Private ruling: Confirmation of endorsement as a deductible gift recipient and tax charity
Published: October 2012
Ruling period: 1 July 2012 - 30 June 2013 | 1 July 2013 - 30 June 2014 | Please note that if the law changes, the protection of this advice ceases from the date of effect of the change. It is anticipated that new legislation affecting the endorsement of charities will be enacted. Therefore, the protection of this advice will cease on the date the new legislation is in effect.
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the entity entitled to be endorsed as a deductible gift recipient pursuant to section 30-125 of the Income Tax Assessment Act 1997 (ITAA 1997) being a public benevolent institution set out in item 4.1.1 of the table in subsection 30-45(1)? | A1: Yes | Q2: Is the entity entitled to be endorsed as a tax concession charity pursuant to section 50-1 of the ITAA 1997 being a public benevolent institution set out in item 1.1 of the table in section 50-5? | A2: Yes

Relevant facts and circumstances: The entity has an ABN. The entity is registered as a company limited by guarantee. The entity is currently endorsed as a public benevolent institution for both deductible gift recipient and tax concession charity status. The entity requests a private ruling on whether the current remuneration provided to its Directors and Chairperson will affects its endorsements. The main source of funding is 'fee for service' contracts with the Commonwealth Government. In order to maintain funding under its government contracts, the entity is required to establish and maintain good corporate governance. The duties of the directors include: · comply with the obligations under the Corporations Act 2001 (Cth); · visit regional and proposed centres to oversee compliance; · meet regularly (with a minimum of one meeting per month) to conduct the business of the Board of Directors; · review documentation such as reports, compliance plans and organisation performance data to be informed the entity's activities and compliance with the government contracts; · efficiently manage corporate oversight; · set strategic direction for the future the entity; and. · undertake general administration to ensure efficient management of compliance by the entity with its legal and administrative obligations In 200X, the Directors contributed a total of approximately Y hours of service. In order to recruit and retain Directors with the requisite qualifications to continue to meet those service hours and ensure that the Directors are kept whole and are not adversely affected as a result of providing services to the entity, a collective remuneration sufficient to recognise this service is reasonable. The entity submits that having regard to the nature and quantum of the services provided by the Directors as the Chairperson an the critical role these services play for the entity in obtaining and maintaining government contracts, the current remuneration is reasonable and proper remuneration for the services provided and consistent with its status as a PBI for tax concession charity and deductible gift recipient endorsement. The entity provides various employment, education and training and community services to a wide range of individuals, including those with severe social disadvantage. Some of the entity's services are not targeted to persons in need of benevolent relief. A breakdown of the cost, time and number of clients assisted were provided by the applicant. The entity has non-profit, dissolution and revocation clauses appropriate for a public benevolent institution. The entity has rules under its constitution that prevent payment to members except where they are made in good faith for reasonable and proper remuneration or in return from any services actually rendered to the company.

