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Bulletin: Public Benevolent Institutions - an opportunity lost?

Native Title & Public Interest Law
Bulletin: Public Benevolent Institutions - an opportunity lost?
On 26 December 2016, the Australian Charities and Not-for-Profits Commission (ACNC) released a Commissioner’s Interpretation Statement on Public Benevolent Institutions (PBI).

A PBI is a charitable institution with a principal purpose of providing benevolent relief to people in need. The ACNC is responsible for determining whether a charity can be registered as a charity sub-type of PBI, which is a prerequisite to the ATO endorsing a charity as a deductible gift recipient in the PBI category.

The recent Commissioner’s Interpretation Statement follows the release of an exposure draft last April, and a consultation period. 

We acknowledge that the role of the CIS is to provide a clear statement of the ACNC’s understanding of the current law that applies to charities.  However, we are concerned that while the exposure draft appeared to support a progressive understanding of the multi-faceted role charities play in today’s complex world, the CIS seemingly signals a potential retreat to an outmoded interpretation. 

In this bulletin we highlight key elements of the CIS, which relate to the three pillars of: Public; Benevolent; and Institution. We also look at special requirements for overseas aid work, and identify the potential implications of the Statement overall for charities wishing to register as a PBI.  

Determining whether an entity is Public

The CIS confirms that the main criterion in determining whether an entity is “public” is the breadth of the class of people the entity benefits. 

Other criteria include:

  • public control and accountability
  • receipt of public funds, and
  • connection with government. 

Unlike public funds, PBIs do not require control by a majority of people who have specific responsibility to the community. However, the updated CIS suggests that having more responsible individuals on the governing body, who are unrelated to each other and have a degree of responsibility to the community, is likely to be advantageous.  

This point was not made in the exposure draft, except by way of a case study that suggested an entity may not be able to demonstrate it is “public” if its members are all family and close friends.  

In our view, the additional explanation in the CIS may go beyond promoting greater accountability and suggests an unnecessary tightening of the requirements to be a PBI.  

Determining whether an entity is Benevolent

The CIS section on benevolence emphasises that benevolent relief provided by PBIs must be specifically targeted at people in need, and also be “provided to relieve the needs of those people”. The second phrase was not included in the exposure draft.

While this requirement is arguably broadly consistent with case law, the CIS stresses that an organisation’s benevolence cannot just be directed at a community in need, for example Indigenous Australians - it must be directed towards relieving those needs (see paras 5.1.2, 5.3.2, 5.4.2, 5.9.3).  

Relevantly, the Commissioner states at 5.9.3: “A PBI’s benevolence must actually relieve the needs of the people in need. Some prevention work will be too remote to be able to meet this requirement.”  Further, the CIS provides that ‘relief may encompass the promotion of indigenous culture’ as long as it ‘does not amount to an independent purpose of promoting culture, independent of need.’ In our view, this is an over simplification of the evolving case law that rightly recognises that in the context of Indigenous disadvantage, addressing need requires a necessarily holistic approach, encompassing, for example, the promotion and preservation of cultures. The CIS seems to overlook the fact there exists an inextricable link between promoting and protecting culture  and relieving the needs of and overcoming the disadvantages suffered by Indigenous people. 

This language in the CIS suggests a potential winding back of the more progressive approach to benevolent assistance put forward in the exposure draft. This approach reflected a shift beyond welfare and service delivery models to creative, capacity building and community development focussed benevolent work.  

We can only hope that our fears will be allayed in due course through the ACNC’s practical application of the CIS.

Determining whether an entity is an Institution 

To qualify as a charitable “institution”, the ACNC requires new charities to demonstrate concrete plans to operate in the foreseeable future (within one year of establishment). This is consistent with the exposure draft, however the ACNC has provided useful clarification about how new organisations can satisfy this requirement.

For example, the CIS suggests that new organisations provide a 2-3 page operational, strategic or business plan outlining proposed activities, resources, projections, personnel and partnerships. 

According to the CIS, the more rigorous the plan, the more readily the organisation will be able to demonstrate that it is an “institution” established for benevolent purposes.

