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Bills Digest No. 164 2003-04
Extension of Charitable Purpose Bill 2004
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Extension of Charitable Purpose Bill 2004
Date Introduced: 27 May 2004
House: House of Representatives
Portfolio: Treasury
Commencement: 1 July 2004
The Extension of Charitable Purpose Bill 2004 (‘the
Bill’) is intended to extend the common law meaning of charitable purpose
to include non-profit child-care providers, certain self-help groups and
certain closed and contemplative religious orders.
Charities are important aspects of modern societies and they often provide
essential services to the community such as looking after those in need.(1)
By assuming roles that have been Government responsibility, charities
provide financial relief to governments. By providing various tax exemptions
for charities as a form of subsidy, the Government has acknowledged this
particular function charities assume.(2)
In order to be eligible for the tax exemptions referred to above, a fund
or institution (hereinafter: ‘entity’) must fulfil all common law requirements
for a charity. At common law, an entity qualifies as a ‘charity’ if it:
-
has a charitable purpose, and
-
is for a public benefit (which includes that the entity is not for
profit).
It was said to be ‘probably impossible to define…’ what constitutes ‘charitable’
or a ‘charitable purpose’.(3) The Statute of Charitable
Uses Act 1601, also called the Statute of Elizabeth, lists
21 examples of charitable purposes in its preamble.(4) Whilst
these examples still form the foundation for the current Law of Charities,
they have been subsequently condensed by the courts to four acknowledged
‘heads of charity’:
-
relief of the poor, aged and impotent
-
advancement of education
-
advancement of religion, and
-
other purposes beneficial to the community.
An entity with a purpose falling into one of these heads
will be considered to be an entity for a charitable purpose.(5)
However, to be considered a charity, an entity has to fulfil a further
requirement: the charitable purpose must be for a public benefit.(6)
It is long established that there is an ‘incongruity between charity
and private benefit.’(7) Accordingly, courts have been concerned
with preventing a certain person or a group of persons to profit from
the entity, for example by becoming eligible for tax concessions.
The 2002 Inquiry Into Definitional Issues Relating To Charitable,
Religious And Community Service Not-For-Profit Organisations (‘the
Charities Definition Inquiry’) extrapolated the relevant principles and
summarised them as follows:
-
The object or purpose must be beneficial in itself, that is, it
must be aimed at achieving a universal or common good; by definition,
a purpose cannot be beneficial if it is harmful to the public.
-
‘Benefit’ is not limited to the delivery of material benefits,
but can extend to include social, mental and spiritual benefits.
However, it has been held by the courts that a basic requirement
of a charitable gift is that it must be seen to have practical utility.
-
The ‘public’ is taken to mean the general community or a ‘sufficient
section of it’. This has been given clearer meaning through what
has become known as the Compton/Oppenheim test, which indicates
that the number of potential beneficiaries of a charity must not
be numerically negligible, and there must be no personal relationship
between the beneficiaries and any named person or persons. (8)
There can be a significant difference between the legal meaning and the
popular understanding of ‘charitable purpose’ and ultimately of ‘charity’.
In fact, the relationship between legal and popular meaning was described
as being:
[S]o far apart that it is necessary almost to dismiss the
popular meaning from the mind as misleading before setting out to determine
whether a gift is charitable within the legal meaning.(9)
In Australia, Fullagar J of the High Court couched this difference in
the following terms:
There is a subjective element in the term as used non-technically,
which is absent when it is used technically. The characteristic of a
charitable act or purpose in this sense is that it possesses a certain
moral quality. This is so although that quality is extremely vague and
difficult to define, and even if it be true that common usage has narrowed
the scope of the term by reference to relief of poverty. On the other
hand, when we ask whether an act or purpose is charitable in the technical
sense, the test to be applied is wholly objective. The whole question
is whether the act or purpose itself falls within a particular class
which we say is to be defined by reference to the statute of Elizabeth.(10)
As the legal standard for ‘charitable purpose’ is still based on the
principles stipulated in the Statute of Elizabeth, entities that are perceived
as ‘charitable’ by the public often fail to obtain recognition as charity
on the basis of the legal meaning.
