The International Journal
of Not-for-Profit Law

Volume 3, Issue 1, September 2000

Australia

By Myles McGregor-Lowndes

As outlined in a previous article in this journal (Vol.2, Issue 3), the Australian taxation regime was altered dramatically on 1 July, 2000. Part of this taxation reform was the introduction of a broadly based goods and services tax at the rate of 10%. The reforms have also had a major impact on nonprofit organizations.

Although nonprofit organizations have not yet filed their first quarterly GST return, many are reporting high compliance costs to meet their new taxation obligations. Many Australian nonprofit organizations were previously completely exempt from the Wholesale Sales Tax and any form of taxation reporting. As the previous article explained, nonprofit organizations that are charities or are able to give their donors a tax deduction for gifts to them are now required to be endorsed by the Australian Taxation Office (ATO). The ATO estimated that 250,000 nonprofit organizations would be endorsed. So far, only 35,000 charities and 15,000 donation deductible organizations have sought endorsement. It appears this is a combination of over-estimation of the number of organizations and a lack of awareness by nonprofits of the obligation to be endorsed.

Nonprofit organizations won some late GST concessions from the Government: the exemption of internal transactions in a religious GST Group (Church denomination) and the treatment of some fundraising as input taxed. These, as well as further incentives for philanthropic giving and exemption of income, are examined below.

Religious Grouping and GST

The GST Act permitted registered entities to form GST groups with other organizations and the groups would effectively be treated as a single entity for GST purposes. Transactions between group members would not be subject to GST. The forming of a GST group enables grouped entities to obtain cash flow benefits by removing the need to charge GST and claim input tax credits on intra-group transactions. In addition, grouping reduces GST compliance costs by removing the requirement to create tax invoices for supplies between grouped entities.

However, for many large religious organizations the use of GST grouping provisions was administratively impractical because of the size, complexity of the structures of these organizations and time limits on reporting.

A new division was added to the GST Act to enable religious organizations to utilize the benefits of grouping, while alleviating some of the administrative difficulties. The entities within a religious organization can form a GST religious group that is effectively treated as a single entity. A GST religious group does not have to file a GST return, but individual members of the group will be responsible for GST transactions outside of the group. Each member will be required to file a GST return for each tax period for its own external transactions. Internal transactions between members of the religious group will not have to be included in the return.

This is a major concession to religious organizations that will result in considerable compliance costs savings.

Input Fund-Raising Events

The Charities Consultative Committee established by the Government to assist in the smooth transition of charities into the new tax system expressed concerns following the announcement of the introduction of the nonprofit sub-entities in December 1999 that these provisions had not gone far enough. Those provisions permitted nonprofit organizations to register parts of themselves as “sub-entities” with their own GST registration procedures. If such parts had less than $100,000 turnover, they would be input taxed and hence not have to account for the GST.

It was argued that many special fundraising events had a turnover of greater than $100,000 and thus required the sub-entity to register for the GST. This made charities no better off. There was also the desire to not include fundraising turnover in the turnover threshold for GST registration, as many charities would not be required to register if this turnover was excluded.

Other related concerns were that special event days, such as Red Nose Day, Daffodil Day, and Bow Tie Day, where goods were given in exchange for donations, would be treated as taxable supplies. The general public and most of the sector regards and promotes such days as donations to the cause. There was a view that the transaction was not a gift because the transaction was a sale of goods. The ATO had expressed an opinion in the Charity Consultative Committee’s Resolved Issues and Questions document of 31/1/200 regarding Daffodil and Red Nose Day:

Generally, where the item received by a person is equivalent in value to that of a receipt and the intention of the person was to donate money rather than purchase an item, the activity would be considered to be a donation and will not give rise to a GST liability.

The view appeared to be that an ANZAC poppy or ribbon was acceptable but pens and other items were not. The policy of the ATO was that a gift needs to be a gift and that activities that are “commercial,” that is compete in the market with for profit organizations, ought to be treated in a similar fashion.

