Restating the ‘in Australia’ special conditions for tax concessions

Submission to The Treasury
From Hillsong Church

1.	OVERVIEW
Australians benefit greatly from the services of our strong charitable sector, household names such as Barnados, the Salvation Army and the YMCA provide much needed services and community support. These, and others like them, only operate in our nation because their overseas founders decided to invest resources here for the betterment of Australians. Whilst we as a nation are willing without restraint to benefit from charities founded overseas, we are proposing laws which limit Australians from extending the same generous hand into other countries.
Hillsong Church recognises the need for laws which prevent the abuse of tax concessions through tax avoidance, terrorist financing or money laundering. However the proposed changes go too far in restricting the support given to the valuable overseas work of Australian born charities. 
Many Christian organisations which operate primarily overseas do not meet the new ‘in Australia’ tests nor do they meet the exemption provisions of being prescribed in the Income Tax Assessment Act Regulations 1997 or endorsed as a deductible gift recipient.
Whilst we need laws which prevent the flow of funds for extreme religious groups, this shouldn’t detract from recognition of the charitable work of genuine religious organisations. Many of the significant charities in Australia are operating because there was first a church established, these include the Smith Family, Anglicare and the Salvation Army. Restricting the support and growth of churches internationally will also stifle the charitable work these churches undertake.
For example, in June 2008, Hillsong established a church in Cape Town South Africa, since that time the church has grown to a congregation of over 4,000 people. Hillsong Cape Town provides many community programs including the provision of food and clothing in poor communities, social enterprise initiatives and disaster relief for families who have suffered through tragic circumstances. The church is the country’s largest provider of free wheelchairs and has recently built accommodation which facilitates a safe learning environment in the city’s only public school for disabled children.
All of these programs were made possible because Hillsong Church Sydney was first able to provide funding for the establishment of the church; funding which was sourced from non-tax supported donations. The proposed changes prohibit the financing of additional new churches as they involve making donations to overseas organisations which are not income tax exempt in Australia and are not prescribed in the regulations. The consequence of this is catastrophic and opposes a core Christian belief as described in Mathew 28:19 “Therefore go and make disciples of all nations”(NIV). Furthermore it prevents the establishment of valuable welfare services which go hand in hand with church activities globally.
We thank the government for its commitment to helpful reform of the charitable sector.  We believe however the proposed changes go beyond the scope of policy announcements and are inconsistent with the government’s commitment to ‘do no harm’ to the sector. The issues raised within the Exposure Draft should be considered following the establishment of the ACNC and after the statutory definition of charity has been established. Allowance should be given for an adequate consultation period which ensures the support of the charitable sector and ultimately provides the best results for the Australian public.  
ABOUT HILLSONG CHURCH

Pastors Brian and Bobbie Houston held the first Hillsong Church service at Baulkham Hills Public School on the 17th of August 1983. Their desire was to build a church which gave people an understanding of the bible message that promotes living whole and effective lives in relationship with their creator God, lives which are fulfilling and committed to helping those less fortunate than themselves.

Over the church’s 28 year history, the Hills congregation has grown to be Australia’s largest church congregation. Hillsong now holds over 30 weekly contemporary church services at 18 locations with over 26,000 people attending. Hillsong has also planted growing churches in London, Kiev, Moscow, Paris, Stockholm, Germany, New York and Cape Town.

Hillsong is committed to seeing generations of young people flourish and be successful in life; and as such we hold weekly youth mentoring programs which have over 2,500 in attendance. Through Hillsong CityCare, we operate self-esteem programs, drop in centres, emergency relief, counselling, drug and alcohol programs and migrant youth integration initiatives which local authorities have recognised to reduce crime amongst those who may otherwise turn to destructive behaviour.

Hillsong Conference has just celebrated its 25th year of training Christian workers as over 18,000 people converged on the Sydney Entertainment Centre, Darling Harbour Convention Centre and Luna Park. Just this year the conference launched a program against school bullying which has seen over 2,500 young people subscribe to a Facebook and twitter community dedicated to addressing this endemic problem. 

