Chapter 5: Serious offence

Charities Bill 2003: Relevant sections:

Section 4: Core definition

(1) A reference in any Act to a charity, to a charitable institution or to any other kind of charitable body, is a reference to an entity that:

(e) does not engage in, and has not engaged in, conduct (or an omission to engage in conduct) that constitutes a serious offence;

Section 3: Definitions

serious offence means an offence against a law of the Commonwealth, of a State or of a Territory, that may be dealt with as an indictable offence (even if it may, in some circumstances, be dealt with as a summary offence).

Section 8: Disqualifying purposes

(1) The purpose of engaging in activities that are unlawful is a disqualifying purpose.

Introduction

5.1 Paragraph 4(1)(e) excludes from charitable status any entity that has engaged in or engages in conduct that constitutes a serious offence.

5.2 The issues raised in relation to this provision were whether it has a basis in common law and whether it is consistent with the treatment of other income tax exempt entities.

Overview of submissions

5.3 A number of respondents regarded paragraph 4(1)(e) as unworkable, lacking in clarity and likely to increase administration costs. It could deny charitable status and result in an entity losing its PBI status.¹ (Freehills)

5.4 However, there was strong agreement that an unlawful purpose (as distinct from an isolated illegal activity) should be a disqualifying purpose as proposed by subsection 8(1).

5.5 The concerns raised were as follows:

Paragraph 4(1)(e) would not require a conviction. It would merely require that an entity has engaged in the conduct that constitutes a serious offence. It is also unclear what process, besides a judicial determination, would be used to establish that an entity has engaged in such conduct.
The words ‘has not engaged in’ indicate that conduct that occurred before the draft Bill was enacted might be taken into account.
It is unclear when loss of charitable status would occur: upon engaging in the conduct; upon administrative challenge; or when an administrative challenge is resolved.
The definition of serious offence is confusing, especially for charitable organisations operating in a number of States or Territories, as each jurisdiction has a different definition of indictable offence.
The draft Bill could result in double jeopardy as a charitable organisation effectively could be punished twice for the one offence.
A charitable organisation could be at risk through vicarious liability for the acts of an agent, employee or volunteer, even though the organisation had exercised reasonable direction and control.
A single instance of conduct (or omission to engage in conduct) that constitutes a serious offence could result in a charitable organisation losing charitable status forever as there is no process of rehabilitation.

5.6 Respondents also noted that the provision would impose an additional requirement on charitable organisations, compared with other income tax exempt entities, without a sound policy rationale.

5.7 Removal of charitable status is a blunt sanction which lacks the flexibility to respond appropriately to offences that vary in gravity. The sanction would also penalise the beneficiaries of a charitable body rather than any individuals who were responsible for the unlawful conduct.

5.8 Some respondents also noted that the sanction might be avoided inappropriately by:

organisations establishing separate entities to quarantine their exposure to the risk of committing a ‘serious offence’; and
a disqualified organisation winding up and transferring its assets to a newly formed entity that could again apply for charitable status (a ‘phoenix’ charity).

Board assessment

5.9 The Board agrees that an entity with the purpose of engaging in activities that are unlawful should not be permitted to be a charity. It notes that this is the position at common law and is provided for in subsection 8(1). However, paragraph 4(1)(e), which deals with engaging in conduct that constitutes a serious offence, does not reflect the common law.

5.10 The Board’s view is that if the draft Bill is enacted in its current form in relation to paragraph 4(1)(e), some entities that are presently regarded as charitable for the purposes of Commonwealth legislation could lose their charitable status and never be able to regain it. This could have effects on beneficiaries, employees, volunteers and public confidence in charitable bodies in general.

5.11 The Board also agrees that paragraph 4(1)(e) provides no flexibility for regulators to respond to offences of varying gravity.

5.12 Some organisations that lose their status might consider establishing new entities that would fall within the new definition of a charity and attempting to transfer their present operations to the new body, which could seek charitable status without the baggage of past serious offences. Thus, even if paragraph 4(1)(e) were retained, the Board’s view is that it would need amendment to ensure it was not avoided.

5.13 The Board is concerned that administration of this section could increase the costs of regulators, especially if enforcement extended to conduct that had not resulted in a conviction.

5.14 The Board’s assessment is that paragraph 4(1)(e) is unnecessary in the draft Bill as the provision goes beyond the common law and would impose requirements on charitable bodies that are not imposed on other income tax exempt entities. Further, it might be more appropriate to penalise those responsible for a serious offence rather than the organisation.

Recommendation

5.15 The Board notes that subsection 8(1) would ensure that an entity with an unlawful purpose was not entitled to charitable status, and recommends that paragraph 4(1)(e) be removed, so that an instance of unlawful conduct would not disqualify an entity from obtaining or retaining charitable status.

¹ 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.

Next: Chapter 6 - Public benefit and other definitional issues