New charities law must not restrict charities' vital advocacy role

Three years ago, the federal government committed itself to modernising the definitions of charity used in tax law, which are based on British laws that are 500 years old.

To that end, the government established a Charity Definitions Inquiry. The Inquiry consulted widely with the charitable sector and delivered its report in June 2001. Broadly speaking, its recommendations were supported by the charitable sector.

Last month, the government released a draft Charities Bill 2003 to define "charity" for taxation purposes and asked the Board of Taxation to consult over its wording.

The Bill does modernise the definition of charity in a number of positive ways, by:

• clarifying the list of charitable purposes to include "advancement of social or community welfare" and of the "natural environment";
• acknowledging that child care services are charitable; and
• acknowledging that self help organisations may be charitable, provided they are open and non-discriminatory in their membership.

Advocacy by charities

However, the Bill seeks to impose outdated and counterproductive restrictions on the advocacy and lobbying activities of charities.

Clause 8 of the draft Bill would exclude from charitable status organisations that have among their purposes "changing the law or government policy", or "advocating a cause", unless these purposes are no more than "ancillary or incidental" to the other purposes of the organisation.

This ambiguous and confusing formulation is a shaky foundation for 21st century charity law in Australia. "Ancillary or incidental" could be interpreted in at least two different ways.

On a liberal interpretation, this is consistent with the Charity Definition Inquiry's recommendation that the advocacy work of charities should not be restricted, provided that it:

• furthers or aids the organisation's dominant charitable purpose; and
• does not promote a political party or candidate for political office.

If this is the correct interpretation, Clause 8 is unnecessary (except to restrict partisan political advocacy) because Clause 4 of the draft Bill already states that a charity should not "engage in activities that do not further or are not in aid of its dominant purpose". There is no need to single out "non-partisan" advocacy for special treatment because all the activities of a charity should further or aid a charitable purpose. This was the Inquiry's argument regarding advocacy by charities.

However, a narrow interpretation of Clause 8 would suggest that charities should restrict the resources they devote to advocacy (as is the case in the United States and Canada), or that charities should be regulated in terms of the kind of advocacy they perform (as in England).

At the very least, this would require intrusive and time-consuming regulation of the advocacy work of charities, and the resources devoted to it. Charities could, for example, be required to catalogue their advocacy activity and its cost, in case their advocacy activities are audited by the Australian Taxation Office (ATO).

At worst, a significant number of charities could lose their charitable status. Whether or not the draft Bill "codifies" existing common law on advocacy by charities (as the government states), the reality on the ground is that the ATO has not up until now attempted to regulate these activities in any systematic way. This would change if it interpreted the provisions of Clause 8 narrowly.

A better approach, which is less intrusive and burdensome for charities, is to recognise that charities may engage in non-partisan advocacy as an integral part of a strategy to promote an underlying dominant charitable purpose, such as relieving poverty or protecting the environment. As outlined above, this is the same basic test that applies to the other purposes and activities of charities.

Given the potential for confusion over the legal status of advocacy by charities, and the need to limit partisan political activities, it is best to clarify these issues in the Bill rather than simply relying on the general rules in Clause 4. To clarify and resolve this matter, we strongly recommend that Clause 8 of the draft Bill be re-drafted consistent with the recommendations of the Charity Definitions Inquiry.

If this crucial change is made, the Australian Council of Social Service (ACOSS) broadly supports the Bill's basic thrust.

Other proposed changes to the draft Bill

A number of other recommendations are suggested to improve the draft legislation:

• to indicate that the dominant purpose of a charity should be altruistic;
• to further clarify the meaning of "government body" to ensure that public funding of an organisation pursuant to a government program does not imply that it is a government body;
• to delete references in the draft Bill to unlawful activities or conduct, since this is relevant to the administration of other legislation (such as the criminal law), not the definition of charity;
• to make it clear that the "advancement of social and community welfare" includes assisting people who are disadvantaged in terms of their access to housing;
• to maintain the common-law meaning of the phrase "other purposes beneficial to the community", while at the same time leaving scope for its meaning to adapt to changes in social conditions.

A second round of charity law reform

We do not believe that it is practicable to modernise the definition of charity for taxation purposes without also adjusting that of Public Benevolent Institutions. Indeed, this category is in greater need of modernisation than that of charity. The Charity Definitions Inquiry recognised this.

Public Benevolent Institution status is very closely related to that of charity, both in the public mind and in administrative practice. Indeed, most charities and members of the public confuse the two categories.

Public Benevolent Institution (PBI) status was legislated in Australia early in the 20th century to restrict certain tax advantages to those charities that assisted the most disadvantaged people in society, such as poor people, sick people, and people with disabilities. ACOSS supports this intention, and considers that benefits such as gift deductability and Fringe Benefits Tax exemptions should be restricted to charities of this kind. However, confusion has since emerged between charitable and PBI status, and the courts have unnecessarily restricted PBI status to organisations providing aid directly to disadvantaged people.

The Charity Definitions Inquiry proposed a simple, workable solution to these problems. It proposed that the Public Benevolent Institution category be replaced by a new class of Benevolent Charity, being a charity whose dominant purpose is to benefit, directly or indirectly, those whose disadvantage prevents them from meeting their needs.

We urge the Board to recommend that the government modernise the legislative definition of Public Benevolent Institution. This should be the centrepiece of a second round of legislative reform in regard to charities.

The other key element of this second round of reform should be the establishment of a Charity Commission, as also recommended by the Inquiry. Access to charitable status is currently regulated by the ATO. This is inappropriate, since the ATO has limited expertise in the regulation of charities and this role is likely to conflict with its public revenue raising function. For these reasons, in its submission to the Inquiry, the ATO itself recommended the establishment of a separate body to regulate access to charitable status at the federal government level.

We propose that a Federal Charity Commission be established to act as the "gate-keeper" of charitable and public benevolent status for the purposes of federal government legislation (especially tax law). If such a body is established, it should work cooperatively with the state government agencies charged with regulating charities. In particular, it should encourage all levels of government to adopt identical definitions of charitable status and administrative guidelines to implement them.

If this is not supported, another (though less effective) option would be to establish by statute an expert advisory body to assist the ATO to carry out these functions. That body should be separate and autonomous from the ATO, and should be capable of conducting its own inquiries and consultations into relevant trends in the charitable sector and their implications for the taxation status of charities and public benevolent institutions.