Charities and tax treatment
Definitions of a charitable organisation
The Committee regards 'charities' as altruistic bodies which seek to
help members of the community in need. They work for those who lack the
resources to provide a comfortable existence for themselves, be they
Australians, people overseas or animals. As well as providing physical
assistance, they counsel and empathise with those in distress. The role of
charities is to mobilise their members and supporters to help others,
not to just act in their members' private interests. Their motives mean that
all true charities are not‑for‑profit organisations (but not all
not‑for‑profit organisations are charities).
This view accords with the definitions of 'charity' in the Shorter
Oxford Dictionary and the Macquarie Dictionary:
Beneficence, liberality to or provision for those in need or
Almsgiving; the private or public relief of unfortunate or needy
The Committee regards this conception of 'charities' as being widely
shared within the community and it was reflected in some submissions:
...the primary purpose of any charitable institution is to
provide assistance to a section of society that is in some way disadvantaged
and/or experiencing hardship.
It became apparent, however, that there was some disjuncture between such
popular understandings of 'charity' and legal and other technical
understandings of the term. In particular, there seemed to be a difference of
view as to whether a charity's focus is on the disadvantaged, or just on
anyone outside its membership. Father Lucas put to the Committee:
Caring for rich people is as charitable as caring for poor
It may help in clarifying this difference to distinguish between the
provision of tangible goods and services that are also available in private
markets (such as food and accommodation) on the one hand, and less tangible
forms of support such as counselling and sympathy that cannot be purchased. The
Committee would expect that a charity would provide the latter to all but
provide physical goods only to those who otherwise cannot afford them.
This difference of interpretation may be a legacy of the legal meaning
of charity deriving from a 400‑year‑old statute passed in the final
years of the reign of Elizabeth I and associated case law (UK and Australian).
In Australia, as in many other jurisdictions, the operation of the not-for-profit
sector relies on the application of common law, which since 1891 has categorised
'charity' and 'charitable purpose' under four heads:
- the relief of poverty;
- the advancement of education;
the advancement of religion; and
- other purposes beneficial to the community.
The common law includes a presumption that charities operating under the
first three heads of charity provide a public benefit and only those that carry
out activities for other purposes beneficial to the community have to
demonstrate public benefit when seeking to qualify as a charitable
Treasury explains that the presumption of public benefit has arisen:
...because of the difficulties faced by the courts in deciding
whether or not particular activities are providing a public benefit.
The bill before the Senate, by introducing a 'public benefit test' would
reverse this presumption. This would bring the situation in Australia closer to
that in New Zealand where the Charities Commission makes an assessment:
...all charities must have public benefit. When we look at
that, we look at, firstly, whether there is a benefit, which means that we will
also look at whether there are harms that are caused; and, secondly, we look at
the extent to which the charity is accessible to the public.
Defining public benefit
Some confusion is evident around the use of the adjective 'public' in
'public benefit'; while members of an organisation are also members of the
'public', if the organisation only provides a benefit to these members, the
organisation is only providing a 'private benefit' not a 'public benefit'. One
suggestion is to replace 'public benefit' with 'community benefit' but this may
suffer from the same potential ambiguity.
Also, a 'public benefit' does not have to benefit every member of the
The bill explicitly seeks to ensure that an assessment of public benefit
also takes account of 'any detriment or harm'. In this it borrows from the
practice of the Charity Commission for England and Wales. They explained to the
Yes, the detriment and harm question is part of our public
benefit test and one of our key principles of public benefit is that any
benefits that might arise to the public must not be outweighed by any
significant detriment or harm. That is a fundamental part of the public benefit
...we give some examples of what might constitute detriment or
harm. We look at a lot of those sorts of issues about whether there is any
evidence about coercive tactics or any encouragement of violence or hatred, for
example, towards individuals or anything like that...
Consideration of detriment or harm raises the issue of how to deal with
the behaviour of individual miscreants within large organisations. Recent cases
of child abuse by clergy were raised during the inquiry in the context of how
widespread such behaviour must be before it is taken as indicative of a culture
that condones such behaviour within an organisation.
One indicator may be how the hierarchy of the organisation responds: do they
investigate matters promptly and refer them to the police, or seek to cover up
the allegations and press members not to go public with information?
