House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Charitable institutions

Outline of chapter

5.1 Schedule 4 to this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986), the Income Tax Assessment Act 1997 (ITAA 1997), the Income Tax Assessment Act 1936 (ITAA 1936) and the Sales Tax (Exemptions and Classifications) Act 1992 (ST(E & C)A 1992) to extend the taxation treatment currently given to public benevolent institutions (PBIs) to certain charitable institutions.

5.2 Charitable institutions whose principal activity is promoting the prevention or control of disease in human beings will be entitled to:

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concessional fringe benefits tax (FBT) treatment;

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status as tax deductible gift recipients; and

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exemption from sales tax on goods for use by the charitable institution (prior to the introduction of the goods and services tax (GST)).

Context of reform

5.3 The Treasurer announced on 22 June 2000 (Treasurers Press Release No. 55) that the Government would ensure that organisations whose main activity is promoting the prevention or control of disease in humans would continue to access the tax benefits available to PBIs. These charitable institutions may have been PBIs in the past but, over time, their activities have changed such that they may no longer be PBIs and therefore, no longer eligible for taxation concessions such as exemption from FBT and sales tax. However, these institutions continue to be exempt from income tax and entitled to GST concessions under the current law.

Public benevolent institutions

5.4 Generally, a PBI:

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has as its main or principal object, the relief of poverty, sickness, suffering, distress, misfortune, destitution or helplessness;

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is carried on without purpose of private gain for particular persons;

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is established for the benefit of the public or a section or class of the public;

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the relief is available without discrimination to every member of that section of the public which the organisation aims to benefit; and

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the aid is given directly to those in need.

Charitable institutions

5.5 A charitable institution is an organisation established for:

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the relief of poverty;

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the advancement of education;

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the advancement of religion; or

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other purposes that are beneficial to the community.

Fringe benefits tax

5.6 Section 57A of the FBTAA 1986 provides that benefits provided by certain employers, including PBIs, are exempt benefits. An exempt benefit is not a fringe benefit. However, from the FBT year commencing 1 April 2000, an employers fringe benefits taxable amount may be increased when benefits provided in respect of an employees employment are exempt under section 57A (subsection 5B(1D)).

Deductions for gifts or contributions

5.7 Section 30-15 of the ITAA 1997 allows a deduction for certain types of gifts made to particular recipients. Item 1 in the table to subsection 30-15(1) provides that certain gifts made to a fund, authority or institution listed in Subdivision 30-B are deductible. PBIs are listed in Subdivision 30-B in the general category of welfare and rights recipients (subsection 30-45(1)).

5.8 For the 1996-1997 income year and earlier income years, section 78 of the ITAA 1936 allows a deduction for, amongst other things, certain gifts or contributions. Subsection 78(4) provides that a deduction is allowable for gifts made to listed funds, authorities and institutions. PBIs are listed in the general category of welfare and rights recipients in Table 4.

Sales tax

5.9 Chapter 14 of Schedule 1 to the ST(E & C)A 1992 allowed an exemption from sales tax for goods for use by certain organisations. Goods for use by PBIs are exempt from sales tax under item 140(c) of Subchapter 14.3.

Detailed explanation of new law

Fringe benefits tax

5.10 Subsection 57A(5) is inserted in the FBTAA 1986 to provide that a benefit is an exempt benefit if:

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the benefit is provided in respect of the employment of an employee;

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the employer is a charitable institution; and

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the principal activity of the charitable institution is promoting the prevention or control of diseases in humans.

[Schedule 4, item 1, subsection 57A(5)]

5.11 Disease is defined in subsection 136(1) to include any physical or mental ailment, disorder, defect or morbid condition whether of sudden onset or gradual development and whether of genetic or other origin.

5.12 The charitable institutions to be covered by this amendment are medical or health organisations whose principal focus is preventative in nature, rather than providing direct relief of sickness or suffering. These organisations typically focus on particular types of ailments or health issues, for example, asthma, cancer, acquired immune deficiency syndrome (AIDS), arthritis, heart conditions, brain conditions, paraplegia and kidney conditions.

5.13 Benefits satisfying these criteria are exempt for the FBT year commencing 1 April 1998 and later years of tax [Schedule 4, subitem 4(1)] . This date has been chosen because section 74 allows the amendment of assessments within a period of 3 years after the date of the original assessment. However, from the FBT year commencing 1 April 2000, exempt benefits provided under section 57A may result in an employers fringe benefits taxable amount being increased by subsection 5B(1D).

