Australia’s rules for tax deductible gifts have recently become more outward-looking. Now is the time for charities to consider whether deductible gift recipient status can be utilised for the support of causes overseas.
Bartier Perry’s Oliver Shtein explains.
In tax policy terms, if a gift deduction is available to an Australian taxpayer, it is seen as a form of government outlay. So when an Australian taxpayer obtains a tax deduction for a gift to help an overseas cause, in the eyes of the policy-makers it is effectively foreign aid expenditure.
There is also a policy concern about the practical difficulties in checking whether money donated and claimed as a tax deduction here is in fact doing good works, or could be falling into the wrong hands outside the reach of ATO supervision.
For many years, these concerns were addressed in a number of ways by the Australian tax rules. Broadly:
- tax exempt bodies have to incur their expenses principally in Australia;
- deductible gift recipient (DGR) bodies have to be ‘in Australia’ to qualify for their status.
In applying the ‘in Australia’ test for DGR status, the ATO took a narrow view of when an organisation was ‘in Australia’. Significant overseas activities could be problematic for Australian tax status and many bodies had to structure around this problem. A notable exception was for DGR funds under the ‘overseas aid gift deduction scheme’. However this scheme was (and remains) closely guarded. Organisations have to be specifically approved by the government and there are many hoops to jump. For benevolent bodies this channel has been largely unavailable in practice.
Things took a more parochial turn when the last Labor government pursued a range of amendments to the not-for-profit tax law. The changes were purportedly designed to ‘better target’ Australia’s not-for-profit tax concessions.
The harshest of these included a ‘sole purpose in Australia’ test for DGRs. Had it actually been enacted, the new test would have required such bodies to pursue their aims solely (a strong word) in Australia. This would have set the bar very high indeed. The proposed legislation also immediately raised potential problems for bodies such as research organisations which increasingly work with overseas organisations as part of their work – a globalising trend one would only expect to continue. Those bodies, and others such as touring orchestras, scrambled to ask for specific exemptions to the ‘sole purpose’ test. But it was clear that the new rules could have a wide and unexpected effect, even if there were carve-outs granted.
Thankfully however, the ‘sole purpose’ proposal languished and has now been abandoned. And for those with a less parochial worldview there have since been a number of other positive developments.
First, in the Hunger Project1 litigation the Full Federal Court held that a public benevolent institution (PBI) need not actually be a direct provider of benevolence. It may operate as a fund-raising body which passes the funds on to another body that actually expends the money on benevolent activities. The ATO’s previous longstanding insistence that to be a PBI one had to provide ‘direct benevolence’ was roundly rejected by the Court.
The Hunger Project decision greatly widened the class of organisations that can qualify as PBIs and the decision appears likely to have an effect on other DGR categories that require a fundraising body to be an ‘institution’.
Hunger Project was about an Australian organisation that raised funds here as part of global network of benevolence. The decision did not directly deal with the ‘in Australia’ requirement. That hadn’t been replaced by the abandoned ‘sole purpose’ test but the original ‘in Australia’ test is still in the law.
But now the ATO has expressed2 a loosening in its interpretation of the ‘in Australia’ test for DGRs. The reason for the change of heart is not entirely clear, but the ATO now accepts that an organisation can be ‘in Australia’ if it has its central organisation and presence here, even if the money it raises is spent overseas.
This means for example that PBIs that are based in Australia but which fund or even conduct significant overseas operations can still claim DGR status here. Whilst the overseas gift deduction scheme still exists, there will need to be less reliance on it by DGR charities wishing to benefit overseas causes. Note however that the last LNP Government did not rule out further changes to ‘better target’ Australian tax concessions.