1. What is a charity?
The definition of charity in Hong Kong and Singapore comes from the traditional English common law test. Although the test in England is now enshrined in statute, Hong Kong and Singapore still look back to the charitable purposes set out in Special Commissioners of Income Tax v Pemsel. The four well known heads of charity are:
- relief of poverty;
- advancement of education;
- advancement of religion; and
- other purposes beneficial to the community.
In contrast, certain purposes have been clearly identified as not charitable e.g. political purposes are not charitable.
As well as having a charitable purpose (or purposes), to be charitable an organization must be “exclusively charitable” and also meet the “public benefit” test.
2. Regulatory issues
Hong Kong and Singapore take very different approaches to the regulation of charities. For example, Singapore has specific legislation which governs charities and also has a centralised regulatory body known as the Commissioner for Charities. In Singapore, it is compulsory for a charity to be registered.
On the other hand, Hong Kong has neither a centralised system of regulation for charities nor a requirement to register a charity. However, there can be a strong incentive for charities to register with the Inland Revenue Department (IRD) due to the tax benefits i.e. charitable organisations are not generally liable to tax and donations to such organisations can be tax deductible. Oversight and regulation of charities is split between a number of different government departments, the main ones being the Secretary for Justice and the IRD (if the organisation is registered as charity).
3. Common structures
In Hong Kong, charities normally adopt one of the following legal forms:
- a company limited by shares or by guarantee;
- an unincorporated association;
- a trust; or
- a statutory body established by statute.
In Singapore, charities can be in one of the following legal forms:
- a company limited by guarantee;
- a society;
- a trust; or
- a foreign charitable purpose trust.
The particular significance of a foreign charitable purpose trust is that the usual rule in Singapore, which states that a Singapore charity must apply its funds wholly or substantially to benefit the Singapore public, does not apply to a foreign charitable purpose trust.
Hong Kong does not have this restriction in terms of the general need to benefit the Hong Kong public, with one exception. Donations under the first three heads of charity (i.e., poverty, education and religion) can benefit any community in the world. However, the IRD takes the view that, to be charitable, donations under the fourth head (“other purposes beneficial to the community”) must benefit the Hong Kong community. This used to be the approach in England, but fourth head donations can now benefit any community in the world.
4. Using charities in succession planning
There is a long history of charities being used in succession planning, often involving shares in a private family company. This can be very simple, for example, transferring shares into a charitable structure. However, it can also be very sophisticated. At our seminars, we looked at the structures adopted by Robert Bosch and IKEA, which show how charitable structures can be used to maintain a family company legacy, whilst achieving philanthropic purposes and making the company less likely to be subject to an aggressive takeover. This can involve carefully allocating shares which participate in dividends and separating dividend rights from voting rights. Alternatively, certain aspects of the business could be split, for example, royalties and real estate could be held by different entities.
5. Duties of charitable trustees
At common law, the overriding duty of charitable trustees is to act in the best interests of the charity. Additionally, the charitable trustees must:
- ensure the proper administration of the charity and act reasonably and prudently in all matters relating to the charity;
- abide by the duty of care in administering the trust property; and
- safeguard and protect the assets of the charity, including taking appropriate action to recover any money due to the trust.
At the seminars, we looked at a number of examples of where charities have hit the headlines. For example:
- The National Kidney Foundation in Singapore, where allegations concerning the misuse of charity funds led to a new regulatory structure in Singapore.
- The current City Harvest case in Singapore, which also includes allegations that moneys held by the charity have been misapplied.
- The Plymouth Argyle Supporters Training and Development Trust case considered a loan made to a struggling football club in circumstances where the trustees were in a position of conflict.
- The London Philharmonic Orchestra case concerned a fraud committed by the former finance director.
The lessons which can be drawn from these cases include:
- Charitable trustees must be robustly reminded that their overriding duty is to act in the best interests of their charity.
- Special care on managing conflicts is needed when the relationship between a charity and a related organisation is strong.
- Charitable trustees must safeguard the assets of the charity by taking practical steps to help prevent fraud, reporting crime and taking action to recover misappropriated funds.
- It may be necessary for the charitable trustees to review the charity’s controls over the financial activities or transactions to ensure the controls are appropriate and adequate.