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BETTER BOARDS CONFERENCE 2014

Presented by Vera Visevic

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Untangling the “not” in not-for-profit:

Advice on commercialising your NFP

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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

Non profits For profits0

10000

20000

30000

40000

50000

US entities that crossed the $50 Million annual revenue barrier since 1970

Source: George Overholser and Sean Stannard-Stockton Tactical Philanthropy 21 January 2002

144

46,136

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WHY NOT COMMERCIALISE? PUBLIC PERCEPTION…

NFPs should pursue NFPs should not make

their objects on a too much profit and

shoestring budget should spend all profit

Under-funded NFPs Funding equals resources

are limited in their and helps achieve scale

capacity to achieve which lets a NFP provide

their objects. more services.

BUT

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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.

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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 2011/4Income 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……

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Taxation Ruling TR 2011/4Income 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

• ……

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Taxation Ruling TR 2011/4Income 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.

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Taxation Ruling TR 2011/4Income 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?

The Charity

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

Charitable Institution

Salvos Legal HumanitarianPublic Benevolent Institution Deductible Gift Recipient

$

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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.

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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.

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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.

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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.

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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.

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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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