Charities
 
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This article is about charitable organizations. For other uses of the word charity, see Charity.
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The definition of charitable organization, and of charity, varies according to the country and in some instances the region of the country in which the charitable organization operates. The regulation and tax treatment of charitable organizations also varies.

Contents

Charitable Organizations in England and Wales

Definition of Charitable Organization

A charity, or charitable organization, in England and Wales is a particular type of voluntary organization. [1]A voluntary organization is an organization set up for charitable, social, philanthropic or other purposes. [2]It is required to use any profit or surplus only for the organization's purposes, and it is not a part of any governing department, local authority or other statutory body.[3] All charities are voluntary organizations, but not all voluntary organizations in England and Wales are charities.

For a voluntary organization to be a charitable organization or charity, its overall goals, sometimes called the “purposes” of the organization, must be charitable. All the purposes of the organization must be charitable, as a charity cannot have some purposes which are charitable and some which are not. [4] The Charities Act 2006 provides the following list of charitable purposes. [5]

  1. the prevention or relief of poverty
  2. the advancement of education
  3. the advancement of religion
  4. the advancement of health or the saving of lives
  5. the advancement of citizenship or community development
  6. the advancement of the arts, culture, heritage or science
  7. the advancement of amateur sport
  8. the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
  9. the advancement of environmental protection or improvement
  10. the relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
  11. the advancement of animal welfare
  12. the promotion of the efficiency of the armed forces of the Crown or of the police, fire and rescue services or ambulance services
  13. other purposes currently recognised as charitable and any new charitable purposes which are similar to another charitable purpose.

A charity must also provide a public benefit. [6]

Governing Document and Trustees

The governing document of a charity means the document that sets out the charity's purposes and usually, how it is to be administered. Depending on the legal structure of the charity, this document may be a constitution, a trust deed, a memorandum and articles of association, or some other formal document. The charity trustees are the people who, as specified in the charities governing document, are responsible for the general control and management of the charity. In the charity's governing document they may be called trustees, managing trustees, committee members, governors, or directors, or they may be referred to by some other title. [7]

Charitable Organization Structure

There are currently three types of legal structure for a charity in England and Wales.

  1. Unincorporated association
  2. Trust
  3. Company limited by guarantee

The unincorporated association is the most common form of organization within the voluntary sector in England and Wales. [8] An unincorporated association is essentially a contractual arrangement between individuals who have agreed to come together to form an organization for a particular purpose. An unincorporated association will normally have as its governing document, a constitution or set of rules, which will deal with such matters as the appointment of office bearers, and the rules governing membership. The organization is not though a separate legal entity. So it cannot start legal action, it cannot borrow money, and it cannot enter into contracts in its own name. Also the officers can be personally liable if the charity is sued or has debts. [9]

A Trust is essentially a relationship between three parties, the donor of some assets, the trustees who hold the assets and the beneficiaries (those people who are eligible to benefit from the charity). When the trust has charitable purposes, and is a charity, the trust is known as a charitable trust. The governing document is the Trust Deed or Declaration of Trust, which comes into operation once it is signed by all the trustees. The main disadvantage of a trust is that, as with an unincorporated association, it does not have a separate legal entity and the trustees must themselves own property and enter into contracts. The trustees are also liable if the charity is sued or incurs liability.

A company limited by guarantee is a private limited company where the liability of members is limited. A guarantee company does not have a share capital, but instead has members who are guarantors instead of shareholders. In the event of the company being wound up the members agree to pay a nominal sum which can be as little as £1. A company limited by guarantee is a useful structure for a charity where it is desirable for the Trustees to have the protection of limited liability. Also, the charity has a clear legal identity, and so can enter into contracts, such as employment contracts in its own name. [10]

The Charities Act 2006 introduced a new legal form of incorporation designed specifically for charities, the Charitable Incorporated Organisation. This is not yet available for charities to use. [11]

Regulations in different countries

Australia

Under Australian law, there is no centralised system of government regulation or recognition for charities. The notion of a charity touches upon several distinct areas of the law; it is up to each individual agency to decide on what is a charity with respect to the laws it is administering. If an entity disagrees with the decision of the agency, it can challenge it through the Courts. It is possible for an entity to be recognised as a charity by some agencies but not others. For example, in the early 1980s, Scientology was recognised as a religious charity by the governments of most States and Territories, but the Victorian taxation system refused recognition, until Scientology successfully challenged that decision through the courts - see Church of the New Faith for more.

The most important of the laws around charities is the registration with the Australian Taxation Office as deductible gift recipients (DGR). This results in the people being able to deduct donations to the charity from their income tax. However, there are also several other areas where charity comes into play: the States regulate charitable fundraising, to ensure only bona fide charities engage in it; ASIC charges reduced fees for companies established for a charitable purpose; charities can avail themselves of exceptions to the company naming provisions under the Corporations Act; trusts for charitable purposes can escape the rule against perpetuities in trust law.

