What is the difference between a charity and not for profit organisation?

In Australia, there is a clear difference between a charity and not for profit organisation. To be legally recognised as a charity, an organisation must meet a strict set of requirements and be endorsed by both the Australian Charities and Not-for-profits Commission and the Australian Taxation Office. Despite its liberal colloquial use, the term “charity” actually has a very specific meaning in Australian law. Only some types of organisations are recognised as charities and qualify for charitable tax exemption status. Not all non-profit organisations are (or can become) charities, but all registered charities must be not for profit.

Difference between charity and not for profit

The main difference between charity and not for profit organisations is the legal definition as well as the benefits charitable entities receive after they register with the Australian Charities and Not-for-profits Commission (ACNC). Not-for-profit and non-profit are umbrella terms used to describe organisations that engage in work to benefit the public rather than for profit. They can either be charities or non-charities.

Australia’s third sector organisations combine not only charities but churches, sporting clubs, advocacy groups, community organisations, cooperatives, trade unions and associations, chambers of commerce, welfare organisations. Charities are one type of non-profit organisation and are a subset of the not-for-profit sector. Together, non profit organisations make a significant economic contribution to Australia, comparable to the agriculture and communications industries. There are as many as 700,000 not-for-profit organisations ranging from voluntary to large teams of employees.

Another difference is that non-charities are organisations run in a more informal way, such as an unincorporated association or a club focused on local sports activities for children. Registered charities tend to raise more funds and hire staff rather than rely on volunteers and the financial contributions of members. The revenue they bring in and the jobs they create has grown in recent years. Australian charities vary in size, with 65% classified as small (under $250,000 in revenue), 19% as large (revenue of $1 million or more), and 16% as medium ($250,000 or more and less than $1 million). Yet, Australia has seen a major rise in its charity sector revenue. The ACNC reports that the sector makes up more than 10% of Australia’s workforce (1.38 million people) and donations have increased to $12.7 billion¹.

Legal definition of a charity

The legal definition of charity was explicitly defined in Commonwealth law in 2013 (The Charities Bill) and the legal definition took effect from 1 January 2014. The Charities Bill 2013 introduced a statutory definition of charity that is applicable across all Australian states and territories. It replaces the common law definition of charity that dated back to 1601 and was based on hundreds of years of case law. More information on the statutory definition of charity is available on the ACNC website. The Charities Act 2013 (Cth) recognises an organisation as a charity under the following conditions:

1. It does not operate for profit,
2. It has a charitable purpose benefitting the public,
3. It does not have a disqualifying purpose such as engaging in unlawful activities contrary to public policy or promoting or opposing a political party or candidate, and
4. It is not an individual, a political party, or a government entity.

Under the statutory definition of charity, charities are defined as non-profit organisations that have demonstrated that their purpose is for the public benefit. The old common law permitted relieving poverty, advancing education, advancing religion, relief from illness and the needs of the aged as charitable purposes in the public benefit. Under Australia’s new statutory definition, there are additional charitable purposes, including but not limited to: promoting and protecting human rights, preventing or relieving the suffering of animals, and protecting the safety of the general public. The statutory definition has also clarified some aspects of the common law that have resulted in some significant cases in the past.

Tax Deductible Charities in Australia

Is charity tax deductible in Australia? Yes, organisations that are registered as a charity are often entitled to a range of additional tax and other benefits beyond those already granted to other non-profit organisations. Some tax exemptions, however, such as Deductible Gift Recipient status (the capacity to offer donors the ability to claim their donations as an income deduction in their personal tax return), are only granted to specific types of organisations and require undergoing additional endorsement processes. Deductible Gift Recipient status is also sometimes granted to non-charities (see our DGR status fact sheet for more information).

The Income Tax Assessment Act 1997 (ITAA) exempts some non-profit organisations from having to pay income tax. The exemption rules depend on the type of activities an organisation is conducting and the revenue they receive. In Australia, a charity can also receive tax-deductible gifts such as money, trading stock, and property. To be tax-deductible, the donation must have been made voluntarily, does not give the donor a material benefit, and is made out of generosity and without obligation. The categories of activities qualifying for exempt status include:

• Religious, scientific, charitable, and educational
• Hospitals
• Trade unions and employer associations
• Friendly societies²
• Music, art, and literature associations
• Groups that promote games and sports
• Community service associations
• Aviation, agriculture, pastoral, horticultural, viticultural, and manufacturing associations
• Funds established by a will or trust for charitable purposes

Resources

• To learn if your organisation is eligible for charity tax concession, visit the ATO website.

• The 8th edition Australian Charities Report.

References