All of those who have some affiliation with the third sector – whether they work for, provide services to, or regularly donate to, a non-profit organisation – will be, at least to some extent, aware of the tax benefits available to such organisations.
The tax concessions and exemptions available to non-profit organisations depend on how those non-profit organisations are classified by the Australian Taxation Office (ATO) and the Income Tax Assessment Act 1997 (Cth) (Act).
An organisation will be classified according to the activities it carries out and the contents of its constituent document (i.e. its constitution, rules or trust deed). Organisations classified as public benevolent institutions (PBIs) and health promotion charities are eligible for the full spectrum of available tax concessions and exemptions. For this reason, such endorsement is highly coveted by organisations carrying out activities that they believe make them eligible. It is also for this reason, however, that the activities of organisations that have been so endorsed are carefully scrutinised by the ATO to ensure that the right organisations are receiving the right benefits. The ATO will, for example, conduct ‘PBI audits’ from time to time, whereby PBIs will be required to satisfy the ATO that they remain eligible for their PBI status.
It is not uncommon for the activities of non-profit organisations to change over time. The danger with such change occurs when the organisation has been endorsed by the ATO as a certain category of non-profit (based on the activities that the organisation was carrying on at the time it applied for endorsement), and the organisation’s new activities do not, in whole or in part, continue to qualify the organisation for its tax concessions and exemptions. Where this occurs, organisations not only endanger their endorsement, but also risk having to repay the tax that the organisation should have been paying from the date that its activities changed.
To avoid this scenario occurring, organisations should review their activities each year to ensure that they are still in line with their original endorsement. Such a review may also lead to certain organisations discovering that they are entitled to additional tax concessions and/or exemptions to those that they already enjoy.
For the purposes of this article, we are going to look at the characteristics that must be present, and remain present, for an organisation to be endorsed as, and retain its endorsement as, a PBI.
Public Benevolent Institutions
A PBI is a non-profit institution organised for the direct relief of poverty, sickness, suffering, distress, misfortune, disability or helplessness. This includes, amongst others, characteristics such as:
Needs requiring benevolent relief
The condition or misfortune which is being relieved by a PBI must be such poverty, sickness, suffering, distress, misfortune, disability or helplessness as arouses pity or compassion in the community. It is the opinion of the ATO that not all degrees of distress or suffering will necessarily arouse community compassion. For example, organisations that provide “PBIs provide their services directly to persons in need of relief. In essence, PBIs need to ‘give the man a fish’ as opposed to ‘teaching that man how to fish’” marriage guidance or counselling to sole parents who are divorced or have lost a spouse will not be PBIs.
Relief of need
Organisations that serve people who are in need will only be PBIs if they relieve those needs. The services of some organisations are far too broad and not sufficiently focused on meeting such needs to be considered PBIs by the ATO.
Direct provision of services
PBIs provide their services directly to persons in need of relief. Out of all of the characteristics of a PBI, this is usually the most difficult to satisfy. For example, if an organisation exists to promote social welfare in the community generally, it would lack the required direct benevolence.
Organisations for lobbying, advocacy, research and policy studies and disseminating information are not generally PBIs. Organisations that merely play a general role in the field of benevolent relief or provide information on welfare and/or similar services to the community will not be PBIs.
It is this requirement of a PBI that can be frustrating for certain organisations. If organisations wish to educate, provide valuable information to or refer clients to other organisations, they risk losing their PBI endorsement. In essence, PBIs need to ‘give the man a fish’ as opposed to ‘teaching that man how to fish’. (However, an organisation can undertake minimal ‘teaching’ activities and remain eligible for PBI endorsement, if the organisation satisfies the next characteristic of a PBI (predominantly for benevolent relief).)
4. Predominantly for benevolent relief
The dominant purpose of a PBI must be the direct relief of poverty, sickness, suffering, distress, misfortune, disability or helplessness. Other purposes and activities must be incidental to that purpose. They must be minor in extent and importance. Organisations that provide benevolent services, but only as part of broader purposes or operations, are not PBIs.
Separating your activities to retain endorsement
All is not lost for organisations that discover that there has been a shift in their activities (or, likewise, organisations that are being established and intend to carry on both PBI and non-PBI activities). Where such a shift has occurred, and the organisation has commenced carrying on some activities that are not suitable for PBI endorsement, it may be possible for such organisations to segregate the PBI activities and retain their PBI endorsement for only those segregated activities. This will mean that the organisation does not lose its endorsement all together, but retains it for those activities that are eligible for endorsement.
It is easy for organisations to change direction and not realise that such a change may affect their tax endorsements. For this reason, and so as to avoid any unpleasant penalties from the ATO, organisations should conduct regular reviews of their activities so as to ensure that those activities continue to qualify them for endorsement.