Draft Taxation Ruling TR 2005D6 Determining the purpose of a particular charitable institution or fu

1
Draft Taxation RulingTR 2005/D6Determining the
purpose of a particular charitable institution
or fund

• John Emerson
• 11 July 2005

2
Overview

• TR 1999/D21 had only about 1000 words on this
  issue - paras (103 to 116)
• TR 2005/D6 contains over 3600 words (paras147 to
  182)

3
Overview (contd)

• Para 103 of D21
• for an institution to be a charitable
  institution its sole or dominant purpose must be
  charitable
• Compare with para 147 of D6
• a charitable institutions purposes are wholly
  and solely charitable

4
Change of ATO view or simply change of language?

• In my view, in D6 the ATO is expressing in a more
  user friendly way, the same principles it
  outlined in D21.
• D21 was indeed consistent with some judicial
  statements regarding dominant purpose. But in
  substance, the cases have generally required a
  sole charitable purpose.
• This has been the manner in which the ATO has
  administered D21.

5
Change of ATO view or simply change of language?
(contd)

• Misuse of language (ie, purpose v power) has
  sometimes arisen due to the facts of particular
  cases where, say, the constitution of an
  institution includes in its purposes clause,
  purposes that are not charitable.
• When faced with this situation, judges have
  understandably referred to the dominant purpose
  in contrast to incidental or ancillary purposes.

6
Change of ATO view or simply change of language?
(contd)

• Alternatively, courts have characterised the
  non-charitable incidental or ancillary purpose
  as powers by which the real purpose can be
  achieved.
• The difficulty with the wording in D21 was that
  on a superficial reading, it could well construed
  it as permitting a charity to have noncharitable
  purposes.

7
Change of ATO view or simply change of language?
(contd)

• Indeed, this appears to be a fair conclusion of
  the requirement that a charitys sole or
  dominant purpose must be charitable
• And so
• - a body whose members carry on social welfare
  work once a month for 6 hours but who meet as a
  business networking group every week for one
  hour or

8
Change of ATO view or simply change of language?
(contd)

• - a body whose purposes are mainly animal
  welfare but which also is a stamp collecting
  club,
• could well on its face be a charity.
• D6 makes it clear that this is not the case.
• Better approach from the publics viewpoint as
  well as ATO officers and practitioners

9
Drafting recommendations

• Adopt suggestion in footnote 171 of D6, namely,
  clearly recognise the difference between an
  object/purpose and a power, and separate the
  objects clause from the powers clause.
• Could introduce purposes clause with words like
  The company / association / trust is
  established for the public charitable purpose
  of

10
Drafting recommendations (contd)

• Confine the purposes to those currently intended
  rather than adopt the drafting technique used
  before the abolition of the ultra vires rule for
  companies, of listing a wide range of purposes

11
Drafting recommendations (contd)

• Be very careful to avoid including at the end the
  purposes (or powers ) clause, the words commonly
  used before the abolition of the ultra vires rule
  for companies
• The company may do all other things
  considered by the directors to be incidental or
  ancillary to attaining the above purposes.

12
Drafting recommendations (contd)

• The reference to the subjective view of the
  directors is unacceptable as the courts are
  unable to find in these circumstances that the
  purposes are in fact charitable the issue for
  them is whether the directors consider them to be
  charitable. And therefore the body will not be
  charitable.
• Omitting the words considered by the directors
  to be would be sufficient.

13
Drafting recommendations (contd)

• Could introduce powers clause with words like
• Solely for the purpose of carrying out the
  above purposes, the company/association/ trust
  may
• ,,,,,
• And end the clause with words like
• and do all other things incidental or conducive
  to so doing

14
Drafting recommendations (contd)

• This approach is not only useful to identify the
  real purposes of the entity from a taxation
  perspective, but will assist those governing the
  entity to identify, and differentiate, its
  objects from its powers.
• It also fits neatly with the gift fund
  requirements in case of deductible gift
  recipients (sec 30-125 of ITAA 97).