‘IN AUSTRALIA’ SPECIAL CONDITIONS FOR TAX CONCESSION ENTITIES (FIRST EXPOSURE DRAFT)
The Federal Government has recently announced major intended changes to the tax endorsement conditions for charities.
It can be observed that the sector has recently been deluged with proposed significant changes with very short periods for response for such major reform.
Summary of the new rules
In summary for an entity to be exempt from income tax, under the new rules it must meet each of the following:
- operate principally in Australia;
- pursue its purposes principally in Australia;
- donate money only to other income tax exempt entities, who have also met the “In Australia” requirements;
- comply with all the requirements in their Governing Rules (i.e. the Constitution of the entity);
- use income and assets solely to pursue the purposes for which it was established; and
- be a not-for-profit entity.
The existing rules – as they apply to churches
Churches in Australia are generally endorsed as Tax Concession Charities under Item 1.1 in the Schedule to Sec 50-5 of the Income Tax Assessment Act 1997.
Section 50-50 sets out some conditions that attach to such an endorsement.
50‑50 Special conditions for items 1.1 and 1.2
An entity covered by item 1.1 … is not exempt from income tax unless the entity:
(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or
(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or
(d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia.
Note 1: Certain distributions may be disregarded: see section 50‑75.
Note 2: The entity must also meet other conditions to be exempt from income tax: see section 50‑52.
Most churches fund, in one form or another, overseas Christian missionary programs.
Many of the funds applied to overseas missionary programs from churches are received from donations by church members after they have already paid tax on their income.
Even for very generous churches, the funding of overseas missionary programs, so as not to offend the “principally in Australia” test have proceeded either under the allowance of Sec 50.75 allowing donations to be disregarded for the purposes of 50-50(a) (which is to be repealed under the new measures) or by affiliation through a prescribed institution under the provisions of Sec 50-50(d) which does not have any equivalent in the exposure draft.
Whilst there is provision (in proposed Sec 50-51(3) for a foreign resident to be prescribed in regulations along the lines of former Sec 50-50(c)), there is now to be no provision equivalent to the old section 50-50(d) relating to a prescribed institution that has a physical presence in Australia but incurs its expenditure and pursues its objectives principally outside Australia.
The failure to allow for prescribed institutions pursuing objectives principally outside Australia means every overseas department of a denomination in Australia will fail to qualify for exemption.
Whilst many individual churches pursuing their own overseas missions programs will not fail due to the omission of a provision similar to the existing Sec 50-50(d) these activities would fail under the proposed amendments due to the operation of the proposed Sec 50-50(2)(c) [which requires that giving be to an exempt entity]. They will not be allowed to donate money to any other entity (including an individual missionary or group) as, by their very nature, the overseas entities to which missionary funds are provided will never qualify as an “exempt entity” within the meaning of the section.
Because the definition of “entity”, as the term is used in proposed 50:50(2)(c), includes an individual, it means that any church wishing to support one of their number going overseas for missionary work will now, as a whole church, lose their exemptIon status.
Whilst our churches do not seek DGR status as Public Benevolent Institutions to attract tax deductible giving for the relief of poverty, misfortune, helplessness etc they all, to some considerable extent, operate to provide such benevolent relief. This relief, though unheralded, is integral to the mission of the Church and, in our submission, is statistically significant to the state.
Under the proposed changes a church giving a donation to a needy person who walks in their door in Australia (“entity”), will place at the risk the exempt status of the church on the basis of proposed Sec 50-50(2)(c).
It does not seem reasonable for the state to assert, on the basis of the structure of exemption legislation, that relief of poverty is only a function of society to be supported through an endorsed PBI and not through a church. Relief of poverty is, and always has been, integral to the church and the proposed measure will, in our submission, remove its ability to lawfully do so if it wishes to maintain its exemption.
We can see the reasoning behind the proposed measures but, for the reasons given above and in the ways indicated, the inclusion of proposed Sec 50-50(2)(c) in its current form, and the exclusion of the previous Sec 50-50(d) provision, will seriously damage the lawful charitable ends of our churches, namely the advancement of religion.
On the one hand, the law will continue to theoretically declare that the advancement of religion is a legitimate charitable purpose, but on the other hand these measures in particular will deny the churches the capacity to outwork the purpose and thus render it practically illegitimate in Australian society.
We suggest a provision with a similar effect to the existing Sec 50-50(d) be included in the measures.
We also suggest proposed Sec 50-50(2)(c) be amended to read as follows
“(c) except for charitable purposes (whether or not within Australia), not donate money to any other entity, unless the other entity is an exempt entity”
(Full details of the Exposure Draft and the Explanatory Material may be found at:
SECOND EXPOSURE DRAFT (issued 18 April 2012)
The long awaited second exposure draft has now been released. See:
If you have queries regarding the ‘In Australia’ test, contact us
Contact our Business Development Officers for an appointment with one of our Brisbane not for profit lawyers. Call (07) 3252 0011.
 Sec 960-100 ITAA 97