Non-profit concepts

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This is an overview of some legal/tax concepts that are relevant to Wikimedia Australia (WMAU). Note WMAU is incorporated in Victoria and the comments below may not be relevant to any other organisation (hopefully they are accurate for WMAU!).

Terms

ATO

Ausralian Tax Office.

CAV

Consumer Affairs Victoria.

Incorporated association

In Victoria the process of incorporation is governed by CAV:

Incorporation is a voluntary process whereby a not-for-profit club or community group can apply to become its own 'legal person' (i.e. the association becomes a distinct legal entity that continues regardless of changes to its membership).

Incorporation is governed by the Associations Incorporation Act 1981 (state law - be careful when searching for this, most states have an Act with the same name!).

Non-profit

According to the ATO:

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people – both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.[...]

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes and must not be distributed to owners, members or other private people.

WMAU meets these requirements by clauses 35 (Winding up) and 37 (Use of funds) in its Rules.

Not-for-profit

Seemingly synonymous with "non-profit" as to who it applies to. Perhaps clearer in meaning than "non-profit", as it is a mistaken assumption that non-profits should not "try" to make a profit. As the ATO uses "non-profit" this document will as well.

Non government organisation (NGO)

Seemingly not used by the ATO in any definition, so we should avoid using it. AusAID uses it.

Third sector

In contrast to the private sector (business) and the public sector (government). WMAU is definitely part of the third sector. It tends to include NGOs, as well as community organisations/groups.

Charity

ATO definition. Also Is your organisation a charity?

The characteristics of a charity are:

  • it is an entity that is also a trust fund or an institution
  • it exists for the public benefit or the relief of poverty
  • its purposes are charitable within the legal sense of that term
  • it is non-profit, and
  • its sole purpose is charitable.

DGR status

DGR introduction An organisation or fund that has Deductible Gift Recipient status. This status lets the organisation/fund tell the public that their donations are tax-deductible.

DGR status can be gained by:

  • Being endorsed by the ATO according to their set criteria. This is the usual method.
  • Getting listed by name in the tax law.

Some charities (but not all) are eligible to apply for DGR status. But they still have to apply! There is no automatic recognition of charities as having DGR status.

Public fund

ATO definition & explanation A public fund needs to:

  • have a constitution or founding document that clearly sets out its aims
  • have the intention that the public will contribute to the fund
  • have an administration/controlling group that involves "the public" (such as Church authorities, school principals, judges, clergy, solicitors, doctors and other professional people, mayors, councillors, town clerks and members of parliament)
  • operate on a non-profit basis (see above) inlcuding re: dissolution
  • a separate bank account and appropriate accounting.

Tax concessions

There are a number of tax concessions available for non-profits, see this excellent table by the ATO.

Income tax exemption

Income tax exemption (ITE) means "your organisation will not need to pay income tax, capital gains tax or lodge income tax returns (unless specifically requested to do so)". Yay! More money and less paperwork. (Note membership fees are not taxable income, due to what is called the "principle of mutuality", but taxable income might include donations, income from sales, bank interest. See [1])

There are two ways to become "income tax exempt":

  • Be endorsed by the ATO as a charity.
  • Self-assess to be within the guidelines.

Factsheet Does your organisation have to pay income tax? is rather confusing. The guidelines that we are supposed to self-assess according to, don't seem to be clearly stated.

FBT exemption

Fringe Benefits Tax "is a tax payable by employers who provide fringe benefits to their employees or to associates of their employees." As we don't have employees this is not currently relevant to us.

FBT rebate

As above.

GST concessions for charities and gift deductible entities

Something to do with claiming GST credits. To be eligible here we need to either be "endorsed to access GST charity concessions" or have DGR status.

GST concessions for non-profit organisations

Some GST related concessions but not as extensive as the previous category.

Deductible gift recipient

Deductible gift recipient (DGR) status is a benefit for our donors rather than us directly, but the thinking goes that offering donors some selfish benefit may help stimulate their philanthropic side. That's strictly it!

Endorsement

Charities have no special advantage in this category. As with other non-profits, they must be endorsed as a DGR by the ATO. That is separate to charity endorsement. There are a number of categories of DGR, including education and culture.

Neither of these categories (nor the others) seems a perfect fit for us yet. More investigation and communication with the ATO is required.

See DGR application process.

Listed by name

The other way to get DGR status is to get listed by name in the tax law! As bizarre as that seems, here are some that have taken that route:

  • Amnesty International
  • RSPCA
  • Crime Stoppers
  • RSL
  • Landcare
  • Scouts, Guides
  • SES, CFA

So... we might need to find some friends in high places for this route, but it is a possibility.

Refunds of franking credits

Uh... this has something to do with shares and dividends. Not currently relevant for us.

Tax deductible donations

If the idea of "Tax deductible donations" means we can tell donors "Donations of $2 or more are tax deductible!", then this is DGR status (see above).

Many respected Australian institutions do not have DGR status. For example, the Country Women's Association.

There are a number of ways we can appeal to donors including:

  • mission-based appeal (help support our mission)
  • tax-concessional appeal (save yourself some tax)

A tax-concessional appeal is frankly a very weak line to run with. We are far from unique in that case. By comparison, a mission-based appeal is very strong: we communicate our mission, the donor feels involved in it, and perhaps we make the world a better place by encouraging altruism rather than greed. :)

Of course, these are hardly exclusive. The vast majority of non-profits run with a mission-based line and the tax concesssional information is just a nice sweetener. Think about your own non-profit donation choices: Didn't you donate to them because of what they do or what they stand for? Do you really stop in the act of donating, on finding out there's no tax concession? Would you never donate to an overseas group (like, say, the Wikimedia Foundation) because such donations aren't tax deductible here?

  • According to a UK report, Focus group discussions suggested that in deciding whether to give or not, givers are more guided by the cause they are asked to support than by considerations of tax-effectiveness or other concerns.
  • Some interesting statistics - of around 700k non-profit organisations in Australia, only 190k are in the tax system, and only 25k have DGR status.
  • Giving Australia survey findings:
    • Among "everyday individuals", Tax deductions only tended to be claimed when higher amounts were donated. Some reported that they did not make claims as they failed to collect receipts or to recall amounts given.
    • Among "wealthy individuals", Most affluent givers claimed tax deductions (through their accountant or adviser) and these deductions were an incentive. The exceptions were those with a particular cause passion who gave anyway and very generously in time and money.

On the other hand, there are a number of philanthropic funds that can only pass money to other institutions that have DGR status. If we think that funds like this (rather than individual donors) are going to be a big target for us, then DGR status should become more important.

Further information