The International Journal
of Not-for-Profit Law
Volume 4, Issue 1, September 2001
Charity Law Conference in Australia
A conference entitled “Charity Law in the Pacific Rim” will be held at Queensland University of Technology in Australia, October 4-6. Dr. Myles McGregor-Lowndes, Director of the Centre for Philanthropy and Nonprofit Studies at the University, is the Chair of the conference. The topics to be addressed include the following:
- Charity Law in the Pacific Nations
- The Definition of Charity
- Charity Law and Civil Society
- Various other themes, including the demarcation between charity and government, the role of religion in charity, reports on various countries, etc.
Speakers at the conference who come from the region include Dr K. Amerandra Singh, National Foundation for India; Dr Mokbul Ahmad, Assistant Professor, Department of Geography and Environment, Dhaka University; Mr John Emerson, Freehill Charity Law Practice Group, Freehills, Sydney; Mr Bernie Mackinnon, Australian Taxation Office; and Mr Gino Dal Pont, Faculty of Law, University of Tasmania. The WA Lee Public Lecture will given by Mr Hubert Picarda, QC (England), on “The Preamble to the Statute of Charitable Uses (1601): Peter Pan or Alice in Wonderland?,” and Mr Robert Fitzgerald, a Member of the Australian Government’s Inquiry into the Definition of Charities and Related Organisations, will give an address entitled “A defining moment: The inquiry and its outcomes”.
For further information on the conference, whose proceedings will be published, please contact Dr. McGregor-Lowndes at m.mcgregor@QUT.EDU.AU.
Charities Definition Inquiry Report Released
By Myles McGregor-Lowndes*
The Australian Treasurer has released the report of the Charities Definition Inquiry that was announced by the Prime Minister in September 2000. The twenty seven recommendations from the over four hundred page report represent a shift from the present common law definition of charity. It is proposed to legislate principles enabling charitable purposes to be identified. These legislative provisions would be adopted nationally as a definitional framework with a national administrative regulator. If it was decided not to establish an independent national regulator, the report recommends other options of a permanent advisory panel to advise the government on definitions or the current endorsement process of the Australian Taxation Office extending to all taxation concessions by such bodies.
There are a number of significant issues that require debate and resolution. One is that the legal and regulatory scheme must be truly national. Another is how the new definitional processes are made to serve broad community interests and another is ensuring an appropriate regulator.
The scheme requires all states, territories and the commonwealth to agree on a national framework of laws and regulation. Anything else would create further gaps in definitions between a statutory regime and a common law regime. The sector may be in a worse situation because of non-conformity of laws and administration.
If the judiciary has failed to keep the definitions socially current, do the alternatives proposed provide a better solution? Legislation and administrative fiat offer the prospect of a much faster process of continual reform, but how will they be made appropriately accountable? Reform that runs ahead of public expectation may harm the public trust and confidence placed in the system of “categorisation” of organisations and at the other extreme a cautious reform approach will not improve the present situation. It requires a sophisticated balancing of interests.
How can a Parliament be made accountable to prevent idiosyncratic political decisions influenced by forces other than the maintenance of a principled approach outlined in the report? The gift deductibility tables in the taxation legislation of individually named organisations added to over the years by various federal government is are an example of the dilemma.
How will the administrators of the definitional gates reach acceptable compromises between adventurous reform and conservative caution? Review by the courts of administrative definition decisions to provide an accountability mechanism has not been favoured by not-for-profit organisations (the report itself points out that the last High Court decision on the definition of Public Benevolent Institution was in 1942 and on a charitable purpose in 1974). The report itself delicately points to the widespread unease of organisations with the past administrative decisions of the taxation authorities, but how will a new body or even the same body do a better job?
Before the model of the Charity Commission is adopted, a careful scrutiny of its operation needs to be undertaken and the problems it has encountered. For example, the House of Commons Committee of Public Accounts has since 1974 been voicing at time strident concerns about the administrative arrangements of the Charity Commission. In 1995-96 the Commission spent 13 million pounds on salaries for 600 staff to monitor 184,000 registered charities with a quarter of staff involved in charity support and education. We need to learn from such experiences.