It is worth noting that the CIS on Health Promotion Charities was also updated on 15 January 2017 to provide consistency regarding the meaning of “institution”.

Overseas aid work

PBIs may have a main purpose of providing benevolent relief to people overseas. 

The CIS has a new focus on governance risks associated with operating overseas, and signals that the ACNC will take a proactive regulatory approach in assessing whether organisations engaged in overseas activities can demonstrate compliance with its governance standards.

This focus on overseas operations was not included in the exposure draft. Following the relaxation of the “in Australia” requirement for PBIs, DFAT’s recent review of the Overseas Aid Gift Deduction Scheme and the ACNC’s recent compliance work on overseas aid charities and terrorist financing, the move is not surprising.

The CIS section on operating overseas clarifies that:

  • PBIs can provide benevolent relief to people in countries that have not been declared as ‘developing’ by the Minister for Foreign Affairs;
  • Benevolence can be targeted at an entire community, if everyone in the community, or the vast majority, are people in need (for example, disadvantaged communities in developing countries);
  • “Relief” in the PBI context is not identical to the concept of relief for the purposes of s 30-85 of the ITAA97 (developing country relief funds); and
  • an organisation with a purpose of building, maintaining or enhancing community infrastructure (for example, roads) will ordinarily not be eligible for registration as a PBI, as the relief will be too indirect.

These statements all relate to the potential overlap between PBIs and other types of charities engaged in overseas aid, in particular developing country relief funds operated by approved organisations under the OAGDS scheme. This overlap raises important questions about the appropriate level of regulation of funds being sent overseas and models of development best practice.

For example, World Vision noted in its paper ‘Re:Think - better tax, better Australia’  that the definition of PBI focuses on a passive welfare model of relief. OAGDS guidelines distinguish between ‘development’ and ‘welfare’, and prevent deductible funds from being used for welfare purposes or activities that create dependency.  World Vision describes the incongruous result as follows:

a charity under the OAGDS scheme cannot use tax deductible funds for welfare projects, whereas a PBI charity wishing to carry out development work in Australia is circumscribed by an outdated concept of welfare-type assistance inherent in the concept of a PBI. The practical outworking of this is that our work as a PBI with Indigenous communities in Australia is unhelpfully constrained. 

Ultimately, like World Vision, we welcome the loosening of the “in Australia” conditions for DGRs, but we also call for a modernisation of the concept of PBI, to enable PBI charities to carry out poverty alleviation projects in Australia, and overseas, in accordance with a modern understanding of best practice.  

Implications for Arnold Bloch Leibler’s public interest law, charity and not for profit clients

Following the latest CSI, our advice to organisations applying for registration as a PBI are in summary as follows:

  • Charities should, if possible, appoint three people to their boards who are unrelated to each other (which includes not being close friends) and who have a degree of responsibility in the community (particularly if the target audience for relief is narrow); 
  • Newly established organisations should include a 2-3 page organisational/strategic plan along with their application;
  • Newly established organisations should expect requests for information about how they meet the “institution” requirement (for example, strategic plan, intended membership size, proposed marketing and communication methods, personnel details, and information to show that the entity is “sizeable, recognisable and permanent”);
  • Organisations sending funds overseas or conducting activities overseas, particularly in developing countries, should consider completing the “protecting your charity against terrorism financing checklist”; and
  • Organisations sending funds overseas or operating overseas should be prepared for the ACNC to enquire into how the organisation:
    • ensures that its overseas activities align with its purpose and character as a NFP;
    • maintains internal control and risk management procedures (including in relation to finances, funds transfer, decision making, safety of volunteers, staff  and people the organisation seeks to assist, and membership of the Australian Council for International Development);
    • monitors and evaluates overseas activities; and
    • selects and partners with overseas organisations, including copies of any partnership agreements.

Final observations

It remains to be seen how the ACNC will apply the potentially more restrictive CIS. It would be truly regrettable, and a great opportunity lost, if a more limited and traditional approach to the concept of a PBI once again becomes the norm, particularly in relation to Indigenous charities.  

If it does, concerned parties must work together to reinvigorate stalled efforts by government to use legislation to promote more empowering, development focused (as opposed to welfare driven) models of benevolent activity.