Chapter 12: Dominant Charitable Purpose

The Committee recommends that to be a charity an entity must have a dominant charitable purpose or purposes. Any other purposes must further, or be in aid of, the dominant charitable purpose or purposes, or be incidental or ancillary to the dominant charitable purpose or purposes. The entity's activities must further the dominant charitable purpose or purposes.

Current approach

Dominant purpose

A trust expressed to be for both charitable and non-charitable purposes is invalid.¹ However, the fact that a charitable institution has non-charitable purposes incidental or ancillary to its charitable purposes does not invalidate gifts to the institution.² These principles of trust law have been applied to determine the charitable status of other types of entities, such as institutions, associations or incorporated bodies.

The requirement has been expressed variously that charitable purposes must be the `exclusive', `main', `chief', `dominant', `primary', `predominant', `fundamental' or `leading' purposes of charitable entities.⁴ The underlying significance of these various terms was dealt with by Windeyer J in Stratton v Simpson where he said:

The words in the Administration Act are `the main object'. This presupposes that the institution has a main object as described, and that it is its only main object. The question is then whether...these words denote the principal object or purpose of an institution that has also other lesser objects which are independent; or do they denote the dominant object or purpose of an institution, other permissible activities being all ancillary to the accomplishment of the main object. I think the latter is the true meaning.⁵

The Australian Taxation Office (ATO) has said that:

For an institution to be a charitable institution its sole or dominant purpose must be charitable. If it has purposes which, when viewed in isolation, would not be charitable, they must be incidental or ancillary to the charitable purpose. (Emphasis added)

For a fund to be a charitable fund it must be established for public charitable purposes. The charitable purposes must be the only purposes for which it is established. If a fund can be applied for purposes that are not charitable it is not a charitable fund. Any objects which, if viewed in isolation, would not be charitable, must be merely incidental to the charitable purposes. (Emphasis added)⁶

Neither the ATO draft taxation ruling nor CharityPack explain clearly what ancillary or incidental means, although an example used in CharityPack provides some insight.

A religious congregation holds occasional sporting activities among its members. These activities are designed to advance and foster religion among the group. The religious congregation is a charity. The sporting activities are incidental to the religious purpose.⁷

Determining dominant purpose

Picarda notes that the orthodox approach is that if an organisation's stated purposes are clearly charitable an activity test is not necessary.⁸ As noted in Vancouver Society of Immigrant and Visible Minority Women v Minister of National Revenue (1999): `It is really the purpose in furtherance of which an activity is carried out, and not the character of the activity itself, that determines whether or not it is of a charitable character'.⁹

Picarda also notes that the Charity Commission for England and Wales in its early years enunciated the view that, if the stated purposes were clearly charitable, an activity test was not necessary, unless the governing documents were obscurely drafted. However, in recent years there has been a shift in approach so that both the objects and activities are looked at when considering whether the purposes of an organisation are charitable. An amendment was proposed to the Charities Bill in 1999 giving an express power to the Courts and the Commissioners to examine an organisation's likely future activities when determining its right to charitable status. The amendment was not passed, mainly because of the view that `it would change the substantive law of charity' and lead to overburdensome administrative and legal costs.¹⁰

Even if the `orthodox' approach is followed, there are some circumstances in which it may be necessary to look beyond the stated purpose of an entity, thereby taking account of the activities undertaken. Dal Pont describes three main circumstances where it may be necessary to look to activity to substantiate the dominant charitable purpose:

• where there is doubt about whether a purpose stated in a governing document as the main purpose is in fact the main purpose. In this case the substance or facts of the matter will prevail over the formulation of the governing documents if the latter are proved to be misleading;

• where an entity's governing documents do not clearly indicate its main object. The activities may serve to indicate the relative weight to be accorded to each purpose; and

• where an entity lacks governing documents or where they are informal or incomplete. It is the nature of the entity as substantiated by its activities that will determine the entity's status.¹¹

