Income tax exemption
To be endorsed as income tax exempt, your charity must meet certain requirements.
Your charity is entitled to be endorsed for income tax exemption if it:
- meets at least one of three tests
- meets both of the following conditions
In Australia test
Your registered charity will meet this test if it meets both of the following requirements:
- It has a physical presence in Australia.
- It incurs its expenditure and pursues its objectives principally in Australia.
Physical presence
A registered charity has a physical presence in Australia if it is wholly in Australia, or it has a division, branch or sub-division in Australia.
It does not have a physical presence in Australia if it is present in Australia only through an agent, or it merely owns investment property in Australia.
Objectives and expenditure principally in Australia
If a registered charity has a physical presence in Australia only, it must pursue its objectives and incur its expenditure principally in Australia.
'Principally' means mainly or chiefly – less than 50% of expenditure is not principally.
The pursuit of objectives in Australia can include things done offshore if they are only a means of pursuing those objectives.
For example, sending employees to an offshore conference to aid their efficiency for the Australian objectives will be pursuing objectives in Australia.
Example – physical presence test met
An association is a registered religious charity. It is physically present only in Australia, but it also sends materials to missionaries overseas. As long as these activities and expenditure are not major, it will meet the physical presence test.
End of exampleIf your registered charity has a physical presence in Australia as well as another country, it is necessary to work out the extent to which it is physically present in Australia. Then it is only to that extent that the purposes and expenditure must be principally in Australia.
This means a registered charity that, when viewed as a whole, does not principally have its purposes and expenditure in Australia can still meet the physical presence test.
Example 1 – physical presence test met
A society is a registered medical charity. It operates two clinics, one in Australia and one in Papua New Guinea. Each clinic operates separately, with general administration being done in Papua New Guinea. If the Australian activities and expenditure are mainly for the Australian clinic, it will meet the physical presence test.
Example 2 – physical presence test not met
VBN Welfare is a registered charity running support programs through four centres, one in Australia and three in Malaysia. All funding comes from Australia and a similar amount is spent on each centre. To the extent VBN Welfare has a physical presence in Australia, it is not principally pursuing its objectives and incurring its expenditure in Australia. It could only meet the physical presence test through the distribution of disregarded amounts.
End of exampleDisregarded amounts
A charity may still meet the in Australia test even if it does not pursue its purposes and incur its expenditure principally in Australia if it has a presence in Australia. This will depend on its distribution of disregarded amounts.
Disregarded amounts are amounts that your registered charity receives as:
- gifts, including testamentary gifts (that is, gifts made under a will)
- proceeds from raffles, dinners, charity auctions, jumble sales and similar fundraising activities
- government grants.
Distributions of these amounts are disregarded when working out where your registered charity pursues its objectives and incurs its expenses.
Example 1 – disregarded amounts: impact on physical presence test
A corporation provides religious instruction in Australia and New Zealand. The amounts it uses for the New Zealand teaching are never more than the disregarded amounts. Because the disregarded amounts are assumed to pay for the New Zealand activities, the corporation can still meet the physical presence test.
Example 2 – disregarded amounts: impact on physical presence test
Continuing the earlier example of VBN Welfare that runs support programs in Australia and Malaysia. If its disregarded amounts cover funding of the Malaysian programs, it could meet the physical presence test. This is because the disregarded amounts are assumed to be the first spent offshore.
End of exampleDeductible gift recipient test
Your registered charity will meet this test if it either:
- has been endorsed as a deductible gift recipient (DGR) in its own right and not merely for a fund, authority or institution it operates
- is listed by name in the tax law as a deductible gift recipient.
If a registered charity is a DGR, it still needs to apply for endorsement to access income tax exemption.
If a registered charity is endorsed as a DGR only for a fund or institution it operates, it does not meet the DGR test.
Example – DGR test not met
A charitable school is endorsed as a DGR for a school building fund it operates and deductible gifts can be made to its building fund. The school would not meet the DGR test because it is a DGR only for the operation of its building fund.
End of examplePrescribed by law test
Your registered charity will meet this test if it is prescribed by name in the income tax regulations, and one of the following applies:
- It is located outside Australia and is exempt from income tax in its country of residence.