The report recommends a host of changes to definitions that cannot be covered in this short comment. Some issues among many are:
- a charity must have a dominant purpose which is appropriate rather than an exclusive activity-based test; commercial purposes should not deny charitable status where appropriate;
- the use of the term ‘not-for-profit’ should be used to overcome the mistaken belief that many believe such organisations cannot make a surplus; the concept of altruistic community organisations and a benevolent charity should also be introduced;
- certain self-help groups, preventative organizations, and child care establishments should receive a more favourable treatment;
- there should be a strengthening of the public benefit test; and
there should be acceptance of lobbying and policy development as acceptable purposes and activities.
Where to now?
The Treasurer stated in his Press Release that, “The Government will carefully examine the recommended changes to the definition of a charity. Adoption of the definitional framework recommended by the Inquiry could have implications for the taxation treatment of charities and related entities. The Government will give careful consideration to the most appropriate way to consider these matters.”
A ‘careful consideration’ of the implications of the tax treatment of charities and related entities might take a number of forms from an internal government review to another consultative inquiry. This step would bring the process back to its genesis, being the issues raised by charity and related definitions used in the implementation of “A New Tax System” pursued by the Australian Democrats in their agreement to support taxation reform at that time.
The recommendations contained in the report are as follows:
That the term ‘not-for-profit’ be adopted in place of the term ‘non-profit’ for the purposes of defining a charity.
That the term ‘entity’ be adopted to describe charities, and that the definition of ‘entity’ include: a body corporate; a corporation sole; any association or body of persons whether incorporated or not; and a trust;
and exclude: an individual; a political party; a partnership; a superannuation fund; and the Commonwealth, a State, or a body controlled by the Commonwealth or a State.
That a charity must have a dominant purpose or purposes that are charitable, altruistic and for the public benefit. If the entity has other purposes, those purposes must further, or be in aid of, the dominant purpose or purposes, or be ancillary or incidental to the dominant purpose or purposes.
That an entity be denied charitable status if it has purposes that are illegal, are contrary to public policy, or promote a political party or a candidate for political office.
That the activities of a charity must further, or be in aid of, its charitable purpose or purposes. Activities must not be illegal, contrary to public policy, or promote a political party or a candidate for political office.
That the public benefit test, as currently applied under the common law, continue to be applied; that is, to be of public benefit a purpose must:
- be aimed at achieving a universal or common good;
- have practical utility; and
- be directed to the benefit of the general community or a ‘sufficient section of the community’.
That the public benefit test be strengthened by requiring that the dominant purpose of a charitable entity must be altruistic.
That self-help groups which have open and non-discriminatory membership be regarded as having met the public benefit test.
That where closed or contemplative religious orders regularly undertake prayerful intervention at the request of the public, their purposes be held to have met the public benefit test.
That public benefit does not exist where there is a relationship between the beneficiaries and the donor (including a family or employment relationship); and that this principle extend to purposes for the relief of poverty, which the common law currently regards as being exempt from the need to demonstrate public benefit.
That there be no requirement that charitable purposes fall either within the ‘spirit and intendment’ of the Preamble to the Statute of Elizabeth or be analogous to one or more of its purposes.
That the principles enabling charitable purposes to be identified be set out in legislation.
The Committee has considered five options for defining charitable purpose as set out in Chapter 16. It concludes that three options are viable, but recommends the following preferred option (Option 5):
Charitable purposes shall be:
- the advancement* of health, which without limitation includes:
the prevention and relief of sickness, disease or of human suffering;
- the advancement* of education;
- the advancement* of social and community welfare, which without limitation includes:
- the prevention and relief of poverty, distress or disadvantage of individuals or families;
- the care, support and protection of the aged and people with a disability;
- the care, support and protection of children and young people;
- the promotion of community development to enhance social and economic participation; and
- the care and support of members or former members of the armed forces and the civil defence forces and their families;
- the advancement* of religion;
- the advancement* of culture, which without limitation includes:
- the promotion and fostering of culture; and
- the care, preservation and protection of the Australian heritage;
- the advancement* of the natural environment; and
- other purposes beneficial to the community, which without limitation include:
- the promotion and protection of civil and human rights; and
- the prevention and relief of suffering of animals.
(* Advancement is taken to include protection, maintenance, support, research, improvement or enhancement.)
That the definition of religion be based on the principles established in the Scientology case, namely:
- belief in a supernatural Being, Thing or Principle; and
- acceptance and observance of canons of conduct in order to give effect to that belief.