Consequential amendments

5.14 Section 135Q explains how certain employers, including those described in section 57A, work out whether an employee has a reportable fringe benefits amount for a year of income. Because section 57A is extended to charitable institutions whose principal activity is the prevention or control of disease in humans, the note to subsection 135Q(1) is amended to refer to these charitable institutions. [Schedule 4, item 3]

5.15 This amendment applies from the FBT year commencing 1 April 1999 and later years, consistent with the application of section 135Q. [Schedule 4, subitem 4(3)]

5.16 From the FBT year commencing 1 April 2000, PBIs are excluded from being rebatable employers and therefore ineligible for the rebate available under section 65J. For consistent treatment, subsection 65J(1) is amended to exclude those charitable institutions described in subsection 57A(5) from being rebatable employers. This means that these charitable institutions do not qualify for both an FBT exemption and a rebate of tax. [Schedule 4, item 2]

5.17 This amendment applies from the FBT year commencing 1 April 2000. [Schedule 4, subitem 4(2)]

Deductions for gifts or contributions

Income Tax Assessment Act 1997

5.18 Section 30-15 of the ITAA 1997 allows a deduction for, amongst other things, gifts made to funds, authorities or institutions listed in Subdivision 30-B. Subdivision 30-B is amended to include charitable institutions whose principal activity is promoting the prevention or control of diseases in humans. These charitable institutions are inserted in the table of general categories of health recipients at item 1.1.6 in subsection 30-20(1). [Schedule 4, item 8]

5.19 Disease is defined in subsection 995-1(1) to include any physical or mental ailment, disorder, defect or morbid condition whether of sudden onset or gradual development and whether of genetic or other origin.

5.20 The charitable institutions to be covered by this amendment are medical or health organisations whose principal activity is preventative in nature, rather than providing direct relief of sickness or suffering. These organisations typically focus on particular types of ailments or health issues, for example, asthma, cancer, AIDS, arthritis, heart conditions, brain conditions, paraplegia and kidney conditions.

5.21 The amendment applies to gifts made in the 1997-1998 income year and later years. [Schedule 4, item 10]

Consequential amendments

5.22 Section 30-315 of Subdivision 30-G contains an index to Division 30, gifts or contributions. Amendment is made to the table in subsection 30-315(2) as a result of the listing of these particular charitable institutions in Subdivision 30-B. [Schedule 4, item 9]

5.23 This amendment applies to gifts made in the 1997-1998 income year and later years. [Schedule 4, item 10]

Income Tax Assessment Act 1936

5.24 Section 78 of the ITAA 1936 is also amended to allow deductions for gifts made to charitable institutions whose principal activity is promoting the prevention or control of diseases in humans. Table 1 in subsection 78(4) is amended to include these charitable institutions in the general category of health recipients. [Schedule 4, item 6]

5.25 Disease is not defined for the purposes of section 78, therefore, it has its ordinary meaning. Disease is defined in the Macquarie Dictionary, third edition, as a morbid condition of the body, or of some organ or part; illness; sickness; ailment.

5.26 The charitable institutions to be covered by this amendment are medical or health organisations whose principal activity is preventative in nature, rather than providing direct relief of sickness or suffering. These organisations typically focus on particular types of ailments or health issues, for example, asthma, cancer, AIDS, arthritis, heart conditions, brain conditions, paraplegia and kidney conditions.

5.27 The amendment applies to gifts made in the 1996-1997 income year and earlier income years. [Schedule 4, item 7]

Consequential amendments

5.28 Subsection 78(3) contains an index to section 78. Amendment is made to update the index in subsection 78(3) as a result of the amendment to subsection 78(4). [Schedule 4, item 5]

5.29 This amendment applies to gifts made in the 1996-1997 income year and earlier years. [Schedule 4, item 7]

Sales tax

5.30 Goods for use by PBIs and certain other organisations were exempt from sales tax under Subchapter 14.3 of Schedule 1 to the ST(E & C)A 1992. Item 140A is inserted in Subchapter 14.3 to provide that goods for use by charitable institutions whose principal activity is promoting the prevention or control of diseases in humans are exempt from sales tax. [Schedule 4, item 11]

5.31 Disease is not defined for the purposes of sales tax therefore, it has its ordinary meaning (see paragraph 5.25).

5.32 The charitable institutions to be covered by this amendment are medical or health organisations whose principal activity is preventative in nature, rather than providing direct relief of sickness or suffering. These organisations typically focus on particular types of ailments or health issues, for example, asthma, cancer, AIDS, arthritis, heart conditions, brain conditions, paraplegia and kidney conditions.

5.33 This amendment applies to dealings with goods on or after 28 October 1992, which is the date of commencement of the ST(E & C)A 1992. [Schedule 4, item 12]

Application and transitional provisions

5.34 The amendments will apply as follows to ensure the continuity of concessional tax treatment given to certain charitable institutions:

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FBT - benefits provided from the FBT year commencing 1 April 1998, and all later years, by certain charitable institutions are exempt benefits;

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deductions for gifts or contributions - gifts made to certain charitable institutions are tax deductible under the ITAA 1997 from the 1997-1998 income year and later years and under the ITAA 1936 from the 1996-1997 income year and earlier years; and

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sales tax - goods for use by certain charitable institutions are exempt from sales tax from 28 October 1992.