Unlocking philanthropy: streamlining governance through the ATO's deductible gift recipient reforms

The end of financial year is a timely reminder to take stock of the recent developments in Australian charities law as individuals seek to capitalise on tax deductions for charitable donations.

On 1 January 2024, the Australian Government introduced reforms to consolidate the administration and oversight of organisations with deductible gift recipient (DGR) status in Australia through amendments to tax legislation [1]. Receiving DGR endorsement is crucial for charities in Australia because organisations that are endorsed as DGRs are entitled to receive donations that are deductible from the donor's income tax.

The reforms specifically target the governance of organisations seeking DGR endorsement as cultural organisations, environmental organisations, harm prevention charities and developing country relief funds or organisations. They also emphasise the importance of effectively planning an organisation's charitable purposes and intended activities from the onset, and ensuring that clear legal drafting captures these legal purposes.

This article outlines the key legislative changes and emphasises the critical role of legal advice for organisations aiming to register as charities and secure DGR endorsement.

What is DGR endorsement and why is it important?

The Australian tax system allows for certain eligible organisations to be endorsed as a DGR. Endorsement by the ATO as a DGR is essential for Australian charities seeking to fundraise from the public, as a DGR is entitled to receive tax deductible gifts and contributions from the public. This means that donors can claim an income tax deduction for donations of $2 or more made to a DGR endorsed organisation.

DGR endorsement also acts as a mark of credibility and legitimacy for an organisation, demonstrating that the organisation has met the regulatory requirements of the ATO and the Australian Charities and Not-for-profits Commission (ACNC).

DGR endorsement is highly regulated and is restricted to certain categories of organisations that provide a clear public benefit. The ACNC is responsible for registering organisations as charities, and the ATO is responsible for endorsing organisations as DGRs.

What changes did the reforms make?

Currently, there are 52 general categories of DGR. Before the introduction of these reforms, the ATO was responsible for administering 48 of these 52 DGR categories. The reforms transferred administration of the remaining four DGR categories to the ATO as well:

• Environmental Organisation DGRs (previously administered by the Department of Climate Change, Energy, the Environment and Water);
• Harm Prevention Charity DGRs (previously administered by the Department of Social Services);
• Cultural Organisation DGRs (previously administered by the Department of Infrastructure, Transport, Regional Development, Communications and the Arts); and
• Overseas Aid DGRs (previously administered by the Department of Foreign Affairs and Trade).

The reforms largely preserved the existing eligibility rules for organisations seeking DGR endorsement. The Tax Act was simplified to remove the requirement of the departments to assess and advise their Minister on the eligibility of organisations, and for the Minister to direct the relevant departmental Secretary to add an eligible organisation to the ‘register’ maintained by that department.

Why is it important to get legal advice?

Securing endorsement as a DGR is a challenging task. To be eligible, an organisation must be registered as a charity with the ACNC, unless the organisation is:

• a government organisation;
• an ancillary fund; or
• specifically listed in the Tax Act.

However, even if an organisation is registered as a charity with the ACNC, it may not be eligible for DGR endorsement. Eligibility for registration as a charity and DGR endorsement depends largely on the organisation’s purposes and activities. This makes it essential for the prospective organisation to have a robust governing document, such as a constitution, with effective governance arrangements.

The eligibility requirements contained in the Tax Act are complex, and there is no one-size-fits-all approach: specific DGR categories each have their own unique eligibility requirements. It is strongly recommended that organisations seeking to register as a charity and apply for DGR endorsement obtain legal advice about their governing documents and arrangements. This includes customers purchasing Cleardocs’ Public Company Limited By Guarantee product.

Tailored drafting that accurately reflects the organisation’s intended purposes and activities of the organisation increases the likelihood that these unique requirements are considered, and that the ATO’s requirements on complex issues (such as appropriate ‘wind up’ clauses and the maintenance of a DGR-endorsed organisation’s ‘gift fund’) are accounted for.

The Commercial team at Maddocks has substantial experience in drafting governing documents and lodging successful charity applications with the ACNC and DGR applications with the ATO, including for charities endorsed under the 4 recently reformed DGR categories.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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[1] Income Tax Assessment Act 1997 (Cth) (Tax Act).