The Controversial Public Benefit Test

November, 2010

Momentum for third sector reform? An in-depth analysis of the Senate inquiry and report, and other federal initiatives.

On 13 May 2010 the Senate Economics Committee referred the controversial Tax Laws Amendment (Public Benefit Test) Bill 2010 for inquiry and report. The purpose of this Bill is to amend the tax laws to require religious and charitable institutions to satisfy a public benefit test to justify their exemption from taxation. The Committee sought written submissions addressing the introduction of this public benefit test from interested stakeholders. Eighty-eight submissions were received from various individuals and organisations. The result of the submissions is the paper prepared by the Economics Legislation Committee which was released in September 2010. This article will discuss the findings of that paper.


In Australia, as in many other jurisdictions, the operation of not-for-profit organisations relies on the application of common law. Since 1891, the common law has categorised “charity” and “charitable purpose” under the following four heads:

The common law has, to date, included a presumption that charities operating under the first three heads of charity listed above provide a public benefit, and only those that carry out activities for “other purposes beneficial to the community” have to demonstrate public benefit when seeking to qualify as a charitable organisation.

The Bill before the Senate, which would introduce a “public benefit test”, would reverse this presumption. This would bring the law in Australia closer to that in New Zealand where the Charities Commission makes an assessment:

… all charities must have public benefit. When we look at that, we look at, firstly, whether there is a benefit, which means that we will also look at whether there are harms that are caused; and, secondly, we look at the extent to which the charity is accessible to the public.” [1]

Definition of “public benefit”

What is “public benefit”? There is no clear current consensus on the meaning of the adjective “public” in “public benefit”. Whilst members of an organisation are also members of the “public”, if that organisation only provides benefits to its members, the organisation is only providing a “private benefit” and not a “public benefit”. However, it must be made clear, that a “public benefit” does not have to benefit every member of the public.

The Bill explicitly seeks to ensure that an assessment of “public benefit” also takes into account “any detriment or harm”. In the United Kingdom, any benefits that might arise to the public must not be outweighed by any significant detriment or harm.

Religious Institutions

Section 50-52 of the Income Tax Assessment Act 1997 (ITAA) specifies that unless a charitable institution has been endorsed by the Australian Taxation Office (ATO), it will not be income tax exempt. By way of contrast, the entitlement of a religious institution to income tax exemption does not hinge on it carrying out charitable pursuits. Rather, a religious organisation’s eligibility to income tax exemption is put beyond doubt by item 1.2 of section 50-5 of the ITAA, and therefore exempts those organisations from having to seek endorsement as charities. Religious institutions can therefore self-assess their status, thereby gaining an exemption on income tax without having to engage with the Commissioner of Taxation.

The Senate Economics Legislation Committee, in its paper, takes the view that the not-for-profit sector is relied upon in Australia to deliver vital services to the community often in the place of government service delivery. It is for this purpose that such not-for-profit organisations are funded by public money, and therefore should be subject to a higher level of transparency.

The Committee is of the opinion that the ATO is not in a position to administer a public benefit test with the aim of regulating inappropriate behaviour and guaranteeing accountability and transparency. The Committee therefore recommends that the incoming government should follow the emerging international best practice, and work with the Council of Australian Governments (COAG) to amend legislation governing not-for-profit organisations to include a definition and test of “public benefit”.

A National Commission as an alternative to the Bill

Much of the evidence collected by this particular public benefit test inquiry reiterated that the previously identified issues of transparency, accountability, complexity and inconsistency remain unaddressed. Although the Bill attempts to address some minor aspect of these issues, it was believed that a public benefit test should never be legislated in isolation, particularly in a Bill that contains little details of how, and by whom, it will be administered. In other words, although the proposed Bill is a possible avenue for achieving much needed reform, its focus is too narrow. The only effect of the Bill is that, when an entity sought income tax exemption under either item 1.1 or 1.2 of the ITAA, the entity would not only need to satisfy the special condition requirements of section 50-50 and section 50-52, charitable and religious institutions would also need to satisfy the public benefit test before qualifying for income tax exemption.

The Committee shares the view of many of those who made submissions that the scope of the Bill before the Senate is too narrow and that the Bill inappropriately delegates legislative power. The Committee further held that this inquiry has only served to highlight the urgent need for broader reforms within the sector. This has been a recurring theme in all previous inquiries dealing with the possible regulation of the not-for-profit sector. The Committee studied how other Commonwealth countries are addressing issues in their not-for-profit sectors, and held that reform in the Australian not-for-profit sector should be guided by international best practice. The success of England and Wales should be studied in setting a precedent and in taking a leading role in international reform of the sector.

The Committee has therefore recommended that the incoming government work through COAG to establish a single independent national commission for not-for-profit organisations. The incoming government should further establish a working group (or use the COAG Business Regulation and Competition Working Group). This working group should consult extensively with the sector in a timely manner to address the issues arising from the establishment of a commission which applies a public benefit test. Further, the Australian model should draw on the Charity Commissions in the United Kingdom and in New Zealand.

This working group should consider the functions and role of an Australian commission which would include:


It is not surprising that once again we have a formal report issued by government which screams out the need for essential reform in the not-for-profit sector. The question is whether this inquiry, like all previous inquiries, will be collecting dust on our shelves sometime in the near future, or whether it will be implemented to some or any extent. It was recently announced that the Gillard Government’s election promise of a reform agenda for the not-for-profit sector will be driven by the newly appointed Minister for Social Inclusion, Tania Plibersek, through a new Office for the Non-Profit Sector in the Department of Prime Minister and Cabinet. Apparently this Office will drive and coordinate the sector reform agenda within government and will report directly to the Minister for Social Inclusion.

Further, it has been announced that the government will establish a Non-Profit Sector Reform Council by the end of the year to advise the government on the sector’s reform agenda. This Council will be made up of representatives from the third sector. The Gillard Government has represented that it will conduct a scoping study for a national “one-stop-shop” regulator for the sector to remove the current complex regulatory arrangements which are in place and to streamline reporting arrangements. This study should be completed by early 2011.

Should we be getting excited by these announcements, or should we be merely filing them away with all the other previous announcements made by our Federal government in the last 15 years?


[1] Mr Trevor Garrett, Chief Executive, Charities Commission New Zealand, Committee Hansard, 28 June 2010, page 25.

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