Charitable Planning

The 4 Goals we consider at Brett Davies Lawyers:

• 1. Philanthropic gifts are used as you intended

• 2. Timing, method and nature of gift (cash or otherwise)

• 3. Best tax position for the charity

• 4. Best tax position for you and your beneficiaries

If you put in your Will a gift to a charitable cause then your remaining estate may be unnecessarily burdened with CGT. Strangely the government is upset that the charity doesn’t pay any tax on the gift. Therefore it makes the remainder of the estate pay the tax immediately upon your death. No waiting around to see what the charity does with the gift. Unfair, but that is the law.

We consider these issues:

• 1. Do you need a full charitable foundation named after you or a loved one?

• 2. Can you set up a "sub Foundation" with full naming rights under an already established like minded Foundation?

• 3. Will the gift be in perpetuity - so that only the income is used?

• 4. How much money is required to keep up a gift in perpetuity?

• 5. Who do you want to have as trustees of the foundation?

Many of these issues require us to work with your Accountant, Lawyer and Adviser. Therefore, we only take instructions after you are referred to us. All work at Brett Davies Lawyers is from professional referrers only.

1. TAXPAYER HAD TO PAY TAX ON HIS CHARITABLE GIFTS
This tax payer tried to set up a trust of income. The Taxpayer by 3 deeds purported to dispossess himself of interest from savings accounts and mortgages and dividends from a building society for periods of 5 years or less in favour of 3 charities. Each deed declared that if any part of the interest or dividends was paid to, or received by, the donor, it was to be so received by him as agent only for the donee and that he would immediately after receipt account for and pay the same to the donee.

The benefits payable under the deed were to cease on the death of the donor.

No trustee was appointed and no trust was declared of the property producing the income.

Sadly, he hadn't come to Brett Davies Lawyers to have it done correctly. The court said that the Taxpayer had not effectively alienated the relevant income. He had only declared the manner in which he proposed to apply it when it was derived.

Judge Hardie Boys placed considerable stress upon the control over the income retained by the taxpayer, pointing out it was always within his power to render the effect of the deeds nugatory. Proper structuring had not been done. Arcus v Commr of IR (NZ) (1962) 13 ATD 101.

2. THIS TAXPAYER GOT PROFESSIONAL HELP
The Taxpayer by deed established a charitable trust for interest payable over a fixed period of 5 years under a mortgage over land owned by his son. The trustees were directed to take and hold possession of the mortgage during the term of the trust, to collect the interest, pay it into a trust bank account and to disburse the charitable trust income as they thought fit for charitable religious purposes within New Zealand.

 The trustees were the Taxpayer and another.

Unlike the above Arcus Case the taxpayer had effectively alienated the interest from the mortgage debt for the relevant period and such interest did not form part of his assessable income. McLeay v Commr of IR (NZ) (1963) 13 ATD 227.

HOW COME YOU GET A TAX DEDUCTION ON CHARITABLE GIFTS?
Sections 50-5 and 50-1 of the Tax Act 1997 provide a tax exemption for tax the ordinary and statutory income of certain charitable, religious, scientific, and educational institutions and funds:

• A "charitable entity" is not exempt from income tax unless it is firstly endorsed by the ATO as exempt.

• A fund so endorsed must use the money for the purpose for which it was established (sec 50-57; 50-60; 50-65);

• Funds established for public charitable purposes that are covered by item 1.5B of sec 50-5 are not exempt unless they are established in Australia and, generally, carry out their activities in Australia; and

• Most of the other entities covered by sec 50-5 are exempt only if, broadly, the entity is physically present or located in Australia and carries out its activities in Australia.

• What about entities not established in Australia and entities not carrying out activities in Australia? A charitable, religious, scientific or public educational institution or organisation is not required to be established in Australia in order to qualify for exemption. To be exempt from tax on income derived on or after 1 July 1997, however, such an institution or organisation must generally have a ''physical presence'' in Australia or, in the case of a scientific research fund, be ''located'' in Australia (sec 50-50; 50-55; 50-65; 50-70).

• A fund for public charitable purposes established by a Will on or after 1 July 1997 or by instrument of trust is not exempt on post-1 July 1997 income unless established in Australia (items 1.5 and 1.5B). Furthermore, post-1 July 1997 income of a charitable trust established in Australia is generally not exempt unless the entity incurs its expenditure principally in Australia and pursues its charitable purposes solely in Australia (sec 50-60).