This difference was acknowledged by the Prime Minister:
We need to ensure that the legislative and administrative
framework in which [charities] operate is appropriate to the modern
social and economic environment. Yet the common law definition of a
charity, which is based on a legal concept dating back to 1601, has
resulted in a number of legal definitions and often gives rise to legal
disputes.(11)
To overhaul and modernise the Law of Charities, the Prime Minister announced
the Charities Definition Inquiry which was, according to the Democrats,
a direct result of an agreement between the Democrats and the Federal
Treasurer.(12) The Australian Labor Party supported the inquiry,
but pointed out that:
[T]hat the Labor opposition would have preferred a broader
inquiry into the impact of fringe benefits tax on the charitable sector.
Nevertheless, the definition of charity and not-for-profit organisations
and the taxation treatment of them are important issues. There is no
doubt that the government have gradually drawn the charitable and not-for-profit
sector into the taxation net.(13)
In response to the recommendations made by the Charities Definition Inquiry,
the Treasurer, the Hon. Peter Costello, announced on 29 August 2002 that
the majority of recommendations made by the Charities Definition Inquiry
would be adopted. To achieve this, the Government planned to introduce
a statutory definition of charity, replacing the common law definition.(14)
In relation to the statutory definition, the Treasurer said that:
The legislative definition of a charity will closely
follow the definition that has been determined by over four centuries
of common law, but will provide greater clarity and transparency for
charities. […] It will provide certainty to those organisations operating
in the sector while still providing the flexibility required to ensure
the definition can adapt to the changing needs of society.(15)
Subsequent to the Charities Definition Inquiry, the Treasurer asked the
Board of Taxation (‘the Board’)
[T]o consult with the charitable sector and to prepare
a report advising the on the workability of the draft Charities Bill
2003 […] and the accompanying Explanatory Material […].(16)
After conducting the consultation, the Board made a number of recommendations
to improve the workability of the proposed legislation. The recommendations
focussed on three dominant issues:
-
disqualifying purpose and advocacy
-
core definition of charity, and
-
Serious offences effecting charities’ charitable status.(17)
These issues primarily reflected two major concerns: first, several provisions
in the Charities Bill 2003 constituted a substantial departure from the
current common law and second, the Charities Bill 2003 fell short of providing
the requisite clarity and certainty.
Based on the Board of Taxation’s report, the proposed statutory definition
of charity was ultimately abandoned. In a press release, the Treasurer
announced the draft legislation would not continue as it did ‘not achieve
the level of clarity and certainty that was intended to be brought to
the charitable sector’.(18)
Instead, the Government decided to continue to rely upon the common law
meaning of ‘charity’ and to include some entities that had in the past
difficulties in ‘satisfying the common law requirements, to be charities
for the purposes of all Commonwealth legislation’ by ‘extending the common
law meaning of charity’.(19)
Adopting some of the recommendations made by the Charities Definition
Inquiry, the ‘extension’ applies to:
-
non-profit organisations providing child-care services (Recommendation
16 of the Charities Definition Inquiry)
-
self-help bodies with open and non-discriminatory membership (Recommendation
8 of the Charities Definition Inquiry), and
-
closed or contemplative religious orders that offer prayerful intervention
to the public (Recommendation 9 of the Charities Definition
Inquiry).(20)
According to the Explanatory Memorandum, entities providing non-profit
childcare services have failed in the past to be recognised as charities
because it was not clear whether the services they provided were for a
charitable purpose.(21) In its Report, the Charities Definition
Inquiry made the following recommendation:
The Committee recommends that not-for-profit entities
with a dominant purpose of providing for the care, support and protection
of children, including the provision of child care services, should
be regarded as charitable.(22)
Section 4 of the Bill implements this recommendation by stipulating
expressly that ‘charitable purpose includes the provision of child care
services on a non-profit basis.’ [subsection 4(1)]. In essence,
the provision promulgates the Government’s acceptance that child care
is to fall within one of the acknowledged ‘heads of charity’.
However, although the provision of non-profit child care
receives statutory recognition as being a charitable purpose, the proposed
legislation does not elevate an entity providing non-profit child care
to charity status. As subsection 4(3) reiterates, the entity will
still have to satisfy the public benefit test, including the requirement
that it is a non-profit entity.