- It has a physical presence in Australia but incurs its expenditure and pursues its objectives principally outside Australia.
Governing rules condition
Your registered charity will meet this condition if it complies with all the substantive requirements in your governing rules, being those rules that authorise the policy, actions and affairs of your registered charity.
Breaches of procedural requirements set out in the governing rules will not prevent a registered charity from meeting this condition for income tax exemption.
If your registered charity is new, it will meet this condition if it intends to comply with all the requirements in its governing rules.
If your registered charity does not meet this condition it is not entitled to be endorsed for income tax exemption.
Income and assets condition
Your registered charity will meet this condition if it applies its income and assets solely for the purpose or purposes for which it is established.
If your registered charity is new, it will meet this condition if it intends to apply its income and assets solely for the purpose for which it is established.
If your registered charity does not meet this condition it is not entitled to be endorsed for income tax exemption.
Check |
Question |
Yes |
No |
|---|---|---|---|
1 |
Does your charity have an ABN? |
Go to 2 |
Your charity must have an ABN. See Australian Business Number. |
2 |
Is your charity registered with the ACNC? See Registered charityExternal Link. |
Go to 3 |
Your charity must be registered with the ACNCExternal Link. |
3 |
Does your registered charity have a physical presence in Australia and to that extent incur its expenditure and pursue its objectives principally in Australia? See In Australia test. |
Go to 4 |
Go to 6 |
4 |
Does your registered charity comply with all the substantive requirements in its governing rules? See Governing rules condition. |
Go to 5 |
Your charity is NOT entitled to be endorsed. |
5 |
Does your registered charity apply its income and assets solely for the purpose for which it is established? See Income and assets condition. |
Your charity is entitled to be endorsed. |
Your charity is NOT entitled to be endorsed. |
6 |
Is your registered charity a deductible gift recipient? See Deductible gift recipient test. |
Go to 4 |
Go to 7 |
7 |
Is your registered charity prescribed by name in the income tax regulations, and meets one of the following: Is it located outside Australia and exempt from tax in its country of residence? Does it have a physical presence in Australia but incur its expenditure and pursue its objectives principally outside Australia? |
Go to 4 |
Your charity is NOT entitled to be endorsed. |
GST charity concessions
To be endorsed to access GST charity concessions your charity must:
- have an ABN
- be a registered with the ACNC.
No additional tests are required to be passed for this endorsement.
See also:
FBT concessions
FBT charity concession are the FBT rebate for registered charities that are institutions, and the FBT exemption for PBIs and HPCs.
FBT rebate
The FBT rebate is only available to registered charities endorsed to access income tax exemption.
However, the FBT rebate is not available to:
- Registered charities that are not institutions
- Registered charities that are institutions of the Australian Government, a state or a territory (examples are public universities, public museums and public art galleries).
- Registered public benevolent institutions and registered health promotion charities – these organisations may be eligible for the FBT exemption.
Institutions
An institution can include an organisation established by:
- will or instrument of trust, or
- its legal structure might be an incorporated association or instrument of trust or a corporation.
- Incorporation is not enough, on its own, to show a registered charity is an institution: its activities are also relevant.
An institution is not:
- a structure with a small and exclusive membership that is controlled and operated by family members and friends and carries out limited activities
- a fund.
A registered charity that is an institution will carry out activities to further its charitable purpose, while a registered charity that is a fund is established under an instrument of trust or a will to mainly manage or hold trust property.
However, if the trustee mainly carries out activities (rather than mainly managing or distributing trust property), the fund will be treated as an institution.
FBT exemption
The FBT exemption is only available to registered public benevolent institutions or registered health promotion charities that are endorsed to access the FBT exemption.
Public and NFP hospitals and public ambulance services are eligible for FBT exemption and do not need to be endorsed to access the FBT exemption.
However, if a hospital is controlled by an NFP society or association that is a charity, that NFP society or association must be a registered charity and endorsed for the FBT rebate to claim the FBT exemption.
See also:
You need to meet certain requirements to be eligible for endorsement for charity tax concessions.