Chapter 2: Overview

The Terms of Reference

2.1 On 22 July 2003, the Treasurer, the Hon. Peter Costello MP, asked the Board of Taxation (the Board) to consult with the charitable sector and to prepare a report advising him on the workability of the draft Charities Bill 2003 (the draft Bill) and the accompanying Explanatory Material (EM).

2.2 The draft Bill represents the Commonwealth’s first legislative definition of a ‘charity’, which until now has been largely defined through the common law. The draft legislation forms a part of the Government’s response to the Report of the Inquiry into the Definition of Charities and Related Organisations (the CDI), June 2001.¹

2.3 The Treasurer forwarded the following Terms of Reference to the Board of Taxation on 22 July 2003 requesting that a report be submitted to him by 1 December 2003. The reporting date was subsequently extended to 19 December 2003.

Consultation by the Board of Taxation on the definition of a charity 1. The Government has announced that it will codify the existing common law meaning of a charity and expand it to encompass certain child care organisations, self-help bodies, and closed or contemplative religious orders. Pursuant to this decision, the Board is to consult on the workability of the legislative definition of a charity proposed in the exposure draft Charities Bill 2003. 2. In addition, the Board should specifically consult on whether the public benefit test in the Charities Bill 2003 should require the dominant purpose of a charitable entity to be altruistic, as recommended by the Report of the Inquiry into the Definition of Charities and Related Organisations. 3. The Board should consult primarily with organisations intended to fall within the new definition of a charity. 4. The Board should consider views put forward and provide its recommendations in a report to the Government by 1 December 2003.

The meaning of workability

2.4 The Board, in considering its brief, offered the following guidance to the sector to assist organisations prepare their submissions and to guide its own advice to the Treasurer. In order to assess the workability of the proposed legislation, the sector was asked whether the proposed legislative definition would:

• effectively implement the Government’s policy as expressed in the Treasurer’s Press Release No. 49, 29 August 2002 (PR No 49);

• provide greater clarity and transparency to charities;

• provide the flexibility to ensure the definition can adapt to the changing needs of society;

• give effect to the common law definition of a charity except where the meaning was deliberately expanded, for example to include not-for-profit child care, open and non-discriminatory self-help groups and closed or contemplative religious orders;

• have any effect on the level of administrative burden upon charities.

2.5 The Board did not consider workability to include:

• the administrative arrangements required of the Government to implement the definition;

• the degree of harmonisation with the laws of the States and Territories; or

• the scope of the new definition (for example, the issue of including certain child care organisations and self-help groups within the definition was dealt with in the CDI Report following the consideration of submissions from the charitable sector, and in the Government’s response to the report contained in the Treasurer’s Press Release (PR No 49)).

How the consultation was conducted

2.6 The consultation was conducted by a Working Group of the Board comprising Ms Jane Schwager (chair), Mr John Bronger, Ms Hilary Penfold, QC and Mr Richard Warburton, with the assistance of the Board Secretariat. As part of its deliberations, the Board had the benefit of the views of its ex officio members: the Secretary to the Treasury, Dr Ken Henry; the Commissioner of Taxation, Mr Michael Carmody; and the First Parliamentary Counsel, Ms Hilary Penfold, QC. The ex officio Government members reserved their final views for advice to the Government. The Board was assisted by four consultants: Ms Denny Groth, Professor Myles McGregor-Lowndes, Ms Jane Pretty and Ms Marie Spencer. The Board is also grateful to Mallesons Stephen Jaques for providing the assistance of Mr Nicholas Vesic to the Working Group.

2.7 The timeframe for conducting group discussions, receiving and reviewing submissions and preparing the report by December 2003 was short. The consultation involved organisations and peak groups from across the sector including those dealing with welfare, legal services, children’s services, housing, culture, education, the environment, health, indigenous affairs, ethnic affairs, overseas aid and religion. Lists of meetings held and submissions received are contained in Appendices 3 and 4.

2.8 The Board issued a press release announcing its brief and inviting organisations within the charitable sector to take part in its consultations. The Board called for submissions through advertisements in major daily newspapers in each State and Territory. Each of the 373 individuals and organisations that had made a submission to the CDI also received an invitation to make a submission.

2.9 To ensure that the consultation was as thorough as possible, the Board also met with key charitable bodies and representative groups and conducted group discussions in all State and Territory capitals. The groups, which were organised by peak organisations, enabled the Board to explain the Terms of Reference and obtain an early indication of the sector’s response to the draft Bill.

2.10 To assist potential respondents, the Board made available the draft Bill and EM, the Board’s Terms of Reference, the Board’s consultation plan, a guide to making a submission, and a ‘frequently asked questions’ information paper.

2.11 The Board received 267 written submissions, including 10 confidential submissions. Each of these was reviewed to enable the Board to assess the perceived impact of the draft legislation.

