Setting up a charitable foundation in Australia is great for giving back to the world while receiving the extraordinary benefits such as strong asset protection, tax minimisation and power to extend your financial blessings to others.
Foundations are one of, if not, the most popular structures amongst the elite both onshore and offshore.
It’s well known that governments are less likely to target charitable trusts or foundations for a number of reasons. An obvious example is it’s not politically popular and doesn’t win them votes.
Hence, they’re far less regulated than companies and trusts as governments want to be seen as supporting charitable and not for profit causes, not targeting them.
We discuss in more depth about foundations in our Overview of Foundations video.
THE THREE (3) KEY HIGHLIGHTS:
– Under the tax law, an income tax exemption is granted for a charitable trust or charitable institution or organisation that is established for charitable purposes under the 4 heads of charity as defined in Pemsel’s case by His Honour Lord MacNaghten.
– It’s possible to have family members as trustees provided there’s more independent than related trustees. For example, you could have 1 family member as a trustee but you’d also need 2 independent trustees. The trustee requirements for DGR status foundations are much stricter.
– There are three (3) issues to consider for tax purposes when setting up a charitable foundation in Australia. The FIRST is the taxation of the entity, SECOND is the individual, THIRD is donations.
What Are The 4 Heads of Charity?
On July 20, 1891, Lord MacNaghten in Pemsel’s case, in the House of Lords declared that charity in its legal sense comprises of four principal divisions: relief of poverty; advancement of education; advancement of religion; and other purposes beneficial to the community.
Each of these 4 heads of charity met the “charitable purposes” test and therefore exempt from paying income tax.
Let’s summarise each one in turn:
1) Relief of poverty
This has to be DIRECT relief of the poor, distressed or underprivileged. Simply raising awareness or educating wouldn’t qualify for this head of charity (that would fall under the next head of charity).
“Give a man fish and you feed him for a day. Teach a man to fish and you feed him for life.”
With a relief of poverty charitable foundation, it’s the opposite. Metaphorically, you must give the fish to the man.
Common examples of a relief of poverty foundation include homeless shelters, disability support services, hospitals, food kitchens, aged care services, crisis counselling and possibly animal shelters.
Watch our Introduction to Public Benevolent Institutions for more information.
2) Advancement of education
This helps to advance or increase knowledge, skills and/or understanding in the world by providing education, awareness or science.
Some groups choose to use their education foundation to provide networking opportunities and sometimes offer scholarships.
Examples include Lebron James Family Foundation and Khan Academy.
Watch our Introduction to Educational Institutes for more information.
3) Advancement of religion
This is very broad and covers any religion or spirituality which connects people to “God” or a Supreme Being.
Foundations under this head of charity have especially favourable tax treatment by the government. It’s the only one where the individuals running the foundation (i.e. pastors) have full income tax exemption (provided you set it up correctly).
(This is very popular amongst the elite).
Examples include the Catholic church, Hillsong, the 7th Day Adventist church.
For tax purposes, let’s look at the 7th Day Adventist church dual structure and what it achieves.
– Church foundation is income tax exempt
– Sanitarium Health Foods Ltd is a company who is TAXABLE however it is OWNED by the church as a shareholder. EFFECT is the company is tax exempt
– Cafes and Health Food Shops, etc.
– Essentially, Sanitarium pays no tax
Clever, right?
Watch our Introduction to Church Foundations for more information on this head of charity.
4) Other purposes beneficial to the community
This is very broad and catches anything else which is set up to be charitable and not for profit.
Lord MacNaghten in Pemsel’s case says, paraphrased …
“These charities are not less charitable in the eye of the law, because incidentally they benefit the rich as well as the poor, as indeed, every charity that deserves the name must do either directly or indirectly.”
Some examples include library clubs, sporting clubs or eliminating prejudice and discrimination.
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Author’s comment: When setting up a charitable foundation in Australia, it must be set up for charitable purposes. Meaning, it’s to be carried on to help others and benefit the community; and not for the private gain of the individuals or members running it.
Therefore, if you’d like to reach out to us … we have an ethical duty to do what’s right and would only accept your application if you’re genuinely giving back to the world; and NOT running it from personal interest / seeking individual gain as your main objective.
This doesn’t mean you can’t enjoy the benefits of a foundation, quite the contrary.
Can Family Members Be Trustees of a Foundation?
Short answer is it’s possible. Keep in mind that setting up a charitable foundation in Australia requires you to have more independent than related trustees. Meaning, you could have 1 family member as a trustee but you’d also need 2 independent ones.
Theoretically, this ensures the charity is an independent not for profit organisation, and is not controlled exclusively by family.
