Treasury has released the eagerly awaited

second draft of the ‚in Australia‛ special

conditions legislation. We report on how this

will restrict Australian NFPs doing altruistic

work overseas.

Also trustees of charitable trusts should take

note of the High Court decision in Bargwanna

– the first High Court decision on charities in

some time to favour the Commissioner of

Taxation.

Lastly, the Council of Australian Governments

(‚COAG‛) has formed an NFP Working Group

to coordinate harmonisation efforts across the

country.

The Federal Budget will be handed down on 8

May 2012. We will let you know if there are

any significant announcements.

Suhanya Mendes

Editor

‚in Australia‛ second draft

legislation

The Government has released a second draft of legislation it intends to

introduce. The legislation sets out the special conditions that will have to

be met by income tax exempt entities and DGRs to qualify for tax

concessions.

We voiced our concerns regarding the first draft legislation in our July 2011

NFP Alert and circulated our submission to Treasury.

We are heartened that most of the concerns we had appear to have been

addressed by the exposure draft, but we still have a number of concerns

which are listed further below.

Income Tax Exempt Entities including

charities

The following table lists the current and proposed conditions for income tax

exempt entities that are not prescribed in the regulations and are not DGRs:

Page 1

Charitable institutions

and religious

institutions must:

Have a physical

presence in

Australia;

Incur expenditure

principally in

Australia; and

Pursue objectives

principally in

Australia.

Most income tax exempt entities

(including charities) must:

Operate principally in Australia; *

Pursue purposes principally in

Australia;*

Be a ‚not-for-profit entity‛;

Comply with all the substantive

requirements in the entity’s governing

rules; and

Use its income and assets solely for

the purpose for which the entity is

established and operated and for

which it is entitled to be exempt from

tax.

* the extent to which the entity gives to

non tax exempt entities and the

recipient’s use of the funds overseas must

be taken into account.

Libby Klein is a Principal at Moores Legal

and Head of the Not for Profit

Workgroup.

Libby’s expertise in governance, tax and

structuring of not-for-profits has been

applied to numerous publications and

she regularly presents seminars and

briefings to boards of not-for–profit

organisations. She works with clients

across the NFP spectrum, from

philanthropic and benevolent funds to

social enterprises and health, community

and educational organisations.

Fiona Thomas has been with Moores

Legal for over 15 years.

She advises commercial and community

organisations and has particular

expertise in the areas of not-for-profit

taxation, governance and structuring.

Fiona is a member of School and Church

governance bodies.

<from page 1>

Deductible Gift Recipients

Similarly for DGR funds, authorities or institutions that are not ancillary funds or

public entities like the Australiana Fund, the conditions are as follows:

Our concerns

The following are our main concerns:

1. The ‚Look-through test‛

If an entity (‚the first entity‛) gives to another entity in Australia (‚the

second entity‛), the use of the funds by the second entity is taken into

account in the calculations for the first entity fulfilling the in Australia test.

It is difficult to envisage how this will work in practise and will probably

require a careful tracing and documentation of the ultimate use of funds.

2. Spending overseas for Australian benefit

It appears that at least one casualty of the new ‚in Australia‛ test will be

Australian Scholarship funds for overseas study. Expenditure for such a

purpose will be overseas although money will ‚change hands‛ in Australia

when the Scholarship is awarded. However the look through test will

require inclusion of any money spent overseas such as tuition and

accommodation to be traced and clawed back into the calculation for the

‚in Australia‛ test.

<continued over>

Page 2

The DGR fund authority or

institution must ‚be in

Australia‛.

The DGR fund, authority or institution

must:

Be established in Australia;

Operate solely in Australia; *

Pursue its purposes solely in

Australia; *

There are exceptions for overseas aid

and environmental organisations,

and allowances for minor or

incidental overseas activities.

* the extent to which the entity

gives to non DGRs and the recipient’s

use of the funds overseas must be

taken into account.

<from page 2>

3. Prescription

In the past, religious missions, churches and other religious organisations have been able to apply for

prescription in the income tax regulations to qualify for charitable status even if they would not qualify under

the in Australia test. The Explanatory Memorandum says that prescription from now will be a policy decision

allowed in ‚exceptional circumstances‛. This will be no comfort to bona fide organisations who intend to make

an application for prescription or to those who might already be prescribed.

4. Excluded Gifts

In the past any gifts made to an income tax exempt entity were not taken into account in the calculation to

apportion overseas spending. Now only non-deductible gifts will be. Accordingly this will severely limit any

Australian DGR undertaking any overseas operations.

We would be happy to provide specific advice about how the reforms may impact on your organisation.

Treasury is seeking feedback on the exposure draft by Friday 11 May 2012. The legislation is expected to be

introduced into Parliament in the middle of this year, with a view to it commencing from Royal Assent.

Suhanya Mendes

Lawyer

Near enough is not good enough for

charitable funds

The decision of the High Court in Bargwanna will send a shiver down the collective spines of trustees of charitable

trusts. A strict approach will be applied in determining whether charitable funds are administered for charitable

purposes. Minor indiscretions may not be tolerated.

Background

In Commissioner of Taxation v Bargwanna [2012] HCA 11, the trustees established a charitable fund.

However the trustees were at fault for a number of reasons:

1. Monies from the fund were paid into an interest offset account to offset the interest on the trustee’s personal

home loan;

2. Monies were paid into the accountant’s business trust account and mixed with other funds in his trust fund; and

3. The monies in the trust fund did not earn any interest.

In 2004, the trustees made an unsuccessful application to the ATO for endorsement as a charitable fund.

