The Australian Taxation Office has released Taxation Ruling TR 2011/4 on 12 October, which sets out the Commissioner's view on:
- features that distinguish a charitable institution from a charitable fund
- circumstances under which an institution or fund will be considered charitable
- determining whether the purpose of an institution or fund is charitable; and
- recent court decisions in numerous cases such as Word Investments, Aid/Watch, Central Bayside and Victorian Womens Lawyers.
The ruling was previously issued as Draft Tax Ruling TR 2011/D2 and replaces TR 2005/21 which has now been withdrawn. The ATO have sought to provide certainty for taxpayers on the above issues and it is expected that the ruling will not adversely affect charities.
We have summarised below the key differences between TR 2005/21 and TR 2011/4:
- For a purpose to satisfy the technical legal meaning of "charitable", it must fall within one of the four heads of charity; the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community. Furthermore, it must be for the public benefit. TR 2011/4 provides that where the charity falls within one of the first three heads, there will be a rebuttable presumption that the charity is for the public benefit. However, for "other purposes beneficial to the community" the public benefit must be affirmatively established;
- TR 2011/4 states that the objects or objectives in the constituent documents of an institution and its activities which give effect to those objects will be the main factors used in determining whether the entity has a charitable purpose. Furthermore, it is essential that the entity is not only established for charitable purposes, but it is maintained (i.e. its ongoing activities) for that purpose;
- Following the High Court's decision in Word Investments, the ATO confirms the following:
- An institution can be charitable even if its activities are not intrinsically charitable as long as the activities are carried on in furtherance of the institution's charitable purpose.;
- A "charitable institution that endeavours to make a profit from its activities can still be charitable if it's profit making goal is only in aid of it's charitable purpose";
- If an entity's sole purpose is charitable and it carries on a business or commercial enterprise to give effect to that charitable purpose, the entity may still have a charitable purpose. It is not necessary for the activities themselves to be intrinsically charitable;
- The fact that an entity can distribute surpluses to owners or members will not deter an entity from being charitable as long as the distribution of funds to its owners or members is in furtherance of its charitable purposes;
- A structure with a small and exclusive membership that is controlled by family members and friends and undertakes limited activities is not an institution. It may however still be a charitable fund;
- Following from the High Court's decision in Aid/Watch, political purpose can be considered charitable if it generates public debate with a view to influence legislation, government activities or government policy in respect of one or more of the four categories of charity;
- Following the decision in Central Bayside, where the sole purpose of an institution is charitable, neither the fact that its services have the effect of helping to achieve government policy objectives nor the fact that it relies heavily on government funding will detract it from being characterised as charitable;
- An entity that accumulates funds can still be charitable as long as the accumulated funds are being accumulated in order to increase the funds available to effect the entity's charitable purpose.
To download a copy of the Ruling, please click here.
In our view the ruling is a positive outcome as it consolidates the various courts decisions and expands the ATO's initial view on charitable purpose. The additional examples included in TR 2011/4 are also welcomed as additional assistance to taxpayers in determining whether their entities are charitable. However, it is essential to review the Ruling and determine if your entity's particular circumstances satisfy the definition of charitable as determined by the Commissioner in this Ruling.
Unfortunately, whilst a number of these concepts have to some extent now been solidified through TR 2011/4, we will also have to watch closely the proposed changes to the statutory definition of charity and other not for profit changes. For the latest on these issues please refer to the NFP online newsletter released by the Assistant Treasurer.
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