A recent decision by the Administrative Appeals Tribunal provides an example of how purpose and activity are weighed. In rejecting an argument that an association's own constitution could in effect be ignored in favour of its actual activities, Deputy President Block said:

In all of the authorities on charitable trusts and charitable institutions cited before me, the starting point for the inquiry into whether a particular body is charitable is the deed or instrument by which the body was established. The applicant cannot rely solely on its actual activities to indicate its objects or purposes, although objects and purposes may change over time. While the written objects at the time of the incorporation of the applicant may have changed over time (and so that the actual activities of the applicant may be relevant in order to ascertain the extent to which the objects have changed over time), they nonetheless are relevant, as also of course are the actual activities.¹²

The ATO takes a different view from Dal Pont. It says:

The purpose of a charitable fund is found by reference to the terms of its constitutive documents (primarily the instrument of trust or the will) and any relevant legislation.

Finding an institution's sole or dominant purpose involves an objective weighing of all its features. They include its constitutive or governing documents, its activities, policies and plans, administration, finances, history and control, and any legislation governing its operation. As these features can change over time, so can an institution's purpose. An institution's purpose at the time it was established is a relevant but not necessarily determinative factor. Accordingly, it is possible for an institution that was not charitable when founded to become a charitable institution, and vice versa.¹³

In stating its position, the ATO points to the High Court's decision in Royal Australasian College of Surgeons v. FC of T:

At issue was whether the College was a scientific institution. To determine whether the College's dominant purpose was advancing science the Court considered the objects in the College's constituent document and also its activities. The objects...were partly for the promotion of surgical knowledge and practice and partly for the promotion of professional interests. They were not exclusively for science. The principal activities included the holding of conferences of surgeons for the discussion and study of surgical matters and the dissemination of knowledge of surgery...In light of the activities, the objects that, in isolation, could have been to promote the professional interests of members, were incidental to the purpose of advancing science. Accordingly, it was apparent that the College's dominant purpose was for science, and any other purposes were merely incidental.¹⁴

In an article on the political activities of charities, Santow J discusses the process of determining whether an activity is `incidental and ancillary'. He notes that:

The court indeed has some latitude in construing the `incidental and ancillary' requirement so that it is not so much a crude requirement directed merely at the level of activity. Rather it is concerned primarily with whether the political activity is genuinely directed to promoting indubitably charitable ends. Matters of degree are also relevant, but only in causing the test to be failed where the political activity is so disproportionate that it is no longer merely instrumental in achieving the indubitably charitable objects but has become an end in itself.¹⁵

Comments on the current approach

The significance of purpose

Submissions to the Inquiry have argued overwhelmingly that an organisation's purpose should be the prime determinant of its charitable status.

Purpose was submitted to be the fundamental indicator of the character of an organisation. Aged and Community Services Australia argued that `definitions should be based on purpose rather than activities' because `the essential question is why the organisation undertakes its activities, not how it does them'.

A number of religious organisations argued that their charitable purposes were inseparable from their faith. The Anglican Church Diocese of Sydney stated that `charitable organisations exist for their purpose not for any specific activities' and that `it is the purpose that inextricably binds together, and makes sense of, the activities which are carried out by the (Anglican) community'. The Catholic Church in Australia stated that `the nature of a particular activity cannot be understood apart from the purpose of the church'.

The Salvation Army submitted that it has two purposes that are inextricable, and so it cannot find a sole purpose:

One is a religious purpose, one is a welfare purpose, and we are not prepared to say that either of those is dominant. They are both fundamental and equal, therefore we have difficulty with the sole purpose test if we need to distinguish between those two things.

ACOSS submitted that it is better to classify according to purpose rather than activity, because basing status on purpose facilitates classifying entities, and the main objective should be to identify entities that are worthy of public support.

