House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 2 - Transitional and consequential amendments

2.1 This Chapter explains the amendments to Commonwealth legislation by the Charities (Consequential Amendments and Transitional Provisions) Bill 2013 as a consequence of the introduction of a statutory definition of charity in the Charities Bill 2013.

2.2 This Chapter covers:

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how the terms charity and charitable purpose have application to Commonwealth legislation;

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the grandfathering of existing charitable purposes, so these purposes remain charitable after the commencement of this legislation;

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the repealing of existing legislation addressing some aspects of charitable purpose that has been included in the Charities Bill 2013;

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changes required to give effect to the expanded number of categories of charitable purpose, including transitional arrangements for streamlining registration of the new subtypes of entities with the Australian Charities and Not-for-profits Commission (ACNC); and

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consequential changes as a result of the amendments in the Charities Bill 2013 to enable charities to provide funds to entities that are connected to government without losing charitable status.

2.3 References in this Chapter to the 'Consequential Amendments Bill' are references to the Charities (Consequential Amendments and Transitional Provisions) Bill 2013.

Context of amendments

2.4 The Charities Bill 2013 defines charity and charitable purpose for the purposes of Commonwealth laws. Consequential amendments are needed to Commonwealth legislation that refers to these concepts in different terms.

Summary of new law

2.5 As a result of the introduction of a definition of charity and charitable purpose in the Charities Bill 2013, a number of consequential amendments to Commonwealth legislation and transitional arrangements are required.

2.6 The key features of the Consequential Amendments Bill are to:

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include the terms charity and charitable purpose in the Acts Interpretation Act 1901 to ensure that they have a consistent meaning for all Commonwealth law purposes;

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repeal the Extension of Charitable Purpose Act 2004, recognising that the Charities Bill 2013 provides that charitable purpose includes child care and open and non-discriminatory self-help groups and closed or contemplative religious orders;

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amend the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act) to reflect the new characterisation of charitable purpose that has been included in the Charities Bill 2013 resulting in changes to applications for registration and sub-types of charities that are registered;

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repeal the income tax exemption available to non-charitable public and private ancillary funds that provide money, property and benefits to deductible gift recipients that are income tax exempt. This recognises that the Charities Bill 2013 extends charitable purposes to funds that provide money, property and benefits to entities that would be charitable if they were not government entities; and

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amend legislation to ensure that the terms 'charity' and 'charitable purpose' are used consistently across Commonwealth laws.

Detailed explanation of new law

Definition of charity and charitable purpose

2.7 The Consequential Amendments Bill ensures that the definition of charity and charitable purpose applies consistently across Commonwealth legislation. This is achieved by amending the Acts Interpretation Act 1901 and other legislation to provide that references in Commonwealth Acts to charitable, charity or charitable purpose take their meaning from the Charities Bill 2013 unless the contrary intention is specifically provided for in Commonwealth legislation. [Schedule 1, items 1, 2 to 4, 14, 38 and 39 of the Consequential Amendments Bill]

2.8 The Criminal Code Act 1995 is an example of where the legislation has a contrary intention, so this legislation is amended to make it clear that the definitions of charitable purpose in the Charities Bill 2013 do not apply to that legislation. [Schedule 1, items 10 to 13 of the Consequential Amendments Bill]

Previous legislation - charitable purposes

2.9 The Consequential Amendments Bill repeals the Extension of Charitable Purpose Act 2004 . This Act provided a statutory extension to the common law meaning of 'charity' for the purposes of all Commonwealth legislation. [Schedule 1, item 43 of the Consequential Amendments Bill]

2.10 The Extension of Charitable Purpose Act 2004 ensured that:

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organisations providing child care to the public on a not-for-profit basis;

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self-help bodies with open and non-discriminatory membership; and

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closed or contemplative religious orders that offer prayerful intervention at the request of the public,

were treated as charities for the purposes of Commonwealth legislation.

2.11 The repeal of the Extension of Charitable Purpose Act 2004 allows the Charities Bill 2013 to deal comprehensively with the meaning of charity and charitable purpose. Accordingly, the Charities Bill 2013 ensures that public not-for-profit child care, open and non-discriminatory self-bodies help bodies and closed or contemplative religious orders offering prayerful intervention at the request of the public continue to be charitable.

2.12 The national rental affordability scheme has not been included as a charitable purpose in the Charities Bill 2013. This reflects that, following the decision of the High Court of Australia in Federal Commissioner of Taxation v Word Investments Ltd (2008) 236 CLR 204, entities can be charitable despite undertaking commercial activities provided the activities are in aid of, or further their charitable purpose.