Relevant legislative provisions: Section 30-125 of the ITAA 1997 | Section 30-45 of the ITAA 1997 | Section 50-5 of the ITAA1997 | Section 50-110 of the ITAA 1997

Reasons for decision: Summary: The entity is presently entitled to DGR endorsement as a PBI under item 4.1.1 of the table in subsection 30-45(1) of the ITAA 1997. Therefore, the current remuneration amounts provided to the Chairperson and Directors will not affect the entity's entitlement to endorsement. | Detailed Reasoning - Detailed reasoning: The entity is currently endorsed as a public benevolent institution (PBI) for deductible gift recipient (DGR) status. However, the applicant has requested a private ruling on whether the remuneration provided to the Directors would affect the entity's endorsement. In order to address this question, we will need to address whether the entity is presently entitled to its endorsement as a DGR. An entity is entitled to be endorsed as a DGR under section 30-125 of the ITAA 1997 if it: · has an ABN; · is a PBI pursuant to item 4.1.1 of the table in subsection 30-45(1) of the ITAA 1997; and · has acceptable rules dealing with the transfer of surplus gifts and deductible contributions on winding up or revocation of endorsement (see subsection 30-125(1)(c) and subsection 30-125(6)). | Detailed Reasoning - ABN: The entity has an ABN. This requirement is satisfied. | Detailed Reasoning - Public Benevolent Institution: The characteristics of a PBI arising out of Taxation Ruling TR 2003/5 Income tax and fringe benefits tax: public benevolent institutions are: · it is set up for needs that require benevolent relief · it relieves those needs by directly providing services to people suffering from them · its dominant purpose is providing direct benevolent relief · it is carried on for the public benefit · it is non-profit, and · it is an institution. | Detailed Reasoning - Established for needs that require benevolent relief: To be a PBI, the condition or misfortune that is relieved must be such as to arouse pity or compassion in the community. Not all degrees of what might be described as distress, suffering or poverty would necessarily have such an effect. In Perpetual Trustee (at 45 CLR 236) Evatt J referred to disability or distress which 'arouses pity'. In Cairnmillar Institute McGarvie J said (at 90 ATC 4761; 21 ATR 675): 'The descriptions of persons as poor, sick, suffering, helpless, in distress, or subject to misfortune or disability are relative descriptions: a person may be moderately or severely so. I consider that the test for whether relief to such persons amounts to benevolence is whether their disability or condition is of such seriousness as will arouse community compassion and thus engender the provision of relief.' In Marriage Guidance Council of Victoria v. Commr of Pay-roll Tax (Vic.) 90 ATC 4770 at 4775; (1990) 21 ATR 1272 at 1277-1278 McGarvie J contrasted such needs with 'the stress and pain encountered in ordinary human experience associated with such things as failure, deception, loss of status and reputation, and bereavement'. Marriage guidance and counselling was not public benevolence because 'the community does not regard those who are, or have been, in marriage, successful or unsuccessful, as a general category of people with an unfortunate disability or condition arousing compassion.' McGarvie J further said of marriage guidance and counselling that while 'entirely commendable socially, this is preventative work and different from the work of a benevolent institution. It is akin to training, education or improvement'. Paragraph 44 of TR 2003/5 provides that benevolence is for people in need and not for the community generally: 44. The activities of a public benevolent institution are directed towards persons in need of relief. If an organisation exists to promote social welfare in the community generally it will lack the required direct benevolence. Examples of activities that might be directed to improving general social welfare include lobbying, advocacy, conducting research and policy studies, providing research assistance, and publishing and disseminating information and advice on social matters. To effectuate the entity's objects it provides education, training, employment, and community services to a wide range of individuals, including those with severe social disadvantage. Paragraph 34 of TR 2003/5 provides guidance on those organisations that provide 'education or training': 34. Needs that are to be met by education or training will not normally be such as to arouse compassion. This includes vocational training and apprenticeship schemes. However, there will be circumstances where education or training may be among the services provided to alleviate the effects of poverty or misfortune. For example some organisations will be public benevolent institutions where they exist to assist long-term unemployed young people cope with the problems caused by not being able to obtain employment. Such organisations encourage them to take on community service and casual employment and also offer a range of activities and training aimed at developing employment and related skills. In contrast, a training or skills organisation that does not specifically target its assistance for those suffering poverty or misfortune (e.g. through its selection processes, the types of courses it