CAN YOU SET ONE UP IN YOUR WILL?
A fund established by Will is normally established at the time you die. The Will vests title in the trust property in the trustee for the purpose of establishing the fund in fulfilment of the charitable purposes set out in the will (Taxation Ruling TR 2000/11).

For a charitable fund established under an inter vivos (created while you were still living) trust to be established in Australia, the trust is settled in Australia. In the case of a fund established by Will, the fund is vested in possession in Australia with the fund's trustee (TR 2000/11).

The settled trust property and objects (purposes) are subject to Australian law.

CAN IT BE "CHARITABLE" AND HAVE OTHER PURPOSES?
In Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215, the Court considered the operation of sec 23(g)(iii) ITAA 1936 (now section 50-45 item 9-1). The court stated that for an entity to qualify for the exemption, it must have as its "main" purpose the purpose stated in the legislation. This purpose need not be its only purpose. It may have other objects or purposes which are merely incidental or ancillary or which are secondary and even unrelated to the main object or purpose without disqualifying from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it is impossible to say that one object is the main or predominant object. 

CAN YOU CARRY ON THE CHARITY FOR THE BENEFIT OF MEMBERS OR FAMILY?
See section 50-1. This provides that the ordinary and statutory income of the entities listed in sec 50-5 to 50-45 is exempt from tax. In some cases (see, for example, item 1.7 of sec 50-5, and sec 50-10, 50-20, 50-30, 50-40 and 50-45), the exemption is available provided the entity is "not carried on for the profit or gain of its individual members".

Chief Justice Barwick in FC of T v Cappid Pty Ltd 71 ATC 4121 made comment as to what "not carried on for the profit or gain of its individual members" means:

"Section 23(g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporate which are carried on for the benefit of their members but not for the profit or gain of their members severally or individually."

Judge Gibbs in Nadir Pty Ltd v FC of T (1973) 47 ALJR 303 applied Cappid. In Nadir the Taxpayer was considered carrying on for the purpose of profit or gain to its individual members because if "a distribution of profits or gains were to take place upon a winding-up it would be within the power of the shareholders to direct the application of those profits or gains for their own benefit".

In The Crows Nest Club Ltd v Commissioner of Land Tax (NSW) 78 ATC 4408, the Court stated that "in order to determine whether the club was not carried on for pecuniary profit, meaning, as is conceded on both sides, for pecuniary profit of individuals, it is necessary to consider the purposes for which the club is carried on, as distinct from the purposes for which any business in which it may engage from time to time is carried on".

At Brett Davies Lawyers we say that an entity is not carrying on for the profit or gain of its individual members provided that members don't benefit as individual members. The test does not require the association is carried on for altruistic purposes (Case W49, 89 ATC 469). Further you can be for the professional benefit of members without being considered to have been carried on for the profit or gain of individual members (Case 46/94, 94 ATC 412).

CHARITY FOR PROFESSIONAL GROUPS?
Sorry, if your main object is the benefit of members (e.g. to enable members of a profession to practice their profession to greater advantage) you do not have a charitable purpose: Chartered Insurance Institute v London Corporation [1957] 1 WLR 867. 

Brett Davies Lawyers can generally work around this. Don't confuse the purpose of a society with the object of individual members in joining it: Institution of Civil Engineers v IRC [1932] 1KB 149. You are charitable even though your activities produce a benefit to members.

It is OK to benefit members so long as it is "merely incidental and subsidiary". The benefit can't represent a "collateral or independent purpose" of your charity: Institution of Civil Engineers [1959] 1 WLR 1077.

From our experience even the offering of benefits to members to obtain funds to carry out its objects does not make the institution non-charitable.

In London Hospital Medical College v IRC [1976] 1 WLR 613, the College Students Union was held to have the charitable purpose of providing physical, social and cultural outlets for the medical college students and thus to be furthering the educational purpose of the college. Note however that the Union did not exist for the benefit of its members.

WHAT DOES "CHARITY" STAND FOR?
The question whether a body is established for charitable purposes is one of law (Royal Choral Society v IR Commrs (1943) 25 TC 263).

It is a rule of statutory interpretation that technical words are given their technical meaning unless a contrary intention appears (Commrs for Special Purposes of Income Tax v Pemsel (1891) 3 TC 53).

"Charity" in the dictionary and what non-lawyers understands of the word "charity" is different to what the law says it means. The words "charity" and "charitable" have a technical meaning in English law as a result of the Statute, 43 Elizabeth, Ch 4, passed in 1601. The preamble of the Statute states a number of charitable purposes which were not charitable in the popular sense of the word. Since the passing of the Statute, any purpose has been regarded as charitable in English law if it is amongst those referred to in the preamble to the Statute or if it could fairly be regarded as being within "the spirit and intendment of the Statute" (Pemsel's case, Bowman v Secular Society (1917) AC 406).

