New ATO guidance on the ‘in Australia test’ for overseas PBIs and HPCs
WHO SHOULD READ THIS
- Directors and senior managers of not-for-profits and deductible gift recipients, particularly public benevolent institutions and health promotion charities.
THINGS YOU NEED TO KNOW
- The ATO has provided further guidance to organisations that may wish to expand their activities overseas.
WHAT YOU NEED TO DO
- Organisations wishing to undertake activities overseas should ensure that they are appropriately empowered under their governing rules and remain compliant under their applicable charitable and tax endorsements.
- Organisations operating overseas should exercise due diligence when engaging with new third parties and ensure there are good corporate and financial governance processes in place and that they are regularly reviewed.
The Australian Taxation Office (ATO) has recently released new guidance on its website for public benevolent institutions (PBIs) and health promotion charities (HPCs) which wish to expand their activities overseas. It is expected that this will be followed by a formal tax ruling on the issue.
Satisfying the ‘in Australia test’
All deductible gift recipients (DGRs) are required to satisfy what is known as the ‘in Australia test’ under the Income Tax Assessment Act 1997 (Cth) (ITAA).
The ATO provides that DGRs will satisfy the ‘in Australia test’ if they are established and operated in Australia. Until recently, however, the ATO took a strict interpretation of the ‘in Australia test’ which restricted PBIs and HPCs from extending their activities overseas.
The ATO has now reviewed this and has clarified that PBIs and HPCs are capable of pursuing purposes overseas and having beneficiaries which are located overseas provided that the entity is established and operated in Australia.
Example of satisfying the ‘in Australia test’
The ATO provides an example of an institution that is set up in Australia as a charity whose main purpose is for the relief of poverty and is a registered PBI. In that scenario, the institution’s controlling board, donors, and most of its assets are in Australia, but all of the money provided by the institution is sent to beneficiaries overseas. The ATO confirms that even in this instance, the institution will satisfy the ‘in Australia test’.
In contrast, the ATO provides that a public fund established by an institution from an overseas country to help people who are in necessitous circumstances in Australia would not satisfy the ‘in Australia test’ on the basis that it would not be established in Australia.
Implications of the new ATO guidance
Under the ATO’s previous interpretation of the ‘in Australia test’, PBIs were unable to provide relief to beneficiaries beyond Australia’s borders. Similarly, HPCs with purposes of promoting the prevention or control of diseases in humans were unable to undertake such activities where the purposes and beneficiaries were overseas.
Previously, organisations wishing to receive income tax deductible donations to fund overseas charitable activities were limited to seeking endorsement of an ‘overseas aid fund’ or partnering with another DGR.
The new ATO guidance therefore provides greater flexibility and certainty for PBIs and HPCs that wish to pursue purposes and beneficiaries overseas.
The other recent major change impacting on PBIs, is that a PBI may further its purpose not just by itself conducting the PBI activity but also by funding another entity to conduct the PBI activity.
The ATO’s new guidance is a welcomed clarification for the sector.
Avoiding risks when operating overseas
The Australian Charities and Not-for-profits Commission has recently conducted a limited review of charities which operate overseas or fund overseas activity and has warned charities operating overseas to ensure that they adopt appropriate measures and policies to protect themselves. A recent report by the Financial Action Task cautioned that the not-for-profit sector is particularly vulnerable to the risk of misuse of charitable funds for money laundering, terrorist financing or other related threats, which could inadvertently occur without the not-for-profit’s knowledge.
It is important that all organisations engaging in activities overseas are appropriately protected from these risks. The risk of misuse is heightened when distributing funds overseas to third parties, for example, to undertake activities on behalf of the organisation.
Accordingly, any charity engaged in overseas activities should, as a minimum:
- exercise critical due diligence when engaging with new third parties overseas, and
- ensure that there are good corporate and financial governance processes in place and that they are regularly reviewed.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.