That the encouragement of sport and recreation for purposes of amusement or competition not be a charitable purpose, it being noted that the advancement of health, education, social and community welfare, religion, culture or the natural environment through the encouragement of sport and recreation would be considered a charitable purpose.
That the care, support and protection of children and young people, including the provision of child care services, be considered a charitable purpose.
That charities be permitted neither to have purposes that promote a political party or a candidate for political office, nor to undertake activities that promote a political party or a candidate for political office.
That commercial purposes should not deny charitable status where such purposes further, or are in aid of, the dominant charitable purposes or where they are incidental or ancillary to the dominant charitable purposes.
That the current approach of denying charitable status to government bodies be maintained. The Committee agrees with the principles set out in the Fire Brigades case and the Mines Rescue case for determining whether an entity is a government body, namely that the entity is constituted, funded and controlled by government.
That there be a definitional framework to distinguish altruistic entities from other not-for-profit entities.
That in the recommended definitional framework, the category of public benevolent institution be replaced by a subset of charity to be known as Benevolent Charity, that is a charity whose dominant purpose is to benefit, directly or indirectly, those whose disadvantage prevents them from meeting their needs.
That the framework recommended in this Report should not include the terms ‘religious institution’, ‘scientific institution’ and ‘public educational institution’, as altruistic entities with religious, scientific or public educational purposes and that are for the public benefit are covered by the categories in the recommended framework.
That there be a category, known as ‘Altruistic Community Organisations’, that are entities that are not-for-profit and have a main purpose that is altruistic. That is, they can have secondary purposes that are not altruistic, and that do not further, or are not in aid of, or are not incidental or ancillary to, their main altruistic purpose.
That the Government seek the agreement of all State and Territory Governments to the adoption nationally of the definitional framework for charities and related entities recommended in this Report.
That the Government seek the agreement of all State and Territory Governments to establish an independent administrative body for charities and related entities, and to the legislative changes necessary for its establishment.
If an independent administrative body is not established:
- that the Government set up a permanent advisory panel, including members from the charitable and related sector, to advise the Australian Taxation Office on the administration of the definitions relating to charities and related entities, and to advise the Government on the definitions of charity and related terms; and
- that the endorsement processes currently undertaken by the Australian Taxation Office be extended to include the endorsement of charities and related entities in order to access all the taxation concessions to which they are variously entitled.
That the Government commit to a comprehensive public information and education campaign to inform the charitable and related sector of any changes arising from its consideration of this Report.
*Myles McGregor-Lowndes is Professor of Law and Management at Queensland University of Technology and Director of the Program on Nonprofit Organizations there. He is a member of ICNL’s Supervisory Council and can be reached at m.mcgregor@QUT.edu.au.
New Draft Law on Local Associations and Non-Governmental Organizations
ICNL has received a copy of an unofficial translation of a Draft Law on Local Associations and Non-governmental Organizations for the Kingdom of Cambodia. Discussions among civil society organizations in Cambodia have been held around the concept, and it is hoped that something similar to this Draft will soon be introduced in the Parliament.
The Draft Law deals with two types of bodies – associations and “local non-governmental organizations “(NGOs). The rules that apply to the former and that are stated in Articles 6-18 generally apply also to the latter (see Art. 19). The main difference between the two types of entities is that associations maybe set up for any purpose (presumably including mutual benefit purposes), while NGOs may carry out a service activity in any field, such as election, health, education, culture, arts, environment, social aid, public authority aid, protection of human rights and other fields, which serve the public interest. (Art. 20)
The Draft Law, by its terms, does not apply to political parties, for-profit organizations, employer associations, trade unions, and foreign NGOs. (Art. 2)
One of the interesting features of the Draft Law is the default registration provision, which is found in Article 8. Registration functions are lodged with the Ministry of the Interior, which must issue a receipt to the applicant organization that furnishes it with “sufficient” documents. (Art. 7) Once those documents are received, the Ministry has 45 days within which to respond to the applicant. It is permitted to authorize the registration, require a modification of the applicant’s documents, or reject the application. In the event of a failure to respond in writing within the 45-day period, “an association shall be considered to have legally received validity.”