Grandfathering of charitable purposes

2.13 Where an entity has a purpose which, on the day before the commencement day, was a charitable purpose, and to which paragraphs 12(1)(a) to (j) and (l) of the Charities Bill 2013 do not apply, that purpose is treated as being a purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in paragraphs (a) to (j) of that definition. [Schedule 2, item 7 of the Consequential Amendments Bill]

2.14 This provision has the effect of grandfathering existing charitable purposes so that they remain charitable purposes after the commencement of the Charities Bill 2013.

Registration of charity subtypes

Expanded categories of subtypes of entity

2.15 The Charities Bill 2013 expands the number of categories of charitable purpose from four to 12. Public benevolent institutions and health promotion institutions also continue to qualify for a separate subtype of entity registration.

2.16 As a result of the expanded number of categories of charitable purposes, amendments are made to the ACNC Act to reflect that there are 14 subtypes of charity, rather than the existing six categories. [Schedule 1, item 7 of the Consequential Amendments Bill]

2.17 Transitional provisions are also included in the Consequential Amendments Bill to address the need to revise existing subtypes of charity registration and to deal with applications for registration from the commencement of the legislation to the new subtypes of charity registration with the ACNC.

2.18 The transitional arrangements apply to entities that on the day before the legislation commences:

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are registered with the ACNC as one or more of the existing six subtypes of charity; or

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have outstanding applications for registration with the ACNC as one or more of the existing six subtypes of charity.

Registration - old subtypes equivalent to new subtypes

2.19 There are five existing subtypes of charity that are treated as having a corresponding new subtype of charity from the commencement of the legislation. These are:

[Schedule 2, subitem 2(3) of the Consequential Amendments Bill]

2.20 The transitional amendments ensure that on the day before the commencement of the legislation, entities with one or more of the above five existing subtypes of charity registration, and applications for such registration, are automatically transitioned into the new category of subtype. [Schedule 2, subitems 2(1) and (2) of the Consequential Amendments Bill]

Registration -old subtypes possibly equivalent to new subtypes

2.21 In contrast, entities that are registered or have an application for registration pending on the day before the commencement of the legislation for a subtype of charity for the relief of poverty, sickness or the needs of the aged, or other purposes beneficial to the community may qualify under a number of different new categories of charitable purpose.

2.22 Accordingly the transitional provisions provide for registration and applications for registration for the relief of poverty, sickness or the needs of the aged, or other purposes beneficial to the community to correspond to the following new subtype of entity registration on the commencement day:

[Schedule 2, item 3 of the Consequential Amendments Bill]

2.23 Entities that on the day before the legislation commences:

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are registered or have applied for subtype registration that has not yet been determined by the ACNC; or

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are registered or have applied for registration as the existing subtypes of the relief of poverty, sickness or the needs of the aged and, other purposes beneficial to the community;

may advise the ACNC which new category of subtype of charity that they should be registered under. [Schedule 2, subitems 3(1) and (2)]

2.24 Entities have 18 months from the commencement of the legislation to make a request in the approved form to the Commissioner of the ACNC under the transitional provision. [Schedule 2, subitem 3(4) of the Consequential Amendments Bill]

2.25 In addition, an entity can revise an application for registration or seek registration under a different subtype of charity at any time. The purpose of the transitional provisions is to streamline the transition of existing subtype registrations and outstanding applications for subtype registrations on the day before commencement of the legislation.

2.26 The Consequential Amendments Bill contains a dictionary of terms to ensure that terms used in the transitional provisions in the Bill are consistent with the ACNC Act. These include:

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adopting the abbreviation of ACNC Act;

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adopting the meaning of approved form from the ACNC Act;

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clarifying the meaning of commencement as the day that the transitional provisions commence; and

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inserting a definition of endorsed as a contributing fund.

[Schedule 2, item 1 of the Consequential Amendments Bill]

Income tax exemption: private and public ancillary funds

2.27 Previously, a specific income tax exemption was provided to public and private ancillary funds to allow them to contribute to deductible gift recipients whether or not they were charitable, for example, entities that would be charities if they were not government entities.

2.28 This specific income tax exemption was introduced to address a court decision, Central Bayside , which clarified that a charity could not give to charity-like government entities without affecting its status as a charity.

2.29 The Charities Bill 2013 extends charitable status to ancillary funds where they contribute to an entity that would be charitable if it were not a government entity. This enables such entities to retain their charitable status and therefore removes the need for a specific income tax exemption to be available to overcome the Court decision.

2.30 This treatment is similar to section 7K of the Charities Act 1978 (Vic) which provides '(1) The powers of the trustees of a charitable trust include a power to provide money, property or benefits to or for an eligible entity, or for the establishment of an eligible entity, that, but for a connection to government, would be a charity to or for which, or for the establishment of which, money, property or benefits could be provided in accordance with the trust instrument'.

