How to structure a charity – should you use an unincorporated or incorporated association or a company limited by guarantee?
How to Structure a Charity
As accountants, we tax effectively structure around individuals, companies, trusts, partnerships and any combination of those. That is what we are familiar with.
But if a client came to you to set up a charity, would you know how to structure this?
How is a Company limited by guarantee different to a Pty Ltd? What is a public benevolent institution? How is a PAF different to a PuAF? What are DGR1 and 2 charities?
Darren Fittler of Gilbert + Tobin Lawyers in Sydney, Melbourne and Perth will give you an answer to all these questions. Darren is a corporate lawyer based in Sydney specialising in charities.
Here is what we learned but please listen in as Darren explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
How to Structure a Charity
There are over 60,000 charities in Australia. Let’s look at how these are commonly structured.
1 – Legal Structures
We have six types of legal structures in Australia – available to all:
- Individual (legal entity)
- Unincorporated Association (not a legal entity, acts through its members)
- Incorporated Association (legal entity)
- Company (legal entity) – either Pty Ltd or Limited by Guarantee
- Trust (not a legal entity, acts through its trustee)
- Partnership (not a legal entity, acts through its partners) between any legal entities
2 – Structure of Charitable Organisations
Individuals and partnerships can’t be charities. So that leaves – if you want to qualify for income tax exemption and DGR status – associations, companies and trusts. Any trust, company, or association can register with the ACNC as a charity and qualify as a DGR if it complies with the relevant rules.
3 – Income Tax Exempt
A charity is income tax exempt if registered with the ACNC as a charity.
4 – Deductible Gift Recipient
A charity is a DGR if the ATO endorses it as a DGR. Public benevolent institutions and health promotion charities can receive their DGR status in one go while applying to the ACNC for charity status. Everybody else needs to apply to the ATO for DGR status separately after the ACNC has accepted them as a charity.
5 – DGR 1 and 2
There are Item 1 DGRs (‘DGR 1’) and Item 2 DGRs (‘DGR 2’).
- Item 1 DGRs do the good work. They collect donations, issue DGR receipts and transfer funds to anybody as needed within their charitable purposes.
- Item 2 DGRs also collect donations and issue DGR receipts. But they can only transfer funds to Item 1 DGRs, hence they can’t do the good work. In other words, Item 2 DGRs are only conduits between the donors and the Item 1 DGRs.
6 – Company Limited by Guarantee
In theory, anybody can use a company limited by guarantee instead of a Pty Ltd. However, companies limited by guarantee can neither issue shares nor pay dividends. Because of these limitations, companies limited by guarantee are of little interest to businesses or investors and, hence, but ideal for non-profit activities.
7 – Public Benevolent Institutions
A PBI is a type of DGR 1 charity to serve the welfare of humans. Examples are The Smith Family or The Salvation Army.
8 – Common Charity Structures
In the past charities often started as an incorporated association. Today most charities that envisage growth set out as a company limited by guarantee.
This is just the tip of the iceberg. Please listen in since David Fittler explains all this in much great.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 31 July 2024