Other good features in the Draft Law include the possibility that an association or NGO that is denied registration may appeal to a court (Art. 10); a minimum number of persons are required to be founders (3) (Art. 12); and the articles of association must contain rules for the governance of the association, including rules about annual meetings (Art. 14). In addition, any proposed administrative dissolution of an organization may be appealed to a court (Art. 16), but it is not clear whether the dissolution is stayed during the pendency of the appeal.
Principal differences between associations and NGOs are as follows:
- the public interest requirement for NGOs, as discussed above;
- the fact that NGOs may receive monies from abroad (Art. 21) but that associations may not (Art. 13); and
- the fact that the annual report for NGOs is more detailed than that for associations (compare Art. 18 (associations) with Art. 22 (NGOs).
The Draft Law also requires that NGOs notify not only the Ministry of Interior but also the Ministry of Economy and Finance of their projects and plans, sources of receipts and project outcomes. This rather intrusive requirement will give both ministries a significant amount of information about what the NGOs are doing.
On the other hand, there is little incentive for an organization to call itself an NGO if it does not expect to receive revenues from abroad. As stated in Article 23, both associations and NGOs are to be permitted to receive tax deductible contributions, and both are to be allowed to import tax-free various articles to be used for the public interest.
The Draft Law as it is represents a significant attempt to create a truly enabling environment for Cambodian civil society. Although certain refinements might improve the Draft, as indicated in this short report, enacting a law similar to this Draft would be a major step in the right direction for the Kingdom of Cambodia.
Developments with respect to the not-for-profit sector include the following:
- There have been minor modifications in tax regulations affecting NGOs. UNTAET, the UN agency presently producing regulations for East Timor has slightly modified the special turnover tax provisions applicable to religious, charitable, and non-profit institutions by specifying that they may be considered enterprises (and thus subject to the turnover tax) only if the Commissioner designates that their turnover exceeds $200 per month. . The requirement that the Commissioner must make the designation provides greater procedural regularity than prior law. See Regulations 2001/20 amending Regulations 2000/18.
- UNTAET promulgated a regulation permitting the registration of political parties in the lead-up to the election (Regulation 2001/2) but has not yet promulgated a regulation on nonpolitical not-for-profit organizations.
In July, Parliament passed the new Law on Charity Foundations, which for the first time provides some regulation for Indonesia’s yayasans. Among its rules is one that says that donations above $70 must be publicized. Another requires that new foundations must be registered by the Justice Ministry, which can withdraw the license of any foundation it regards as a “threat to public welfare.” There is fear that the law can be misused by the bureaucracy, big business, and the military.
But the law seems to result from a deterioration of goodwill towards NGOs over time. Since the 1997 Asian financial crisis, NGOs have grown to number hundreds of thousands. Every week dozens pop up-and disappear. As these sorts of “briefcase NGOs” multiply, so does fraud. The public trust in NGOs has practically disappeared and donor monitoring is limited.
In addition, the line dividing the government and NGOs has become blurred. When an aid project is contracted out to an NGO, or requires third-party monitoring, some officials see an opportunity and establish-perversely-government-operated NGOs, or GONGOs.
It is obvious that the new law will not help to solve all these problems, and it may well result in more government-friendly NGOs being registered. Those that are more independent may have a more difficult time. The new law is not presently available in ICNL’s library, and as soon as it is we will print a more in-depth report.
As part of the reform of the economy, on 2 August 2000 substantial amendments were enacted to the principal income tax law, Act No. 7 of 1983. As amended, the law provides that:
- taxable income includes profits resulting from the transfer of assets in the form of grants or donations, except those granted to religious, education or social agencies provided that the parties to the transaction are not related by means of business interests, employment, ownership or control;
- exempt income includes donations received by charity agencies or institutions established or validated by the government and entitled to receive donations provided that the parties to the transaction are not related by means of business interests, employment, ownership or control;
- in computing taxable income of residents and branches of non-resident taxpayers, disallowable deductions include grants to religious, educational or social agencies or donations (include both gifts during lifetime and on death) to charity agencies except when made in the form of a tithe paid by Islamic individuals or corporate taxpayers owned by Islamic individuals to tithe charity agencies or institutions established or validated by the government.
