in Not-for-profit - Better Boards Australasia

Report
BETTER BOARDS CONFERENCE 2014
Presented by Vera Visevic
MELBOURNE | SYDNEY | BRISBANE
Untangling the “not”
in not-for-profit:
Advice on commercialising
your NFP
MELBOURNE | SYDNEY | BRISBANE
With the decline of the welfare state, charitable organisations are
expected to do more with the same resources. Reliance on
donations alone will, in many cases, be insufficient. Hence many
charitable organisations have established business ventures to
generate the income necessary to support their activities.
Sundberg J, Word Investments v Commissioner of Taxation (2008) 236 CLR 204
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BACKGROUND
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BACKGROUND
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COMMERCIALISING NFPs
• Even though the purpose of a NFP is not to make
profit, the unavoidable fact is that almost nothing can
be done in the absence of money.
• So with charitable giving decreasing, need
increasing, the struggle to maintain or increase
membership income and changes in the law, NFPs
are increasingly considering creative ways to fund
themselves.
Vs
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WHY COMMERCIALISE?
Get money  grow  help more
members/beneficiaries
US entities that crossed the $50 Million
annual revenue barrier since 1970
50000
40000
46,136
30000
20000
144
10000
0
Non profits
For profits
Source: George Overholser and Sean Stannard-Stockton Tactical Philanthropy 21 January 2002
MELBOURNE | SYDNEY | BRISBANE
WHY NOT COMMERCIALISE?
PUBLIC PERCEPTION…
NFPs should pursue
their objects on a
shoestring budget
NFPs should not make
too much profit and
should spend all profit
BUT
Under-funded NFPs
are limited in their
capacity to achieve
their objects.
Funding equals resources
and helps achieve scale
which lets a NFP provide
more services.
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WHAT DOES THE LAW SAY YOU CAN DO?
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Word Investments v Commissioner of
Taxation (2008) 236 CLR 204
“The activities of Word in raising funds by
commercial means are not intrinsically
charitable, but they are charitable in character
because they were carried out in furtherance of
a charitable purpose.”
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Word Investments v Commissioner of
Taxation (2008) 236 CLR 204
The High Court said that Word Investments, an income tax exempt
charitable institution, was entitled to be endorsed as such, despite
its only activities being:
– the carrying on of a funeral business;
– other commercial activities; and
– the distribution of those funds to other charitable entities.
MELBOURNE | SYDNEY | BRISBANE
Word Investments v Commissioner of
Taxation (2008) 236 CLR 204
The outcome:
An entity can be a charitable institution despite carrying out
commercial activities as long as its purpose is charitable.
What about non-charitable NFPs?
First, we will define Purpose as:
the purpose which entitles that NFP to whatever tax
exemption/s it enjoys.
Although we haven’t seen this Word Investments outcome applied to
income tax exempt NFPs, it would be logical to assume that an
income tax exempt NFP could retain its income tax exempt status as
long as any commercial activity did not detract from or shift the
purpose away from the NFP’s Purpose.
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THE REACTION OF THE TAX OFFICE
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Taxation Ruling TR 2011/4
Income tax and fringe benefits tax: charities
A purpose of carrying on a business or commercial enterprise to
generate a surplus where that purpose is an end in itself is not
charitable.
However,
Commercial or business-like activities can be compatible with
charitable purpose. An institution undertaking commercial or
business-like activities can be charitable if……
MELBOURNE | SYDNEY | BRISBANE
Taxation Ruling TR 2011/4
Income tax and fringe benefits tax: charities
An institution undertaking commercial or business-like activities
can be charitable if:
• its sole purpose is charitable and it carries on a business or
commercial enterprise to give effect to that charitable purpose.
In these circumstances it does not matter that the activities
themselves are not intrinsically charitable; or
• ……
MELBOURNE | SYDNEY | BRISBANE
Taxation Ruling TR 2011/4
Income tax and fringe benefits tax: charities
An institution undertaking commercial or business-like activities
can be charitable if:
..…
• the sole purpose of the institution is charitable and the
commercial activities directly carry out the charitable purpose;
• it has a business or commercial purpose that is simply
incidental or ancillary to its charitable purpose;
• its activities are intrinsically charitable but they are carried on in
a commercial or business-like way; or
• it holds passive investments to receive a market return to
further its charitable purpose or to meet reasonable operational
expenses, without undermining its charitable status.
MELBOURNE | SYDNEY | BRISBANE
Taxation Ruling TR 2011/4
Income tax and fringe benefits tax: charities
But note:
An institution carrying on a business or commercial enterprise will
not be charitable simply because it is controlled by another
institution that is charitable.