The Charity Commission of England and Wales explained their approach:
It is really a question of how the organisation itself
manages those sorts of issues. Obviously, in any organisation things can arise
and it is all about whether the trustees who deal with those situations had
policies and procedures in place to mitigate risk of detriment or harm... If it
was endemic throughout the organisation and affected its ability to operate for
the public benefit...that is when it would become an issue...it could affect the
organisation’s ability to demonstrate that it satisfies the public benefit
Some submissions propose a very narrow test of public benefit:
If a test is to be applied to religious groups it should be
limited to questions of Law, i.e., "Are the activities of this group
within the Law". In cases where it is proven that certain religious groups
are conducting illegal activities their tax exemption status could be
It seems an odd argument to make that anything which is not illegal
deserves a subsidy.
Charity versus commercial
An important consideration in distinguishing between a charity and a
commercial enterprise is whether goods and services are provided free or at a
market price. This principle has been applied by the Charity Commission for
England and Wales in the context of applying its public benefit test, and they
...one of the greatest areas of discussion and debate around
the public benefit requirements in England and Wales has been around the
question of the effect of fees and charities charging fees for their services.
Similarly, in New Zealand the extent of charging for services affects
One of the things we would say, as part of a public benefit,
is that the public should have a reasonable opportunity to get a benefit from
the charity and the charging of fees may hinder that ability. For example, we
register sports organisations. There is a difference between golf where at some
places it is $500—we would probably say that is reasonable—but if someone
charged $20,000—we would say that the public does not have a reasonable
opportunity to participate, so we would not register them.
The Committee notes a number of submissions emphasise this distinction
between commercial enterprises and charities:
Any organisation that doesn't provide the bulk its services
freely and openly to those who do not donate to it is not a charity...
If an organisation “charged” for services and restricted who
could access their services by ways of monetary obligations, I would suggest
this organisation was acting in a commercial capacity and not in the interest
of the public.
Any church claiming that they have a philosophy of
“exchange" requiring payment be made for services may be a church or a
religion but not one that warrants charity status because such a philosophy is
the anti-thesis of charity.
Some submitters were wary of bans or excessive restrictions on
commercial activity but emphasised that:
...any such commercial enterprise should be incidental to the
main purpose of the organisation...
There can be cases of initially charitable organisations that over time
mutate into commercial operations, such as:
...hospitals which began as genuinely charitable institutions
run by orders of nuns whose work was voluntary and ‘seen as part of their
vocation’. They relied entirely on donations for their survival. Today, they
are essentially business operations. Ministering to the sick and destitute is a
substantially different thing from providing high quality health care for those
able to afford it.
Legal definition of religion
As the term 'religion' is not defined in Australia's tax legislation,
its meaning is determined by the common law definition.
In Australia, the High Court gave its interpretation of religion in the
1983 case of Church of the New Faith v Commissioner of Pay-Roll Tax (Vic):
...for the purposes of the law, the criteria of religion are
twofold: first, belief in a supernatural Being, Thing or Principle; and second,
the acceptance of canons of conduct in order to give effect to that belief,
though canons of conduct which offend against the ordinary laws are outside the
area of any immunity, privilege or right conferred on the grounds of religion.
This ruling by the Court is sometimes put forward as implying that any
organisation claiming a belief in a supernatural being, thing or principle
should unquestionably receive a tax benefit.
But while there is probably a consensus that a broad definition of religion is
perfectly appropriate in determining the right to express religious views, it
does not follow that there are always sound public policy grounds for other
taxpayers to subsidise such an organisation.
This difference between a right to believe in a religion and a
justification for taxpayer subsidy for it is particularly important given that
Justices Mason and Brennan commented in their judgement:
...charlatanism is a necessary price of religious freedom, and
if a self‑proclaimed teacher persuades others to believe in a religion
which he propounds, lack of sincerity or integrity on his part is not
incompatible with the religious character of the beliefs, practices and
observances accepted by his followers.
As identified in Chapter 2, the existing tax concessions probably reduce
tax revenues by between $1 billion and $8 billion, or possibly more. A recent
court case may increase the cost of these concessions and also raises concerns
about competitive neutrality.
The Committee agrees with the Henry Review's statement of principle
Tax concessions for NFP organisations...should not undermine
competitive neutrality where NFP organisations operate in commercial markets.
