This article outlines the factors charities with overseas operations, or who are considering establishing operations overseas, should consider in light of a proposed tightening of the law with respect to the requirement that they operate in Australia.
Under the current law, charities may conduct activities overseas provided that those activities are consistent with the guiding objects of the charity. In fact, the Australian Charities and Not-for-Profits Commission (ACNC) specifically notes that approximately 6,100 charities on the ACNC Charity Register indicate they have charitable purposes and activities overseas.
Summary of Current and Proposed Law
- As long as a charity ensures that it is pursuing its stated objects in doing so, the establishment of overseas operations will not impact on its Australian charitable status.
- Under proposed amendments to Div 50 of the Income Tax Assessment Act 1997 (“ITAA97”), an ‘in Australia’ test would be introduced to require that at least 50% of a tax-exempt entity’s activities are conducted in Australia in order for the entity to retain its status.
Background to Proposed Law
The High Court of Australia in FCT v Word Investments (“Word case”) decided that a charity which operates in Australia merely to pass funds from Australia to another charity which conduct its activities overseas is still pursuing its objectives principally ‘in Australia’.
The Court’s ruling in the Word case was inconsistent both with the Commissioner’s view and the Government’s policy intention behind this special condition.
The Government has now released an exposure draft explanatory memorandum (“EM”) which provides a useful discussion of the current law and the proposed amendments to the ‘in Australia’ test.
Division 50 of the ITAA97 contains throughout it various ‘special conditions’ that must be fulfilled by an entity claiming tax-exempt status. The special conditions imposed differ depending on the type of entity.
In the case of entities seeking tax-exempt status as charities, the pertinent requirement of laws enacted in 2013 is that the entity must comply with all the substantive requirements of its governing rules (usually its Objects as set out in its Constitution).
In addition, under pre-existing law, tax exempt entities must:
- apply income and assets solely for the purpose for which it was established; and
- be a non-profit entity.
At this stage, only an exposure draft EM of the proposed law is available for analysis.
As expressed in this EM, stricter requirements to be introduced into the ‘in Australia’ test are that tax-exempt entities (whether because of charitable status or otherwise) must:
- operate principally in Australia; and
- pursue its purposes principally in Australia.
Some worthwhile comments in the EM relating to these requirements are that:
- It intends to standardise the ‘in Australia’ test across all categories of tax-exempt entity (EM para 1.52).
- ‘Principally’ means mainly or chiefly. Less than 50 per cent is not considered principally (para 1.60 of EM).
- While no one factor is conclusive in determining whether an entity is ‘operating in Australia’ and ‘pursing its purposes principally in Australia’ the Commissioner is expected to consider all surrounding circumstances: including factors such as (para 1.59 of EM):
- where the entity incurs its expenditure;
- where it undertakes its activities;
- where the entity’s property is located;
- where the entity is managed from;
- where the entity is resident or located;
- where its employees or volunteers are located; and
- who is directly and indirectly benefiting from its activities.
A challenge with the EM at the moment is that it doesn’t appear to differentiate between >50% of income flowing out of Australia (such as in the Word case) versus >50% of income flowing into Australia. This distinction might be addressed explicitly in the drafting of the legislation.
- Tax-exempt entities which conduct substantial activities overseas should acquaint themselves with the proposed laws and consider themselves in light of the factors listed in 1.59 of the EM.
- Entities at risk of not satisfying the new ‘in Australia’ test should consider the following:
- Amending their operations such that they operate principally in Australia and pursue their purposes principally in Australia.
- If they satisfy all other special conditions, apply to be prescribed under regulations as income tax-exempt, though this will likely be used sparingly.
- Consider making a submission during the consultation phase of the legislative process.