The other possibility was if the transaction was not treated as a gift, the transaction qualified for GST-free treatment as a non-commercial supply by a charity (Subdivision 38G). The main issue was whether the supply was less than 50% of the GST inclusive market value of the supply, in which case, it would be regarded as GST-free. Establishing the market value was not an easy matter and most transactions fell over or close to the 50% line.

The amendments seek to address these concerns by permitting more flexibility for fundraising activities to be taken out of the threshold calculations of nonprofit organizations. The definition of what is a “fundraising event” is also added in the amendments.

Item 3 inserts new Subdivision 40-F into the GST Act to provide a charitable institution, trustee of a charitable fund or a gift-deductible entity with the choice to treat certain fund-raising events conducted by the charity as input taxed. As a result of treating certain fund-raising events as input taxed, charities may not be required to register for GST as their annual turnover may no longer be over the $100,000 annual turnover threshold. This is because the value of input taxed supplies are excluded from the calculation of annual turnover.

New section 40-160 provides that a charitable institution, a trustee of a charitable fund or a gift deductible entity may choose to have all the supplies that it makes in connection with a fund-raising event treated as input taxed. This means the charity will not have to charge GST on supplies connected with that event.

However, it will also not be able to claim input tax credits on acquisitions made in relation to the fund-raising event.

The charity must also record the fund-raising event as being treated as input taxed. It must retain these records for 5 years after making this choice.

It should be noted that where a charity does not make the choice to treat a fund-raising event as input taxed, supplies relating to the event will be treated according to normal principles.

Meaning of Fund-Raising Event

New section 40-165 describes the types of fund-raising events that a charity may treat as input taxed. For all events described, the fund-raising event must be separate from and not form any part of a series or regular run of like or similar events. The amendment uses concepts and words similar to those contained in the UK VAT provisions.

For the purposes of new Subdivision 40-F, a fund-raising event is:

• a fete, ball, gala show, dinner, performance or similar event [new paragraph 40-165(1)(a)]. The Explanatory memorandum states that a “similar event may include a charity auction”;
• an event comprising the sale of goods where the consideration received for the item does not exceed $20 or such other amount as specified by regulation and where the selling of such items is not a normal part of the suppliers business [new paragraph 40-165(1)(b)]. It is envisaged that those events that involve the selling of small fund-raising items such as flowers, confectionery and chocolates will be covered under this provision. However, an event that involves the sale of items where the items are alcoholic beverages or tobacco products will not be considered a fund-raising event under new subsection 40-165(2); An example would be a major charity holding an annual flower day where it sells flowers for $2 each. This event fits the meaning of fund-raising event as each item sells for less than $20, the charity is not in the business of selling flowers and the event does not form any part of a series or regular run of like or similar events; and
• an event that the Commissioner decides is a fund-raising event. A charity may make an application in writing to the Commissioner to request that an event it is conducting be treated as input taxed [new paragraph 40-165(1)(c)].

In making a decision to treat a fund-raising event as input taxed, the Commissioner must be satisfied that the charity is not in the business of conducting such an event and that the proceeds from the event are for the direct benefit of the charity [new subsection 40-165(3)]. It should be noted that refusing an application is a reviewable GST decision.

The “fete” limb above appears to be expressed widely and should capture most special events. However, there may be a question of whether it would catch a special event held over more than one day as the items mentioned—fetes, balls, gala shows and dinners– would not in the ordinary meaning of those words last for more than one day. Where special events are conducted over a period of time such as a marathon bike ride or jog around Australia or a car rally over a weekend, they may not be covered by this limb. These events may be able to qualify under other limbs, however.

The second limb, the sale of goods less than $20 that is not a normal part of the supplier’s business, will also capture a large portion of such fundraising projects.

The third limb permits the Commissioner to approve a fund-raising event that falls outside the other two limbs. The amendments [s 40-165 (3)(b)] prohibits the Commissioner from granting such an application if, “the proceeds from conducting the event are for the direct benefit of the supplier’s charitable or non-profit purposes.” If the Commissioner takes this prohibition seriously, it may be that he will require the proceeds to go into a fund arrangement as occurs for a deductible donation in a Deductible Gift Recipient through a gift fund. The Commissioner may also wish to guard against arrangements or schemes whereby for-profits have arrangements to use the names of charities in order to acquire GST-free status for their supplies, passing on a mere commission to the charitable organization. It may be that one measure open to the Commissioner is to specify percentages of returns on sales by charities.