It is the purpose of the entity itself which must be charitable.
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LOOKS GOOD… WHAT’S THE CATCH?
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POTENTIAL LEGISLATION
Since Word Investments, the sector has cautiously watched to see
if the decision would result in the introduction by Government of
legislative limits.
The Gillard Government released the paper: Better targeting of
not-for-profit tax concessions :
“The Government provides valuable tax concessions to NFPs to support their
altruistic activities. But the Government believes that it is important that these
tax concessions are only used to further the altruistic purposes of NFPs, and
not their unrelated commercial activities. Such an approach is consistent with
that followed by comparable overseas jurisdictions…..
Income tax exempt entities will begin to pay income tax on profits from
unrelated commercial activities that are not directed back to their altruistic
purpose….”
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POTENTIAL LEGISLATION
The current Government announced on 14 December 2013 that it
would not be proceeding with the better targeting of not-for-profit
tax concessions measure, but that it intended to explore other
alternatives to address risks to revenue.
The Government has not released further information as to what
those alternatives might be.
The Government may be concerned to address competitive
neutrality issues.
MELBOURNE | SYDNEY | BRISBANE
WHAT’S THE RISK?
The Word Investment decision was made six years ago and the sector
has largely failed to capitalise on it since that time.
It is up to the sector to test the limits.
Perhaps over-commercialising will encourage Government to
legislate, but NFPs may earn significant profits in the interim.
NFPs should consider whether it would still be financially worthwhile
for them to undertake a commercial activity regardless of what the
Government does. Even if Government starts taxing profits, NFPs
may still benefit from:
- the mutuality principle;
- receipt of tax deductions through giving to a DGR; and
- capitalising on its brand/reputation or the patronage of its members
or supporters.
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SO WHAT CAN NFPs DO?
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WHAT COMMERCIAL ACTIVITIES CAN NFPs
UNDERTAKE?
The law has not been tested since Word Investments. Currently, the
law does not limit any particular commercial activity. Instead, the main
consideration must be whether the commercial activity is being
undertaken in pursuit of the Purpose.
If the commercial activity becomes a purpose in its own right, the NFP
will not be entitled to income tax exemption.
SO, a NFP can undertake a commercial activity if it raises funds but it
retains its Purpose.
e.g. a soup kitchen sells coffees to non-disadvantaged students
during the day for the sole purpose of raising funds to purchase food
to give to disadvantaged people in the evening.
MELBOURNE | SYDNEY | BRISBANE
WHAT COMMERCIAL ACTIVITIES CAN NFPs
UNDERTAKE?
Undertaking fundraising commercial activities may be viewed more
favourably if the activity supports the NFP’s objects.
e.g.
Do:
The Animal Rescue Charity sells healthy pet food; or
The Skin Cancer Charity sells children’s sun hats.
Don’t:
The Nature Society sells DVDs advocating the destruction of native
flora and fauna.
MELBOURNE | SYDNEY | BRISBANE
WHAT COMMERCIAL ACTIVITIES CAN NFPs
UNDERTAKE?
A NFP can operate a commercial activity if that activity
is in the form of charging for the provision of services.
e.g. A NFP hospital charges patients for hospital stays.
MELBOURNE | SYDNEY | BRISBANE
WHAT COMMERCIAL ACTIVITIES CAN NFPs
UNDERTAKE?
A NFP can operate a commercial activity if that activity
furthers the NFP’s aims.
e.g. An organisation runs a nursery selling plants for
the purpose of providing meaningful employment to
people with disabilities.
MELBOURNE | SYDNEY | BRISBANE
WHAT COMMERCIAL ACTIVITIES CAN NFPs
UNDERTAKE?
A NFP can operate a commercial activity if that activity
is simply a passive investment (preferably one that
does not conflict with the NFP’s objects).
e.g. the Homelessness Charity invests its profits in
stable, low-risk shares.
MELBOURNE | SYDNEY | BRISBANE
WHAT COMMERCIAL ACTIVITIES CAN NFPs
UNDERTAKE?
NFPs can conduct commercial activities that are merely
incidental or ancillary to their primary activities.
e.g. an organisation grows vegetables to use to feed
the homeless. The organisation occasionally sells
surplus vegetables when they are not needed to feed
the homeless.
MELBOURNE | SYDNEY | BRISBANE
HOW MUCH TIME CAN BE SPENT ON A
COMMERCIAL ACTIVITY?
The law is not settled on this issue.
A possible approach could be: if the NFP retains its Purpose and
the time spent is equivalent to what a reasonable NFP would
spend fundraising, then the time spent might be considered
reasonable.
