Charity Law's Public Benefit Test: Is Legislative Reform in the Public Interest?

CHARITY LAW’S PUBLIC BENEFIT TEST: IS LEGISLATIVE REFORM IN THE PUBLIC INTEREST? PAUL HARPUR* I INTRODUCTION This paper explores the current position of the ‘public benefit’ test in relation to charitable institutions. Primarily this paper focuses on a proposed new definition for charities released in July 2003 by the Commonwealth government1 and subsequent legislative moves in 2003, which support this proposal.2 This paper will focus on one aspect of the proposed definition: the public benefit test. The paper will commence by examining the rationale behind this component of the definition for ‘charities’ and by examining the current common law test. The paper will then explore the proposed definition itself and critically evaluate it. First, the general approach to dividing the ‘public benefit’ test into three sub-questions which all are condition precedents to satisfying the test will be criticised. The inadvisability of leaving the explanation of ‘or a sufficient section of the public’ in its current form will be highlighted, as will the continued use of ‘universal or common good’ as a condition precedent test. The paper will then note the positive variances between the 2001 Charities Definition Inquiry and the 2002 proposed definition. Thirdly, the paper will compare the Australian situation to other common law jurisdictions. Finally recommendations will be made as to how the proposed definition could be improved before it is tabled as a Bill before parliament. II RATIONALE BEHIND THE ‘PUBLIC BENEFIT’ REQUIREMENT FOR CHARITIES When an organization holds itself out as a ‘charity’ various social welfare attributes are associated with that organization.3 However more important than the general public perception are the legal implications of being held a ‘charity’ at law. When an organisation is held to be a ‘charitable institution’ or ‘charitable fund’ that organization enjoys various tax relief benefits. The scheme of tax relief costs the * 1 2 3 B Bus/LLB Student, Faculty of Law, QUT. A Bill for an Act to define charities and charitable purpose, and for related purposes 2002/2003; s 2 Short Title: This Act may be cited as the Charities Act 2003. Taxation Laws Amendment Bill (No 5) 2003 (Cth) implements part of the proposals while the Explanatory Memorandum, Taxation Laws Amendment Bill (No 5) 2003 continues the Government’s position stated in the 2002 Press Release. E Abery, ‘Charities: A Target for Ralph?’ (2000) 29 Australian Tax Review 4. HARPUR (2003) government consolidated revenue substantially.4 The 2001 Tax Expenditure Statement released by the Department of Treasury states the estimated cost of permitting a deduction for gifts to approved entities was $300 million for the 2001/2002 income year. This massive relief is granted through a complicated scheme with the ‘charity’ and ‘public benefit’ requirements being central.5 The Charities Definition Inquiry6 estimated there are 19,000 charities, which employ staff, as opposed to charities which rely totally on volunteers. Those employing charities account for approximately 4.8% of people employed in Australia. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 5) 2003 (Cth) which forms part of the government’s response to the 2002 Charities Report estimates the revenue cost of one part of the government’s response ‘is expected to be $5 million in each of 2003-2004, 2004-2005 and 20052006’.7 While relief to charities seems positive, such relief has the correlative effect of denying the community from having the revenue allocated to other ventures. Simply put, the charity tax relief scheme has a high opportunity cost to the community. This opportunity cost means the public has a vested interest in ensuring only those purposes, which are truly for the public benefit, receive the tax benefits. This is the rationale behind the ‘public benefit’ test. III ANALYSIS OF THE CURRENT ‘PUBLIC BENEFIT’ TEST Before a purpose can be deemed ‘charitable’ the purpose must satisfy the ‘public benefit’ test and fall within the spirit and intention of the Statute of Elizabeth,8 unless it is a trust for the relief of poverty. The object or purpose must be a charitable purpose as well as a publicly beneficial one, however the focus on the ‘beneficial’ aspect of the ‘public benefit’ test has not been as extensively explored as the interest in the examination of what constitutes the ‘public’. A What Constitutes a ‘Benefit’? A purpose is beneficial to the public if it goes towards achieving a universal common good and is not harmful to the public. While the provision of benefits is not limited to material benefits, the purpose must have some practical utility.9 Being beneficial to the public is a condition precedent to acquiring charitable status. What constitutes the ‘benefit’ to the public is often unclear and relies on personal opinion, for example in Re 4 5 6 7 8 9 G Santow, ‘Charity in its Political Voice - A Tinkling Cymbal or a Sounding Brass?’ (1999) 18 Australian Bar Review 3, 223-253. Tax Issues for Charities in the New Millennium (2002) 7 Deakin Law Review 131. Report of the Inquiry into the Definition of Charities and Related Organisations, June 2001, 3 (‘Charities Definition Inquiry’). Explanatory Memorandum, Taxation Laws Amendment Bill (No 5) 2003. Income Tax Special Purposes Commissioners v Pemsel [1891] All ER Rep 28 (Lord McNaughten); [1891] AC 531; Scottish Burial Reform and Cremation Society v Glasgow Corporation [1968] AC 138. H Picarda, The Law and Practice Relating to Charities (Butterworths, 3rd ed, 1999) 19-29; HAJ Ford and WA Lee, Principles of the Law of Trusts (The Law Book Company, 2nd ed, 1990) 829-833; G Dal Pont, Charity Law in Australia and New Zealan, (Oxford University Press, 2000) 13-22. 2 Vol 3 No 2 (QUTLJJ) Charity Law’s Public Benefit Test: Is Legislative Reform in the Public Interest? Pinion10 a gift of an art studio to be set up as a museum was held not to be beneficial as the artwork lacked public utility and educative value. National Anti-Vivisection Society v Inland Revenue Commissioners11 concerned an association attempting to abolish experimentation on animals and repeal legislation which permitted experimenting on animals. The court acknowledged caring for animals was prima facie charitable and that the benefits such research gave to the community in the changed environment justified the experimentation. The court held the benefit from such changes were not in the public benefit and struck down a charity, which had existed since 1895. The House of Lords in Gilmour v Coats12 attempted to rationalize the subjective nature of the ‘benefit’ test. The court held: The court can only act on proof of public benefit and not on belief; and the value of intercessory prayer was manifestly incapable of proof. The benefit to be derived by others from the example of pious lives was something too vague and intangible to satisfy the test of public benefit.13 The test of (...truncated)