Tax deductibility for churches

Ross Woods, Rev. Feb, 11

There are now six relevant grounds for tax deductibility (DGR or Deductible Gift Recipient status) that can be relevant to churches:

Community care (i.e. public benevolence)

Public benevolent institutions (PBIs) are most suitable to community care aspects of ministry, and their services must be open to anyone who needs them. The range of activities is fairly limited to such things as the relief of poverty and suffering.

Not only can expenditure be any kinds of legitimate cost of the PBI (including wages and salaries), there can be GST benefits and better Fringe Tax Benefits than other kinds of tax deductible funds.

It must be separately incorporated, and the objects can't be religious, because it must be open to the whole community and not represent one faction of the community.

If the church wholly controls the PBI, then the PBI can be deemed to comply with the church's religious objectives rather than its stated benevolent objects. It is therefore religious and not eligible for DGR status. (This also affects cultural organizations.) You should avoid the appearance of a church controlling a dummy PBI as a front to gain tax deductibility. The solution is for the church and the PBI to agree upon a board that overseas interests in common.

Cultural organization

It must be separately incorporated, and the objects can't be religious, because it must be open to the whole community and not represent one faction. It includes equipment for cultural activities and apparently can include all staff salaries and related costs. It can include the whole building, including non-building facilities (e.g. a car park, which is not included in educational buildings).

Music and related performing arts are most appropriate for churches.

Public Library

Tax deductibility for a library covers more than just the building. It can cover staff salaries, equipment, maintenance, etc. It can be religious.

School Building Fund

Churches can get 100% tax deductibility for their buildings if they have sufficient training and educational activities. People mainly want a tax-deductible building fund for construction, but it can also be used for maintenance and maintenance staff (because they are working on the building). So don't close down the fund when you've finished building.

But tax deductibility is difficult because the burden of proof is on the church to show that it is doing that much education. It makes it difficult for new buildings.

It can be easier to get 100% tax deductibility if the property is owned by a separately incorporated body that has educational objects and is a Registered Training Organisation. That is, the evidence that the owner is educational in nature is that it is a separately incorporated body with purely educational objects. The value of being an RTO is an extra, indisputable layer of evidence that the body is educational. The school then rents the building to the church for weekend and some weekday community education activities. Even so, the ATO does everything possible to obstruct tax deductibility, and will now ask for much more information than is required for the application. For example, even if the college:

The ATO may still require evidence that 50% of inside floor space (not including offices, passages, trafficways, kitchens, toilets, etc.) is used for educational activities for 50% of the working week. In some buildings, these excluded areas make up a huge proportion of the floor space.

Turning suitable church programs into accredited training is quite possible but requires a substantial commitment. Many other programs can be unaccredited community education, which still fits the scope of educational activities.

The educational activities may be religious, but a school building only covers building-related expenses. It doesn't apply to teaching and administration staff. It also doesn't apply to non-building construction, such as roadways and car parks.

TAFE

This seems to be an excellent option for any organization that is an RTO, because it can spend the money on anything within the organization's objects such as buildings, cultural activities, staff, or scholarships, benevolence, or overseas work. There are no discriminatory rules like PBIs, cultural orgaizations and overseas aid, which can't be Christian. And there are no antidiscriminatory rules such as those for scholarship funds.

It is advisable to relate the use of funds to the RTO's activities. Although not a requirement, it prevents the suggestion that it might be used as a tax-free slush fund for the organization's non-RTO activities.

Although the organization as a whole can be a DGR, it is better to set up a separate DGR fund with a set of rules that apply only to that fund. This is because the ATO requires the organization to give all money away to another DGR if it loses its DGR status. As the ATO can very easily take that status off an organization it would be easy to lose all the organization's other funds not just those received as deductible gifts.

Structures for Building Funds

Here's how I see the main possible structures:

1. Try and get tax deductibility as a church for educational programs (Discussed above. Difficult and not recommended.)

2. Incorporate a new body and get RTO status from scratch. (Not recommended. Becoming an RTO is much harder and more time-consuming than it looks.)

3. Incorporate a new body (Blackstump College Inc.) and use another outside RTO's status and accreditation under an auspice agreement. This is easy and should work quite well.

4. Church and RTO sign an MOU, so that the RTO has a Board of Trustees appointed by the church to manage the property. This is easy and quick, but its safety depends of a solid binding agreement between the two.

Other ideas don't seem as good:

5. Get an RTO to change its name to Blackstump College Inc. or similar. (Not really feasible.)

6. The church owns the land and the educational foundation owns the buildings.

7. Incorporate a new body (Blackstump College Inc.), get it registered as an RTO, and then get accredited courses from another RTO. (Becoming an RTO is the difficult part, so this is not a good option.)

Overseas Aid Fund

Some mission agencies have set up aid foundations that get tax deductibility status. Possible, but usually very difficult.

Combinations

The most common combinations are:

Some churches split their staff time between the DGR organization and the church. This allows their staff to gain the very advantageous religious worker Fringe Benefit for their time doing religious work, while their DGR work is supported by deductible gifts. (Get professional advice when you set it up. This could get legally tricky if the DGR paid the church, because you can't use Deductible Gifts as a back door to channel funds to religious work.)

Scholarship funds for cultural pursuits or for disadvantaged persons are also possible, but they must be open to the general public.

Scholarship fund

In May 2005, the Treasurer announced a new deductible gift recipient (DGR) category for scholarship funds, to be effective from 1 July 2006.

"Charitable funds that are established and maintained solely for the purpose of providing scholarships, bursaries or prizes to promote education where entry is open to persons at a national, regional or state level. This category covers scholarships for all levels of education."

Source: http://www.ato.gov.au/nonprofit/content.asp?doc=/content/58442.htm