What is a charity?
According to the Charities Act 2013 (Cth) (“Charities Act”), a charity is an entity that:
•has purposes that are charitable and for the public benefit;
•does not have any disqualifying purpose;
•is not an individual, political party or government entity.
The Australian Charities and Not-for-profits Commission (ACNC) registers charities and determines whether an organisation’s purposes are for the “public benefit”.
A number of purposes are set out in the Charities Act but these are non-exhaustive. According to the Charities Act, an organisation’s purposes are for the public benefit if:
•the achievement of that purpose would be for the public benefit; and
•the purpose is directed to a benefit that is available to members of the general public or a sufficient section of the general public.
Under common law, a purpose that is for the relief of the needs of the poor, the aged and the impotent, that advances education or religion is presumed to be a purpose that benefits the public.
The ACNC registers charities in Australia. Registering as a charity is free and carries no annual fees. Registering an organisation as a charity is required to access federal government charity tax concessions and other benefits (discussed further below).
If eligible, another potential advantage of registering as a charity is increased public trust in an organisation as it will be listed on a public register of charities maintained by the ACNC. The flip side of this is that via the register, the public (including potential donors, members and volunteers) can access core information about an organisation, including its annual filings, where it operates, who is on the governing body, and if the organisation is up-to-date with its reporting obligations.
Charities must have an Australian Business Number (ABN). An ABN is a unique number that identifies an organisation to the Australian Taxation Office (ATO) and other governmental agencies. For more information, visit the Australian Business Register at www.abr.gov.au.
Charities are required to report to the ACNC each year. The type of reports that must be submitted vary according to the size of the charity:
•small charities (annual revenue of less than $250,000): annual information statement and (optionally) annual financial report;
•medium charities (annual revenue of between $250,000 and $1 million): annual information statement and audited annual financial report;
•large charities (annual revenue of $1 million or more): annual information statement and audited annual financial report.
For more information about reporting requirements, see the ACNC’s website (www.acnc.gov.au/reporting).
Charities also need to notify the ACNC when certain things change, such as the organisation’s name, address, governing documents (e.g. the constitution), or when the “responsible persons” (e.g. board members) in the organisation change.
Some registered charities also have obligations regarding record-keeping and compliance with standards of governance and external conduct.
Community organisations, unless specifically exempted, must pay tax on income and money received from people who are not members. Income from members (e.g. membership fees and sales of merchandise to members) is exempt from income taxation on the basis of what is called the mutuality principle. For more information, see www.ato.gov.au. Examples of money received from non-members include where an organisation holds functions, raffles or street stalls, or operates a shop or canteen, or otherwise raises income from the public. If, after expenses and deductions, there is net income from non-member sources, many types of community organisation can obtain an exemption from income tax for the (non-member) income. For more information about income tax exemptions, see www.nfplaw.org.au/incometax.
Aside from an exemption from paying income tax, there are other tax concessions that might be relevant. In particular, the ability for those who donate to the organisation to claim a tax deduction for their donation – this is called deductible gift recipient (DGR) status. This status is only available to a limited group of organisations that are specifically listed in, or fall within a recognised category under, the Income Tax Assessment Act 1997 (Cth). There are almost 50 categories, which include:
•public benevolent institutions;
•health promotion: promoting good health and awareness (rather than relief);
•harm prevention: working towards preventing harm (e.g. drug or alcohol abuse).
Each category has specific requirements.
The most common organisations to be endorsed as deductible gift recipients are public benevolent institutions (PBIs). Generally, to gain PBI status, an organisation must be mainly engaged in directly assisting people to relieve their poverty, sickness, suffering, destitution, distress, misfortune or helplessness. Such an organisation usually has to address this purpose in its constitution, which also has to contain not-for-profit and winding-up clauses. PBIs must be registered with the ACNC as a prerequisite for ATO endorsement as a deductible gift recipient or to access Fringe Benefits Tax exemption and other federal government concessions.
Organisations may be eligible for other exemptions or discounts (e.g. on stamp duty, payroll and land tax). For further information, see www.nfplaw.org.au/tax, or contact the ATO (www.ato.gov.au; 13 28 66).
The Fringe Benefits Tax (FBT) is a tax an employer pays when it provides a non-salary benefit to its employees. An example is where an employee chooses to have part of their salary paid directly to their landlord or car loan provider.