There were over 14,500 attendees at the 2011 annual women’s Colour Your World conference. The purpose of the conference each year is to place value on womanhood and encourage them to have a positive impact on their community. Over the last 4 years, the Colour Sisterhood, which is the charitable program of the conference, has raised over $2 million to support initiatives including those which provide facial reconstruction for tortured Ugandan women, support the rehabilitation of African child soldiers, assist victims of the Queensland floods, provide hygiene packs to Sydney’s homeless, accommodation for Watoto Children’s Home in Rwanda, human trafficking recovery programs as well as educating and feeding children in Mumbai India.
Each year Hillsong records the songs written and used in its church services and releases Christian worship albums for use in church worship and personal devotion worldwide. Hillsong has sold over 11 million albums. In April this year we released a recording of an old Christian hymn It Is Well With My Soul which reached the number one position in the ARIA singles charts with the purpose of raising money for the victims of the Queensland floods. Our Brisbane congregation has provided emergency accommodation, cleaning crews, building teams and finances to assist those caught in the floods.
This year Hillsong’s fundraising appeals have raised over $500,000 to assist people struggling to recover from the Queensland Floods, the Christchurch earthquake and the Tsunami in Japan. 
Hillsong operates a tertiary college with over 1,200 students offering courses in Christian leadership, youth work and many other disciplines. Students have come from 93 different countries to be trained in the skills of running relevant and effective church programs.

Hillsong is committed to transparency and good governance. The church provides an open book policy to its congregation, releases an annual Financial Report, lodges its financial statements with the ASIC and the Dept. of Fair Trading and determines all salaries through a salaries committee comprised of non-executive directors involving independent remuneration specialists.

Hillsong is first and foremost a Christian church committed to helping people, not a business, and despite wild media claims, does not own Gloria Jeans, a tavern or a resort in the Blue Mountains as has been wrongfully portrayed.

The purpose of Hillsong is best described in its mission statement:

To reach and influence the world by building 
a large Christ-centred, Bible-based church, changing mindsets 
and empowering people to lead and impact 
in every sphere of life.

2.	SUMMARY OF CONCERNS
Whilst we recognise that some of the consequences of the Exposure Draft may be unintentional, the detrimental effects of the proposed changes are significant. These consequences are summarised as follows: 

a)	Prohibits churches providing financial support to overseas Christian initiatives 
(Explanatory Material [EM] 1.45 3rd point)

b)	Dedicated overseas missionary and teaching organisations no longer meet the ‘in Australia’ tests, resulting in a loss of income tax exemptions
(Exposure Draft [ED] paragraph 23, ITAA 1997 section 50-50 (2))

c)	Prohibits churches from supporting Australian organisations whose primary activity is overseas missions and teaching who lose income tax exemption
(EM paragraph 1.45) 

d)	Prohibits cross charity support between organisations which do not have ‘similar or identical purposes’
(EM paragraph 1.64)

e)	Prohibits DGR endorsed charities making donations to non-DGR organisations carrying on charitable work 
(ED paragraph 2, ITAA 1997 section 30-18 (3))

f)	Prohibits charities establishing an entity for a special purpose 
(ED paragraph 27, ITAA 1997 section 995-1 (1)(a))

g)	Prohibits parent/controlled charity structures  
(ED paragraph 27, ITAA section 995-1 (1)(a) and (b))

h)	Prohibits cash payments to support people in need pursuant to the purposes of the charity  (ED paragraph 23, ITAA 1997 section 50-50 (2), EM paragraph 1.6 and 1.44)

i)	Limiting more than tax supported funds 

j)	No transition period provided for entities who no longer meet the ‘in Australia’ special conditions
k)	Harsh penalties for minor non-compliance

3.	CONCERNS AND RECOMMENDATIONS
Following is an explanation of our concerns and recommendations which enable the stated agenda of government policy to be achieved without having a negative impact on the sector. 

a)	Prohibits churches providing financial support to overseas Christian initiatives 

The third point of EM paragraph 1.45 states that in order to become income tax exempt, an entity must usually:
“donate money only to other income tax exempt entities (who have therefore themselves met the ‘in Australia’ special conditions where applicable)”