The Government’s response to the Charities Definition Inquiry

2.12 The Treasurer announced the Government’s response to the CDI Report in a Press Release (PR No 49). The Treasurer announced that ‘[T]he Government has decided to enact a legislative definition of charity for the purpose of the administration of Commonwealth laws and to adopt a majority of the Inquiry’s recommendations for the definition.’

2.13 The Treasurer stated that the ‘[T]he legislative definition of a charity will closely follow the definition that has been determined by over four centuries of common law, but will provide greater clarity and transparency for charities. The details of the definition are attached. It will explicitly allow not-for-profit child care available to the public, self-help bodies that have open and non-discriminatory membership and closed or contemplative religious orders that offer prayerful intervention for the public, to be charities. It will provide certainty to those organisations operating in the sector while still providing the flexibility required to ensure the definition can adapt to the changing needs of society.’ (PR No 49)

2.14 The announcement specifically noted that ‘commercial purposes should not deny charitable status where such purposes further, or are in aid of, the dominant charitable purposes or where they are incidental or ancillary to the dominant charitable purposes.’ (PR No 49)

2.15 The announcement also sets out elements of the proposed definition of a charity which, among other things, indicated that an entity must not have a dominant purpose of:

• advocating a political party or cause; or

• supporting a candidate for political office; or

• attempting to change the law or government policy. (PR No 49)

2.16 The Treasurer also noted that the Commonwealth’s main requirement for a definition of a charity is to determine eligibility for tax relief but that the definition would also apply for all Commonwealth legislation. He also noted that he would be writing to each State and Territory Treasurer to gauge their interest in achieving harmonisation of laws defining charity.

Structure of report

2.17 This chapter:

• describes the background to the draft legislation, including the Government’s response to the CDI;

• provides an overview of some of the changes that are shaping the charitable sector;

• summarises the main issues raised by the sector in submissions and group discussions; and

• canvasses other views on charitable sector reform.

2.18 Chapters 3, 4, and 5 discuss the three major issues which the Board believes require further consideration if the draft Bill and EM are to provide the workability and flexibility intended by the Government. Chapter 3 addresses advocacy and disqualifying purpose, Chapter 4 addresses charitable structure and Chapter 5 addresses serious offence.

2.19 The remaining chapters address other issues related to the Board’s brief. They include:

• Public benefit and other definitional issues (Chapter 6);

• Altruism (Chapter 7);

• Administrative burden (Chapter 8); and

• Other views on charitable sector reform (Chapter 9): a summary of concerns which may affect the workability and flexibility of the draft Bill but are outside the Terms of Reference of the Board.

The contemporary shape of the charitable sector

2.20 A key test of workability of the draft definition is whether it provides greater clarity and transparency to the charitable sector and whether it is flexible enough to ensure the definition can adapt to the changing needs of society.

2.21 Charitable bodies and other not-for-profit organisations represent a sizeable segment of the Australian economy. The Australian Bureau of Statistics First National Accounts Report on the not-for-profit sector established that non-profit institutions contributed $21 billion or 3.3 per cent to Australia’s GDP in 1999-2000.² When volunteer services were valued and included, the contribution rose to $30 billion or 4.7 per cent of GDP. Non-profit institutions employed 604,000 people, or 6.8 per cent of the total national figure, in 1999-2000.

2.22 There are around 45,600 charitable bodies registered with the Australian Taxation Office (ATO) for income tax exemption and/or Deductible Gift Recipient (DGR) status.³ There are approximately 10,350 Public Benevolent Institutions (PBIs) endorsed by the ATO.⁴ PBIs will continue to be defined by reference to the Income Tax Assessment Act 1997 (ITAA 1997). However, at present all PBIs are regarded as charitable. There is thus a sector expectation that the new definition of a charity will have an indirect effect on PBIs.⁵

2.23 Charitable bodies have changed the way they work with disadvantaged groups.⁶ A far greater emphasis is now given to supporting people to achieve economic independence — a key indicator of social wellbeing. This includes assisting people to gain the necessary support, confidence and skills to win jobs in a competitive employment market. Increasingly, charitable bodies are establishing social enterprises to address entrenched welfare dependence. Social enterprises adopt business practices and apply them to achieve social objectives. In its submission to the CDI, the Smith Family described social enterprise as any private activity, conducted in the public interest, organised with an entrepreneurial strategy, the main purpose of which is the attainment of certain social and economic goals, rather than the maximisation of profit.⁷ In some cases, social enterprise is taking the form of innovative joint ventures between not-for-profit and for-profit organisations that do not fit the traditional model of social welfare delivery.