Community organisations are only liable to pay FBT on benefits provided to an employee or an associate of an employee in respect of their employment. Generally, benefits provided to volunteers do not attract FBT as they are not employees.
The FBT rate (as at 1 July 2016) is 49 per cent. This rate is paid by the employer, based on the value of the non-salary benefits provided to its employees. FBT must be recorded on employees’ PAYG payment summaries (formerly called group certificates).
There are two types of FBT concessions provided by the ATO:
•fringe benefit rebate;
•fringe benefit exemption.
The fringe benefit rebate is a rebate on the tax that employers pay on non-salary benefits (currently 48 per cent) up to a certain amount per employee (currently $30,000).
The fringe benefit exemption is a more extensive tax concession as it completely exempts employers from having to pay FBT on non-salary benefits up to a certain limit per employee, and therefore makes it financially viable to offer salary packaging to employees. Only limited types of community organisations are exempt from FBT (subject to a cap per employee).
More information about the FBT is available from the ATO (www.ato.gov.au; 13 28 66).
Not-for-profit organisations with a turnover of more than $150,000 per year are required to register for the Goods and Services Tax (GST).
Not-for-profit organisations with a turnover of less than $150,000 per year may choose to register for the GST. If organisations are not registered, they do not collect or remit GST to the ATO. However, they still pay GST on purchases.
If an organisation is required to register for GST, then it need an ABN. An ABN is distinct from registration for the GST. However, even if an organisation is not required to register for GST, it may still be useful to have an ABN.
Organisations registered for the GST are generally able to claim input tax credits in respect of GST paid. An input tax credit is basically a refund of GST paid. However, organisations that are registered for GST also have to collect GST. Membership fees and charges made for specific purposes incur GST. There are also significant reporting and accounting requirements.
If an organisation registers for GST, then generally GST is payable on supplies made by the organisation. However, there are a limited number of GST concessions available for not-for-profit community organisations. These concessions usually relate to particular activities (e.g. sales relating to raffles, bingo, fundraising events, sales of second-hand goods or uncommercial transactions and volunteer expenses).
Organisations should obtain professional advice about whether the organisation should register for GST, the effect of GST on funding sources, and the best way of maintaining cash flow for the organisation in light of GST remittance obligations.
The ATO provides useful general information; contact the ATO by calling their business tax enquiries line (13 28 66) or by visiting their website (www.ato.gov.au).
Community organisations may obtain funds in a variety of ways. Fundraising activities include requesting donations for your own or someone else’s benefit, selling merchandise where some or all of the profits go towards a cause or organisation, or holding events to raise money.
It is important to remember that permits or licences are required for activities such as door-knocking, lotteries, raffles, street collections, fetes, stalls and selling alcohol. Information about permits and licences is available from local councils.
Also, remember that tax deductible receipts for donations of over $2 cannot be given unless the organisation has been endorsed as a deductible gift recipient by the ATO.
For further information about Victorian fundraising laws, see Not-for-profit Law’s Information Hub at www.nfplaw.org.au/fundraising.
Organisations may apply for financial grants from government, private citizens, charitable trusts, industry and others. Information on how to make these applications is available from grant providers. Possessing tax-deductible status is important to many grant providers, and many such providers require the organisations they finance to be incorporated and have an ABN.
Organisations should be aware that GST applies to sponsorship and funding arrangements (and that “sponsorship” is defined very broadly). GST generally does not apply to donations. However, public acknowledgment of a donation can change it from a donation to sponsorship, thus attracting GST.
A community organisation (regardless of whether it is an incorporated or unincorporated association) is not required to have an Australian Business Number (ABN) (unless it is a charity) but may need one for business purposes. An ABN is distinct from registration for the Goods and Services Tax (discussed above). An ABN is an identifying number for all Australian enterprises (the definition of “enterprise” is very broad and encompasses businesses and most community organisations). Generally, organisations should apply for an ABN.
Community organisations may have to comply with other laws. This depends on a range of factors, including an organisation’s activities, funding arrangements, contracts, legal structure, and the kind of people involved in the organisation.
Some of the legal topics that may have legislation applicable to a community organisation include:
•health and safety;
•employment, workplace injury and superannuation;
•equal opportunity and human rights;
•working with children;
•planning and the environment.
For more information about these laws, see Not-for-profit Law’s Information Hub at www.nfplaw.org.au.