From our experience, we have seen that it is possible for an
organisation to invest a greater portion of time and money into a
commercial activity during its initial start-up phase.
MELBOURNE | SYDNEY | BRISBANE
HOW MUCH MONEY CAN BE SPENT ON A
COMMERCIAL ACTIVITY?
It depends what tax endorsement your NFP enjoys….
NFPs enjoy different tax exemptions based on their different objects
and purposes. Generally, the greater the exemption, the more
charitable the purpose.
It follows, therefore, that it will be more difficult for those receiving
greater exemptions to divert time and money away from the charitable
purpose while still maintaining that its Purpose has not changed.
An interesting case to note here is the Commissioner of Taxation v Hunger Project
Australia [2014] FCAFC 69 which followed Word Investments and allowed a Public
Benevolent Institution (PBI) to retain its status despite its principal activities being
fundraising as opposed to the direct provision of benevolent relief. The case did not
consider whether PBIs should also be able to undertake commercial activities, but
did change the position in relation to time spent directly providing benevolent relief.
MELBOURNE | SYDNEY | BRISBANE
HOW MUCH MONEY CAN BE SPENT ON A
COMMERCIAL ACTIVITY?
The law in Australia has not addressed this issue, but we expect
the answer is…. not much! While the law is not settled, this may
be a reputational issue.
The previous Government was concerned with competitive
neutrality.
Overseas jurisdictions have attempted to prevent NFPs from
engaging in any kind of commercial activities which would involve
risk.
MELBOURNE | SYDNEY | BRISBANE
CHANGING FACE OF GIVING
Monthly giving

Consumer altruism
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CAPITALISING ON BRAND
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CASE STUDY 1 – SALVOS LEGAL
$
Salvos Legal
Salvos Legal Humanitarian
Charitable Institution
Public Benevolent Institution
Deductible Gift Recipient
MELBOURNE | SYDNEY | BRISBANE
CASE STUDY 2 …. ?
Who are they?
A Public Benevolent Institution disaster relief charity
with the purpose of providing emergency relief to
people in the face of disasters.
What are they good at?
Logistics, provision of medical services, food and shelter.
MELBOURNE | SYDNEY | BRISBANE
CASE STUDY 2 …. ?
Let’s consider some options:
-
They begin producing first aid packs for sale.
They run the campsites at large music festivals, charging for
entry and using their tents and resources.
They charge non-disadvantaged people for the provision of
medical services in remote areas.
MELBOURNE | SYDNEY | BRISBANE
CASE STUDY 3 …. ?
Who are they?
A new charity with the purpose of producing specialised
books to relieve the suffering experienced by children
with dyslexia.
What are they good at?
Producing children’s books.
MELBOURNE | SYDNEY | BRISBANE
CASE STUDY 3 …. ?
Let’s consider an option:
-
In their first year, the new charity devotes 90% of its time and
money producing storybooks for children who do not suffer from
dyslexia in order to raise money to kick-start the charity. Its 5
year plan is that by year 5 it will be spending 90% of its time
and money producing books for children with dyslexia.
MELBOURNE | SYDNEY | BRISBANE
CASE STUDY 4 …. ?
Who are they?
An incorporated association which self assesses as
income tax-exempt under the heading Tourism with the
purpose of promoting tourism.
What are they good at?
Running a member-based organisation, promoting tourism.
MELBOURNE | SYDNEY | BRISBANE
CASE STUDY 4 …. ?
Let’s consider some options:
-
-
The Association runs a tourism fair, and charges the public for
entry.
The Association runs a kiosk at the fair selling drinks and food.
The Association charges the local tourism training centre for
consultation services.
The Association charges members for attending its annual
conference.
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Melbourne
Level 6, 530 Collins Street, Melbourne VIC 3000
P.O. Box 453, Collins Street West, Melbourne VIC 8007
DX 558 Melbourne VIC
+61 3 9670 9111 Phone
+61 3 9605 0933 Fax
Sydney
Level 12, 400 George Street, Sydney NSW 2000
P.O. Box H316, Australia Square NSW 1215
DX 13025 Syd-Market St NSW
+61 2 8289 5800 Phone
+61 2 9247 1315 Fax
Brisbane
Level 14, 145 Ann Street, Brisbane 4000
P.O. Box 12608, George Street, Brisbane QLD 4003
DX 40160 Brisbane Uptown QLD
+61 7 3228 0400 Phone
+61 7 3012 8777 Fax
MELBOURNE | SYDNEY | BRISBANE

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