offers, the types of special assistance it provides, the targets of its advertising and promotion, and so on) would be unlikely to be a public benevolent institution. Unemployment itself is not a condition that evokes pity and compassion in the community. However, where unemployment is also linked to a degree of helplessness, then the condition may be one that would raise the issue of benevolent relief (paragraph 157 of TR 2003/5). With similar organisations that have been allowed as PBI's, the target groups have been the unemployed and the disadvantaged. The inclusion of disadvantaged groups means that not only are the people unemployed, but they are also in need of assistance by virtue of a particular characteristic. It is conceded that simply finding employment for someone who is not currently unemployed is not a benevolent activity - it is simply doing what any employment agency would do. It is considered that the entity's current services are wide ranging and will target those suffering from such needs as poverty, sickness, suffering, helplessness and distress as would arouse pity and compassion in the community. They are targeted at overcoming the immediate needs experienced by these people as well as providing jobs skills and employment opportunities to address long-term unemployment. The entity also provides a range of programs that do not specifically target people who are in need. Of relevance are paragraphs 48, 56 and 58 of TR 2003/5: Paragraph 48 of TR 2003/5 provides that a purpose of preventing distress or misfortune from arising is not on its own benevolent in the required sense. Paragraph 56 of TR 2003/5 states that it is not sufficient that an organisation's operations be directed at categories of people who could be in need of relief. It must also be for the relief of poverty, sickness, suffering, distress, misfortune, disability, destitution, or helplessness experienced by those people. The services of some organisations are too broad and not sufficiently focused on meeting such needs to be PBIs. Paragraph 58 of TR 2003/5 provides that Indigenous Australians as a class of people have been judicially and statutorily recognised as being severely disadvantaged and impoverished in Australian society and are a class which generally are, generally speaking, in need of protection and assistance ( Aboriginal Hostels v Darwin City Council (1985) 33 NTR 1) However, despite the fact that the courts have accepted Indigenous Australians as in need of special consideration and assistance, the 'usual tests' of 'benevolence' must be satisfied. | Detailed Reasoning - Relieves needs by directly providing services to people: TR 2003/5 clearly sets out the ATO's view that a PBI must provide direct aid to persons in need. Paragraph 17 states: 17. A public benevolent institution provides its aid and services directly to people in need of benevolent relief. The provision of direct relief may be achieved through the work of the employees or volunteers of the organisation itself or through its agents. Also, having regard to Australian Council for Overseas Aid v. FC of T 80 ATC 4575; 11 ATR 343, an organisation that provides services and coordination for public benevolent institutions is itself a public benevolent institution where the circumstances are the same as in that case. Therefore, PBI's are expected to provide their aid and services directly to the people in need although it can be provided by, employees, volunteers or agents. The ATO also recognises the possibility that 'direct relief' does not need to be provided by employees or volunteers of the organisation itself but though other institutions as per the circumstances in the Australian Council for Overseas Aid . The entity directly provides services to people in need of benevolent relief, these activities are not only directed at people in need but are for the relief of the needs experienced by these people. | Detailed Reasoning - Dominant purpose is providing direct benevolent relief: To be a PBI, an entity's purposes and objectives must predominantly provide direct benevolent relief. That is any activities which do not provide direct benevolent relief must be necessarily incidental or ancillary to those activities which provide the benevolent relief or minor in importance. This is further explained in paragraphs 95 and 96 of the TR 2003/5: 95. To be a public benevolent institution an organisation must be at least predominantly for the direct relief of poverty, sickness, destitution or helplessness. Other purposes or activities must be incidental to the main purpose or minor in extent and importance. 96. In contrast, the benevolent services provided by some organisations are only part of broader purposes or operations which cannot be described as public benevolence. Such broader purposes include propagating religion, providing social services or promoting ethnic community. These organisations are not public benevolent institutions. A breakdown of the cost, time and number of clients assisted were provided by the applicant. Any activities that are not considered to be providing benevolent relief should be incidental or ancillary to providing benevolent relief or minor in importance. Paragraph 108-110 of TR 2003/5 discusses the meaning of 'ancillary' or 'non-benevolent' activities: 108. Considered in isolation, some of an organisation's objects might not be characterised as promoting relief. However, where they are merely incidental to the benevolent purpose, or the activities giving effect to them are minor, the organisation may nonetheless be a public benevolent institution. 