Community organisations - dealing with money

Contributed by RachelGleeson and current to 1 May 2016

There are four basic ways for a community organisation with limited funds to improve its financial position. The group can:

• earn funds from trading activities
• obtain a grant from a government department, foundation or corporation
• appeal for funds
• apply for tax exemptions and concessions.

A group's ability to use any or all of these methods for raising and saving money will depend on a number of factors, which are described in this section.

This section will also deal with:

• charitable status of organisations,
• other exemptions available to assist community organisations, and,
• ownership of assets.

Earn funds from trading activities

Income and expenditure needs to be accounted for in the same manner as a "for profit" business, and so standard accounting practices and governance are to be applied. A non-profit business that receives income from trading beyond its expenses must apply its revenue in accordance with the objectives of the association as stated in its constitution.

Government grants

Funding agreements

If a group is allocated government grant money, members usually have to sign an agreement with the funding body before receiving the grant. The agreement sets out why the grant is made, and the group's responsibilities on receiving it. Each funding agreement is different, but a number of matters are common to most.

Most funding bodies offer their own standard agreement. This does not mean that there is no room for negotiation. Funding agreements change from year to year, partly as a result of suggestions made by the groups asked to sign them.

Any aspect of a funding agreement which is not clear or is unacceptable should be raised in a letter to the funding body. It is important to ensure that any agreed changes are confirmed in writing, and included in the final agreement.

Although the staff of an organisation may play an important role in negotiating and implementing a funding agreement, it is the management committee, not the staff, who must ultimately decide whether or not to sign the agreement and they ensure that its terms are carried out.

Government grants are almost always made on condition that the recipient does something. Under the GST legislation, the organisation is treated as though it is supplying goods or services to the government in return for the grant. Therefore, if the organisation is registered (or should be registered) for the GST, it will have to pay GST from the grant funds to the ATO. It is expected that grants will be increased by 10% to cover the GST if the recipient gives the provider department a tax invoice for the grant.

Audit and reporting requirements

Most funding agreements include conditions requiring audited financial statements and activity reports to be submitted to the funding body at regular intervals. A group may find that the requirements of one funding body are different from those of a joint funder (or a regulatory body such as ASIC). To make the process more efficient, it is possible to negotiate with funding bodies on the frequency and type of information required.

Before choosing an auditor, it is important to find out what their qualifications are and to check that these meet the requirements of the relevant funding or regulatory body. Most funding agreements indicate exactly what qualifications are required, and usually specify that the auditor must not be a member of the organisation's management committee, or an employee.

Appeal for funds

There are various methods a group can use in its quest for funds. The most straightforward is a simple request for donations from the public or a business sponsor. This approach tends to be more successful if the group can offer tax deductible status for donors. If it can't, it may have to make requests for money more attractive by offering something in return, like raffle tickets or entertainment.

Tax exemptions and concessions

A group's eligibility for exemptions depends on the type of activities it undertakes and what is in its constitution.

In order to be exempt from income tax and other federal taxes, a charity must be registered with the ACNC as a charity and endorsed by the ATO. Organisations can apply for charity tax benefits, including deductible gift recipient (DRG) status with the ATO when applying to register with the ACNC. The ATO accepts the ACNC's decision on charity status and decides which tax concessions a charity is entitled to, depending on your charity's registered charity type.

Not-for-profit organisations that are not charities can self-assess their entitlement to certain tax concessions, such as income tax exemption. Self-assessment means an organisation can work out for itself whether it is entitled to access a tax concession, and it does not need to be endorsed by the ATO.

Categories for exemption

Charitable institutions

The Australian Charities and Not-for-profits Commission (ACNC) is the independent national register of charities. It is responsible for deciding which organisations qualify as charities according to the technical legal meaning of 'charity'.

The meaning of 'charitable' adopted by Australian lawmakers comes from early English common law. Although there are only four 'heads' of charity, the concept is flexible, and can take into account changing community values. An organisation is a charitable institution if its main purpose comes under the 'heads' of charity, and it is a non-profit body. Examples of charitable institutions under the four heads are:

• relief of poverty: welfare organisations, refuges and crisis centres, disaster relief organisations

• advancement of education: non-profit schools and business colleges, parents and citizens associations, scouts and guides

• advancement of religion: organisations established to build or maintain a building of worship, seminaries and theological colleges

• other purposes beneficial to the community: bodies that protect animals or preserve historic buildings; rescue organisations; bush fire brigades and surf life saving clubs; organisations that promote the health of a section of the community; organisations that educate the public about a particular disease, and organisations that provide community or neighbourhood facilities.

Changes to the Charities Act 2013 (Cth) (the Charities Act) and related legislation came into effect on 1 January 2014. The Charities Act sets out the legal meaning of charity from the common law, and also recognises charitable purposes such as the protection of human rights, the promotion of reconciliation and tolerance, and recognises that many modern charities advance causes by preventing, educating, researching and raising awareness.