A number of submissions argued that purpose is what distinguishes charities from for-profit entities, particularly when they may be carrying out the same activities. Mission Australia argued that `the for-profit, not-for-profit and public sectors are now becoming more closely merged through outsourcing of public activity, and it is difficult to distinguish between the sectors on the basis of activities'.

Others claimed that applying charitable status to entities based on their purpose provides scope for them to be flexible in how they achieve their purpose and allows them to use creative solutions for effecting change. Community Aid Abroad-Oxfam Australia argued that definitions should be based on purpose to enable charities `to remain dynamic in responding to the demands of our stakeholders'. The St Vincent de Paul Society stated that defining a charity as an entity and basing its treatment on the purpose of the organisation facilitates charities being `innovative in developing services for the people they serve and in identifying avenues of fund raising'.

A few organisations expressed concern that the sole purpose or dominant purpose tests may be too tight in principle or too tightly applied in practice. The RSPCA sought a `dominant purpose' rather than a `sole purpose' test as the latter may be too rigidly applied and unfairly exclude some organisations. Rotary International commented that the inclusion of `the development of fellowship among business and professional persons', as part of Rotary's charter, `has been used to disallow charity status'. The submission argued that such aspects `are ancillary to...and devised to make the [prime] Object of Service more attainable'.

Activity

Classifying by activity was argued to be administratively more complex for both charitable entities and government authorities. For instance, Anglicare Australia argues that to base definitions on activities `would increase confusion and complexity and operating costs, thereby reducing the resources available for charitable purposes'. ACOSS claimed it is more complex, costly and intrusive to classify activities.

Jobs Australia submitted that any attempt to apply activity based definitions would be `fraught with difficulty' as it would:

...impose complex and resource-intensive compliance burdens; place inappropriate pressure on organisations to implement separate structures for different activities, when an integrated structure is more efficient and effective; and mitigate against organisations adopting innovative and creative approaches to achieving their overall purposes.

Several organisations, even where they considered purpose should be the main determinant, argued that activity should play some part in determining an organisation's status, with most saying that it should be a substantiation role. Jobs Australia commented that `while definitions should be based primarily on the purpose of the organisation...it may be appropriate to undertake a secondary examination of particular activities when it is not readily apparent how the activity...relates to an organisation's charitable purpose'. The Physical Disability Council of Australia stated that `looking at the nature of activities enables a much more comprehensive understanding of the overall organisation to be gained'.

Other organisations argued that the activities must be there to serve or further the charitable purpose. Mission Australia commented that `the activities carried out by a charitable entity must be consistent with the purpose of the entity'. Community Aid Abroad-Oxfam Australia suggested that `the nature of the activities should of course be expected to further that purpose' and `the acid test should be: who are the prime beneficiaries and does the activity primarily support the charitable purpose?'

A few submissions argued that less emphasis should be given to purpose in defining a charity and more emphasis given to activity on the grounds that this would better serve the principle of competitive neutrality. Access Economics commented that `definitions can make due allowance for the primary purpose of an organisation, but should not be based solely on purpose...The principles of competitive neutrality and mutuality can be used to determine which activities are charitable and which are commercial in nature'. Similarly, the Allen Consulting Group argued that less attention should be given to purpose in determining charitable status and more should be given to activities, with a view to providing `competitive neutrality between for-profit and not-for-profit entities providing similar goods and services'.

Several organisations, while arguing that activities should play a role in assessing purpose, nevertheless cautioned against looking at activities in isolation. The Australian Federation of AIDS Organisations stated that the nature of an organisation's activities will assist in assessing its primary purpose but that `no one activity should be conclusive of that primary purpose'. Anglicare Australia commented that `finding an organisation's dominant purpose involves an objective weighing of all its features which includes its constitution, its activities, its policies and plans, its administration, finances, history and control'. The Benevolent Society considered that `application of any definitions should involve an holistic assessment of an organisation's activities - rather than a piecemeal examination of the activities of different organisational parts' and that `modern non-profits function as diverse but integrated units and should be treated as such'.

