House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 3 New class of deductible gift recipients

Outline of chapter

3.1 Schedule 3 to the Bill creates a new class of community charities that may apply for DGR endorsement by the Commissioner. The class consists of community charity trusts and community charity corporations.

Context of amendments

3.2 In the 2023-24 Budget, the Government reaffirmed its earlier decision to facilitate DGR status for up to 28 entities affiliated with the peak body Community Foundations Australia. The entities are, or will be, structured as either trusts or incorporated entities.

3.3 The income tax law allows taxpayers who make gifts of $2 or more to DGRs to claim tax deductions for those gifts, subject to any conditions applying to the DGR and/or the gift. An entity may apply, under Division 426 in Schedule 1 to the TAA, to the Commissioner for endorsement as a DGR. The criteria for endorsement, set out in section 30-125 of the ITAA 1997, include the requirement that the entity be covered by one of the DGR categories in Subdivision 30-B of the ITAA 1997, or be established to donate funds to an entity covered by one of those categories.

3.4 Separate to the endorsement process, an entity is a DGR if it is listed by name in Subdivision 30-B of the ITAA 1997. The decision to list an entity by name is made in exceptional circumstances by the Government. Generally, a specific listing is accorded if the entity does not easily fit within any of the existing DGR categories, but has a single charitable purpose that closely parallels one of those categories. Entities may be specifically listed for a limited period of time or in perpetuity (or until the specific listing is repealed). A listing of 3 to 5 years is now the default.

3.5 The specific listing regime has a low level of regulatory oversight and lacks compliance infrastructure. The Commissioner's powers in relation to specifically listed DGRs are limited to seeking information and conducting audits.

3.6 Community charity trusts and community charity corporations do not fit neatly into any of the existing DGR categories in the ITAA 1997. A particular charity's activities may fall under several of those categories; some activities may extend beyond them. This would create integrity risks were this class of entity to attain DGR status through specific listing.

3.7 By contrast, the endorsement regime empowers the Commissioner to revoke an entity's endorsement on grounds including failure to comply with its conditions of entitlement. Administrative penalties may also be imposed.

3.8 In view of the above considerations, the amendments in Schedule 3 to the Bill create a hybrid framework for DGR endorsement for community charities. This involves specification by class in the ITAA 1997, specification by name in a ministerial declaration, and entitlement to endorsement by the Commissioner, subject to certain conditions, including compliance with the community charity guidelines.

Summary of new law

Income Tax Assessment Act 1997

3.9 Part 1 of Schedule 3 to the Bill specifies the class of community charities in Subdivision 30-B of the ITAA 1997. It inserts listing items in respect of community charity trusts and community charity corporations. These new listings do not confer DGR status in and of themselves. Rather, they allow entities in the specified class to apply for DGR endorsement under Division 426 in Schedule 1 to the TAA.

3.10 The new listing items apply only to community charities that meet certain conditions, as discussed below. The conditions relate to entity purposes, registration under the Australian Charities and Not-for-profits Commission Act 2012, financial obligations set out in entity governing rules, and compliance with the community charity guidelines.

Taxation Administration Act 1953

3.11 Part 2 of Schedule 3 to the Bill amends Subdivision 426-D in Schedule 1 to the TAA in order to:

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empower the Minister to make a declaration setting out community charity trusts by name;

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create a ministerial obligation to make guidelines;

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require the Australian Business Register to show community charity trust status;

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impose civil liability for misrepresenting endorsement status;

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empower the Commissioner to suspend, remove and replace trustees of community charity trusts; and

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limit certain transfers between community charity trusts and other entities.

3.12 Part 2 of Schedule 3 to the Bill also creates a new Subdivision in Schedule 1 to the TAA in order to achieve the same suite of objectives listed above in relation to community charity corporations (other than the suspension, removal and replacement of trustees, which is not relevant to corporations).

Detailed explanation of new law

A new class of deductible gift recipients

3.13 The amendments create a new framework to facilitate community charities achieving DGR status, subject to appropriate oversight and enforcement powers. Although this framework will currently only apply to a small number of named community charities, additional organisations could be brought within scope in future by being specified in ministerial declarations as candidates for endorsement.

