Government Charity Boundary

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Government Charity Boundary
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• Prof Myles McGregor-Lowndes
• Centre of Philanthropy and Nonprofit Studies
• What is a Charity for Taxation Purposes? Seminar,
  QUT, Brisbane,
• 11 July 2005, 2.00-3.00 pm

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Order of the Day
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• Draft Ruling TR2005/D6
• Central Bayside Division of General Practice Ltd
  v Commissioner of State Revenue 2005 VSCA 168
• English Charity Commission Approach to the issue

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Any Difference between the Drafts?
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• No differences between the draft on this point.
• Paragraphs 131 and 132 are identical.

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• Governmental departments and organisations are
  unlikely to be charitable institutions. They are
  simply performing a governmental responsibility.
  In In re Cain (deceased) The National Trustees
  Executors and Agency Co of Australasia Ltd v.
  Jeffrey 1950 VLR 382 a bequest was made in
  favour of the Childrens Welfare Department of
  the Victorian State Government. In discussing
  whether it was charitable, Dean J said at 387
• In my opinion if the present gift be construed
  as a gift for carrying on the ordinary activities
  of a Government department pursuant to a statute,
  the gift is not a gift for charitable purposes,
  even if the activities are such that if carried
  on by private persons they would be charitable.
  Such activities are simply part of the government
  of the country ... It is performing functions
  which Parliament, as a matter of public policy,
  has committed to it. It cannot whilst performing
  its statutory duties, have any greater claim to
  be charitable than the Railways Department, the
  Department of Public Works, or the Crown Law
  Department.

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• In Auckland Harbour Board v. Commissioner of
  Inland Revenue 1959 NZLR 204 the Board argued
  that all its property and assets were held on
  charitable trust as its purposes were within the
  words repair of ports and havens in the
  preamble to the Statute of Elizabeth. Shorland J,
  in rejecting the Board as a charity, said, at
  208-209
• The true concept of a Harbour Board, in my view,
  is not the narrow concept of a public body
  charged merely with the duty of the repair of
  ports, havens ... and sea banks or with duties
  truly analogous thereto but the much broader
  concept of an elective public body charged with
  the duty of local government and control of a
  prescribed area of land and territorial waters
  defined in a Warrant issued under the hand of the
  Governor-General.1
• 1 See also Waitemata County v. Commissioner of
  Inland Revenue 1971 NZLR 151.

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Simple?
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• Blurring of sector boundaries is making it
  increasingly difficult to tell government from
  nonprofit from business.
• Government tendering of community services to all
  sectors increasing
• Government control through contract and
  legislation is increasing.

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EM of Tax Laws Amendment (2005 Measures No. 3)
Bill 2005
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• Summary of new law
• 4.5 This amendment will ensure that government
  institutions of the Commonwealth, a state or a
  territory that are accepted as charitable at law
  will continue to be ineligible for FBT rebatable
  employer status from 1 July 2005.

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• In introducing this new requirement, a caveat of
  the law precluding charitable institutions of the
  Commonwealth, a state or a territory from
  claiming FBT rebatable employer status was
  omitted.  As a result of this anomaly,
  institutions such as public universities, public
  museums, public art galleries and other
  government bodies accepted as charitable at law
  will become eligible FBT rebatable employers from
  1 July 2005.
• 4.4 These government institutions have
  traditionally been ineligible for FBT rebatable
  status as their overriding purpose is considered
  to be to carry out the functions or
  responsibilities of government.  It is
  appropriate that this arrangement continues after
  1 July 2005 in recognition of this distinction.

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Central Bayside Division of General Practice Ltd
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• Victorian Payroll Tax case a charity?
• Members were general medical practitioners
• Independent Company Limited by Guarantee
• 93 of income was from government grants with
  about 43 being outcomes based funding
• Only control by government was through funding
  agreements
• Central Bayside Division of General Practice Ltd
  v Commissioner of State Revenue 2005 VSCA 168

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Primary factors for determining control
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• The degree of government control over the
  appointment of the bodys board or directors
• Whether it was created by statute or otherwise
  under the aegis of government
• The extent to which government provides funding
  for the organisation and controls its
  expenditure
• The extent to which government can prescribe
  effectively the level or standard of performance
  that the organisation is required to achieve
• Whether government has effectively assumed the
  responsibility for the services in question
• Chernov JA at para 10.

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The essence

• The functions performed by divisions fall
  clearly within the purview of governmental
  functions, albeit not solely performed by
  government and moreover, the government has
  assumed responsibility for the establishment,
  direction, funding and control of divisions, not
  through statute, but through policy and its
  choice of funding mechanism.
• Chernov JA at para 20

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But OK for

• Other organisations such as aged care facilities
  operated by a church, public universities or
  operating a town camp for impoverished
  Aboriginal people which were heavily government
  funded and required to meet certain standards
  relating to governance, financial or service
  matters.
• The difference was that they conducted their
  core activities untainted by government
  control so that one could not properly say they
  perform the work or function of government. In
  the case of the Division, however, its core
  activities are performed pursuant to the dictates
  of government.

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Charity Commission Approach

• Policy Statement on Charities and Public Service
  Delivery June 2005
• Charities must only undertake activities that are
  within their objects and powers. This is
  essential. Charities must not stray from their
  objects in pursuit of funding.
• Charities must be independent of government and
  other funders. An organisation must be a separate
  and independent legal entity to be eligible for
  charitable status.
• Trustees must act only in the interests of the
  charity and its beneficiaries.
• Trustees must make decisions in line with their
  duty of care and duty to act prudently.
• http//www.charity-commission.gov.uk/supportingcha
  rities/polstat.asp

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• Trustees have a duty to use charity assets as
  effectively as possible. Charities should always
  aim to recover the full cost of delivering
  services for public authorities, including
  administrative and overhead or "core" costs. It
  is reasonable for a charity to expect an
  authority to fund its full costs. Full cost
  recovery is supported by government policy, as
  set out in the Compact and its good practice code
  on funding and procurement.
• http//www.charity-commission.gov.uk/supportingcha
  rities/polstat.asp

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• the trustees would have a choice about whether or
  not they accepted funding on the terms proposed
  by the govermental authority
• they would take their own legal and financial
  advice
• they would draw up their own policies and
  business plan
• they would conduct arms-length negotiations with
  the governmental authority
• a trustee who was subject to a conflict of
  interest would not participate in discussions
• the funding arrangements would preserve the
  trustees fundamental discretions as to the
  selection of beneficiaries and the provision of
  services
• the trustees would not commit themselves simply
  to giving effect to the policies and wishes of
  the governmental authority
• the trustees would not agree to conditions that
  undermined the confidentiality of their
  discussions (such as the presence at their
  meetings of an observer from the governmental
  authority) and
• the trustees would be free to make their own
  decisions on matters outside the scope of the
  funding arrangement.
• Charity Commission, The Independence of Charities
  from the State, Para 9

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Another way of looking at the issue

• Of course, depending upon the circumstances, an
  alternative conclusion might be that the body had
  been created for exclusively charitable purposes
  but not operating properly. In that event, while
  recognising the bodys charitable status, we
  would need to take steps to secure its proper
  administration.
• Charity Commission, The Independence of Charities
  from the State, Para 10

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Trafford Community Leisure TrustWigan Leisure
and Culture Trust

• Operated 4 leisure centres and 2 golf courses
• Leased from the Council for 20 years
• 216 former council staff transferred
• Entered into a partnership agreement with council
• Agreement closely linked to Councils strategic
  plan
• Performance monitoring by Council
• Found to be independent from Council