The definition of trust in Australia is derived through English common law, originally from the Charitable Uses Act 1601, and then through several centuries of case law based upon it. In 2002, the Federal Government established an inquiry into the definition of a charity. That inquiry proposed that the government should legislate a definition of a charity, based on the principles developed through case law. This resulted in the Charities Bill 2003. The Bill incorporated a number of provisions, such as limitations on charities being involved in political campaigning, which many charities saw as an unwelcome departure from the case law. The government then appointed a Board of the Taxation inquiry to consult with charities on the Bill. As a result of widespread criticism from charities, the Government decided to abandon the Bill.

As a result, the government then introduced what became the Extension of Charitable Purpose Act 2004. This Bill did not attempt to codify the definition of a charitable purpose; it merely sought to clarify that certain purposes were indeed charitable, whose charitable status had been subject to legal doubts. These purposes were: childcare; self-help groups; closed/contemplative religious orders.[12]

Hong Kong

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The city's tax department, the Inland Revenue Department, grants tax exemption status to charitable institutions or trusts of a public character. Organisations may apply to the Department for recognition as approved charitable institutions or trusts of a public character. The Department stresses that it is not responsible for the registration of charities.

Currently there are about 4,400 charitable institutions and trusts registered with the Department. Any group engaged in poverty relief, education or religious advancement, or other beneficial activities may apply for charitable status.

United Kingdom

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There were over 200,000 registered charities in the UK at the start of 2005.

  • The 190,000+ charities in England & Wales are generally registered with the Charity Commission for England and Wales. The Charity Commission has an online register listing them all.
  • The 5,000 or so charities in Northern Ireland are registered with the Inland Revenue. There is no central register or regulatory body for these charities, but this situation is currently under discussion.

Tax treatment of charities and gifts to charity

In common law jurisdictions, charities generally enjoy tax exemption for their income, and donors generally enjoy tax reliefs for gifts to charity. Details vary, of course, from country to country.

In civil law jurisdictions not all charitable organizations are tax exempt. Tax exemption is not automatically attributed to a charitable organization, each charity must apply specifically for tax exemption status if desired. Tax exemption may be attributed in full or in pre-categorised percentage levels. When charitable organizations have been established by companies within a tax planning strategy or by any other reason, those charities are usually legally bound in liability to the parent companies.

United States

In the United States, there are complex tax law differences between the various types of charitable organizations such as private foundations and public charities.

Donations to charities in the United States may be deductible for income tax purposes if the organization is determined by the Internal Revenue Service to be a qualified organization under IRS Publication 526. Qualified Organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.[13]

Charitable Organizations include Churches, religious organizations, federal, state, and local governments, Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, war veteran’s groups, fraternal lodges, nonprofit schools, hospitals, museums, etc.[13] IRS Publication 78 is the Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code that lists specific qualified organizations.[14] The IRS also provides an online site to look up qualified charitable organizations by name or city.[15]

Qualified Charitable Organizations have tax exempt status from the Internal Revenue Service, usually under non-profit organization sec. 501(c)(3) of the tax code. Such organizations file a tax return by using IRS Form 990, which is monitored by watchdog groups like Charity Navigator to analyze their business practices. US tax law also allows trusts that do not qualify as exempt under 501(c)(3) to get significant tax advantages if they are set up with specific provisions.[16]. These are called Charitable Remainder Trusts (CRT) and Charitable Lead Trusts (CLT). Charitable Remainder Trusts are so named because the remainder of the assets in the trust passes to a designated charity at the death of the grantor or one or more beneficiaries. A current tax deduction is given for the portion that is determined to be the expected amount the charity will receive in the future, which is called the remainder. During the lifetime of the primary beneficiary, a percentage of assets or a fixed dollar amount are paid to the primary beneficiary. There are two primary types of CRTs: Charitable Remainder Unitrusts (CRUT), where a percentage of assets is received by the lifetime beneficiary, and Charitable Remainder Annuity Trusts (CRAT), where a fixed dollar amount is received every year. Charities or other trustees are also allowed to set up pooled trusts that operate similarly to individual CRTs except that they receive contributions from multiple donors. This allows each donor similar benefits as an individual CRT without the expense of creating the trust themselves.[17] The Charitable Lead Trust is essentially the reverse of a Charitable Remainder Trust [18]. In this form, the lifetime payments go to the charity and the remainder returns to the donor or to the donor's estate or other beneficiaries. Thus the two types of CLTs are CLUTs and CLATs, which are analogous to CRUTs and CRATs.

Similarly named and often confused with CRUTs and CRATs are Grantor Retained Unitrusts (GRUT) and Grantor Retained Annuity Trusts (GRAT) [19]. The difference is that GRUTs and GRATs do not involve charitable beneficiaries and therefore are not given the charitable deduction.