Income Tax Assessment Act 1997

3.14 Section 30-105 of the ITAA 1997 is amended by inserting a new table that sets out two new categories of miscellaneous recipients of tax deductible gifts. The categories cover the subset of community charity trusts and community charity corporations that meet new requirements inserted in other than a community charity Subdivision 30-B of the ITAA 1997. An additional special condition set out in the new table, which must be met by the relevant community charities before donors may claim tax deductions, is registration as a charity under the Australian Charities and Not-for-profits Commission Act 2012. [Schedule 3, item 1, table in subsection 30-105(1) of the ITAA 1997]

Requirements for community charities

3.15 A new provision added to Subdivision 30-B of the ITAA 1997 in tandem with the listing items requires community charities to have certain characteristics. A community charity trust must be established and maintained under a will or instrument of trust for specified allowed purposes, and for no other purposes. A community charity corporation must be operated only for the same specified purposes.

3.16 The specified mandatory purposes are:

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providing money, property or benefits to a DGR (other than a community charity) for any of the purposes for which the DGR may receive such gifts; and

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engaging in the principal activity of a DGR (other than a specifically listed DGR or a community charity), or pursuing the principal purpose of such a DGR.

[Schedule 3, item 2, subsections 30-110(3) and (4) of the ITAA 1997]

The second requirement may be met by funding another organisation, whether or not it has DGR status, to assist the community charity to engage in its own activities or pursue its purposes. However, any such funding must be for a purpose consistent with a general DGR category. The community charity guidelines may impose requirements on distributions to entities without DGR status.

3.17 In addition to the two mandatory purposes, community charities may have an optional purpose of establishing one or more DGR entities, other than community charities. [Schedule 3, item 2, section 30-110(5) of the ITAA 1997]

Endorsement as a DGR

3.18 A community charity will be entitled to endorsement as a DGR, upon application to the Commissioner, if it:

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has an ABN; and

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is described in item 1 of the table in section 30-15 of the ITAA 1997, and is not described by name in Subdivision 30-B; and

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meets the relevant conditions identified in the column headed "special conditions" of table item 1 in section 30-15; and

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has governing rules requiring it, in the event of being wound up, to transfer any surplus assets, gifts, contributions or associated monies to another entity with current DGR status; and

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complies with the rules in the community charity guidelines (so long as all the trustees/directors of the charity also comply with those rules).

[Schedule 3, item 3, subsection 30-125(1) of the ITAA 1997]

Definitions

3.19 To facilitate the expansion of the DGR regime to community charities, Schedule 3 to the Bill adds the following definitions to the ITAA 1997.

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'ancillary or community charity trust fund' means a public ancillary fund, a private ancillary fund or a community charity trust. Note that this term is merely an internal label designed to extend existing references to 'the fund' in the ITAA 1997 and TAA to community charity trusts. It is not intended to suggest that a community charity trust has the characteristics of a fund. Nor will the label affect the existing ancillary fund regime in any way.

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'applicable trust fund guidelines' means the relevant ministerial guidelines in respect of public or private ancillary funds or community charity trusts.

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'community charity corporation' has the meaning given by section 426-180 in Schedule 1 to the TAA. This definition is outlined below in paragraph 3.26.

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'community charity corporation guidelines' has the meaning given by section 426-185 in Schedule 1 to the TAA. This new section in Schedule 1 to the TAA requires the Minister to create guidelines for community charities, and is explained further in paragraphs 3.28 – 3.30.

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'community charity trust' has the meaning given by section 426-117 in Schedule 1 to the TAA. This definition is explained in paragraph 3.23.

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'community charity trust guidelines' has the meaning given by section 426-118 in Schedule 1 to the TAA. This new section in Schedule 1 to the TAA requires the Minister to create guidelines for community charities, and is explained in further detail at paragraphs 3.28 – 3.30.

[Schedule 3, item 5, subsection 995-1(1) of the ITAA 1997]

3.20 References to community charity trusts and community charity corporations are added to the index to Division 30, which indicates where to find the new table specifying the class of community charities. [Schedule 3, item 4, section 30-315 of the ITAA 1997]

Taxation Administration Act 1953

3.21 Schedule 3 to the Bill amends Subdivision 426-D in Schedule 1 to the TAA to extend its application to community charity trusts, as newly defined in that Subdivision. The Subdivision's governance of ancillary funds will continue unchanged. Its operation in respect of community charity trusts is explained below.