The High Court decision in the Word Investments Case
significantly broadened the ability of charitable institutions to carry on
commercial activities on an income tax exempt basis:
Under that case an organisation—say, an aged care home for
wealthy retired merchant bankers—could be set up on a fee‑paying
commercial basis. They could be considered charitable if they are giving all of
their profits, say, to a charity. This entity could be considered under the
Word Investments case a charitable entity, even though it itself does not have
charitable activities...as long as its money is going to a charitable
purpose—that is, it is being given to a separate entity or it itself is
undertaking a separate charitable purpose.
Recent reports of both the Productivity Commission and Henry Review have
been relaxed about the implications for competitive neutrality of the case:
...on balance, income tax exemptions are not significantly
distortionary as not-for-profit [entities] have an incentive to maximise
returns on their commercial activities that they then put towards achieving
their community purpose.
The NFP income tax concessions do not generally violate the
principle of competitive neutrality where NFP organisations operate in
Income tax exemption
In recognition of the long held view that the services provided by
the not-for-profit sector are worthy of public funding and that the
sector can often provide those services at a lesser cost than government,
not-for-profit entities, including charities and religions, qualify for a range
of tax and other exemptions at both the state and federal level.
As was noted in the Productivity Commission's report there is
a general understanding that tax concessions are granted to NFPs because they
serve the community and their activities provide positive public benefits and
the greater the benefit, the larger the range of exemptions.
Who is relieved from the tax burden that the rest of us have
to bear? ...tax relief is granted to activity that delivers such common good
outcomes that it may otherwise have to be paid for by the government directly.
At a national level the income tax legislation provides that the income
of charities and religious institutions is exempt from income tax. Section 11-5
of the Income Tax Assessment Act 1997 (ITAA 1997) lists those entities
that are exempt from income tax and identifies the provisions of the
legislation under which the exemption is granted. In the case of religious and
charitable institutions, exemption is granted pursuant to Division 50 of the
Section 50-5 specifically lists charitable and religious institutions as
being income tax exempt at items 1.1 (charitable institutions) and 1.2 (religious
institutions). Section 50-50 explains the special conditions that attach to the
tax exempt status of charities and religious institutions. It provides that:
50-50 Special conditions for items 1.1 and 1.2
An entity covered by item 1.1 or 1.2 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
(b) is an institution that meets the description and
requirements in item 1 of the table in section 30-15 [ie a Deductible Gift
(c) is a prescribed institution which is located outside
Australia and is exempt from income tax in the country in which it is resident;
(d) is a prescribed institution that has a physical
presence in Australia but which incurs its expenditure and pursues its
objectives principally outside Australia.
Section 50-52 goes on to specify that unless a charitable institution
has been endorsed,
it will not be income tax exempt and further specifies that an entity seeking
endorsement must apply in accordance with the requirements of Division 426 of
the Taxation Administration Act 1953 (TAA 1953).
Subsequently, provided a charitable institution meets the definition of
charity, satisfies one of the tests set out in section 50-50 and is endorsed by
the Commissioner, it will be income tax exempt and not required to lodge income
tax returns unless otherwise specified.
By way of contrast, although the application of the common law treats
the advancement of religion as a charitable purpose, the entitlement of a
religious institution to income tax exemption does not hinge on it carrying out
charitable pursuits. Rather, a religious organisation's eligibility to income
tax exemption is put beyond doubt by item 1.2 of section 50-5 of the ITAA 1997,
and therefore excludes those organisations from having to seek endorsement as
charities. As a result, where an institution self assesses that it is a
religious institution and it also meets one of the tests of section 50-50 it
will be exempt from income tax and not required to lodge income tax returns.
Although the tax laws specifically provide that charities and religious
institutions are eligible for these tax exemptions, the income tax laws do not
define the terms 'charity' or 'religion' leaving the common law to determine
eligibility. In addition to the common law, the Commissioner issues interpretive
aids to assist self‑assessing entities to apply the common law.