109. In Maclean Shire Council v. Nungera Co-operative Society Ltd the object of the Society was to relieve the poverty and helplessness of needy members of the Aboriginal community. This was to be done though three means: improving housing, improving vocational skills and employment prospects, and arresting 'social disintegration by strengthening and fostering….identity and culture…' It was argued that the third means disqualified the Society from being a public benevolent institution. The Court rejected this view. The object was the relief of poverty and helplessness, and the fostering of culture only a means. 'The Society is not authorized to pursue these activities for their own sake as independent objects or purposes but solely as an ancillary or dependent means. 110. Of course, if the organisation was in fact chiefly and independently engaged in cultural pursuits, it would be necessary whether the organisation was truly for the provision of benevolent relief. Having an expression from the Perpetual Trustee case- such as the relief of poverty, sickness, destitution or helplessness- as the primary object will not on its own make an organisation a public benevolent institution. The secondary objects and the actual operations must also be considered. Paragraph 117 and 118 of TR 2003/5 considers 'incidental' activities: 117. Some of a public benevolent institution's activities might not, if viewed in isolation, be characterised as benevolent operations. …. Where these activities are incidental or ancillary to the provision of direct benevolent services they will not detract from public benevolent institution status. 118. However, where they are or become dominant, the organisation will not be a public benevolent institution…. Paragraphs 119 and 120 of TR 2003/05 consider 'minor non-benevolent' activities: 119. Some organisations predominantly provide benevolent services but also perform non-benevolent activities. They will still be public benevolent institutions if the other activities are minor in extent and importance. 120. For example in Cairnmillar Institute , the Institute predominantly provided psychotherapeutic treatment that constituted public benevolence. However, it also provided marriage counselling at two community centres on one day a week. The counselling was not itself public benevolence. In finding that the Institute was a public benevolent institution McGarvie J said at 90 ATC 4767; 21 ATR 683 that 'on the whole scale of the institute's activities, the operation of the two centres is a relatively minor activity'. Those services that are considered not to provide direct benevolent relief to people in need are incidental or ancillary to providing direct benevolent relief or are minor is importance. Further, these non-benevolent activities are not dominant activities. Paragraph 121 of TR 2003/5 provides that a pubic benevolent institution operates to get its aid and services to those in need. The policies and procedures that the organisation adopts to target its services for them will help indicate whether it is predominantly for public benevolence. The entity has appropriate supporting documents which provide evidence that the entity's target groups are people who are in need of benevolent relief. Therefore, it is considered that the entity has a predominant purpose of providing direct benevolent relief to people in need. However, if the entity's non-benevolent activities or ancillary activities became dominant, the entity would no longer have a predominant purpose of providing direct benevolent relief to people in need. | Detailed Reasoning - Established for the benefit of a section or class of the public: Paragraph 18 of TR 2003/5, provides the ATO's view on 'public': 18. A public benevolent institution is organised to confer benevolence upon an appreciable needy class in the community. Organisations are not public in the required sense where: · they are carried on for the profit or gain of particular persons including the organisation's individual members; · benefits are not provided to the public or a section of it, but rather on such grounds as personal relations, membership of a voluntary association, or an employment relationship; or · benefits are provided on a discriminatory basis, not primarily because of need. The entity has been established to provide education, training and employment and other community services to people in Australia. It is accepted that the entity is for the public benefit and it does not limit the provision of its services based on family ties, employment or membership of a particular organisation. It is considered that the entity is established for the public benefit. | Detailed Reasoning - Non-Profit: According to paragraph 77 of TR 2003/5 a PBI is not carried on for the purposes of profit or gain to particular persons including the individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. Page 72 of the Income tax guide for non-profit organisations (NAT 7967-03.2007) states that: A non-profit company can make payments to its members as bona fide compensation for services they have provided to it, and as reasonable