The Explanatory Memorandum notes that self help bodies failed to be recognised
as charities because it was uncertain whether their purpose was for a
public benefit.(23) This uncertainty is founded in the very
structures of those entities – they are organised and managed by the same
people that benefit from the group. In relation to these bodies, the Charities
Definition Inquiry recommended:
That self-help groups which have open and non-discriminatory
membership be regarded as having met the public benefit test.(24)
Section 5, subsection (1)(a) of the Bill creates a deeming provision,
stipulating that self help groups, as long as they are open and non-discriminatory,
fulfil the public benefit test. The open and non-discriminatory self-help
group is, for the purposes of this Bill, further defined in section
5, subsection (2). This subsection contains a catalogue of
criteria all of which must be met before a self-help group will be deemed
to fulfil the public purpose test.
However, although those self-help groups are deemed to fulfil the public
benfit test, the Bill does not deem them to be ‘charities’ with access
to possible tax concessions under Commonwealth legislation. The respective
entity still will have to fulfil the remaining common law requirements,
especially that the entity fulfils a charitable purpose.
According to the Explanatory Memorandum, closed and contemplative religious
orders have difficulties to fulfil the public purpose criterion.(25)
The Charities Definition Inquiry chose a ‘public interface’ criterion
to distinguish between those orders that should be considered to fulfil
the public purpose test and those which should not. It stated:
On this basis, it is possible to distinguish closed or
contemplative orders that have a public interface from those that undertake
meditation or contemplation on their own behalf. Those orders with a
public interface offer prayerful intervention to any members of the
faith community who seek it.(26)
Where those orders provide this service unrestrictedly to the members
of public, the Charities Definition Inquiry recommended:
That […] their purposes be held to have met the public
benefit test.
Section 5, subsection (1)(b) translates this recommendation
into legislation. It provides that orders that meet the public interface
criteria as set out in the recommendation are deemed fulfil the public
benefit test.
However, like the open and non-discriminatory self-help groups, the proposed
legislation will not deem those religious orders to be charities. Religious
orders will still be required to fulfil the charitable purpose requirement
as understood pursuant to common law.
The relevance of the Law of Charities was recently again highlighted
when a bitter row erupted between the Wilderness Society and Greenpeace
on the one side and the National Association of Forrest Industries on
the other side.(27) It was argued that the use of tax deductible
contributions as available to charities should not be used for the pursuit
of political lobbying. In a nutshell, this argument revives the discussion
surrounding those provisions in the Charities Bill 2003 which aimed at
curtailing the amount of lobbying a charity can undertake without loosing
its charitable status.(28)
The current approach by the government, implemented after abandoning
the Charities Bill 2003, closely resembles an approach
which received strong support from a small number of
carefully considered submissions. They argued that the Government should
consider retaining the common law approach, and legislate only for those
changes to the common law position that the Government expressly intends
to make.(29)
This approach, involving only minor changes to the Law of Charities by
creating new, or confirming existing, charities, keeps the Government
in the driver’s seat but creates certainty and transparency for those
who receive legislative acknowledgement.
Plainly, the Bill will provide some certainty to those entities that
come within the scope of the Bill. However, three specific issues the
Bill raises deserve more attention.
Statements made about the Bill may be interpreted as giving the Bill
an effect it does not have. This includes statements made, for example,
in:
- the Explanatory Memorandum, stating that
The Extension of Charitable Purpose Bill 2004 provides
a statutory extension to the common law meaning of ‘charity’
for the purposes of all Commonwealth legislation.
The statutory extension allows:
-
organisations providing child care to the public on a non-profit
basis,
-
self-help bodies with open and non-discriminatory membership;
and
-
closed or contemplative religious orders that offer prayerful
intervention to the public,
to be treated as charities for the purposes
of all Commonwealth legislation.(30) [emphasis added]
- the Treasurer’s press release according to which
The Government will … introduce a statutory extension
to the common law meaning of a charity to include non-profit
child care available to the public, self-help groups with open and
non-discriminatory membership, and closed or contemplative religious
orders that offer prayerful intervention to the public.(31)
[emphasis added]
- the Second Reading Speech in which Ross Cameron, Parliamentary Secretary
to the Treasurer, suggested that
By extending the common law meaning of charity in this
way, the concessions embodied in Commonwealth legislation that
are available to charities will also become available to these organisations.