Non-profit organisations

Generally, a not-for-profit is an organisation that does not operate for the profit, personal gain or other benefit of particular people (for example, its members, the people who run it or their friends or relatives). A non-profit organisation may earn more than it spends. It may trade and have employees, and make payments to members in the form of wages, rent, interest and reimbursement for expenses. However, if it makes such payments to members above normal commercial levels, it would probably be regarded as distributing profits and would not be considered a non-profit organisation.

If a non-profit organisation closes down, all its assets must be given to another similar non-profit organisation.

Public benevolent institutions

A public benevolent institution (PBI) is one of the categories or 'subtypes' of charity that can register with the ACNC. A PBI is an institution that provides benevolent relief as its main purpose. Benevolent relief includes working for the relief of poverty or distress (such as sickness, disability, destitution, suffering, misfortune or helplessness).

To be recognised as a public benevolent institution a group must:

• provide relief for the benefit of a disadvantaged section of the public
• make its services available without discrimination to every member of the public which the organisation aims to benefit
• be administered for the public good without purpose of private gain
• be an organisation or association formed to promote a particular purpose (especially non-business).

Groups recognised as public benevolent institutions include community legal centres, the National Heart Foundation and the Mental Health Foundation of Australia. Groups refused such recognition include an amateur swimming club, social clubs, a baby health centre and the Australian Council of Social Services.

PBIs can apply for charity tax concessions and may be eligible to be endorsed as deductible gift recipients (DRGs) by the ATO.

Federal taxation

Federal Government taxation affects community organisations in the areas of:

• income tax
• tax deductible donations
• fringe benefits tax (FBT)
• goods and services tax (GST)
• superannuation guarantee charge

Registration as a charity with the ACNC provides charities with access to tax concessions including income tax exemptions, GST charity concessions, FBT rebates and FBT exemptions, depending on the type of charity.

Income tax

All community organisations (incorporated and unincorporated) are regarded as having a separate legal entity for income tax purposes. This means an organisation is liable to pay income tax at company rates unless it is an exempt entity.

Exemption from income tax

The following non-profit organisations are exempt from paying income tax:

• cultural organisations
• community service organisations
• educational organisations
• employment organisations
• resource development organisations
• scientific organisations
• sporting organisations.

Non-profit organisations that are not charities are required to make a self-assessment of their income tax status and can obtain basic online assistance at the ATO website. To qualify for income tax exemption, most organisations must have a physical presence in Australia, and pursue their objections and incur their expenditure principally in Australia.

Other exemptions

In the NT, stamp duty and pay-roll tax are administered by the Commissioner of Territory Revenue. The Commissioner grants exemptions to religious and public benevolent institutions, non-profit hospitals and other non-profit organisations in some circumstances. The exemption provisions are complicated, and organisations seeking exempt status should forward a copy of their constitution with information about the scope of their activities to the Commissioner of Territory Revenue.

Ownership of assets

All the assets (and income) of a non-profit group must be used for the group's objects, as set out in its constitution. It is a fundamental principle that a member of a non-profit group has no individual or personal right to the group's assets or income. This principle should be clearly stated in the group's constitution.

Most government departments require the return of any grant funds not spent (or committed) during the funding period. Some funders stipulate that anything purchased with grant money is the property of the department that supplied the funds. This can create problems if the group wishes to trade in or sell outdated equipment or it is sued and a court order is issued to seize property. Some departments require groups to include in their constitution a provision that on winding up, any property purchased with grant funds will be returned to the funding body, after all other debts and liabilities have been paid.

All associations incorporated under the AA must on winding up return any surplus property that was supplied by a government department or public authority, including unexpended grant funds. The property must be returned to the department or authority that supplied it, or to a body nominated by them. This applies even if there is nothing to that effect in the funding agreement. However, the requirement only comes into force if surplus property remains after the payment of outstanding debts, liabilities and winding-up costs.

Useful Contacts

Australian Charities and Not-for-Profits Commission

The Australian Charities and Not-for-profits Commission (ACNC) is the independent national regulator of charities. The ACNC can provide information to help you and your organisation to register as a charity and carry out its obligations to the ACNC.

Website: http://www.acnc.gov.au
Tel: 13 ACNC (13 22 62) weekdays 9am to 6pm AEDT
Email: advice@acnc.gov.au

Our Community

The Our Community group provides advice, connections, training and easy-to-use tech tools for people and organisations working to build stronger communities.
Website: http://www.ourcommunity.com.au/
Tel: 03 9320 6800
Email: service@ourcommunity.com.au

The Funding Centre

The Funding Centre is an enterprise of Our Community that provides support and information to not-for-profits regarding money and fundraising. Contact details are as above for Our Community.
Website: http://www.fundingcentre.com.au/