(Act No. 17 of 2000, as translated in Warta Cafi)
From this month’s articles:
An Overview of Issues in Charity Litigation in Malaysia 2001
By Mary George
The Malaysian law of charities consists of a variety of legislation, both public and private, and case law from local and foreign jurisdiction. The dearth of written literature is compounded by the legal breadth of the topic. This article draws together the various statutes and case law on the Malaysian law of charities by reference to three additional sources of law regarding the establishment and regulation of charities, namely, the Companies Act 1965, the Societies Act 1966, and the Income-tax Act 1961. While essentially a compliation in nature, for purposes of legal evaluation, this paper also addresses the flaws of the current system and suggests some changes for reform.
Reviews of Legislation Affecting Charities in New Zealand
By David Robinson*
Legislation affecting the charitable sector in New Zealand is currently being considered by Government in three separate reviews. These concern taxation issues, government – charity partnership issues, and the taxation of Maori organisations.
The first inquiry is the review “Tax and Charities,” a government discussion document on taxation issues relating to charities and non-profit bodies” produced by the Inland Revenue Department. This report considers three broad areas: definition, accountability, and taxation. It makes some suggestions as to how they could be dealt with and invites comments and submissions.
Definition. As far as definition is concerned, the Report suggests either that the current definition be retained, with regulation added, or that New Zealand move away from existing case law to a new form of definition whereby each organisation would be considered on a case-by-case basis.
Accountability. An improved system of accountability is considered to be essential; this could be somewhere between self-regulation and regulation by a government department, as in Canada, or the establishment of a form of charity commission, as in England and Wales.
Taxation. As far as taxation is concerned, the maximum individual rebate on donations to charity currently obtainable is $500, and the report suggests that this be increased to $600 in line with inflation. Minor changes are also suggested in relation to GST and Fringe Benefit Tax.
Maori Trust Boards. The Report also suggests that the public benefit test be changed to allow indigenous Maori trust boards whose management and beneficiaries consist of “fluctuating groups of individuals linked by blood relationships” to be considered charitable.
Over 1,800 submissions have been received, and these are being considered by IRD at present. Many charitable and community organisations are opposed to any change in the current regulations. They are especially concerned over the prospect of more stringent accountability procedures on the grounds that these will greatly increase compliance costs. There have also been objections to any change in the public benefit test in favour of Maori organisations as it is felt that this could open the way for abuse of the legislation by family trusts.
The Government hopes to introduce legislation in its current term on the tax changes, including increasing the rebate levels, clarifying GST procedures and making charitable organisations liable to pay Fringe Benefit Tax.
The wider issues beyond taxation concerning definitions and accountability may be picked up in the research recommended in the second recent report. This one was developed by the Community and Voluntary Sector Working Party and is entitled “Communities and Government: Potential for Partnership”. The report, which was published by the Ministry of Social Policy, recommended that the “Review of Taxation of Charities” discussion document and consultation process should “enable discussion on a modern and broad definition of charitable purposes”. The Report also recommended that further work be carried out on accountability systems and processes.
In addition to these two reports, a third discussion document was released by the Inland Revenue Department in August 2001 on the “Taxation of Maori Organisations”. These rules were last revised 50 years ago. According to the Minister of Finance, Michael Cullen, “They are confusing, sometimes result in double taxation, and impose unnecessarily high compliance costs.”
The government is inviting feedback on three options based on income tax law but modified to take account of the specific characteristics of Maori organizations. They would be able to choose whether to be taxed under the Maori authority rules or the ordinary income tax rules. The definition of ‘Maori authority’ would be clarified to ensure that only Maori organizations and businesses that administered Maori property in common ownership could apply the special rules. The review also proposed changes to the charitable status requirements for an exemption from income tax so that an entity would not cease to be eligible simply because its purpose was to benefit a group of people connected by blood ties.
The current state of play is that the Inland Revenue Department is considering the submissions on the “Taxation of Charities” paper, the Ministry of Social Policy has established a new working party to follow up the recommendations in “Communities and Government” and to report back in July 2002, and the “Taxation of Maori Authorities” paper is being considered in consultative meetings with Maori around the country. It remains to be seen whether these three different sets of discussion will be brought together into a comprehensive and cohesive proposal for the improvement of charity legislation in New Zealand.
* David Robinson is a principal in the Robinson Driver Partnership, Wellington, New Zealand and a member of ICNL’s Board. He can be reached at email@example.com.