls’ about status involve a balancing of competing (and sometimes conflicting) facts. The creation of clearer, harder ‘edges’, such as setting percentages or proportions would help to ease the issue, and make decisions simpler to explain.
DOES THE TAX OFFICE BELIEVE THE CHARITIES BILL PROVIDES GREATER CLARITY TO CHARITIES?
38. Yes, to the extent it puts the definition into a contemporary piece of legislation that people can readily obtain and read for themselves. In other words, the proposed Bill has the advantage of de-mystifying the definitional issue. This may have a small flow on benefit to the Tax Office in easing some elements of explaining decisions.
HOW DOES THE TAX OFFICE PROPOSE TO ADMINISTER THE SERIOUS OFFENCE PROVISION OF THE CHARITIES BILL?
39. Pragmatically, the Tax Office could be expected to ask about this issue on the endorsement application, and to follow up any instances that come to attention. On present indications, it appears that the risk in this issue is unlikely to be sufficient to warrant specific compliance activity on other than individual cases. The Tax Office would be inclined to rely on actual convictions, rather than institute investigations itself.
40. Actual conviction of a relevant offence would lead to refusal or revocation of endorsement.
41. Information leading the Tax Office to believe that a serious offence may have been committed would be referred to law enforcement authorities. In the case of an alleged offence for which a charge has been laid, it is unlikely that endorsement would be granted. For charities already holding endorsement:
• for alleged offences that go to the heart of the charitable operations, it is likely that endorsement would be revoked from the time a charge was laid; and
• for other offences, it is likely that any decision to revoke endorsement would be delayed until the criminal matter has been decided.
(In all cases, once the criminal matter has been decided, it is open to the Tax Office to backdate the time of endorsement in appropriate cases, to achieve a fair outcome)
42. On present indications, regulations are probably not necessary.
43. The operation of the proposed provision is absolute in expression, in that once the proscribed behaviour has been engaged in, then entitlement to charitable status would seem to be forever lost. Whether or not the offence is handled on indictment or summarily is not relevant. The issue is whether the offence is indictable, under the relevant law – this could vary between jurisdictions. In other words, an indictable offence that can, and is, handled summarily, would be caught by the proposed provisions.
44. Any entitlement to review of a decision on this issue would be attached to the tax consequences of the finding of such behaviour. That is, endorsement would be refused or revoked. That decision then gives rise to an entitlement to objection (internal, but independent, Tax Office review), with appeal to the AAT or Federal Court, at the applicant’s discretion. All administrative law and other remedies whereby the courts can exercise a supervisory jurisdiction over the Tax Office would of course also be available.
Specific example
45. The specific example put was of an entity found to have committed an OH&S offence that could be treated as an indictable offence but is treated as a summary offence.
46. The example organisation could not be considered charitable, and could not in the future be considered charitable. The organisation would consequently lose its entitlement to endorsement for tax purposes, and could not again be endorsed.
47. As an aside however, it is relevant to note that offences in the OH&S legislation of a number of jurisdictions are expressly made summary offences only. Additionally, an offence would normally only be committed after notice of some kind. In other words, an organisation is most unlikely (in the absence of negligence) to commit an indictable offence accidentally.
