Australian Charities and Not-for-profits Commission (‘ACNC’) registered charities are eligible for a number of tax concessions at both Federal, State and local government level. These concessions include income tax exemption, a FBT rebate, payroll tax and land tax exemptions etc.
However, in order to qualify for, and maintain, ACNC charity registration, the applicant must be a charity and maintain its charity status, within the legal meaning of that term.
The Charities Act 2013 (Act) defines a ‘charity’ to mean an entity:
- that is a not‑for‑profit entity; and
- all of the purposes of which are:
- charitable purposes that are for the public benefit; or
- purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (1); and
- none of the purposes of which are disqualifying purpose; and
- that is not an individual, a political party or a government entity.
So to be recognised as a charity and to maintain ACNC registration an organisation must only have purposes that are charitable and for the benefit of the public (or a section of the public). To the extent that there are non-charitable purposes these must be ancillary or incidental to the furtherance of the broader charitable purpose(s).
The recent case of Angel Loop Ltd v Commissioner of Australian Charities and Not-for-profits Commissioner (Taxation) [2021] AATA 3894 (‘Angel Loop’) considers how the definition of ‘charitable purposes’ is impacted by the public benefit requirement.
Broad overview
The case is a review of an objection to an ACNC decision disallowing Angel Loop’s registration because not all of its purposes were held to be charitable and for the public benefit. Further Angel Loop’s non-charitable purposes were not incidental or ancillary to a broader charitable purpose.
By way of background, Angel Loop Ltd is a not-for-profit public company limited by guarantee. The company was established to promote early-stage investing in regional areas of Australia through the establishment of local community groups called ‘Angel groups’. The role of the Angel groups was to foster greater connections between inventors and prospective investors for the purposes of mentorship and direct investments to enable innovations to be brought to commercialisation.
The Constitution of Angel Loop set its objects (amongst other things) as:
Angel Loop is a facilitator encouraging knowledge transfer, sharing, promotion of a code of conduct, and delivering education within the broader community to ensure long-term sustainability of Angel Investors. All Angel Loop activities foster knowledge transfer between Angel Investors, entrepreneurs and the broader community.
Angel investors are usually successful commercial members of the community.
In December 2019, Angel Loop was a syndicate of 11 independent Angel groups. Each Angel group was responsible for running meetings and to source and supply, where possible, presenters (referred to as ‘pitchers’) for the scheduled meeting.
Angel Loop was responsible for assisting the Angel group both to source and screen local pitchers. If an Angel group decided to proceed with a proposal Angel Loop would assist the group to raise capital from another group to enable the inventor’s idea to be commercialised.
A breakdown of time spent by Angel Loop on each of its activities established that it spent
- 50% of its time on presentations at roadshows which were Angel group meetings as well as educational sessions with entrepreneurs and investors as part of those roadshows;
- 25% of its time on training/screening/mentoring sessions including individual discussions with entrepreneurs and coaching for presenters helping them to present their pitch as well in screening business ideas;
- 5% of its time connecting with national Angel groups; and
- 20% of its time planning and booking Angel roadshows and working out the logistics of who would be pitching where.
The ACNC argued that the facilitation of inventors obtaining funding was not just a by-product of Angel Loop activities but rather the centre of the whole enterprise.
The result of Angel Loop activities was to confer a benefit to both the inventor (by way of funding) and the investor(s) (by way of potentially deriving significant commercial benefit from their investments if the start-up business was successful).
Angel Loop contended that its facilitation of private investment through the roadshows, screening, coaching, and combination of groups was part of its objective of promoting a culture of innovation and entrepreneurship and should be considered as similar to the organisation which was accepted as charitable in Commissioner of Taxation v The Triton Foundation [2005] FCA 1319 (Triton).
(TaxEd note: since the Triton decision it is accepted that the promotion of a culture of innovation and entrepreneurship is capable of being a charitable purpose as an aspect of the advancement of industry or commerce).
The Tribunal distinguished Triton noting the facts in the present case were different. In Triton, the evidence showed that all of the help was given to the inventor.
In the present case, Angel Loop’s activities were found to have extended beyond encouragement for innovation and entrepreneurship. The evidence showed that its core function was not simply to educate and encourage or assist. Rather a core function of Angel Loop was to bring about a commercial deal between investor and inventor. The facilitation of the possible deal between investor and inventor was not ancillary to the charitable purpose. Angel Loop was found to have an independent, non-charitable purpose of facilitating private business relationships for the primary benefit of entrepreneurs and angel investors.
Accordingly, the Tribunal upheld the ACNC decision to refuse charity registration of Angel Loop.
What are the implications?
The Angel Loop case demonstrates that the only purposes a charity can have are charitable purposes that are for the public benefit. An organisation’s charitable purposes are established not only by reference to the terms of its constituent documents but also its activities, operations, transactions, and any other relevant matters. In the Angel Loop case it was the examination of the activities that disclosed there to be an independent non-charitable purpose.
Registered charities should, as a minimum, have in place a self review process to ensure activities, projects and services remain charitable.
The ACNC self assessment checklist in word document format is a useful tool, providing a framework for charities to self-assess their entitlement for continued registration with the ACNC.