Not-for-profits – Charitable trusts
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What is a charity?
Not all not-for-profit organisations are considered to be a charity, however all charities must be not-for profit. The term charity is often used colloquially, however charities are essentially a type of not-for-profit organisation in Australia. Not-for-profits invest all profits back into the organisation to fund their activities and purpose.
Charities at federal level are defined under The Charities Act 2013 as a not-for-profit that exists for a charitable purpose and is for a public benefit. The following purposes are deemed to be for a public benefit under The Charities Act:
- Preventing and relieving sickness, disease, or human suffering.
- Advancing education.
- Relieving poverty, distress or disadvantage of individuals or families.
- Caring for and supporting the aged or individuals with disabilities.
- Advancing religion.
Charitable purposes under The Charities Act include:
- Advancing health.
- Advancing social or public welfare.
- Advancing religion.
- Advancing culture.
- Promoting reconciliation, mutual respect, and tolerance between groups of individuals that are in Australia.
- Promoting or protecting human rights.
- Advancing the security or safety of Australia or the Australian public.
- Preventing or relieving the suffering of animals.
- Advancing the natural environment.
- Any other purpose beneficial to the general public which is analogous to the above purposes.
- Advancing public debate.
Therefore, for a trust to be considered a charitable trust, it must be for the public benefit of a charitable purpose as defined under The Charities Act.
Groups can be disqualified from being a charity if they engage in activities that are unlawful or contrary to public policy, or if they promote or oppose a political party or candidate.
Charities can also be formed under any of the usual not-for-profit structures in Australia if they meet the requirements of the charities act, for example companies limited by guarantee, incorporated associations or co-operatives.
What is a charitable trust?
Generally, a charitable trust has often been the first choice of legal structure for charities in Australia. More recently this has changed with the increase in incorporated associations and companies limited by guarantee. Charitable trusts are established to enable other organisations fulfil their purpose. In comparison to other not-for-profit organisations who operate in a way to pursue a specific purpose. A charitable trust will hold and distribute funds in accordance with their trust deed, to benefit other organisations and enable them to fulfil their purpose.
How to establish a charitable trust?
To start with, a trust deed will need to be formed to establish your charitable trust. It is necessary to obtain legal advice to assist you in forming your trust deed and ensure you comply with relevant legal requirements. Under a charitable trust, the trustees agree to hold assets to be used for the purpose of the charity. The deed needs to include the purpose of the charity and how it will be determined which causes and organisations will be supported through the charity. The deed must satisfy legal requirements and comply with the Australian Charities and Not-for-profits Commission (ACNC) as well as any ATO requirements. It should also include how the trust can be dissolved and the procedure for doing so. There are many requirements when setting up a charitable trust – trust law can be complex and professional advice will be required to set up this structure of charity.
Differences between a trust and charitable trust
The main differences between a regular trust and a charitable trust are that they must be for charitable purposes for a public benefit, the substantial tax concessions available and that the rule of perpetuities does not apply therefore a charitable trust can exist perpetually.
Advantages of a charitable trust
- Substantial tax concessions
- Charitable entities are exempt from income tax under the Income Tax Assessment Act 1997 (Cth).
- Under division 30 of the Income Tax Assessment Act tax deductions for gifts can be allowed.
- The Fringe Benefits Tax Assessment Act 1986 allows trusts to be exempt from fringe benefits tax.
- Charitable discretionary trusts do not have to file tax returns.
- State and territory tax concessions may apply.
- Perpetual existence.
- No need to comply with the laws that govern incorporated associations or companies limited by guarantee.
- There is no requirement to report to ASIC.
Overall, as you can see there are significant tax advantages to forming a charitable trust structure for your not-for-profit. In comparison to other not-for-profit entities, a charitable trust has lower reporting requirements than companies limited by guarantee and incorporated associations, is able to obtain substantial tax concessions and can have a perpetual existence unlike other trusts.
Disadvantages of a charitable trust
- Trust law can be complex and requires professional advice.
- A charitable trust is not a separate legal entity therefore everything must be in the name of the trustees.
- There is no limited liability and therefore trustees are liable for the debts and liabilities of the charity.
- Limited to charitable purposes.
- Must comply with ACNC regulations if registered as a charity.
Unlike some other not-for-profit structures, a charitable trust is not a separate legal entity. Therefore, the trust is not able to own assets or sign documents in its name. There is also no limited liability available, making trustees liable for the debts and liabilities of the charity. Charitable trusts must also comply with the Charities Act in that they must exist for a public benefit and be for a charitable purpose.
if they are registered as a charity, organisations must maintain financial records, submit annual information statements, and comply with corporate governance requirements set by the ACNC. Generally, to access the benefits of a charity such as tax concessions, the organisation must be registered.
If your organisation is a not-for-profit and is acting for a charitable purpose, establishing a charitable trust should be considered due to the substantial advantages available. GLG Legal will be able to assist you in ensuring you meet the requirements under the Charities Act, as well as assist in all aspects of forming your charitable trust.
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