While most submissions argued that dominant purpose should be the basis for defining charities, only a few commented on the specific issue of the meaning of the term. Relationships Australia specifically asked that the terms `dominant', `incidental' and `ancillary' be clarified.

The Charity Commission for England and Wales provides some guidance on their understanding of `ancillary':

To be ancillary, activities must serve and be subordinate to the charity's purposes. They cannot, therefore, be undertaken as an end in themselves and must not be allowed to dominate the activities, which the charity undertakes to carry out its charitable purposes directly.¹⁶

Committee's conclusions

Dominant purpose

The reason for a charity's existence is what distinguishes it from other entities that operate in society and the economy. The reason for its existence is given by its overriding purpose or objects.

Many terms have been used to describe the `overriding' purpose, for example, main, sole, dominant and exclusive. For purposes of clarity, it is preferable that only one word be used to describe the position of an entity's charitable purpose in relation to other purposes. The Committee recommends the use of the term dominant purpose.

The issue before the Committee is then to define the sense in which a charity's purpose is dominant. That is, if and on what terms should non-charitable purposes of an entity be allowed?

Charities will have purposes that are non-charitable when viewed in isolation. For example, a youth development charity may have a purpose of promoting sport among its members. The Committee considers that such purposes should not deny charitable status where they further, or are in aid of, the dominant charitable purpose, or are incidental or ancillary to the dominant charitable purpose.

The Committee's views on the meaning of charitable purpose are discussed in Chapter 16. The Committee also concludes, in Chapter 13, that in order to be charitable, an entity's dominant purpose or purposes must be altruistic and for the public benefit.

Recommendation 3

That a charity must have a dominant purpose or purposes that are charitable, altruistic and for the public benefit. If the entity has other purposes, those purposes must further, or be in aid of, the dominant purpose or purposes, or be ancillary or incidental to the dominant purpose or purposes.

The Committee considers that there are certain purposes that would always be inappropriate for charities. These are purposes that are illegal, contrary to public policy, or that promote a political party or a candidate for political office. (Charities and political purposes are discussed in Chapter 26.) Such purposes will deny charitable status.

Recommendation 4

That an entity be denied charitable status if it has purposes that are illegal, are contrary to public policy, or promote a political party or a candidate for political office.

Determining the dominant purpose

An examination of an entity's activities should continue to be a factor in determining that the charitable purpose is being given effect to. It is appropriate to consider an entity's activities in order to substantiate - that is, confirm or corroborate or demonstrate - the entity's charitable purpose. It is not the nature of the activity that is relevant, but its role in supporting the charitable purpose.

The Committee wishes to stress that, where it is looked at, activity by itself should not determine charitable status because activity by itself is not a sufficient guide to the overall character of an entity. Nor should an activity be assessed as to whether it is efficacious in achieving an entity's charitable purpose. The exercise is conducted to ascertain the entity's dominant purpose, not to judge the best way for it to achieve its purpose. The test is that the activity must further the charity's purpose.

The Committee notes that, where relevant, charities are restricted by the doctrine of ultra vires that they cannot act beyond the legal power or authority of the charitable entity, so `acts done by the management committee of a charitable incorporated association that are outside its objects are voidable'.¹⁷

In addition to ensuring that activities further an entity's dominant purpose or purposes, it is the Committee's view that some types of activities should disqualify an entity from charitable status. Charities should be prohibited from engaging in activities that are illegal, contrary to public policy, or that promote a political party or a candidate for political office.

Recommendation 5

That the activities of a charity must further, or be in aid of, its charitable purpose or purposes. Activities must not be illegal, contrary to public policy, or promote a political party or a candidate for political office.