This would prevent churches from supporting overseas Christian initiatives as they would not meet the ‘in Australia’ special conditions and although these entities are exempt in their own country, they may not be endorsed as income tax exempt in Australia.
Hillsong Church first started in Sydney Australia, but has since opened churches in London, Kiev, Moscow, Paris, Stockholm, Germany, New York and Cape Town. Each of the new churches required initial funding but now rely on their own income to operate.
In addition to the advancement of religion, which is in itself charitable, these churches provide welfare programs that bring significant benefit to the local people they reach. Examples include human trafficking prevention initiatives, providing free wheelchairs for the disabled, social enterprise programs and providing food and clothing for the most disadvantaged in their communities.
When we have the opportunity to help others in need it is our responsibility to do so. Should changes in legislation prevent the establishment of overseas Christian initiatives and the follow on community work, we are negating our obligation to help others.
It should be noted that initial funding provided to establish Hillsong’s overseas churches came from non-tax supported funds and there was no impact on Australian government revenue.
Recommendations
•	Extend EM paragraph 1.38 to state that the payment for goods and services includes financial support towards entities internationally endorsed as not-for-profit entities pursuant to the purposes for which the Australian entity was established and not considered a donation under EM paragraph 1.45.
•	In doing so, continue to allow churches to support overseas Christian initiatives, even if the overseas entity is not a DGR in Australia or a prescribed organisation under the Income Tax Assessment Act Regulations 1997. 
•	Adopt the following amendment to ITAA 1997 Section 50-50(2)(c):
	“Except for the charitable purposes (whether or not in Australia) not donate money to any other entity, unless the other entity is an *exempt entity.”

b)	Dedicated overseas missionary and teaching organisations no longer meet the ‘in Australia’ test, resulting in a loss of income tax exemption
A foundational value of the Christian Church is the Great Commission as stated in Matthew 28:19-20:

“Therefore go and make disciples of all nations, baptising them in the name of the Father and of the Son and of the Holy Spirit, 20 and teaching them to obey everything I have commanded you.”(NIV)
An organisation which primarily carries out overseas missions or teaching activities in furtherance of the Great Commission stands to lose its income tax exempt status as it does not ‘pursue its purposes principally in Australia’ as stated in ED paragraph 23, ITAA 1997 section 50-50(2) and further explained in EM paragraph 1.47 and 1.48.
ED paragraph 23, section 50-51 (3)(b) only allows an exemption from this test for foreign entities which are prescribed in the regulations therefore not allowing continued exemption for Australian entities whether or not they are prescribed.
Overseas missionary and teaching organisations are often independently incorporated to provide a targeted focus even though they are closely related to Christian organisations whose activities are pursued principally in Australia. It would be costly and unnecessarily burdensome for these organisations to restructure and merge so that their activities fall within a larger operation which meets the principally ‘in Australia’ tests.
It would also be very difficult to choose which religious organisation to merge with as organisations who fulfil the overseas purposes often do so for a number of different churches. 
Costs would be significant including accounting and legal fees and the stamp duty on the transfer of properties etc.
Recommendations
•	Expand those institutions which are prescribed in the regulations as detailed in EM paragraph 1.40 to include Australian domiciled organisations which are currently prescribed under the regulations, and 
•	Apply the requirement to ‘pursue its purposes principally in Australia’ to a religious group (as defined for GST purposes) rather than by entity, this would allow a missions organisation to be assessed in context to a group of religious entities to which it belongs, or
•	Exclude overseas missions and teaching organisations from the requirements of ITAA 1997 section 50-50(2), similar to the treatment of Trade Unions.
•	If no proposal will be considered for overseas focused missionary and teaching organisations to qualify for income tax exemption, provide a grandfathering clause permitting those currently endorsed to continue to hold their income tax exemptions. Many overseas focussed missionary organisations would have structured themselves to meet the criteria that ‘it pursues its purposes principally in Australia’ by being incorporated within the broader Australian church organisations they represent. It is unfair for these organisations to bear costs unnecessarily due to a change in wording in the legislation. Costs which could be expensive if stamp duty is payable on the movement of property.