compensation for expenses incurred on behalf of the organisation. The term 'reasonable compensation' (i.e. remuneration) is not defined in taxation law. Paragraph 78 of TR 2003/5 states that we accept the provision of fair and reasonable remuneration of members of non-profit organisations: We will accept an organisation as being non-profit where, by its constituent document or by operation of law (for example, a statute governing the organisation), it is prevented from distributing its profits or assets among members while it is operating and on its winding-up. The organisation's actions must, of course, be consistent with the prohibition. Subject to the legal and other requirements for particular organisations, examples of suitable clauses in constituent documents are: | Detailed Reasoning - Non-profit clause: The assets and income of the organisation shall be applied solely in furtherance of its above mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation. This approach is reiterated in footnote 207 to paragraph 258 of Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities which states; Bona fide remuneration for services provided (say, as an employee, contractor, office-holder or consultant) would not, of course, be inconsistent with a charitable purpose... Whether a given level of remuneration is bona fide in the sense that it is a genuine 'arm's length' payment for services rendered, will depend upon a number of factors, for example: | Detailed Reasoning - Entity-specific factors: Size, nature and complexity of the entity; Complexity of operations - lines of business, geographic spread of operations; Structure and responsibilities of board including the number of board committees; and Risks and challenges of the entity's activities. | Detailed Reasoning - Director-specific factors: Qualifications and experience; Time commitment required; General performance and involvement in decision making; and Additional responsibilities e.g. chair of a committee and other special duties where applicable. | Detailed Reasoning - External market factors: Business and economic conditions; and Supply and demand - the shrinking pool of available directors An organisation should be able to show that due diligence and governance were undertaken, taking into account factors such as those above, in determining the remuneration levels of directors. In supporting the remuneration to be paid to its Chairperson and Directors, the entity has provided documentation identifying: Hours of service required from the Directors and Chairperson, (Y hours in 200X) Duties and responsibilities they are required to undertake: · comply with the obligations under the Corporations Act 2001 (Cth); · visit regional and proposed centres to oversee compliance; · meet regularly (with a minimum of one meeting per month) to conduct the business of the Board of Directors; · review documentation such as reports, compliance plans and organisation performance data to be informed the entity's activities and compliance with the government contracts; · efficiently manage corporate oversight; · set strategic direction for the future the entity; and. · undertake general administration to ensure efficient management of compliance by the entity with its legal and administrative obligations | Detailed Reasoning - The value the entity receives from these services: Rules under the constitution of the entity, preventing payments to members except where they are made in good faith for the reasonable and proper remuneration or in return for any services actually rendered The documentation provided by the entity, when considered against the factors listed above supports a conclusion that based on the entity's size and structure, the commitment and responsibilities required of the Directors and Chairperson in relation to the demands of funding bodies, and the impact of supply and demand pressures associated with the market availability of such persons with the necessary skills and expertise, due diligence and governance has been undertaken in determining the current remuneration amounts. There is no indication the entity has an independent non-charitable purpose of providing private benefits or that the proposed remuneration is excessive. As the information presented by the entity indicates that the current remuneration to be paid to its Chairperson and Directors falls under the term 'reasonable compensation' (i.e. remuneration) the entity would continue to satisfy the non-profit requirement. Accordingly the current remuneration will not affect the entity's status as a PBI endorsed as a DGR. | Detailed Reasoning - Institution: Paragraphs 91 of TR 2003/5 provide the characteristics of an 'institution': 91. No particular structure is prescribed for public benevolent institutions. An institution has been described as the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle ( Mayor of Manchester v. McAdam (1896) 3 TC 491 at 497; [1896] AC 500 at 511 per Lord Macnaghten). Some institutions take the form of corporations limited by guarantee, unincorporated associations or charitable trusts. Incorporation is not sufficient on its own: Trustees of the Allport Bequest . An institution may be created by will: Lemm at 66 CLR 409 410 per Williams J. Whether a particular entity is an institution is indicated by a range of factors including activities, size, permanence