Australia: ATO releases new tax ruling for charities
Not for profits update

On 12 October 2011, the ATO released a new tax ruling TR 2011/4 setting out its views on the meaning of 'charitable' in the context of determining whether the purpose of an organisation is charitable, including the features distinguishing a charitable institution and a charitable fund, and the circumstances in which an institution or fund will be considered charitable.

This is important to existing charities as it brings alignment between the tax ruling and current operations.

Operational implications for charities

TR 2011/4 is the final form of the draft ruling TR 2011/D2 released in May 2011 (see our update here) and includes a compendium of the ATO's comments on the issues raised in the submissions to TR 2011/D2.

The new tax ruling TR2011/4 can be accessed here, and the compendium of comments can be accessed here.

The changes made by the ATO following public submissions clarify some aspects of the draft ruling. Among the most significant points for existing charities are:

• Advocacy
  Clarity that lobbying and advocacy activities of themselves do not prejudice charitable status.
• Public benefit
  the advancement of education, relief of poverty and the advancement of religion are presumed to be for the public benefit unless shown otherwise.
• Passive and accumulated investments
  The holding of passive investments, for example reserves, to receive a market return to meet reasonable operational expenses does not undermine charitable status. In addition, a fund can accumulate investment income and still be charitable, although the ability to accumulate significant amounts or for extended periods may not be constistent with a charitable purpose.
• Commercial/business activities
  Commercial or business activities can be compatible with a charitable purpose where those activities give effect to the charitable purpose or if they are simply incidental to the charitable purpose, or if they are charitable but carried out in a business-like way.

Many charities will find that the new ruling, for the most part, brings the ATO's position in line with their current operations. This should reduce the compliance risk faced by charities in relation to their charitable status.

The broader implication of the changes is that they recognise the complexity of a charitable organisation and acknowledge that effective delivery of charitable purposes requires a holistic approach, which includes ensuring that the charity can, without jeopardising its charitable status:

• use its experience to address the underlying systemic issues of its charitable purpose through advocacy and lobbying
• tailor its capital structure to ensure that it is appropriate for its charitable purposes and operational strategy and future plans
• undertake activities not reliant upon external funding and therefore increase sustainability and capacity building.

Gadens Lawyers is able to assist charities reviewing their operational strategies to assess risks and to carry out their activities with greater efficiency and sustainability.

For more information, please contact:

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