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Charitable organization
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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, tax treatment, and the way in which charity law affects charitable organizations also varies.
Australia
Definition of charity
The definition of charity 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.
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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, tax treatment, and the way in which charity law affects charitable organizations also varies.
Australia
Definition of charity
The definition of charity 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.
Charity law
Under Australian law, there is no centralized 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 recognized as a charity by some agencies but not others. For example, in the early 1980s, Scientology was recognized 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.
England and Wales
Definition of charitable organization
A charity, or charitable organization, in England and Wales is a particular type of voluntary organization. A voluntary organization is an organization set up for charitable, social, philanthropic or other purposes. 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. 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. The Charities Act 2006 provides the following list of charitable purposes.
- the prevention or relief of poverty
- the advancement of education
- the advancement of religion
- the advancement of health or the saving of lives
- the advancement of citizenship or community development
- the advancement of the arts, culture, heritage or science
- the advancement of amateur sport
- the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
- the advancement of environmental protection or improvement
- the relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
- the advancement of animal welfare
- the promotion of the efficiency of the armed forces of the Crown or of the police, fire and rescue services or ambulance services
- 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.
Before the Charities Act 2006 the definition of charity arose from a list of charitable purposes in the Charitable Uses Act 1601 (also known as the Statute of Elizabeth), which had been interpreted and expanded into a considerable body of case law. In Commissioners for Special Purposes of Income Tax v Pemsel (1891), Lord McNaughten identified four categories of charity which could be extracted from the Charitable Uses Act and which were the accepted definition of charity prior to the Charities Act 2006.
- the relief of poverty,
- the advancement of education,
- the advancement of religion, and
- other purposes considered beneficial to the community.
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 charity's 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.
Charitable organization structure
In 2008 there are three types of legal structure for a charity in England and Wales.
- Unincorporated association
- Trust
- Company limited by guarantee
The unincorporated association is the most common form of organization within the voluntary sector in England and Wales. 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.
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.
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.
The word Foundation is not generally used in England and Wales. Occasionally a charity will use the word Foundation as part of its name e.g. British Heart Foundation, but this has no legal significance and does not provide any information about either the work of the charity or how it is legally structured. The structure of the organization will be one of the three types of structure described above.
Charity registration
Charitable organizations who have an income of more than £5,000, and for whom the law of England and Wales applies, must register with the Charity Commission for England and Wales. For companies, the law of England and Wales will normally apply if the company itself is registered in England and Wales. In other cases if the governing document does not make it clear, the law which applies will be the country with which the organization is most connected.
Some charities which are called exempt charities are not required to register with the Charity Commission and are not subject to any of the Charity Commission's supervisory powers. These charities include most universities and national museums and some other educational institutions. Other charities are excepted from the need to register, but are still subject to the supervision of the Charity Commission. The regulations on excepted charities have however been changed by the Charities Act 2006. Many excepted charities are religious charities.
Northern Ireland
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.
Scotland
The 20,000 or so charities in Scotland are registered with the Office of the Scottish Charity Regulator (OSCR), which also publishes a Register of charities online.
United States
In the United States a charitable organization is an organization that is organized and operated for purposes that are beneficial to the public interest. The requirements and procedures for forming charitable organizations vary from state to state. So also do the registration and filing requirements for charitable organizations that conduct charitable activities or solicit charitable contributions. So effectively in practice the detailed definition of charitable organization is determined by the requirements of state law of the state in which the charitable organization operates, and the requirements for federal tax relief set by the IRS.
Federal Tax Relief
Federal tax law provides tax benefits to non profit organizations recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (IRC). The benefits of 501(c)(3) status include exemption from federal income tax as well as eligibility to receive tax deductible charitable contributions. To qualify for 501(c)(3) status most organizations must apply to the Internal Revenue Service (IRS) for such status. .
There are several requirements that must be met for a charitable organization to obtain 501(c)(3) status. These include the organization being organized as a corporation, trust, or unincorporated association, and the organization’s organizing document (such as the articles of incorporation, trust documents, or articles of association) must limit its purposes to being charitable, and permanently dedicate its assets to charitable purposes. The organization must refrain from undertaking a number of other activities such as participating in the political campaigns of candidates for local, state or federal office, and must ensure that its earnings do not benefit any individual.
The types of charitable organization that are considered by the IRS to be organized for the public benefit include those that are organized for:
- Relief of the poor, the distressed, or the underprivileged,
- Advancement of religion,
- Advancement of education or science,
- Erection or maintenance of public buildings, monuments, or works,
- Lessening the burdens of government,
- Lessening of neighborhood tensions,
- Elimination of prejudice and discrimination,
- Defense of human and civil rights secured by law, and
- Combating community deterioration and juvenile delinquency.
A number of other organizations, including those organized for religious, scientific, literary and educational purposes, as well as those for testing for public safety and for fostering national or international amateur sports competition, and for the prevention of cruelty to children or animals, may also qualify for exempt status.
The IRS, except in rare circumstances, refers to all organizations qualifying for exemption under 501(c)(3) as charities.
List of relevant organizations
Charity regulating bodies
See also
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