and recognition. All relevant factors need to be considered and whether an institution exists will depend on its particular facts. Institutions accepted by the High Court in this and related contexts have included a Boys Brigade, a home for aged women, a university and a university college, a publisher of law reports, a YMCA, and an association of surgeons. The word institution has a meaning greater than a structure controlled and operated by family members and friends: Pamas Foundation (Inc) v. DFC of T 92 ATC 4161 at 4168; (1992) 23 ATR 189 at 197. Whether an entity is an institution is determined by looking at the whole of the entity's circumstance. Relevant factors include an entity's activities, size, permanence and recognition. In consideration of the above factors, it is evident that the entity demonstrates that it is an institution. It is registered as a company limited by guarantee that has been established to provide education, training, employment and other community services. The entity is instituted for the objects in its constitution and is considered to be greater then a structure controlled and operated by family members and friends. Therefore, the entity is an institution. (c) Acceptable rules dealing with the transfer of surplus gifts and deductible contributions on winding up or revocation of endorsement Subsection 30-125(6) of the ITAA 1997 provides that endorsed DGRs are required to transfer all remaining gifts, deductible contributions and money received in relation to such gifts and contributions to another deductible fund, authority or institution on winding up or on revocation of endorsement. The entity has appropriate rules in its constitution that require the transfer of surplus gifts and deductible contributions on the winding up and revocation of endorsement. Therefore, it satisfies the requirement under subsection 30-125(6) of the ITAA 1997. | Detailed Reasoning - Conclusion: The entity is presently entitled to DGR endorsement as a PBI under item 4.1.1 of the table in subsection 30-45(1) of the ITAA 1997. Therefore, the current remuneration amounts provided to the Chairperson and Directors will not affect the entity's entitlement to endorsement. | Summary: The entity is presently entitled to its TCC endorsement as a PBI under item 1.1 of the table in section 50-5 of the ITAA 1997. On this basis, the current remuneration provided to its Directors and Chairperson will not affect its endorsement. Therefore, the ordinary and statutory income of the entity will continue to be exempt from income tax under section 50-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The entity is currently endorsed as a PBI for tax concession charity status. However, the applicant has requested a private ruling on whether the remuneration to be provided to the Directors of the entity would affect the organisation's endorsement. In order to address this question, we will need to address whether the entity is presently entitled to its endorsement as a tax concession charity. The entity is entitled to be endorsed as exempt from income tax under section 50-110 of the ITAA 1997 if it: · has an ABN; · satisfies the requirements of item 1.1 of the table in section 50-5 of the ITAA 1997; and · meets the special conditions under that item. | Detailed Reasoning - ABN: The entity has an ABN. This requirement is satisfied. | Detailed Reasoning - Public benevolent institution: The characteristics of a PBI arising out of TR 2003/5 are: · it is set up for needs that require benevolent relief; · it relieves those needs by directly providing services to people suffering from them; · its dominant purpose is providing direct benevolent relief; · it is carried on for the public benefit; · it is non-profit, and · it is an institution. The above characteristics were examined in question 1 and it was found that the entity: · is set up for needs that require benevolent relief; · relieves those needs by directly provides services to people suffering from them; · has a dominant purpose of providing direct benevolent relief; · is carried on for the public benefit; · is non-profit; and · it is an institution Therefore, the entity satisfies the characteristics of a PBI. The current remuneration paid to its Directors and Chairperson will not effect the entity's endorsement as a PBI. | Detailed Reasoning - Special conditions: Under section 50-50 of the ITAA 1997, a charitable institution is not exempt from income tax unless the entity satisfies one of the following: · Has a physical presence in Australia and to that extent incurs its expenditure and pursues its objective principally in Australia, or · Is a deductible gift recipient, or · Is prescribed by name in the income tax regulations. The entity is currently endorsed as a deductible gift recipient. Therefore, the entity satisfies the special conditions in section 50-50 of the ITAA 1997. | Detailed Reasoning - Conclusion: The entity is presently entitled to its endorsement as public benevolent institution under item 1.1 of the table in section 50-5 of the ITAA 1997. Therefore, the current remuneration amounts provided to the Directors of the entity, will not affect its endorsement as a tax concession charity. The total ordinary and statutory income of the entity is therefore exempt from income tax.

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