This article is part two of our charity article series. Click here to read the first article titled So you want to start a charity? Part one – Before you start
Tax concessions for charitable purposes have been granted in one form or another for over 400 years. Today, tax concessions are critical to the financial viability of registered charities. Obtaining charity tax concessions is the principal driver behind many charity registrations. This article will outline which tax concessions are available, how an organisation is endorsed and what ongoing obligations exist.
Importance of tax concessions
Charity tax concessions are highly sought (and protected) for a simple reason – charity income that would otherwise go to state and federal governments can instead be spent furthering the charity’s purpose. Less money on tax means more money for supporting the vulnerable, protecting the environment, promoting the arts or otherwise contributing to the community.
What tax concessions are available to charities?
A range of tax concessions may be available to charities. Federal charity tax concessions include:
- exemption from paying income tax (income tax exemption);
- concessions on tax paid for goods and services (GST concessions);
- rebate on Fringe Benefits Tax (FBT Rebate) OR Fringe Benefits Tax exemption (FBT Exemption).
The federal government also regulates which entities can be endorsed as tax deductible gift recipients (Deductible Gift Recipient (DGR) endorsement).
In addition to federal charity tax concessions, charities may also be eligible for state tax concessions, including exemptions from paying:
- Stamp duty;
- Payroll tax; and
- Land tax.
Is my charity eligible for tax concessions?
Federal charity tax concessions are available to charities registered with the Australian Charities and Not-for-profits Commission (ACNC). To register with the ACNC, organisations must meet the requirements of the Charities Act 2013 (Cth) (Charities Act), which requires a charity to:
- be a not-for-profit;
- have only charitable purposes that are for the public benefit;
- not have a disqualifying purpose; and
- not be an individual, political party or government entity.
Charitable purposes must be set out in an organisation’s governing document (such as its constitution, rules or trust deed) and must be reflected in its activities. The Charities Act recognises 12 charitable purposes:
- advancing health;
- advancing education;
- advancing social or public welfare;
- advancing religion;
- advancing culture;
- promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;
- promoting or protecting human rights;
- advancing the security or safety of Australia or the Australian public;
- preventing or relieving the suffering of animals;
- advancing the natural environment;
- promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a state, a territory or another country (where that change furthers or opposes one or more of the purposes above); and
- other similar purposes ‘beneficial to the general public’.
All charities registered with the ACNC are eligible to receive basic charity tax concessions – income tax exemption, GST concessions and FBT rebate.
Only some charities registered with the ACNC will be eligible for FBT exemption and/or DGR endorsement. For example:
These charities must meet additional criteria – for example, they must take steps to ensure that their assets will go to another charitable DGR in the event that the charity loses its endorsement or is wound up.
Eligibility for state tax concessions varies in each state and territory. Most state tax concessions are administered by state revenue offices. The charity’s application for exemption must demonstrate that it has a purpose which meets that state or territory’s definition of “charitable”. What the states considers to be charitable largely overlaps with, but is not identical to, the Charities Act charitable purposes listed above. Being ACNC registered is not conclusive evidence of eligibility for state tax concessions. Additionally, eligibility for particular concessions is based on a charity’s activities, rather than its purposes. This means that although an ACNC registered charity will usually be eligible for state tax concessions, eligibility is not guaranteed.
Concessions for non-charities
Although this article focuses on charity tax concessions, it is worth noting that some “mere” not-for-profits (that is, not-for-profits that are not charities) can still access certain tax concessions. Sports groups, for example, generally cannot be ACNC registered charities (unless they also have a charitable purpose, such as a group that carries out sporting programs to advance education or social welfare), but may be exempt from paying income tax as self-assessing income tax exempt organisations.
Maintaining eligibility for tax concessions
Eligibility for tax concessions must be maintained throughout the life of a charity. There are obligations on charities to self-assess their ongoing entitlement to tax concessions, and notify the ACNC, Australian Tax Office or State Revenue Office if they are no longer eligible.
If a charity ceases to meet the eligibility requirements for tax concessions, it may lose those concessions. In a worst case scenario, the loss of concessions can be retrospective, which can result in a significant tax liability.
It is important that the governing body (Board, Committee or Trustees) of a charity understands the tax concessions it holds and the importance of its not-for-profit character and charitable purpose. The governing body should have a process in place to review ongoing eligibility – both periodically and when contemplating any change in activities, purpose or structure.
It is also critical that charities meet ongoing obligations of charity registration, including providing annual statements or reports to the ACNC. The charity must also take steps to comply with the Governance Standards (unless the charity is a Basic Religious Charity) and, if operating overseas, the External Conduct Standards.
The ACNC is increasingly active as a regulator and will investigate non-compliance connected to eligibility for charity tax concessions and DGR endorsement. Additionally, the Government has provided additional funding to support proactive reviews of charity and DGR eligibility, which will commence with a review of 500 public benevolent institutions.
Tax concessions can help a new charity stretch their donated dollars further, so more resources can be put towards their charitable purpose. Our For Purpose team can provide advice and assistance establishing new entities and applying for tax concessions. For further guidance, please do not hesitate to contact us.