c)	Prohibits churches from supporting Australian organisations whose primary activity is overseas missions and teaching who lose income tax exemption 
EM paragraph 1.45 point 3 states income tax exempt organisations must:
 “donate money only to other income tax exempt entities (who have therefore themselves met the ‘in Australia’ special conditions where applicable)”
Should Australian organisations, whose primary activity is overseas missions and teaching, lose their income tax exemption, church organisations will not be able make donations of support without risk of losing their own income tax exempt status. This would leave many Australian missionaries working abroad destitute with their funding immediately cut off.
Recommendation
•	Extend EM paragraph 1.38 to state that the payment for goods and services includes financial support towards Australian organisations whose primary activity is overseas missions and teaching in pursuit of the purposes for which the Australian entity was established and not considered a donation under EM paragraph 1.45.

d)	Prohibits cross charity support between organisations which do not have ‘similar or identical purposes’. 
EM paragraph 1.64 states:
 “for a charity to make a donation, it would need to ensure that the entity receiving the donation had similar or identical purposes.  If it did otherwise, the entity making the donation could no longer itself be considered exempt.”
Charities that are endorsed under varying charity classifications and with different purposes often work together. It is our concern that this paragraph will prevent an organisation established for one charitable purpose from supporting a charity endorsed with a different purpose. 
For example, during the Queensland Floods, Hillsong Church, a religious organisation, provided emergency accommodation for victims of the floods and Hillsong CityCare, a welfare organisation, provided building repairs, cleaning crews, food, clothing and other urgent assistance. EM paragraph 1.64 would prevent Hillsong Church from making a donation to fund the activities of Hillsong CityCare during the floods as the religious purposes of the church are not ‘similar or identical’ to the purposes of the welfare entity.
Another example can be seen with the operation of Hillsong Media and Performing Arts, a cultural organisation, which teaches dance, music, acting and media. The curriculum includes performances in church services providing an opportunity for the students to perform in public. Hillsong Church would not be able to make donations required for the ongoing sustainability of the cultural organisation due to the different purposes contained in the constitution of the cultural entity.
If Hillsong Church is prohibited from making donations to the Hillsong CityCare or Hillsong Media and Performing Arts, these welfare and cultural activities could suffer significantly or cease operating. It is the community that would suffer as a result.

Recommendations
•	Replace the ‘similar or identical’ requirement with ‘a similar purpose’ in EM 1.64 as follows:
“For example, for a charity to make a donation, it would need to ensure that the entity receiving the donation had similar or identical purposes a similar purpose.  
•	Extend EM paragraph 1.38 to state that the payment for goods and services includes financial contributions towards income tax exempt entities with different purposes as long as the financial contributions achieve the purposes of the charity making the donation and that such a payment is in pursuit of the purposes for which the entity was established.

e)	Prohibits DGR endorsed charities making donations to non-DGR organisations carrying on charitable work 
ED paragraph 2, ITAA 1997 section 30-18 (3) states that:
“The fund, authority or institution must not donate money or property to any entity that is not a *deductible gift recipient.”

There are times when charities endorsed as a DGR make donations to organisations that are undertaking welfare activities which are not themselves endorsed as a DGR, these donations are pursuant to the purposes for which the DGR has been established and must be used for a specific purpose. The beneficiary organisation may not be entitled to DGR status as the welfare activities it undertakes are ancillary to the organisation’s main purpose.
An example would be when a welfare organisation makes a donation to the local Rotary Club toward their winter appeal for blankets to support homeless people. Under current legislation this is allowable pursuant to the objectives of the charity; however proposed changes would prohibit this as the club is not endorsed as a DGR. 
Recommendation
•	Extend EM paragraph 1.38 to state that the payment for goods and services made by DGRs includes donations towards entities which are not endorsed as a DGR as long as the donation is made to achieve the purposes of the donor charity and that such a payment is in pursuit of the purposes for which the donor entity was established.
•	Amend ITAA 1997 section 30-18 (3) to read:
“Except for charitable purposes, the fund, authority or institution must not donate money or property to any entity that is not a *deductible gift recipient.”

f)	Prohibits charities establishing an entity for a particular purpose 
ED paragraph 27, ITAA 1997 section 995-1 (1)(a) states:
“ not‑for‑profit entity means an entity that:
(a)		does not carry on its activities for the purposes of profit or gain for particular entities, including its owners or members, either while it is operating or upon winding up;”

It is common for a charity to establish an entity for a particular purpose. Amongst other reasons, an entity established to hold property for asset protection purposes or an entity set up to carry out a new activity which is deemed risky or untried so as not to threaten the strength of the main entity carrying out existing activities.

