Question
We are a public benevolent institution that is endorsed as a deductible gift recipient. Our constitution contains a clause that requires us to maintain a gift fund to receive deductible gifts. We are looking to amend our constitution to remove the requirement to maintain a gift fund. Are we required to maintain a gift fund under income tax law?
Answer
Section 426-55 of Schedule 1 of the Income Tax Administration Act 1953 sets out the circumstances under which the Commissioner may revoke an entity’s deductible gift recipient (‘DGR’) endorsement. One set of circumstances is if, at any time after the date of effect of the endorsement, the entity is not, or was not, entitled to be endorsed.
The current requirements for an entity to be endorsed as a DGR (contained in section 30-125 of the Income Tax Assessment Act 1997) differ depending on whether the entity is being endorsed as a fund, authority or institution itself or or whether the entity is being endorsed for the operation of a fund, authority or institution.
Where the entity is being endorsed as a fund, authority or institution itself the income tax law does not currently require the entity to maintain a gift fund to be endorsed as a DGR.
Where the entity is being endorsed for the operation of a fund, authority or institution, the legislation requires the entity to maintain a gift fund (in accordance with section 30-130 of the Income Tax Assessment Act 1997). However, if the entity is also endorsed as a DGR as a fund, authority, or institution itself it is not required to maintain a gift fund for the fund, authority or institution that it operates.
We note that the income tax law previously required all DGRs to maintain a gift fund. However, this requirement was removed in 2006 (with effect from 1 July 2004) when section 30-120 of the Income Tax Assessment Act 1997 was amended. This previous requirement is likely the origin of the clause contained in your organisation’s constitution. Although this requirement has been removed a DGR may still maintain a gift fund should it wish to do so (including by retaining a constitutional requirement to maintain a gift fund).
Despite the above, subsections 30-125(6) and 30-125(7) of the Income Tax Assessment Act 1997 still requires the constitution of a DGR to contain clauses requiring the DGR to transfer any surplus gifts of a gift fund to another DGR in the event that the DGR is wound up or its endorsement as a DGR is revoked.
Applying the above to your organisation, the income tax law does not require it to maintain a gift fund and there is no impediment, from an income tax law perspective, from removing the constitutional requirement to maintain the gift fund. However, your organisation’s constitution will need to retain a clause requiring that any surplus (e.g unexpended) gifts be transferred to another DGR in the event your organisation is wound up or its endorsement is revoked.