A public benevolent institution (PBI) is a subtype of charity, which has the relief of poverty or distress as its main object. PBIs are entitled to several taxation benefits, generally wider than those enjoyed by other charities. In particular, PBIs have the ability to be endorsed as a Deductible Gift Recipient (DGR), and to enjoy a Fringe Benefits Tax (FBT) exemption.
The requirements regarding endorsement as a PBI have undergone change in recent times, particularly in light of the Federal Court of Australia’s decision in Commissioner of Taxation v Hunger Project Australia  FCAFC 69. This decision extended the types of organisations that are eligible for PBI endorsement.
PBIs are entitled to DGR endorsement. In order to be endorsed as a PBI, an entity is required to satisfy the ‘in Australia’ special condition. This is a test that historically required a charity’s activities to primarily benefit people in Australia, even if some of its activities indirectly benefited people overseas. This requirement has previously restricted the endorsement of some organisations as PBIs, with such organisations having to explore the use of other structures in order to gain DGR endorsement, such as being an Overseas Aid Fund (OAF).
An OAF is a strict category of DGR, which is required to be established solely for the relief of people in distress in a country declared by the Minister of Foreign Affairs to be a developing country. Being endorsed as an OAF is a particularly involved process, and is limited to particular organisations that conduct their activities in certain ways.
The Treasury has previously considered amending the ‘in Australia’ special condition, to make the requirements even more stringent surrounding the beneficiaries of PBIs being primarily in Australia. Exposure draft legislation was introduced in 2014 to clarify the condition, but at this stage is yet to be enacted. This has made the requirements regarding the ‘in Australia’ special condition uncertain in recent times and vulnerable to change. In particular, this has created uncertainty surrounding entities that are currently entitled to DGR endorsement, but would not be under the proposed changes.
Thankfully for the sector, earlier this month the ATO released an interpretive update on the requirements for DGR endorsement. This featured a different interpretation than what has been seen previously. In this update, the ATO stated that the ‘in Australia’ condition only requires DGRs to be established and operated in Australia, but the purposes and beneficiaries of the DGR do not have to be in Australia (except for in certain types of public funds). Previously, beneficiaries of PBIs were required to be located primarily in Australia, but this new interpretation clearly states that even PBIs that give the entirety of their funds overseas may be eligible for endorsement.
Organisations with overseas beneficiaries, which are seeking DGR endorsement, should consider applying for DGR endorsement in light of the ATO’s new interpretation. Furthermore, new organisations with overseas beneficiaries, which are seeking DGR endorsement, may, under this interpretation, now be able to achieve this using the PBI subtype.
As OAFs are limited to relief in particular developing nations, organisations that provide relief outside of these nations may now be eligible for DGR endorsement under the new interpretation. There are also several advantages of being a PBI over an OAF, including a FBT exemption for PBIs. The process of endorsement as an OAF is more time-consuming, expensive, and uncertain. The legal structure of a fund is also more complex, as well as being limited in the work they do. In contrast, a PBI is usually in the form of a public company limited by guarantee or an incorporated association, which are simpler structures.
If organisations are considering applying to be PBIs, they should consider obtaining legal advice. The process and submissions that must be made to either the Australian Charities and Not-for-profits Commission or ATO are particular, and must be carefully drafted. Furthermore, although this new interpretation is less stringent than was previously the case, there remain requirements surrounding governing documents and board structure. This includes the requirement for governing documents to properly demonstrate the benevolent work conducted by the entity, and also ensuring that board directors meet the governance standards mandated by the Australian Charities and Not-for-profits Commission. These are also issues on which it may be advisable to seek legal advice.
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