We earlier looked at the ATO's approach to finding an institution's dominant purpose by an objective weighing of all its features including activity. The ATO's approach seems to depart from what Picarda described earlier as the `orthodox approach'. Nevertheless, it would appear to be in line with the current thinking of the Charity Commission for England and Wales. It may be that the ATO's approach is justified on the basis that the ATO has a duty to protect the revenue and ought not be hamstrung in its assessment of a particular case simply because of a clear statement of purpose or object in an entity's constituent document. In any case the ATO's approach seems to have an element of practicality and thus common sense about it, not just for revenue cases but for all cases. This seems likely to have been the thinking of those who proposed the Charities Bill mentioned by Picarda in the passage earlier referred to. In relation to what Picarda there said, it seems difficult to see in what way the proposed amendment would have changed the substantive law of charity.

We agree that an over-enthusiastic administration can be a burden if no purpose is served by it being undertaken. But it is difficult to perceive why a short investigation of the nature of the activities of an organisation may not be beneficial. If the nature of the activities are in accordance with the formal purposes or objects found in an organisation's constituent documents, there is greater assurance that the purposes are indeed charitable. Thus not only is it likely that the revenue will be protected, but those members of the public who for various reasons have dealings with the organisation will have greater confidence in doing so.

In relation to newly formed entities, the exercise may be more difficult and less reassuring. But in such cases there should at least be statements by those responsible for the governance of the charity as to what its intentions and manner of working are likely to be. And even in the early stages there may exist minutes, notes, memoranda and perhaps some correspondence which should be readily available and which would be confirmatory of or consistent with the stated purposes or objects. If they are not, there will be a serious question about the entity's entitlement to charitable status.

1 Meagher, RP and Gummow, WMC 1997, Jacobs' Law of Trusts in Australia, 6^th edition, Butterworths, Sydney, p 237. Some State legislation operates to save as charitable trusts that would otherwise be invalid because of mixed charitable and non-charitable purposes. The Acts are: Charitable Trusts Act 1993 (NSW) s 23(1); Property Law Act 1958 (Vic) s 131(2); Trusts Act 1973 (Qld) s 104; Trustee Act 1936 (SA) s 69A(1); Trustees Act 1962 (WA) s 102(1); and Variation of Trusts Act  1994 (Tas) s 4(3). As noted earlier in Chapter 11, there is a question whether such legislation, dealing as it does with trusts, would apply to entities constituted as companies limited by guarantee or as associations. While the matter is not clear, the better view would seem to be that the legislation would apply.

2 Congressional Union of New South Wales v Thistlethwayte (1952) 87 CLR 375; Stratton v Simpson (1970) 125 CLR 138.

3 (1932) AC 650.

4 Dal Pont, G 2000, Charity Law in Australia and New Zealand, Oxford University Press, Melbourne, p 226. All these terms have been used by the courts essentially to mean the same thing.

5 (1970) 125 CLR 138. The decision concerned the Administration Act 1903-1965 of Western Australia which exempted from duty gifts, bequests etc to certain bodies. The issue in this case was whether it was possible to know whether the charitable bodies that could conceivably benefit from a trust created by a will had exclusively charitable purposes.

6 Australian Taxation Office (ATO) 1999, Draft Taxation Ruling - Income tax and fringe benefits: charities, TR 1999/D21, paras 103 and 111-112.

7 ATO 2000, CharityPack, p 40.

8 Picarda, H 1999, The Law and Practice Relating to Charities, 3^rd edition, Butterworths, London, p 32.

9 99 DTC 5034 at 5040 [1999] ISCR 10 at 12.

10 Picarda, pp 32-33.

11 Dal Pont, pp 228-229.

12 Taxpayers Association of New South Wales v Commissioner of Taxation [2001] AATA 278.

13 TR 1999/D21, paras 24 and 105-106.

14 (1943) 68 CLR 436, cited in TR 1999/D21, paras 107-109.

15 Santow, GFK 1999, `Charity in its Political Voice - a Tinkling Cymbal or a Sounding Brass?' 18 Australian Bar Review, p 230.

16 Charity Commission for England and Wales 2000, CC9 - Political Activities and Campaigning by Charities, para 11.

17 Dal Pont, p 376.