If you are thinking of establishing a not-for-profit organisation or charity, or even if you are running one already, it is important to know the answer to the question of what a charity actually is. The answer might surprise you and is more complicated than people first think. And the dictionary is not going to help this time!
When stripped right back to the basics, a charity is a not-for-profit organisation established and operated to pursue a charitable purpose.
So, what is a not-for-profit organisation and what is a charitable purpose?
A not-for-profit organisation (sometimes referred to as a non-profit organisation or even a ‘for purpose’ organisation) is an organisation that has the following two key characteristics:
- it is established and continues to exist for a purpose beyond making a profit (often of a charitable, environmental, cultural, sporting, industry or community benefit nature) that underpins the reason for its existence and shapes the nature of its activities; and
- if it does make any profit (or surplus), it is retained by the organisation to help further its purposes and, except in certain circumstances, is not distributed to the organisation’s members.
By way of contrast, a for-profit venture is generally established with profit as its primary focus and it may distribute profit to its shareholders, usually through the payment of dividends.
Other characteristics of a not-for-profit organisation include that it:
- consists of members who have no proprietary rights in the organisation; and
- commonly, but not always, prohibits the members of its governing body, usually a management committee or board of directors, from receiving money, property or other benefit in their capacity as a member of that governing body. Not-for-profit organisations play a very important part in society and are abundant within our social fabric. They can be incorporated or unincorporated, big or small, may or may not have employees and may be, but need not be, charitable in the legal sense.
Not-for-profit organisations are found almost everywhere and cover a full and diverse spectrum of purposes, interests and activities including:
- groups whose activities are “charitable” in the legal sense – being directed towards things like social welfare, advancement of education, advancement of religion, reconciliation, human rights and protection of animals;
- sporting, social and cultural groups such as football clubs, staff social clubs and arts festival committees;
- public universities, schools, hospitals and religious institutions;
- environmental foundations, cancer research institutions and community resource centres; and
- industry associations and associations of employees, business people or professional people formed for the purpose of protecting their mutual interests.
Whilst a lot can be said about not-for-profits (most of which is beyond the scope of this article), it is important for us to call out one common, but critical, misconception. There is a commonly held belief that a not-for-profit organisation is, simply by being a not-for-profit, automatically a charity or somehow exempt from income tax.
To be exempt from income tax you need to be either a registered charity or a type of not-for-profit permitted to self-assess as income tax exempt.
We have all heard of charities. However, defining a charity and determining what is a charitable purpose can be a little tricky and will depend on the context.
The concept of “charity” or “charitable” has an everyday meaning and a legal meaning. Even within the legal meaning, there are variances depending on whether we are talking about:
- registering as a charity with the Australian Charities and Not-for-profits Commission (ACNC);
- accessing Commonwealth tax concessions from the Australian Taxation Office – such as income tax exemption, fringe benefits tax concessions and deductible gift recipient endorsement;
- accessing state-based tax concessions – such as exemptions from stamp duty, payroll tax and land tax; or
- obtaining authorities to undertake charitable fundraising activities – such as asking the public to donate.
And these are only examples!
Whilst the legal meaning of charity has a long and interesting history, much of this is now codified in the Charities Act 2013 (Cth) (Charities Act). The Charities Act lists 12 different categories (sometimes called ‘heads’) of charity. These are:
- advancing health;
- advancing education;
- 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 purposes beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in the subtypes above;
- advancing public debate (promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a state, a territory or another country).
There is a large amount of case law and explanatory material that helps unpack and understand what each of the above categories mean and include which we won’t go into now. We hope however this article has given you a flavour of what a not-for-profit is and what makes a not-for-profit a charity.
As we are sure you can appreciate, we have only really scratched the surface. For instance, we haven’t covered the charity registration process, what might disqualify an organisation from being a charity, what deductible gift recipient endorsement is and how to obtain it, when a non-charitable not-for-profit can self-assess as income tax exempt or when a charitable fundraising authority is required. The world of not-for-profits and charities is fabulously diverse and complicated, which is why we love working exclusively to serve this sector.
Feel free to contact our passionate and dedicated charity law specialists if you would like some help or guidance with your charity or not-for-profit organisation.
You can also learn more about charities and their characteristics, the different types of charities and how to register a charity at the ACNC’s website.