Australia: New special conditions for charity and not-for-profit tax concessions

On 17 April 2012, the Assistant Treasurer released a revised exposure draft on the special conditions applicable to tax concession entities including the 'in Australia' requirement and the definition of 'not-for-profit'. The changes affect the requirements and criteria to be met to qualify for income tax exemptions in Australia by charities and not-for-profits which have any overseas activities.

The revisions are the result of consultations on the initial exposure draft released in July 2011 (see our update here).

The draft legislation is expected to be introduced into Parliament in mid-2012.

Submissions on the revised exposure draft are due 11 May 2012.

The revised exposure draft, together with a fact sheet and explanatory material can be accessed here.

Will the changes affect my charity/not-for-profit?

The changes mainly affect the following:

• Charities and not-for-profits which may have some or all of their activities overseas but are not endorsed as overseas aid funds or disaster relief funds
• Charities and not-for-profits that make donations overseas or in support of overseas activities
• Organisations falling within those two categories should:
• review their activities in light of the changes to ensure that the impact of the draft legislation does not place their eligibility for deductible gift recipient (DGR) status or income tax exemptions at risk
• consider making a submission on the revised draft legislation to address the operation impact and the policy basis for the changes.

What are the changes?

The previous draft legislation contained a number of problematic provisions with serious consequences for charities and not-for-profits either conducting overseas activities or providing funds to other organisations with overseas activities. Other problematic provisions included a provision that put an organisation's endorsement for income tax exemption at risk for failing to comply with its constitution or other governing rules; and a provision that restricted transfers of funds and assets between not-for-profit entitles.

The revised draft legislation addresses many of the problematic issues with the previous draft. The principal features of the revised draft are:

• Definition of 'not-for-profit' will no longer target commercial subsidiaries who generate a surplus for the purpose of supporting charitable objectives
• The 'In Australia' special condition for an income tax exempt entity means that the entity operate principally in Australia and pursue its purposes principally in Australia.
• The 'In Australia' special condition for a DGR must be established in Australia, operate solely in Australia and pursue its purposes solely in Australia. Although activities outside Australia that are incidental or minor will not cause a DGR to fail the special condition
• Organisations falling within the category of international affairs, including international aid and development funds and disaster relief funds satisfy the 'in Australia' requirement if they are established in Australia.
• The use of a donation made by an income tax exempt entity to a non-income tax exempt entity will be taken into account when determining whether the 'in Australia' requirement is met in respect of the income tax exempt entity.
• The use of a donation made by a DGR to a non-DGR will be taken into account when determining whether the DGR meets the 'In Australia' requirement.
• Exemption from the 'in Australia' special condition for certain environmental organisations endorsed as DGRs operating overseas, subject to certain requirements.
• Entities that are currently prescribed in the regulations as income tax exempt will be unaffected by the changes.

Gadens Lawyers is able to assist charities and not-for-profit organisations to evaluate the impact of the proposed changes set out in the exposure draft as well as participate in the consultation to address the policy issues underlying the proposed changes.

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.