These statements may be interpreted as elevating certain entities to
charitable status. However, this is not the actual effect of the provisions
contained in the Bill. The Bill does not automatically award charity status
to any entity to which this Bill applies. The Bill merely provides a clarification
in relation to one aspect of the question whether an entity may qualify
as a ‘charity’ – that is whether the relevant entity has a charitable
purpose or provides a public benefit, as the case may be.
As pointed out above, entities will still be required to fulfil all remaining
common law requirements before they can qualify as charities and become
entitled to the tax concessions.
The title of the Bill suggests that the effect of the proposed
legislation is to extend the scope of one of the two limbs of the common
law test for ‘charity”, i.e. the ‘charitable purpose’ limb. However, the
Bill is not that limited and the title of the Bill is imprecise for two
reasons:
-
it also deals with the ‘public benefit’ limb, and
-
the Bill is most likely not an extension of the common law but,
at best, it provides a clarification of the limbs ‘charitable purpose’
and ‘public benefit’.
By clarifying the limbs ‘charitable purpose’ and ‘public benefit’ by
way of Commonwealth legislation, the provisions contained in the Bill
will only assist in determining the charity status in relation to Commonwealth
legislation. It will not assist charities in relation to State legislation.
As the Commonwealth has no legislative power to legislate aspects of charities
that fall within State competence, this proposed legislation has the potential
to open up a legislative gap between Commonwealth and State law which
can lead to added legal uncertainty.
This problem has already been recognised by the Treasurer in relation
to the Charities Bill 2003 when he announced that he:
[W]ill be writing to each of the State and Territory
Treasurers to gauge their interest in achieving harmonisation of laws
defining charity.(32)
For a comprehensive application of the effects of the Bill throughout
Australia, State legislation would need to be amended in a similar way.
-
G Dal Pont, Charity Law in Australia and New Zealand, Oxford
Press, 2000, at p. 3; The Board of Taxation, Consultation on the
definition of a Charity, a Report to the Treasurer, 2002, available
at http://www.taxboard.gov.au/content/charities.asp,
accessed 3 June 2004.
-
This so called ‘subsidy theory’ is not the only justification for
the charities’ eligibility for tax exemptions. For other theories
see G Dal Pont, Charity Law in Australia and New Zealand, Oxford
Press, 2000, at pp. 446–448.
-
Re Nottage [1895] 2 Ch 649 at p. 656.
-
Statute of Charitable Uses Act 1601, 43 Eliz. I, c. 2.
-
G Dal Pont, Charity Law in Australia and New
Zealand, Oxford Press, 2000, at p. 6.
-
There is one exception to this principle. Where the charitable purpose
is the relief of poverty, the public benefit test is not a prerequisite
for considering the entity to be a charity. G Dal Pont, Charity
Law in Australia and New Zealand, Oxford
Press, 2000, at p. 121.
-
G Dal Pont, Charity Law in Australia and New
Zealand, Oxford Press, 2000, at p. 13.
-
Report of the Inquiry Into Definitional Issues Relating To Charitable,
Religious And Community Service Not-For-Profit Organisations, Chapter
13, available at http://www.cdi.gov.au/report/pdf/23_chap13.pdf,
accessed 3 June 2004.
-
Verge v Somerville [1924] AC 496 at p. 502.
-
Salvation Army (Victoria) Property Trust v Fern
Tree Gully Corporation (1952) 85 CLR 159 at p. 184.
-
The Hon. J Howard, Prime Minister, Inquiry Into Charitable And
Related Organisations, media release, 18 September 2000, available
at http://www.pm.gov.au/news/media_releases/2000/media_release456.htm,
accessed on 2 June 2004.
-
Senator Natasha Stott
Despoja, then Australian Democrats
spokesperson for Treasury, Democrat-initiated Inquiry
calls for broadening of charities’ concessions, media release,
24 August 2001, available at http://www.democrats.org.au/news/index.htm?press_id=1462&display=1,
accessed on 2 June 2004.
-
K Thomson, ‘A New Tax System (Fringe Benefits) Bill 2000: Consideration
of senate message’, House of Representatives, Debate, 11 May 2000,
p. 16259.
-
The Hon. P Costello, Treasurer, Government Response To Charities
Definition Inquiry, media release, 29 August 2002, available at
http://www.treasurer.gov.au/tsr/content/pressreleases/2002/049.asp,
accessed on 2 June 2004.