Frequency of Events

New subsection 40-165(4) provides that the Commissioner may determine in writing the frequency with which events may be held without forming any part of a series or regular run of like or similar events. The determination will be used to provide clarity as to what might constitute a regular run or a series of events.

The Explanatory Memorandum states that, “an event that is held weekly would be considered to be a regular run of like events and therefore would not be a fund-raising event for the purposes of new Subdivision 40-F.” The Commissioner has declared that no more than 15 events a year may be held.

Similar provisions have been in place in the UK for some time and use similar words and phrases in their VAT legislation. It gives a good indication of some of the issues that will arise in Australia. Charities can hold a number of the same types of events in a year, provided that they are reasonably spaced apart. The VAT guidelines permit an event over more than one day providing that it is “a single organic whole event”, rather than a situation where the events of the days repeat themselves. The guidelines suggest that a large single event (for example a rock concert) that would draw away trade from commercial operators would be permitted as an annual event. Where the risk of distortion to the market was low (e.g. coffee mornings and jumble sales), the events could take place up to once a month. The UK guidelines also introduce a notion that is not included in the Australian amendments, being that the location of the fundraising event could also be a factor. Geographic proximity with respect to impact on commercial activity is a determining factor. The guidelines suggest that a fete held twice in a month but some distance apart (it suggests 5 miles) will be acceptable. However, a play held twice in the same provincial city would be an unfair advantage to charities and not permitted. The guidelines do accept that a gala ball is different from a dinner dance and an opera performance is different from a concert. The guidelines also accept that similar events organized in different parts of the country by a national charity are within the exemption.

In November 1999 the UK Government announced that the existing VAT exemption for fund-raising events would be widened to include more types of events, including events on the Internet. This was in response to a review of charity taxation by the Government. In March 2000 in the Budget statement, the UK Government announced that the number of events would be increased to fifteen of each type or kind of event in any location in a twelve-month period. For small-scale events, the exemption will apply to any number of events, provided the gross weekly income does not exceed one thousand pounds.

A Further Incentive for Philanthropic Gifts

The Australian Stock Exchange (ASX) has announced alterations to its escrow requirements that will encourage philanthropic gifts of shares. Normally at the time of a new listing of shares on the exchange, shares held by related parties and vendors are put in escrow for a period of up to 2 years. This means that such shares are effectively locked up during this period so that insiders are prevented from using a public offering to offload shares immediately after their release and encourage people integral to a company’s operations to deliver value over time to new shareholders.

The ASX now allows the transfer of escrow shares for charitable purposes. The shares must be transferred to an Umbrella Charitable Trust that can only make gifts to organizations that are endorsed by the Australian Taxation Office as having gift deductible status. In 1999 about $2.5 billion of shares at current market values were placed in escrow. It is yet to be seen how many escrow shares are gifted.

Dividend Imputation Rebate

A major inquiry into charitable organizations in 1995 (Industry Commission, Charitable Organisations in Australia) recommended that tax credits that accompanied dividend revenue from company investments should be made available to nonprofit organizations with such investments. Under the previous system, such credits for the tax paid by companies could only be offset against other taxation liabilities. As many nonprofit organizations were exempt from taxation, they had no taxation liabilities against which to offset such taxation credits.

Amendments to the taxation regime by the New Business Tax System (Miscellaneous) Bill 1999 will enable charitable institutions and trusts as well as gift deductible entities endorsed by the ATO to claim franking credits rebates. These will be claimed annually through a form approved by the Taxation Commissioner. This will apply to dividends received directly as a shareholder in a company or indirectly as a beneficiary of a trust that receives a franked dividend.

It is estimated that this will cost the revenue about $50 million dollars a year.