The requirements and laws are much stricter on the kind of trustees you must have if you run a DGR status (e.g. PBI) foundation.
Basic Tax Guide for Foundations
We’re frequently asked about the tax laws around foundations so we’ve simplified this below for you.
There are three (3) issues to consider for tax purposes when setting up a charitable foundation in Australia.
FIRST is the taxation of the entity
SECOND is the taxation of the individual
THIRD is the taxation of donations
We’ll look at each in turn.
Do charitable foundations pay taxes?
There are multiple levels of taxation to consider for charitable foundations – income tax, GST, FBT and, in limited circumstances, state tax. If a foundation is endorsed in Australia, it may apply for income tax exemption. If a foundation is income tax exempt, it can also qualify to be GST exempt, and up to a certain limit, to have fringe benefits tax exemption also.
The Tax Act states to be tax exempt, a foundation must be endorsed. In Australia, this involves registering your charitable foundation with the ACNC and gaining approval from the ATO.
See types of income tax exempt organisations.
Also see charity tax concessions
Do private foundations pay taxes?
Private foundations are privately set up between two (2) consenting parties and set up outside the public arena. In Australia, private foundations are not approved by the ATO nor endorsed by the ACNC; and therefore not exempt from paying income tax.
Governments in Australia don’t recognise private foundations and, to date, anyone who has been audited by the tax office has been taxed on the foundation income PLUS heavy penalties.
In USA, the IRS have also had relative success in taking on private foundations.
However, in some offshore jurisdictions such as Seychelles, private foundations are legal to set up and in fact work quite well for asset protection.
The elite are known to set these up in certain common law countries when millions of leaked documents show their offshore tax havens in the 2016 Panama Papers, and more recently 2021 Pandora Papers.
Watch our Private Foundations Should You Have One for more information.
Do the trustees (or individuals) of the foundation pay taxes?
As a general rule, yes. This is important to understand when setting up a charitable foundation in Australia. Most charities in Australia will not give any individual tax exemptions, and the few that do have limitations.
There are ways to address these issues, but you’d need to discuss this with a specialist.
This can be a confusing concept for some to understand so I’ll simplify this. YOU or other individuals, members or trustees running the foundation are separate entities to the foundation itself, and therefore taxed separately.
In most circumstances, monies taken out for personal use as salary or other benefits are subject to income tax or fringe benefits tax.
However, there are usually ways around this (depending on your personal circumstance, and which foundation you set up).
EXAMPLE:
You can sometimes claim Fringe Benefits rebates and occasionally exemptions, depending on the foundation, activities undertaken and people involved.
Are donations tax deductible in Australia?
Donations are only tax deductible if you donate to a charitable foundation which has the deductible gift recipient (DGR) status. The person who makes the gift can claim a deduction.
A deductible gift recipient is a body approved by the ATO to receive tax deductible donations (i.e. any monies given to it by individuals or businesses).
The requirements to be a deductible gift recipient are strict.
To qualify for gift deductibility status, there are a few categories, however the most common one is the following:
Public Benevolent Institution. A PBI is an institution set up for the relief of poverty, distress, misfortune, helplessness, sickness, etc.
As discussed in the 4 heads of charity section, PBIs (or relief of poverty) is set up to DIRECTLY RELIEVE. Meaning, you must provide direct relief in the form of food parcels, handouts, counselling for the severely distressed, etc.
If you set up a foundation which provides direct relief, you may apply for DGR status. For other charitable foundations, the laws are quite strict, although it’s still possible that gifts may be deductible (however speak to a specialist for more information).
EXAMPLE:
The Red Cross is a DGR as it provides direct relief (i.e. medication) and if $10,000 is donated to the charity, the donations are tax-deductible. By contrast, religious foundations do not meet this strict criteria, however there are ways to address this.
Types of Taxes To Understand When Setting Up a Foundation in Australia
i. Income Tax
Under the tax law, an income tax exemption is granted for a charitable trust or charitable institution or organisation that is established for charitable purposes under the 4 heads of charity as defined in Pemsel’s case by His Honour Lord MacNaghten.
As a reminder they are relief of poverty; advancement of education; advancement of religion; and other purposes beneficial to the community.
The requirements for income tax exemption are broad. Most charitable organisations would satisfy these requirements.
If a foundation is income tax exempt, it can also qualify to be GST exempt, and up to a certain limit, to have fringe benefits tax exemption also.
ii. GST or Sales Tax
Charitable foundations endorsed by the ATO to be income tax exempt can also be endorsed to be exempt from GST.