The Commissioner of Taxation and current administration
To assist self-assessment and inform entities as to how he will in fact
administer the law, the Commissioner of Taxation has issued guidance in an
extensive Taxation Ruling, TR 2005/21—Income tax and fringe benefits tax:
The ruling sets out that:
- charities are not-for-profit;
- 'charitable purpose' has an intention of benefit or value—and
notes that the benefit that the entity provides is required to be real or
substantial, it must not be negligible but must be of overall benefit and on
balance cannot be harmful;
- the entity's activities must benefit the community (although it
need not benefit the whole community provided it is for an 'appreciable
section' of the public);
- the sole purpose of a charity must be charitable although it may
have purposes which in isolation would not be charitable (but may be commercial
or business-like) provided they are not more than incidental or ancillary to
the charitable purpose.
The published guide which complements the ruling further explains that
whether or not an institution seeking charitable status is a charity is to be
determined by looking at the purpose of the entity and identifies that evidence
supporting the purpose would be sought by reference to the governing documents
of the entity (for example, trust deeds or constitutions), annual reports,
financial statements, minutes of meetings, or the activities it is undertaking.
In advising that TR 2005/21 does not apply to religious institutions
that do not conduct charitable activities, the ATO confirmed that the
Commissioner has not released any public ruling concerning the income tax
exemption and how it applies to religious institutions.
Mr Hardy—On just the question of religious organisations,
there is no particular ruling on that question. It is a particular category in
the taxation legislation as to whether a religious organisation, if it is one,
can be exempt from tax. That is a self-assessment option as opposed to
approaching the tax office to also be granted charitable tax concession.
Senator XENOPHON—Has the tax office considered giving a
ruling in terms of religious organisations, giving guidance?
Mr Hardy—No. We tend to provide public rulings where there is
a large public demand or uncertainty. We have not been approached by entities
that have found it concerning enough to seek public guidance.
It is noted that the Commissioner's Income tax guide for non-profit
organisations draws on the High Court ruling in identifying that:
An institution will be a religious institution if:
–its objects and activities
reflect its character as a body instituted for the promotion of some religious
–the beliefs and practice of the
members constitute a religion.
[and]...to be a religion there must be:
–belief in a supernatural being,
thing or principle, and
–acceptance of canons of conduct
that give effect to that belief, but that do not offend against the ordinary
Religious organisations therefore self-assess their status thereby
gaining an exemption from income tax without having to engage with the
Commissioner of Taxation:
If the nature of their activities in relation to goods and
services tax, for example, were below the thresholds for registration, they
would not be registered for goods and services tax purposes. If they did not
have employees they would have no requirement to engage with the tax office in
the fringe benefits tax space, and so they may in fact be technically invisible
to the tax office in any formal sense.
At present, organisations claiming exemptions self-assess eligibility
and are only audited if a concern is raised with the ATO. Given the right to
privacy of information is the foundation of taxation law in Australia, unless
the ATO makes a ruling in a particular case, the wider public has no idea as to
whether or not there has been impropriety.
The Tax Office did state however that self-assessment does not mean that
religious institutions will never come to the attention of the Commissioner of
Taxation as the Commissioner does have powers of inquiry that can be invoked if
there is reason to believe that a self-assessing organisation were making an
The Treasury pointed out that:
...the Commissioner of Taxation can and does revoke endorsement
of organisations where there is factual evidence available that the
organisation does not provide a public benefit.
Although the ATO currently has the power to revoke charitable status, it
has neither the mandate nor the resources to act beyond its functions as a
revenue collection service.
As many religious institutions carry out charitable activities and
therefore seek tax exemption pursuant to item 1.1 of section 50-5 as a charity
rather than a religious organisation under item 1.2 of section 50-5, it was
suggested by submitters to the inquiry that reform is perhaps more necessary in
respect of item 1.2 rather than 1.1 of section 50-5:
The bill...seeks to amend items 1.1 and 1.2 of section 50-5...Within
1.1 of course, we have the four heads of charity...in which religious
institutions can be included. Item 1.2 does not have a similar charitable test.
It allows the endorsement as tax-exempt...religious institutions that do not have
[a] charitable purpose...perhaps reform is needed more in relation to 1.2 than it
is to 1.1 because in 1.1 charitable institutions are already subject to a test
of having to be charitable...Religious institutions under 1.2 currently are not
required to be charitable.
It now appears the religious institutions category may be an
inoperative category, or is currently only accessed by a limited number of
organisations that are not able to be endorsed as charitable institutions.