3.22 Also as explained below, a new Subdivision 426-E in Schedule 1 to the TAA is created in respect of community charity corporations.

Community charity trusts

3.23 A 'community charity trust' is defined in Schedule 1 to the TAA as a trust:

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that is specified in a declaration by the Minister that is in force; and

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each trustee of which is a constitutional corporation, has agreed to comply with the rules in the community charity guidelines, and has not revoked that agreement.

[Schedule 3, item 11, subsections 426-117(1) and (2) in Schedule 1 to the TAA]

3.24 The ministerial declaration specifying community charity trusts is a legislative instrument and subject to disallowance by Parliament. [Schedule 3, item 11, subsection 426-117(3) in Schedule 1 to the TAA]

3.25 It is appropriate to delegate this power to specify community charities because:

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the declaration is only the first step in the process of being endorsed as a DGR; and

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the declaration will be subject to Parliamentary oversight; and

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the ITAA 1997 and TAA impose robust requirements on entities seeking to qualify as community charity trusts and community charity corporations, and on endorsed community charities' continuing entitlement to that status.

Community charity corporations

3.26 A 'community charity corporation' is defined in Schedule 1 to the TAA as a company:

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that is specified in a declaration by the Minister that is in force; and

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that is either a constitutional corporation or a body corporate that is not a constitutional corporation; and

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each director of which has agreed to comply with the rules in the community charity guidelines, and has not revoked that agreement.

[Schedule 3, item 34, subsections 426-180(1) and (2) in Schedule 1 to the TAA]

3.27 As with community charity trusts, the Minister is empowered to specify a company by declaration. The declaration is a legislative instrument and subject to disallowance by Parliament. It is appropriate to delegate this power for the reasons set out in paragraph 3.25 above. [Schedule 3, item 34, subsection 426-180(3) in Schedule 1 to the TAA]

Ministerial obligation to make guidelines for community charity trusts and community charity corporations

3.28 The activity profile of the entities covered by the new class of DGRs makes it appropriate to formulate mandatory guidelines. These will be modelled on the existing guidelines governing ancillary funds. The guidelines will set out rules that community charities and their trustees or directors must comply with if community charities are to be, or remain, endorsed as DGRs. The guidelines will also include the amount of the administrative penalty, or a method for how to work out the amount of the administrative penalty, imposed by section 426-120 in Schedule 1 to the TAA and the new analogous provision relating to community charity corporations. The penalty relates to misrepresentations about endorsement status, and is further discussed below. [Schedule 3, items 11 and 34, sections 426-118 and 426-185 in Schedule 1 to the TAA]

3.29 The guidelines may specify different penalties or methods for different infringing behaviours. It is appropriate for the guidelines to set out penalty amounts, as this allows for them to be customised to the nature and size of the breach, as well as taking account of the trustee or director's level of culpability. This level of specificity is not present in, or appropriate for, the primary legislation, which sets out an overarching narrative in the context of which detailed obligations would be out of place and difficult to comprehend. An additional reason for including penalty amounts in the guidelines rather than the primary legislation is that the former may be more readily updated to respond to new factual scenarios and ensure recipients of DGR status are being satisfactorily regulated.

3.30 The guidelines may also specify requirements about the structure and governing rules of a community charity. This ensures community charities have robust governance arrangements, are properly accountable and act in a manner consistent with public expectations of philanthropic organisations. These requirements may also need updating to reflect changing circumstances and ensure ongoing appropriate regulation. Hence, it is preferable to locate them in the guidelines rather than in primary legislation.

Administrative penalties

3.31 As outlined above, administrative penalties will apply to trustees of community charity trusts and directors of community charity corporations. This is achieved through amending the existing administrative penalties provision for ancillary funds and their trustees in Division 426 in Schedule 1 to the TAA, and creating a similar provision in respect of community charity corporations and their directors.

3.32 Neither the trustees of a community charity trust, nor any directors of such trustees, may hold out the trust as being endorsed, entitled to be endorsed or entitled to remain endorsed as a DGR if there is no factual basis to do so. Trustees and their directors will be jointly and severally liable to an administrative penalty if the trust is held out in this manner, and any portion of the penalty cannot reasonably be recovered from the trustees. As corporate trustees of community charity trusts may not have much capital, it is necessary to also impose the penalty on their directors to ensure compliance with this requirement.