United Kingdom

In the United Kingdom, Gift Aid is a scheme to enable tax-effective giving by individuals and companies to UK charities. In outline, Gift Aid allows individuals who are subject to UK income tax to complete a simple, short declaration that they are a UK taxpayer. Any cash donations that the taxpayer makes to the charity are then treated as being made after deduction of income tax at the basic rate (22% in 2006/7), and the charity can reclaim the basic rate income tax paid on the gift, adding approximately 28 per cent to the value of the gift. Higher-rate taxpayers can also claim a deduction for income tax purposes. Charitable companies are also exempt from paying corporation tax on any profits they make. Charities also gain more favourable treatment for value added tax purposes as well. For example, donated materials for charity shops are classed as zero-rated for VAT purposes and adverts placed by charities are also zero-rated in many circumstances.

Although strictly intended for cash donations, HMRC have recently (2006) allowed schemes wherby charities can also claim tax relief on goods donated (such as via charity shops) for sale.[20]

Hong Kong

Charitable organizations are exempt from taxation when they engage in a trade or business from which the profits shall be exempt if used for a charitable purpose within Hong Kong.[21] Furthermore, said trade or business must actually carry out the express purpose of the organization or the benefited persons actually carry on the work of the charitable organization.[22]

A taxpayer may receive a deduction from their income taxes equal to the amount of charitable contributions to tax-exempt charitable organizations.[23] However, the taxpayer must have made such contributions that in the aggregate exceed $100.[24] The taxpayer may not receive a deduction in an amount that exceeds 25% of their total income.[25]

Common law and charities

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In law, the concept of "charitable" purpose has a meaning which is not quite the same as in normal language.

In common law jurisdictions the concept derives loosely from the meandering list of charitable purposes in the Charitable Uses Act (also known as the Statute of Elizabeth) 1601, interpreted and expanded in a considerable body of case law. In Commissioners for Special Purposes of Income Tax v Pemsel (1891), Lord McNaughten identified four heads of charity which could be extracted from the Charitable Uses Act and that are recognized by the law of charities today: (1) relief of poverty, (2) the advancement of education, (3) the advancement of religion, and (4) other purposes considered beneficial to the community.

For a purpose to fall into the fourth category, the courts will usually refer to the preamble of the Charitable Uses Act 1601, and decide by analogy to the purposes listed there. An example of this is the case of Vancouver Regional Freenet Association v Minister of National Revenue (1996), where free Internet access was likened by analogy to the repair of highways found in the preamble to the Charitable Uses Act 1601.

In some jurisdictions, the common law definition has been replaced by a statutory definition, but without greatly changing the underlying concept.

List of relevant organizations

Charity regulating bodies

Evaluations of charities

United States

United Kingdom


See also

References

  1. ^ "Charity Facts". Retrieved on 2008-08-18.
  2. ^ "Institute of Fundraising What is a charity or voluntary organization". Retrieved on 2008-08-18.
  3. ^ "NCVO Voluntary organization definition". Retrieved on 2008-08-23.
  4. ^ "Charity Commission for England and Wales". Retrieved on 2008-08-20.
  5. ^ "Charities Act 2006". Retrieved on 2008-08-20.
  6. ^ "Charities and Public Benefit". Retrieved on 2008-08-20.
  7. ^ "Choosing and Preparing a Governing Document". Retrieved on 2008-08-24.
  8. ^ "Seniors Network - Unincorporated Association". Retrieved on 2008-08-24.
  9. ^ "NCVO - Legal structures for voluntary organisations". Retrieved on 2008-08-24.
  10. ^ "Guarantee Company - Not for Profit Companies - Charities". Retrieved on 2008-08-24.
  11. ^ "Charitable Incorporated Organisation (CIO)". Retrieved on 2008-08-21.
  12. ^ Extension of Charitable Purpose Bill 2004 (Bills Digest, no. 164, 2003-04)
  13. ^ a b IRS Publication 526 - Charitable Contributions
  14. ^ IRS Publication 78 - Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code
  15. ^ IRS Search for Charities, Online Version of Publication 78
  16. ^ Internal Revenue Manual - 4.76.5 Non-Exempt Charitable And Split Interest Trusts
  17. ^ Lawyer, Lawyers, Attorney, Attorneys, Law, Legal Information - FindLaw
  18. ^ Alphabet Soup of Estate Planning (archived page)
  19. ^ Internal Revenue Bulletin - March 14, 2005 - T.D. 9181
  20. ^ UK Tax
  21. ^ Hong Kong Inland Revenue Ordinance, Chapter 112, section 88
  22. ^ Hong Kong Inland Revenue Ordinance, Chapter 112, section 88
  23. ^ Hong Kong Inland Revenue Ordinance, Chapter 112, section 16D
  24. ^ Hong Kong Inland Revenue Ordinance, Chapter 111, section 16F
  25. ^ Hong Kong Inland Revenue Ordinance, Chapter 112, section 16D


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