2.24 Charitable bodies have become major contractual partners with government in providing human services, sometimes taking on functions from governments, such as through the Jobs Network. Charitable bodies also play an important role in advising government and helping to develop policy.⁸

2.25 As the charitable sector’s role has become more complex and the administrative and accountability requirements more onerous, there is an increased requirement to develop greater expertise in policy, research, education and advocacy alongside improved accountability systems in finance, human resources and information technology. Charitable bodies have also emulated other sectors by establishing peak bodies or separate entities to undertake these functions more efficiently.⁹

2.26 Finally, the call on their skills, innovation and services continues to eclipse the funds available to charitable bodies through the traditional mix of sources. As the Treasurer’s Press Release (PR No 49) recognised, many charitable bodies now support their charitable purpose through commercial operations.¹⁰

Overview of issues

2.27 Many respondents welcomed the concept of a legislative definition to provide clarity and certainty to the sector. Some suggested minor amendments. A small number of submissions supported the legislation in its entirety. However, a significant majority of the comments received by the Board suggested that the draft Bill and EM require amendment if the Bill is to be workable, clear and flexible. Submissions focused on a wide range of issues but three issues were dominant and are summarised below.

2.28 Disqualifying purpose and advocacy: The main concern is that the draft definition appears to limit the amount of advocacy a charity can undertake and still retain charitable status. The ‘disqualifying purpose’ clause was regarded widely as more restrictive than the common law, the CDI Report recommendation or the approach proposed in the Treasurer’s Press Release (PR No 49).

2.29 Core definition: Many respondents, particularly those representing some of the large religious organisations, were concerned that the draft definition does not provide clarity about the many different entities formed to more efficiently further the charitable purposes of organisations.

2.30 Both the common law and the draft definition exclude government bodies from having charitable status. Determining whether an entity is controlled by government is critically important, particularly for bodies operating in the health and emergency services areas. The common law is far from clear on what constitutes government control and cannot be applied easily to the complex arrangements of many State and local government created bodies.

2.31 Serious offence: Paragraph 4(1)(e) would put charitable bodies at risk of losing their charitable status if they engage in, or have engaged in, conduct that amounts to a serious offence  even if there is no conviction. This provision does not reflect the common law and there is wide support for its removal.

Other views on charitable sector reform

2.32 The need for wider regulatory reform: The Board received many submissions arguing for further reform to simplify the complex regulatory system in which charitable bodies operate.

2.33 Many submissions also echoed those received by the CDI which argued that the ATO was an inappropriate regulator for the sector and that an independent administrative body should be established. There was strong support for the CDI’s concept of a rationalised definitional framework to incorporate charitable bodies, PBIs and DGR status. The Board appreciates that this issue falls outside of its Terms of Reference, and is a matter of policy for government, but notes that the complexity of the overall framework may add to the administrative burden on charitable bodies.

2.34 An alternative to codification: The Board also notes an alternative approach to enacting the Bill as drafted, which received strong support from a small number of carefully considered submissions. They argued that the Government should consider retaining the common law approach, and legislate only for those changes to the common law position that the Government expressly intends to make. (Freehills; Catholic Church in Australia; Philanthropy Australia)

2.35 This approach would involve minor legislative changes to recognise new categories within the charitable sector, such as self-help groups and closed or contemplative religious orders, as well as additional charitable purposes including child care, the advancement of the natural environment and the advancement of human rights. Legislation would also be needed to address the public benefit test requirement. This approach has precedents in the UK definition of charity and the Australian States’ definitions of recreational charities.¹¹

2.36 Submissions noted that this approach would avoid attempting to codify many of the anomalies and confusions inherent in the common law. It would also retain the flexibility of the common law. It might also avoid costly litigation which may occur in order to resolve issues emerging as a result of codification.

2.37 The Board has also noted the recently proposed reforms to the charitable sector in other countries operating within common law jurisdictions such as the United Kingdom and New Zealand.

---

¹ http://www.cdi.gov.au.

² Australian Bureau of Statistics, Non-Profit Institutions Satellite Account, Canberra, (Cat No.5256.0) 28 November 2002.

³ The statistics in paragraph 2.22 were provided by the Australian Taxation Office, 25 November 2003.

⁴ ATO, SB NP OLAP Cubes (1 December 2003).

⁵ For the purposes of Division 50 of the ITAA 1997, a public benevolent institution which is an entity is a charitable institution — paragraph 24 of Taxation Ruling TR 2003/5: Income tax and Fringe benefits tax: public benevolent institutions.

⁶ Mark Lyons, Third Sector: The Contribution of Non-profit and cooperative enterprises in Australia, Allen & Unwin, Sydney, 2001, Chapter 24.

⁷ Report of the Inquiry into the Definition of Charities and Related Organisations, Canberra, June, 2001, pp 63-64. See also http://www.cdi.gov.au

⁸ Mark Lyons, op cit, Chapter 21.

⁹ Mark Lyons, op cit, Chapter 25.

¹⁰ Mark Lyons, op cit, Chapters 16 and 17.

¹¹ Subsection 103(2) of the Trusts Act 1973 (QLD); subsection 69C(1) of the Trustee Act 1936 (SA); subsection 5(1) of the Charitable Trusts Act 1962 (WA) and subsection 4(1) of the Variation of Trusts Act 1994 (Tas); Recreational Charities Act 1958 (UK); and subsection 61A(3) of the Charitable Trusts Act 1957 (NZ) .

 

Next: Chapter 3 - Advocacy and disqualifying purpose