3.33 Neither a community charity corporation nor any of its directors may hold out the corporation as being endorsed, entitled to remain endorsed, or endorsed at a particular point in time as a DGR, if there is no factual basis to do so. Liability for such misrepresentations rests with the directors alone, as it is undesirable to impose a financial impost on the community charity corporation itself.

3.34 Exposure to liability promotes an appropriate level of accountability by directors for decisions affecting the community charity in question.

3.35 A director may an administrative penalty in certain circumstances avoid. These circumstances are that:

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the director can demonstrate a lack of awareness of the breach, if it would not have been reasonable to expect such awareness; or

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the director took all reasonable steps to ensure that the breach did not occur, or there were no such steps that the director could have taken.

3.36 It is appropriate to place the burden of proof on a director to make out this defence, because knowledge of whether or not they were aware of the breach is peculiarly within their possession and would be relatively easy to establish. Also, as noted, these provisions are not novel; they have been extended or used as a model in respect of community charities.

3.37 As noted above, the amount of the administrative penalty for misrepresenting the endorsement status of a community charity trust or community charity corporation will be specified in the community charity guidelines made under sections 426-118 and 426-195 in Schedule 1 to the TAA.

3.38 An administrative penalty must not be reimbursed from the community charity in question, and the Corporations Act cannot apply to provide relief to a director of a corporate trustee or of a community charity corporation in respect of any administrative penalty imposed for breach of the holding out provision. [Schedule 3, items 12 to 15 and 34, sections 426-120 and 426-195 in Schedule 1 to the TAA]

Suspension or removal of trustees

3.39 The amendments relating to the Commissioner's powers to suspend and remove trustees, explained below, will apply to the trustees of community charity trusts. This regime is an extension of the Commissioner's current powers in relation to the trustees of public and private ancillary funds.

Commissioner's powers to suspend or remove trustees

3.40 As is the case for public and private ancillary funds, the Commissioner will have the power to remove or suspend a trustee of a community charity trust that breaches the community charity guidelines, or any other Australian law. Section 425-125 in Schedule 1 to the TAA is amended so that the Commission's suspension and removal powers extend to community charity trusts.

3.41 It is expected that the Commissioner would only suspend or remove trustees of community charity trusts in cases of serious non-compliance.

3.42 Should the Commissioner choose to suspend a trustee, it will be for a period that the Commissioner determines by reference to the circumstances. The Commissioner may also modify the suspension period as necessary.

3.43 If the Commissioner suspends or removes a trustee, the Commissioner must give the trustee a written notice advising them of the decision, explaining the reasons for the decision and, in the case of suspension, setting out the period of suspension. The trustee may seek a review of the decision by the Administrative Appeals Tribunal or a court following the process set out in Part IVC of the TAA. [Schedule 3, items 16-19, section 426-125 in Schedule 1 to the TAA]

Commission's powers in case of suspension or removal of trustees

3.44 If a trustee is suspended or removed, the Commissioner must appoint an acting trustee to undertake the duties of trustee until the suspension period has ended or a replacement trustee is appointed.

3.45 An acting trustee may be an individual, a body corporate or a Government authority. The Commissioner may also appoint themselves as acting trustee. The acting trustee must agree to comply with the community charity trust guidelines, and the governing rules of the community charity will apply to the acting trustee. The Commissioner cannot appoint an acting trustee that is not a constitutional corporation for more than 6 months.

3.46 The Commissioner may determine the terms and conditions of an acting trustee's appointment, including by determining that the acting trustee's fees are to be paid out of the corpus of the community charity trust. Such terms and conditions are valid despite any limitation in an Australian law or the governing rules of the community charity.

3.47 The Commissioner may also direct an acting trustee to do or not do certain things. An acting trustee commits an offence if they contravene a direction.

3.48 The Commissioner may terminate the appointment of an acting trustee at any time. If the Commissioner were to do so, the Commissioner would be required to appoint a new acting trustee.

3.49 An acting trustee may resign that office, by written resignation given to the Commissioner. The resignation is not effective until seven days after its receipt by the Commissioner.

3.50 If the Commissioner appoints an acting trustee, the Commissioner must make an order transferring the property of the community charity trust from the former or suspended trustee to the acting trustee. The order, which can cover both legal and equitable property, has the legal effect of immediately transferring the property, subject to certain limitations.

