Retrospective revocation of charitable status and tax benefit entitlements. What it means to have charitable objectives.
The decision of the Federal Court of Australia is an important appeal decision because it demonstrates the importance of ensuring that, as a “charitable institution”, your predominant or dominant objects are charitable and that those objects translate into actual activities which “fulfil the purposes for which the institution was incorporated”.
Additionally, it is important that those activities “benefit the public generally rather than the domestic or private interests of particular members of the community or the domestic or private interests of those who may have come together to form the entity”. This means that it is not simply enough that a charity is established for charitable purposes, engages in charitable activities and that those activities are in furtherance of the objects of the company. You also need to look at who will receive the primary benefit from those activities and therefore assess whether or not the activities can truly be classified as charitable. There must be some public utility to the activities engaged in by the institution. Activities may not be truly charitable if they benefit the members alone.
The case also serves as a warning to charities that initial endorsement as a charity or a public benevolent institution does not equate to ongoing endorsement without scrutiny. Further, it warns that should the activities of the institution initially endorsed as a charity cease to be predominantly “charitable”, those endorsements may be revoked retrospectively. This will consequently result in significant losses to the entity.
This case involved the endorsement of The Study and Prevention of Psychological Diseases Foundation (SPED) as a charitable institution in 2005 to promote the prevention of Psychological Disease through research conducted 24 hours per day 7 days per week by its members (“the research team”).
SPED expressed its objects as:
“The foundation objects are for public benefit and charitable purposes, in seeking to promote the prevention and control of psychological disease in human beings and therefore setting out to ultimately create the ideal human environment”.
SPED aimed to outwork its foundation objects by operating and funding a “research team” that would operate 24 hours per day, 7 days per week. It was stated that the research team would “study a cross section of human behaviour in a variety of emotional, social and physical conditions, circumstances and environment” and that “SPED’s income and property may only be applied toward the promotion of its objects” being the research conducted by its members.
The primary facts that weighed heavily on the decision of the Tribunal in the first instance and the Federal Court on appeal were that:
- SPED’s members were all blood relatives or partners of blood relatives and there had been no new added members since incorporation 10 years prior;
- While potential membership was unlimited by the constitution, the constitution required members to “donate” all thier assets and income to the institution upon becoming members. Because of this, membership was essentially limited by such extreme terms of membership to blood relatives and those in a relationship with blood relatives;
- The institution’s income came primarily from the “donation” of assets belonging to the members upon joining the institution and the commercial investments of the institution in various public companies;
- SPED considered that all activities engaged in by its research team were “research expenses” because the study operated 24/7, notwithstanding that this equated to 100% of its member’s daily living expenses. Because the primary activity of the institution was 24/7 research, the expenses of the institution were predominantly the day to day living expenses of its members.
- The “research” simply involved engaging in normal daily activities and documenting various experiences, engaging in a small number of programs including the “luxury motor vehicle use research” (where SPED provided, to selected members, a luxury motor vehicle) and “project India” (which involved a visit to India to attend a wedding). There were few, if any, projects engaged in by SPED that could not be described as ‘daily life occurrences’ or ‘normal social engagement’ from a range of socioeconomic positions.
- There was no evidence that any research conducted by SPED was published, or at the very least submitted to any journals or forums in the traditional sense of research publication. Further there is also no evidence to suggest that any findings derived from the research were made available to the general public. The publications were compiled for SPED’s internal purposes only.
Both the Tribunal in the initial decision and the Federal Court in the appeal held that:
- “there is little, if any, public utility in SPED’s activities”;
- Their principal activity was not to promote the prevention or control of human disease, but rather was for the sole benefit of its members. The Court reached their decision on this point primarily because there was no evidence that the ‘research’ produced any findings that were available to or could be used by the public to enhance human life, experience or prevent suffering or disease;
- SPED’s actual activities did not match its stated purposes and therefore it could not, at any relevant time, be considered a charitable institution. The activities only benefited the members themselves and it could not be said that this in any way prevented or controlled psychological disease in humans.
- Because it was not at any relevant time a charitable institution the endorsements to which it was entitled under various pieces of legislation were revoked retrospectively from the date they were granted. Retrospective revocation was considered appropriate in the circumstances given the conduct engaged in by the institution, particularly its self-serving nature and lack of public utility from the beginning.
There was some question over precisely when the retrospective revocation should commence and this question was remitted back to the tribunal for consideration. Nonetheless the case shows us that regardless of what and institution’s stated objects is, it is important that the “actual activities” of the institution are and continue to be in furtherance of those objects. Further, it is not simply enough that the charity benefits its members, in accordance with its objects, but that there is some public utility to the activities conducted by the institution and the public must ultimately receive that benefit.
If you are considering registering a charitable institution or you have concerns over the activities engaged in by your charity, you should speak to an experienced not-for-profit lawyer to assess your options.
For more information regarding Charitable Objectives
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