Last December the Federal Coalition Government released a list of announced but unlegislated tax measures which it plans to enact. One of these measures from the 2009-10 budget, involves the re-stating of the ‘in Australia’ requirements which will apply to not-for-profit organisations and deductible gift recipients (“DGR”).

An exposure draft with respect to this restatement was released on 12 March 2014.

Tax-exempt status

Under the proposed changes, in order to qualify for tax-exempt status an entity must:

  • be established in Australia
  • operate principally in Australia
  • pursue purposes principally in Australia

In contrast, the current law is either unclear or focuses on a ‘physical presence in Australia’ and expenditure in Australia to the extent of that presence. The Government’s policy is that tax concessions should ultimately be for the broad benefit of the Australian community.

A further change governs instances where an entity that is not a DGR wishes to make a donation to taxable entities or overseas entities. Under the proposed laws such an entity would be required to take steps to:

  • trace where the money will be spent overseas
  • obtain evidence that overseas activities are genuinelyundertaken and that the overseas entity is effective in achieving the entity’s purpose
  • coordinate with third parties who receive money overseas
  • have governance processes put in place to properly monitor the use of that money.

This is in order to ensure that tax exempt entities cannot avoid the ‘in Australia’ special conditions by having other entities use its funds to undertake activities it itself cannot undertake.

The Government also aims to centralise and simplify the special conditions that entities must meet in order to become tax exempt.

Deductible gift recipient status

There are differences between the laws proposed by the previous Government and the laws proposed by the current government, most notably with respect to DGR special conditions. Under the laws previously proposed there was possibly a lack of clarity as to the threshold that an entity was required to meet in order to qualify as a DGR.

The law has been restated under the current proposal to state that entities that want to be eligible for DGR must:

  • be established in Australia
  • operate solely in Australia
  • pursue purposes solely in Australia

Special conditions for deductible gift recipients

Some entities would be afforded DGR status even if their operations are not solely ‘in Australia’. These would include some overseas aid organisations (organisations approved by DFAT or listed in s 30-80 of the Income Tax Assessment Act 1997)), some touring arts organisations (subject to approval by the Arts Minister), some environmental organisations (subject to approval by the Environment Minister) and medical research institutes.

There are also proposed amendments to the Income Tax Assessment Regulations 1997 which set out the process by which the Environment Minister and the Arts Minister make decisions with respect to approving the tax-exempt status of organisations.

The proposed laws may have significant implications for not-for-profit organisations which conduct any activities outside of Australia (e.g. New Zealand, Australasia and developing countries). These organisations should carefully review all overseas activities, expenditure, funding, control and influence in light of the proposed laws.

The exposure draft is available here.

Treasury is taking submissions with respect to the proposed laws until 7 April 2014. Information on how to make a submission to Treasury can be found here.