3.51 The Commissioner must also make a subsequent property transfer order at the end of an acting trustee's appointment. This order may be to a new acting trustee, to the previously suspended trustee or to a newly appointed trustee, as appropriate.

3.52 If the Commissioner makes a property transfer order, that property immediately vests in the entity to which it is transferred. However, the transfer is not immediate if the property is of a kind whose transfer is registrable under an Australian law. In this case, the property is transferred only after the registration process has been completed.

3.53 A former trustee has a number of obligations following their suspension or removal or the ending of their appointment.

3.54 A former trustee must provide the acting or new trustee with all books relating to the trust's affairs that are in their custody, possession or control within 14 days. Failing to do so constitutes an offence which attracts a penalty of 50 penalty units.

3.55 If the property of a community charity trust is vested in a former trustee, an acting trustee may, by written notice, require the former trustee to identify all the property of the community charity trust (as much as they possibly can), and explain to the acting or new trustee how that property was accounted for.

3.56 The acting or new trustee may also require the former trustee to assist with the property transfer. The acting or new trustee may mandate that the former trustee take certain actions necessary for the transfer of a specific item of property. Failing to do so constitutes an offence which attracts a penalty of 50 penalty units. Strict liability applies to this offence. This is appropriate in view of the necessity of compelling former trustees to deal fairly with a community charity trust's property during the handover period. [Schedule 3, items 20-31, sections 426-130 to 426-165 in Schedule 1 to the TAA]

Transfers between entities

3.57 Community charities, whether trusts or incorporated entities, are not permitted to transfer money, property or benefits to other community charities or to ancillary funds. Ancillary funds may make such transfers to community charities, as this is consistent with their purpose of providing support to DGRs covered by item 1 of the table in section 30-15 of the ITAA 1997. Under the existing regime, ancillary funds may not make such transfers to other ancillary funds.

3.58 This limitation applies unless the relevant guidelines explicitly permit such transfers. [Schedule 3, items 32-34, sections 426-170 and 426-200 in Schedule 1 to the TAA]

Community charity status to be entered on Australian Business Register

3.59 If a community charity trust or community charity corporation has an ABN, the Australian Business Registrar must enter a statement on the Australian Business Register that the entity is a community charity trust or a community charity corporation, as applicable.

3.60 The Australian Business Registrar must take reasonable steps to ensure that the statement is true, and may change or remove it if necessary. [Schedule 3, items 11 and 34, sections 426-119 and 426-190 in Schedule 1 to the TAA]

Other amendments to the TAA

3.61 Schedule 3 to the Bill makes minor consequential amendments to Subdivision 426-D in Schedule 1 to the TAA to extend its application to community charity trusts. [Schedule 3, items 8-10, various sections in Schedule 1 to the TAA]

3.62 The scope of Subdivision 298-A in Schedule 1 to the TAA, which deals with administrative penalties, is broadened to include penalties imposed on directors of community charity corporations under section 426-195. (Penalties imposed in relation to community charity trusts are already covered by Subdivision 298-A.) That Subdivision sets out when penalties are due for payment, empowers the Commissioner to remit all or part of a penalty, and enables an entity that is dissatisfied with a decision by the Commissioner refusing to remit a penalty to object in the manner set out in Part IVC of the TAA. [Schedule 3, item 6, paragraph 298-5(c) in Schedule 1 to the TAA] .

3.63 As community charities must be registered charities, disclosures to the Commissioner of the Australian Charities and Not-for-profits Commission or the Attorney-General of a State or Territory are permitted, and will not constitute an offence, if the information relates to the non-compliance of a community charity with an Australian law, and the disclosure is for the purpose of administering an Australian law governing trusts and charities. [Schedule 3, item 7, subsection 355-65(8) in Schedule 1 to the TAA]

Consequential amendments

3.64 A New Tax System (Australian Business Numbers) Act 1999 is amended to facilitate the Australian Business Registrar entering statements about community charities onto the Australian Business Register. [Schedule 3, item 35, paragraph 26(3)(ga) of the A New Tax System (Australian Business Number) Act 1999]

Commencement, application, and transitional provisions

3.65 The amendments made by Schedule 3 to the Bill commence on the day after the Bill receives Royal Assent.