<continued over>

Page 3

Suhanya Mendes provides advice on

governance, structuring and taxation issues for

Not for Profit organisations and individuals

with philanthropic objectives.

Suhanya has previously practiced in the Estate

Planning, Superannuation and Structuring

Group at Moores Legal and hence has an

understanding of Wills and bequests and their

impact on the Not for Profit sector.

Elizabeth Turnour provides structuring,

taxation and governance advice to Not for

Profit organisations and philanthropic

individuals. Elizabeth is passionate about the

contribution made to the community by the

Not for Profit sector.

Elizabeth is committed to assisting individuals

and organisations within the NFP sector to

achieve their goals

<from page 3>

High Court decision

The High Court decided in favour of the Commissioner. The above

instances of ‚maladministration‛ meant that the fund had not been

applied for charitable purposes – part of it had, but part had not. The

majority of the Court stated that ‚applied‛ does not mean ‚substantially

applied‛ or ‚on the whole, applied‛. While not all breaches of trust will

be fatal, in this case mixing trust funds and deriving a personal benefit

tipped the balance. The fact that the trustees were ignorant of the

breaches because their accountant actioned them was no excuse.

Key lessons

Trustees of charitable trusts should note:

near enough is not good enough. Minor misapplications of the fund

could lead to a loss of endorsement.

ensure any powers you seek to exercise are allowed under the trust

deed – get advice if you need to.

maintain separate accounts for each trust fund – mixing trust funds

with other funds is not allowed.

your obligations are personal – you cannot rely totally on the advice of

professional advisors.

every year you need to check that the fund still meets the endorsement

requirements.

Suhanya Mendes & Wendy Ooi

Lawyer and Legal researcher

Page 4

COAG progresses NFP reform agenda

This month, the Council of Australian Governments (COAG) has taken important steps in progressing the Federal

Government’s NFP reform agenda.

Moores Legal welcomes this move. The full benefits of the Federal Government’s extensive NFP reform agenda will

only be realised when the States and Territories come on board.

NFP Reform Working Group

On 13 April 2012, the Prime Minister and Minister for Social Inclusion jointly announced that the COAG has agreed

to the terms of reference and the 2011-2012 work plan of a new NFP Reform Working Group. The aim is to reduce

the regulatory burden on the NFP sector.

The NFP Reform Working Group is comprised of Treasury officials from the Commonwealth and each State and

Territory Government. The group will meet monthly, and ‘out of session’ for pressing matters.

Terms of reference

The NFP Reform Working Group will advise on:

the Commonwealth’s NFP reforms;

adoption by the States and Territories of the Commonwealth statutory definition of charity;

harmonisation of fundraising regulation;

harmonisation of the unrelated business income tax (UBIT); and

reviewing legal, governance and reporting regulation for the NFP sector, including regulations embedded in

service level agreements.

Moores Legal comment

Moores Legal awaits with interest the outcome of the group’s work. In particular, a harmonised approach to a

statutory definition of charity and fundraising regulation will be warmly welcomed by the sector. However these

two items are assigned a ‚medium‛ level priority in the group’s work plan, as compared to work on the UBIT and

regulation of the sector which are awarded ‚high‛ level priorities.

We are particularly alarmed by the apparent intention to encourage the States and Territories to introduce a form of

the UBIT. We have voiced our strenuous objections to introducing a UBIT at Commonwealth level, let alone at State

or Territory level.

We will watch on with interest to see how State and Territory Governments will respond.

Suhanya Mendes and Wendy Ooi

Lawyer and Legal researcher

Page 5

Page 6

We have a range of practitioners who are able to assist

with any minor queries or major issues you may have. If

you require further information, please contact a member

of our team.

Moores Legal is a law firm servicing companies and businesses, Not for Profit

organisations and individuals across Melbourne in the areas of Commercial

Law, Workplace Relations, Property Law, Not for Profit Law, Aged Care,

Elder Law, Estate Planning, Superannuation & Structuring, Dispute

Resolution, Family Law and Personal Injury Law.

Murray Baird

Principal

Not for Profits

Libby Klein

Principal

Not for Profits

Fiona Thomas

Senior Lawyer

Not for Profits

Suhanya Ponniah

Lawyer

Not for Profits

Elizabeth Turnour

Lawyer

Not for Profits

Andrew Sudholz

Principal

Property Transactions

Peter Andrew

Special Counsel

Employment & Schools Law

Andrew Simpson

Principal

Bequests & Estates

Aged Care Facilities

Nils Versemann

Senior Lawyer

Intellectual Property

Cecelia Irvine-So

Principal

Volunteer Law

Allan Swan

Principal

Estate Planning

DISCLAIMER: This Not for Profit Briefing is of a general nature only. Specific legal advice should be sought rather than relying on this Briefing.

Not for Profit Conference –

University of Melbourne

The Not for Profit Project at the University of Melbourne Law School is

hosting a conference entitled ‚Defining, Taxing and Regulating Not-for-

Profits in the 21st Century‛. The Conference will be held in Melbourne on

Thursday 19 and Friday 20 July 2012.

Elizabeth Turnour of Moores Legal will be presenting a paper at the

conference and Moores NFP team members will be present. More

information can be found via the website.