-
The Hon. P Costello, Treasurer, Government Response To Charities
Definition Inquiry, media release, 29 August 2002, available at
http://www.treasurer.gov.au/tsr/content/pressreleases/2002/049.asp,
accessed on 2 June 2004.
-
The Board of Taxation, Consultation on the Definition of Charity,
A report to the Treasurer, Terms of Reference, at paragraph 2.1,
available at http://www.taxboard.gov.au/content/Charity_consultation/Chapter_2.asp,
accessed 3 June 2004.
-
The Board of Taxation, Consultation on the definition of a Charity,
a Report to the Treasurer, Chapter 2: Overview, 2002, available
at http://www.taxboard.gov.au/content/Charity_consultation/Chapter_2.asp,
accessed 3 June 2004.
-
The Hon. P Costello, Treasurer, Final response to the charities
definition inquiry, media release, 11 May 2004, available at http://www.treasurer.gov.au/tsr/content/pressreleases/2004/031.asp,
accessed on 3 June 2004.
-
R Cameron, ‘Second Reading Speech: Extension of Charitable Purpose
Bill 2004’ House of Representatives, Debates, 27 May 2004, at p. 29136.
-
The Hon. P Costello, Treasurer, Government Response To Charities
Definition Inquiry, media release, 29 August 2002, available at
http://www.treasurer.gov.au/tsr/content/pressreleases/2002/049.asp,
accessed on 2 June 2004.
-
Explanatory Memorandum to the Bill, at p. 5, paragraph 1.9, available
at http://parlinfoweb.parl.net/parlinfo/Repository/Legis/ems/Linked/27050405.pdf,
accessed on 2 June 2004.
-
Report of the Inquiry Into Definitional Issues Relating To Charitable,
Religious And Community Service Not-For-Profit Organisations, Chapter
25, available at http://www.cdi.gov.au/report/cdi_chap25.htm,
accessed 3 June 2004.
-
Explanatory Memorandum to the Bill, at p. 6, paragraph 1.15, available
at http://parlinfoweb.parl.net/parlinfo/Repository/Legis/ems/Linked/27050405.pdf,
accessed on 2 June 2004.
-
Report of the Inquiry Into Definitional Issues Relating To Charitable,
Religious And Community Service Not-For-Profit Organisations, Chapter
13, available at http://www.cdi.gov.au/report/cdi_chap13.htm,
accessed 3 June 2004.
-
Explanatory Memorandum to the Bill, at p. 6, paragraph 1.20, available
at http://parlinfoweb.parl.net/parlinfo/Repository/Legis/ems/Linked/27050405.pdf,
accessed on 2 June 2004.
-
Report of the Inquiry Into Definitional Issues Relating To Charitable,
Religious And Community Service Not-For-Profit Organisations, Chapter
13, available at http://www.cdi.gov.au/report/cdi_chap13.htm,
accessed 3 June 2004.
-
R Peake, ‘Tax break for greenies sparks row’, The Canberra
Times, 9 June 2004, at p. 2.
-
The Board of Taxation, Consultation on the definition of a Charity,
a Report to the Treasurer, Chapter 2: Overview, paragraph 2.28,
2002, available at http://www.taxboard.gov.au/content/Charity_consultation/Chapter_2.asp,
accessed 3 June 2004.
-
The Board of Taxation, Consultation on the definition of a Charity,
a Report to the Treasurer, Chapter 2: Overview, paragraph 2.34,
2002, available at http://www.taxboard.gov.au/content/Charity_consultation/Chapter_2.asp,
accessed 3 June 2004.
-
Explanatory Memorandum to the Bill, at p. 3, paragraph 1.1 and 1.2,
available at http://parlinfoweb.parl.net/parlinfo/Repository/Legis/ems/Linked/27050405.pdf,
accessed on 2 June 2004.
-
The Hon. P Costello, Treasurer, Final response to the charities
definition inquiry, media release, 11 May 2004, available at http://www.treasurer.gov.au/tsr/content/pressreleases/2004/031.asp,
accessed on 3 June 2004.
-
The Hon. P Costello, Treasurer, Government Response To Charities
Definition Inquiry, media release, 29 August 2002, available at
http://www.treasurer.gov.au/tsr/content/pressreleases/2002/049.asp,
accessed on 2 June 2004.
Thomas John
17 June 2004
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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