The Committee acknowledges the limitations on the Commissioner in
administering the myriad of tax laws which necessarily requires that his
limited resources be spread across the whole of the tax system. This makes it
impractical to look in detail at every religious or charitable institution claiming
income tax exemption but requires that he apply resources:
...where we perceive the most risk and advantage, consistent
with the parliamentary intention of various tax laws the commissioner
The Committee also notes the evidence provided by the Treasury and Tax
Office representatives that, in terms of requiring information and ensuring
compliance with Division 50 of the ITAA 1997:
...in the end it probably comes down to policy choices by
different governments—indeed, by different parliaments—from time to time about
where the appropriate place to strike the balance might be at any particular
time...There are policy choices involved in deciding when it is appropriate to
allow an entity to self-assess as the basis for accessing a particular
concession...and when it is appropriate instead for particular processes to be
set in place which require more active steps by the relevant entity to seek
access to the concession by approaching the ATO and seeking some form of
Administering any public benefit test may not always be a case of merely
applying precedent. Policy decisions may also need to be made. While the ATO is
well-placed to make decisions relating to revenue matters, issues beyond that
need to be dealt with elsewhere.
Australia’s federal system of government further complicates reform in
this sector as charitable and religious organisations are also subject to state
and territory laws that affect their operations. For example, much of the behaviour
alleged of cults actually falls within the ambit of state and territory laws.
The Committee takes the view that as this sector is relied on to deliver
vital services to the community often in the place of government service
delivery, and is funded by public money to do so these entities should be
subject to a higher level of transparency. Requiring a higher level of
accountability is not viewed by the Committee as an unjust impost given:
There is a kind of covenant that charities have with society:
charities bring public benefit and, in their turn, are accorded high levels of
trust and confidence and the benefits of charitable status. These mutual
benefits are considerable: charities receive significant tax advantages; they
can access funds which others - even other voluntary organisations - cannot;
volunteers and donors give, respectively, time and money.
The Committee does not consider that the ATO is in a position to
administer a public benefit test with the aim of regulating inappropriate behaviour
and guaranteeing accountability and transparency.
The Committee recommends that the incoming government should follow the
emerging international best practice and work with the Council of Australian
Governments to amend legislation governing not-for-profit entities to include a
definition and test of 'public benefit'.
In the discussion of whether detriment should be taken into account when
considering whether an organisation would pass a 'public benefit' test for tax
concessions, there was discussion of the behaviour of cults.
It is a matter of concern that allegations of grossly inappropriate
behaviour continue to be made, and arouse concern, yet there is no systematic
means of dealing with these allegations, especially where no specific criminal
offence has been committed.
The Cult Information and Family Support Group told the Committee that:
CIFS can confidently estimate that there are many hundreds—if
not more; perhaps thousands—of groups operating within Australia that claim tax
exemption simply because they claim a religious status. Yet these groups would
show on examination that basic human rights and the freedoms that we take for
granted here in Australia are not afforded to their members and indeed would
contravene all that freedom and democracy are about...We have also heard of the
horrendous long-lasting harm caused to individuals and to families by
authoritarian, elitist, exclusive groups of all shapes and sizes. They use
psychological manipulation, insidious and coercive techniques and the dynamics
known as thought reform or mind control to indoctrinate and keep members
obedient and compliant.
There has been no inquiry into this issue, although the Standing
Committee of Attorneys-General contemplated in 1988 creating an offence of
recklessly or intentionally causing harm to a person's mental health.
In France there is an agency Miviludes (Mission Interministérielle de Vigilance et de
Lutte contre les Derives Sectaires) charged with monitoring the activities of
The Committee believes that sufficient evidence was put before it to
suggest that the behaviour of cults should be reviewed with a view to
developing and implementing a policy on this issue that goes beyond taxation
The Committee recommends that the Attorney-General's Department
provide a report to the Committee on the operation of Miviludes and other law
enforcement agencies overseas tasked with monitoring and controlling the
unacceptable and/or illegal activities of cult like organisations who use
psychological pressure and breaches of general and industrial law to maintain
control over individuals. The report should advise on the effectiveness of the
operation of Miviludes and other similar organisations, given issues that need
to be addressed to develop an international best practice approach for dealing
with cult-like behaviour.
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