It could be argued entities that are established for a particular purpose breach ITAA 1997 section 995-1 (1)(a) as they are carrying on their activities for the gain of another.
Recommendation
•	Provide clarification in the Exposure Draft that ITAA section 995-1 (1)(a) does not intend to prevent charities from establishing entities for a particular charitable purpose.
•	Amend EM 1.78 to say:
However, the fact that a not-for-profit entity may make a profit does not negate its not-for-profit status so long as the profit is applied to the not-for-profit purposes of the entity and the profit does not accrue to the benefit of identifiable members and donations made to identifiable members are done so pursuant of the purposes of the entity either directly or indirectly.

g)	Prohibits parent/controlled charity structures  
It is commonplace for the parent entity of a group of charities to hold the membership of other entities within the group. In the examples provided previously, a charity may establish an entity particularly for holding property, or establish a new entity to carry out an untried riskier activity. In these circumstances, the parent charity can exercise reserve power over the new entity by being its sole member.
ED paragraph 27, ITAA 1997 section 995-1 (1)(a) prohibits an entity for carrying on its activities for the gain of its members.
This is further complicated when the parent entity no longer has use for the property in the subsidiary and wishes to sell it and wind up the entity. ED paragraph 27, ITAA 1997 section 995-1 (1)(b) states:
“Not-for-profit entity means an entity that:
(b)	“does not distribute its profits or assets to particular entities, including its owners or members, either while it is operating or upon winding up.”

The clause would prevent the property holding entity from distributing the equity in the property either on the sale or upon winding up the entity to the parent entity.

This paragraph would also prevent a group of charities re-structuring to consolidate any entities that it is a member of. 

Recommendations
•	Allow a not-for-profit entity to carry on its activities for the profit or gain of a member (section 995-1 (1)(a)), or distribute its profits or assets to a member (section 995-1 (1)(b)) only when both entities have a similar purpose and when the donations to a member is made pursuant to the objectives of the entity making the donation.  

h)	Prohibits cash payments to support people in need pursuant to the purposes of the charity 
Making donations to people in need is a core activity of many charities. ED paragraph 10, ITAA 1997 section 50-1 and EM paragraph 1.6 and 1.44 could be interpreted to prevent charities from making donations to entities which are not income tax exempt. A person is an entity for tax purposes who is not income tax exempt, the proposed legislation could prevent charities from making a donation to people in need. 
Recommendation
•	Provide clarity within the legislation that donations to people which are pursuant to the purposes of the charity are not prohibited and are considered payment for goods or services as explained in EM paragraph 1.38. This could be achieved through the following amendment to ITAA 1997 Section 50-50(2)(c):
	“Except for the charitable purposes (whether or not in Australia) not donate money to any other entity, unless the other entity is an *exempt entity.”

i)	Limiting more than tax supported funds 
EM paragraph 1.42 declares:
“Restating the ‘in Australia’ special conditions will provide support to the anti‑avoidance measures in the tax law which limit income tax exempt entities expending money offshore and ensure tax supported funds remain in Australia.”
Hillsong supports the policy agenda of government scrutiny being applied to charitable funds which have been supported through tax deductibility but believe the changes go too far in limiting the use of funds that have been received post-tax.
The proposed legislation places greater restraint on the use of income given to a charity than is applied to individual donors.
For example, should individual congregation members wish to make a donation toward providing free wheelchairs in Cape Town, they can each do so by making a gift directly to Hillsong Cape Town, no tax deduction is available for the gift. However, if Hillsong Church was to co-ordinate the giving of those congregation members through an offering, the church will be unable to make a donation to that cause because Hillsong Cape Town is not a prescribed organisation (EM paragraph 1.46)  nor income tax exempt in Australia (EM paragraph 1.45).
A further example would occur in the circumstance where a tragic event has occurred in one of Hillsong’s overseas churches, such as a fire in a building or a natural disaster etc. The church congregation would expect that we would be able to make a donation to assist our global church family. It is not right that law changes would prevent the church from making a donation under these circumstances from income that has not been tax supported.

