Redesigning the Charitable Exemption from Duty in New South Wales

In my September 2023 Australian Tax Forum article, ‘Redesigning the Charitable Exemption from Duty in New South Wales’, I argued that the New South Wales Government should make changes to the various exemptions and concessions from duty that New South Wales specifically grants in the Duties Act 1997 (NSW) (‘Duties Act’) to charities that acquire “dutiable property” in New South Wales. Typically, the “dutiable property” in question will be land in New South Wales. I called these exemptions and concessions the “charitable exemption from duty in New South Wales”.

What is the charitable exemption from duty in New South Wales?

The charitable exemption from duty in New South Wales comes in three main forms.

Firstly, a “general” exemption under section 275(3)(a) of the Duties Act provides a qualifying entity with an ongoing exemption from duty for all transactions that it undertakes in New South Wales that may be subject to duty. It covers any and all “dutiable transactions”.

To qualify for the general exemption, an entity must be a “body corporate, society, institution or other organisation”. Its resources must be “in accordance with its rules or objects, used wholly or predominantly for” either or both of the “relief of poverty in Australia” or the “promotion of education in Australia”. Moreover, it must seek and receive approval from the Chief Commissioner of State Revenue (in practice, Revenue NSW) for the exemption.

Revenue NSW also requires an entity that applies for the general exemption to be not-for-profit, by having relevant clauses in the entity’s governing document that confirm its not-for-profit character whilst the entity is operating, and in the event of dissolution or winding up. Revenue NSW’s administrative practice is to grant a general exemption to an entity for three years at a time.

Secondly, a “transactional” exemption under section 275(3)(b) of the Duties Act provides a qualifying charity with an exemption from duty for a specific dutiable transaction.

To qualify for the transactional exemption, other than be a “body corporate, society, institution or other organisation”, the entity must also be “of a charitable or benevolent nature” or have “as its primary objects the promotion of the interests of Aborigines”.

Additionally, the dutiable transaction that the entity wishes to undertake must be for one or more of six purposes that have been approved by the Chief Commissioner, which are:

• the relief of poverty;
• the relief and prevention of sickness and disability;
• the relief of suffering and distress caused by old age;
• the promotion of education;
• the establishment of organisations to assist sections of the community with special needs; and
• the relief of distress caused by natural disasters or sudden catastrophes.

These six approved purposes are similar to (but somewhat broader than) the two purposes covered by the general exemption. Revenue NSW also requires an entity that applies for the transactional exemption to be not-for-profit.

Lastly, a “partial” exemption under section 275A of the Duties Act can be granted by Revenue NSW if only part of a dutiable transaction would otherwise be covered by the general exemption or the transactional exemption.

Why the need for reform?

In my article, I argued that there are clear public policy and legal rationale to justify reforms or amendments to the current charitable exemption from duty in New South Wales. In summary, there are three significant problems with the charitable exemption from duty in New South Wales.

Firstly, the charitable exemption from duty in New South Wales is incredibly restrictive. After all, only organisations that promote education or relieve poverty in Australia (or have broadly similar purposes to those two purposes) are eligible for either the general exemption or the transactional exemption. A wide range of other charities would not be eligible for the charitable exemption from duty in New South Wales. This includes environmental organisations, some cultural organisations, churches and other religious organisations, charities that engage in advocacy and overseas aid charities.

Secondly, requirements for entities accessing the charitable exemption from duty in New South Wales to be not-for-profit have not been codified in the legislation, and are mere administrative requirements imposed by Revenue NSW. These requirements should be so codified.

Thirdly, the charitable exemption from duty in New South Wales is convoluted and ambiguous, and is accordingly difficult and arduous for Revenue NSW to administer. The charitable exemption from duty in New South Wales uses concepts that are inconsistent with approaches taken to designing and evaluating charitable exemptions at general law and in Commonwealth and other State and Territory legislation (including other New South Wales legislation).

The overarching difficulty that these three significant problems causes is that charities may be turned off by the complexity, restrictiveness and convolution of the charitable exemption from duty in New South Wales, and choose not to engage in (or expand their existing) charitable activities in New South Wales. These charities may rightfully wish not to subject themselves to the administrative burden of applying for the charitable exemption from duty in New South Wales, and to the burden of paying the cost of duty in New South Wales if they are not able to access an ongoing, a case-by-case, or a partial exemption from duty when completing a dutiable transaction in New South Wales.

Reform options

In my article, I proposed two options for reforming the charitable exemption from duty in New South Wales.

In developing these two reform options, I was guided by three principles. I wanted any reformed version of the charitable exemption from duty in New South Wales to be: (1) simple to understand and efficient to administer; (2) reflective of current perceptions of what ‘charity’ is (so that the exemption applied to all entities recognised as charitable under the general law or under the Charities Act 2013 (Cth)); and (3) broadly available, so that as many charities as possible could avail themselves of exemptions from duty in New South Wales and focus on allocating more of their resources towards their charitable activities (and not towards the payment of state duty).

The two reform options that I proposed in my article are consistent with the above three principles. I would prefer to redesign the charitable exemption from duty in New South Wales so that it is ‘tied’ to registration as a charity with the Australian Charities and Not-for-profits Commission (ACNC) – this would mean that all charities registered with the ACNC would be eligible for an exemption from duty in New South Wales.

There is precedent for such a redesign – many charitable exemptions from state and territory fundraising regulatory regimes (including New South Wales’ exemption) are similarly designed. However, I recognise that the New South Wales Government may not wish to tie eligibility for the charitable exemption from duty in New South Wales to registration as a charity with the ACNC, as the New South Wales Government may not want to cede the current flexibility it has to evaluate for itself both the particular purposes of an entity, or whether an entity is not-for-profit (in order to determine eligibility for the charitable exemption from duty in New South Wales).

Accordingly, in my article I also proposed an alternative ‘common law’ charitable exemption from duty in New South Wales, which would still satisfy the above three principles. This common law charitable exemption would grant entities that are “established for charitable purposes” and “not-for-profit” a general exemption from duty in New South Wales. This alternative approach is inspired by the broad and simple Victorian charitable exemption from duty, and the New South Wales charitable exemptions from motor vehicle duty, payroll tax and land tax.

My article was accepted for publication on 1 May 2023 – over a year ago. In the time that has passed since my article was accepted for publication, and ultimately published, in the Australian Tax Forum, the current Labor State Government has now abolished the ‘property tax’, a tax that was introduced by the former Coalition Government to replace both stamp duty and land tax (and which was discussed at some length in my article – a whole page; oh, no!).

With the benefit of hindsight, I wonder whether there is now little appetite for reform in the State taxes space – this lack of appetite may render it all but impossible for reform proposals (such as my two reform options for the charitable exemption from duty in New South Wales) to be given serious consideration by the New South Wales Government. Watch this space, shall we?