THE 4 CLASSES OF CHARITABLE TRUSTS
You need to prove that your purpose falls within one of the 4 classes. See here You also show that public benefit is present. This is consistent with the rule that charitable trusts are for purposes and only indirectly for persons (Attorney-General (NSW) v Perpetual Trustee Co Ltd (1940) 63 CLR 209.

WHY IS THE TRUST DEEDS AND WORDING SO IMPORTANT?
In determining the purpose of your charity, it is important to consider its object as stated in its founding documents: Keren Keyemeth Re Jisroel Ltd v IR Commrs (1932) 17 TC 27.

Your activities after you set it up are also watched: Royal Australasian College of Surgeons v FC of T (1943) 68 CLR 436.

The Court doesn’t care about your motives and ultimate aim. It is solely concerned with the meaning and effect of the language employed in your Trust Deed.

CAN YOUR CHARITY RUN A BUSINESS?
Yes, if structured correctly. For example, in Calder Construction Co Ltd v Commr of IR (NZ) (1963) 9 AITR 348 the income of a company carrying on business as trustee in trust for a charitable trust and holding its surplus profits in trust for the charity was held to be exempt from tax.

The Salvation Army used land to operate a training farm for underprivileged boys, the land was held to be used exclusively for charitable purposes for rating purposes, even though income was derived from the sale of surplus farm produce (Salvation Army (Vic) Property Trust v Shire of Fern Tree Gully Corp (1952) 85 CLR 159).

In The University of Western Australia v Commr of State Taxation (WA) 88 ATC 4020, it was held that the words "for the purpose of a university or for charitable or similar public purposes" necessarily included the acquisition of property for income-producing purposes for use in carrying out the activities of a university or a charitable purpose.

ARE POLITICAL PRESSURE GROUPS CHARITABLE?
If your purpose is monitoring legislation and advising on changes to legislation you aren’t a charity. For example, a society for protecting the unborn had the purpose of opposing changes in the law on abortion. This is political - not charitable: Molloy v Commr of IR (1977) 3 NZTC 61, 218). At Brett Davies Lawyers we ensure that your charity is formed for a charitable purpose and you will still be charitable even if you watch and advise on legislation.

INNOVATION FOUNDATION WAS A CHARITABLE INSTITUTION

Federal Commissioner of Tax v Triton Foundation

The Commissioner failed in his appeal against the AAT decision that a foundation promoting innovation and entrepreneurship in Australia was a charitable institution, entitled to endorsement as being exempt from income tax.

Facts

The foundation was established by a successful investor, Mr George Lewin, in 2000 following the Federal Government sponsored National Innovation Summit in February of that year. The foundation’s principal object was to promote a culture of innovation and entrepreneurship in Australia, particularly among the young, by visibly assisting innovators to commercialise their ideas.

The foundation provided advice to inventors on marketing, intellectual property, technical, business planning and the like by telephone, facsimile, email or in person. It had an interactive website, which provides information to inventors, including downloadable resources and templates. The website provides a self-assessed module to assist inventors identify gaps in their knowledge and to determine where they are placed in the pathway to a commercial product.

In addition, the foundation had case managers who reviewed applications for assistance and provide guidance. Inventions, approved by a case manager, are assessed by a panel of voluntary, experienced people who provided comments and suggestions to the inventor. Where professional services were required, the inventor may be referred to an appropriate professional. The foundation did not charge any fees for its services.

When the Commissioner refused to endorse the foundation as a charitable institution, it objected on the basis that it advanced education and, therefore, operated for charitable purposes.

AAT decision

The AAT said that the objects and operations of the foundation in promoting innovation were for purposes beneficial to the community in the sense of providing direct services to a section of the community and overall future benefits to the community as a whole. Consequently, it found that the foundation was a charitable institution within the meaning of item 1.1 of s 50-5 of ITAA 1997 and was entitled to be endorsed as exempt from income tax under s 50-105.

Court decision

The Federal Court found that it was open to the AAT to conclude that the taxpayer’s activities were not only beneficial to the Australian public generally but also of direct benefit to a section of the community — those with the inclination and ability to make inventions for commercial purposes and invest in them. Having regard to the taxpayer’s constitution, activities and history, its essential object was a charitable one, as found by the AAT.

To start get your Accountant, Lawyer or Adviser to ring us for an appointment. We work throughout the whole of Australia.

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