You are not required to be GST registered unless your GST turnover of your organisation is $150,000 or more. Be aware if you are exempt from GST, and even if you have to register for GST, you are entitled to input tax credits for all your expenses of the foundation.
EXAMPLE:
If a foundation spends $2,200 in buying a laptop computer for the purposes of the charity, there’s $200 GST included in this. The foundation can lodge a statement (known as a BAS statement) every 3 months, and claim back the GST paid. So in this example, the charity can claim back from the ATO the $200 paid for GST
iii. Fringe Benefits Tax (FBT)
In 1986, this was brought in by communists Hawke and Keating to stop businesses paying benefits on behalf of people (as opposed to salaries) to effectively limit taxes paid by the individuals.
Fringe Benefit Tax (FBT) is a tax that a foundation pays to the ATO for the benefits it pays for its employees, e.g. the foundation has an employed secretary, and pays their school fees rather than pay them cash (which they’d pay tax on), so the ATO instead ensures the foundation pays taxes called FBT on the value of the school fees.
The ATO provides charities with FBT Rebates as follows:
For charitable institutions, FBT Rebate is capped at $30,000. If the total grossed-up taxable value of benefits is more than $30,000 a rebate cannot be claimed for the FBT liability on the excess amount. Grossing up is a special Tax Office formula which is applied, so in actual fact, the benefit is not going to be $30,000.
So for example, School fees of $20,000, are grossed up to $38,000. So this means in practice that anything more than $15,000 is going to miss out on the benefit. Some FBT exemptions are meals, entertainment allowance, business lunches, fundraising events, planning conferences, farewell functions and gym memberships.
See – FBT rates and thresholds
iv. State Tax
Land tax and stamp duty will apply for the foundation in very limited circumstances but isn’t applicable for the individual(s) running it.
How Much Does It Cost To Set Up A Foundation?
The same answer to, “how much does it cost to buy a car?” Are you wanting something second hand, brand new, a Porsche, etc. Setting up a charitable foundation is no different. It could range anywhere from $1,000 – $100,000 depending on the complexity, what’s involved and who you set it up with.
However, the general price range you can expect to do things properly with a foundation is around $15k – $50k AUD.
The specialist we work with ensures the foundation retains all the benefits while remaining compliant within the laws and system.
If you wish to go down the path of a private foundation in Australia, this is much cheaper than a public foundation but doesn’t have the same recognition or benefits in our opinion.
If you have a higher net worth and you’re wanting to set up a foundation in an offshore jurisdiction such as Seychelles, Panama or Cook Islands, you’d be looking at a larger investment.
Although in our opinion, we know the tax, asset protection and philanthropy benefits you receive from setting up a foundation far outweigh the cost of setting it up.
However, it’s always best to speak with a specialist about the options for your personal circumstance.
Watch our Introduction to Offshore Foundations for more information.
Summary of Setting Up a Charitable Foundation in Australia
(If you’re more of a visual person, watch our Summary of Foundations video for a recap of charitable foundations).
On July 20, 1891, Lord MacNaghten in Pemsel’s case, in the House of Lords declared that charity in its legal sense comprises of four principal divisions: relief of poverty; advancement of education; advancement of religion; and other purposes beneficial to the community.
Each of these 4 heads of charity met the “charitable purposes” test and therefore exempt from paying income tax.
However, this doesn’t exempt the individual from paying personal taxes or FBT. Donations are also another story. There are ways to address these issues but this requires a specialist.
The types of taxes to consider when setting up a foundation in Australia include income tax, GST, FBT and, in very limited circumstances, state or land taxes / stamp duty.
The investment you can expect to set up a foundation properly is around $15k – $50k AUD. This comes down to the jurisdiction, structures and complexity involved.
If you prefer something cheaper such as a private foundation, that’s your choice but it’s better to see a private foundation specialist (not us) as we don’t believe they work in Australia considering the current climate and how the government view them.
Most people who set up private foundations are willing to help you but the question is, will they stand with you if something goes wrong?
By contrast, when a foundation is set up legitimately, you gain far better value such as being able to give back through philanthropy while sleeping peacefully at night knowing it’s legal and compliant, you gain strong asset protection as well as tax minimisation.
If you’d like to discuss more, please complete our form and have a free 30-minute consultation with one of our team.
DISCLAIMER:
This information is provided for educational purposes only. It should not be relied upon as tax, asset protection or legal advice. None of the information takes into account your personal objectives, financial situation or needs. You must make your own decision how to proceed. If you want general or specific advice that takes account of your particular objectives, financial situation or needs, please seek advice from a licensed professional in the area such as an accountant, lawyer or similar professional.