2.31 In harmonising the treatment of these funds, new funds established after the commencement of this legislation in States with more flexible rules than the Victorian model may need to change the entities to which they contribute to avoid losing income tax exemption.

2.32 The income tax exemption in item 4.1 in section 50-20 of the Income Tax Assessment Act 1997 (ITAA 1997) that applies to non-charitable public and private ancillary funds which provide money, property and benefits to income tax exempt deductible gift recipients is repealed. Existing funds falling under item 4.1 will benefit from the grandfathering provision discussed at paragraph 2.34 below.

2.33 A number of consequential changes are required to the Income Tax Assessment Act 1936 and the ITAA 1997 to reflect this change. [Schedule 1, items 19 to 23, and items 26 to 35 of the Consequential Amendments Bill]

Transitional arrangements for endorsement of funds that contribute to charity-like government entities

2.34 The Bill ensures that existing item 4.1 type income tax exempt funds that are endorsed by the Commissioner of Taxation are treated as registered charities following these amendments. [Schedule 2, item 4 of the Consequential Amendments Bill]

2.35 These income tax exempt funds are provided with an opt out provision, should they not wish to be endorsed as a registered charity. [Schedule 2, item 5 of the Consequential Amendments Bill]

Grandfathering of poor relations' and poor employees' trusts

2.36 As discussed at paragraph 1.76 above, gifts or trusts that provide benefits to a limited range of people that are closely connected, whether because of family ties (poor relations) or a shared employer (poor employees) may have been charitable under the common law.

2.37 These trusts, which may continue indefinitely, are widely considered anomalous in contemporary Australia. Such a purpose is no longer likely to satisfy a public benefit requirement. However, to reflect that these trusts may be difficult to change, the Consequential Amendments Bill will 'grandfather' these existing trusts, so that where a trust has a purpose of relieving poverty, and these trusts were established before the commencement of the Charities Bill 2013 and were registered with the ACNC, this purpose will be treated as being for the public benefit following the commencement of the Charities Bill 2013. [Schedule 2, item 6 of the Consequential Amendments Bill]

2.38 Minor changes are made to the wording in Division 30 of the ITAA 1997 relating to public funds established and maintained for the purpose of relieving the necessitous circumstances of one or more individuals who are in Australia. The effect of this general DGR category item is unchanged. [Schedule 1, items 24 and 25]

Minor consequential changes

2.39 A number of minor changes are made to the A New Tax System (Goods and Services Tax) Act 1999 , the ACNC Act, the Fringe Benefits Tax Assessment Act 1986 , the ITAA 1997, and the Social Security Act 1991 to recognise that:

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the existing four categories of charitable purpose have been expanded to 12 categories of charitable purpose; and

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the relief of poverty, sickness or the needs of the aged now forms part of the charitable purpose of advancing social or public welfare.

[Schedule 1, items 5, 6, 8, 9, 15 to 18, 36, 37 and 40 to 42 of the Consequential Amendments Bill]

2.40 Amendments are made to the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Act 2013 if enacted. Further information about the transitional arrangements is below. [Schedule 1, items 45 to 47 of the Consequential Amendments Bill]

Cy pres and cy pres-like schemes

2.41 The Charities Bill 2013 allows cy pres and other similar schemes to be taken account of in determining charity status under Commonwealth law. The Consequential Amendments Bill contains an amendment which extends that treatment to the ACNC Act. This ensures that, consistent with the Charities Bill 2013, if a cy pres or similar scheme applies:

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non-charitable purposes of a mixed purpose trust are disregarded in determining if it is charitable; and

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the Charities Bill 2013 and the ACNC Act apply consistently to such trusts.

[Schedule 1, item 7 of the Consequential Amendments Bill, subsection 25-5(6)]

Application and transitional provisions

2.42 The Consequential Amendments Bill generally applies from 1 January 2014, being the date that the Charities Bill 2013 commences. [Clause 2 of the Consequential Amendments Bill]

2.43 However, the inclusion of the definition of not-for-profit entity, which will be included in the income tax law by the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 is contingent on the commencement of the Charities Bill 2013 and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012. If the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 does not commence then the meaning of not-for-profit entity takes its ordinary meaning. [Schedule 1, item 44 of the Consequential Amendments Bill]

2.44 Similarly, consequential amendments in the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 are redundant if amendments in the Consequential Amendments Bill have already taken effect. This reflects that both Bills make conflicting amendments to the same provisions.

2.45 Accordingly, the amendments to section 50-20 and subsection 50-110(5) of the ITAA 1997 in the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 do not take effect if the Consequential Amendments Bill commences prior to that Bill.