Recommendation
•	Place the proposed controls only over funds to which tax deductibility has been given; however ensure that there is equality between the choices available to a charity and choices available to individual donors in circumstances where revenue is received to which no tax deduction is available.
This would be consistent with the view held in ITAA 1997 section 50-75, whereby gifts were disregarded when determining “whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia” as stated in paragraph (1) of that section.
Therefore we recommend ITAA 1997 section 50-75 is not repealed and clarification provided that it applies to ITAA 1997 section 50-50(2)(e). This would establish that EM paragraphs 1.45 and 1.46 do not apply to donations made which have been funded from non-tax supported gift income.

j)	No transition period provided for entities who now do not meet the ‘in Australia’ special conditions
Entities which no longer meet the ‘in Australia’ special conditions will become subject to a number of taxes including Income Tax, Fringe Benefits Tax, Payroll Tax, Stamp Duty and Capital Gains Tax.
Recommendation
Many Australian missionary or teaching organisations which have an overseas focus would have structured their affairs differently and been incorporated within broader church organisations which they support. With that in mind we propose the following: 
•	Allow a grandfathering clause enabling organisations currently endorsed to retain their tax concessions to avoid expensive restructuring costs.
•	Alternatively, allow two years for entities which no longer meet the ‘in Australia’ test to restructure their affairs before removing their entitlement to tax concessions, this would allow time to sell or transfer property.
•	Provide financial relief for those who are required to restructure as a result of the changes in the legislation to cover stamp duty on properties, legal and accounting fees etc. 
k)	Harsh penalties for minor non-compliance
Current drafting of the legislation suggest that an entity’s income tax exempt status can be revoked for what could be a very minor breach of an entity’s governing documents or if $1 of the entity’s asset’s or income are used in a manner deemed inappropriate. We believe this to be harsh and unfair resulting in considerable uncertainty in the sector.
Recommendation
•	Make an exception for minor and incidental breaches and adopt a more conciliatory approach to compliance in line the principles established in the National Compact.

Conclusion
Hillsong Church supports the long standing government position expressed in EM paragraph 1.1:
•	“income tax exempt entities generally must be operated principally in Australia and for the broad benefit of the Australian community; and
•	deductible gift recipients generally must be operated solely in Australia  and for the broad benefit of the Australian community.”
Exceptions have always been allowed for Trade Unions, Employer Associations, Ausaid accredited organisations and those prescribed under the regulations, namely overseas missions organisations.
We consider it unreasonable that Trade Unions are excluded from the application of ITAA 1997 section 50-50 (2) as stated in section 50-51 (2) and believe a more equitable position should be reached. 
The government’s response to the terrorist activities of extreme religious groups should not prevent genuine religious organisations who provide significant public good through the establishment of both religious and charitable programming overseas.
Hillsong Church is concerned that the consequences of changes proposed in the draft legislation reach beyond the scope of announcements made by the Assistant Treasurer. Changes that restrict charities with different purposes working together, the prevention of the establishment of tax exempt entities which serve a strategic purpose and the prohibition of the distribution of profit to another charity which holds its membership could be significantly damaging to the sector.
We also believe it is important to differentiate between the controls placed over the charitable income for which the donor has received a tax benefit and those received without tax support. 
We applaud the government’s objectives to bring reform and positive change to the sector however believe it is inappropriate to introduce a new meaning of ‘not for profit’ prior to the statutory definition of charity being established and before the commencement of the ACNC.
Engaging the sector on these issues following the establishment of the ACNC will ensure that the reforms ultimately adopted will advance the government’s stated policy objectives.
Recognising the role of the ACNC and providing a more reasonable time period for consultation will engender support from the sector and ensure the government achieves its objectives.  Providing adequate time and opportunity for engagement reflects the principles agreed upon in the National Compact and will result in reforms which provide the greatest benefit to the Australia public.  
Hillsong Church welcomes any future opportunity to be involved in this consultation process.
As a member of the Community Council for Australia, we also support and endorse their submission.