Leasing out real property can be an attractive value proposition for charitable and not-for-profit entities. Such arrangements can be a useful method of maximising the value of a charity’s assets and generating additional finances for the charity to use in pursuing its charitable purposes and objectives.

Typically, leases of property may be attractive to charitable entities as legal ownership over a leased asset remains vested in the charity – rather than ownership being transferred to the Buyer under a Contract of Sale. Additionally, charitable or not-for-profit entities often enjoy the following benefits from leasing arrangements:

• Steady income generation and diversification of revenue streams – charities who lease their property broaden their revenue sources and increase their capacities to pursue charitable purposes through additional rental income. This is especially useful in situations where charities seek to derive benefit out of land which is idle or unused.
• Taxation minimisation – where a property is used for charitable purposes, the property may be eligible to receive specific types of taxation concessions or exemptions (such as state-based land tax exemptions or local council general rates rebates/exemptions). A charity may seek to lease out its property to ensure that property owned by a charity is being used for charitable purposes (which may be necessary for it to qualify for state taxation benefits).
• Certainty of rights and obligations – Charities will often enter into leases to ensure they have certainty over the particular rights, responsibilities and potential liabilities of the parties to the agreement, which is particularly useful in solidifying and documenting tenancies which have previously existed as more informal arrangements (such as those which may occur between parties/entities related to the charity).
• Alignment with charitable purposes – some charities, such as those established to provide housing assistance or affordable housing schemes, might acquire and develop property to lease out at reduced rates to persons experiencing hardship or disadvantage. Accordingly, entering into leases may form part of the charity’s charitable mission.

What should a charity consider before leasing its property?

A decision by a charity or not-for-profit entity as to whether to lease out its property should never be made rashly or hastily – there are a multitude of factors which should carefully considered before entering into such a lease. Generally, laws governing leases of property differ across different States and Territories, but some general considerations to which a charity or not-for-profit entity should turn its mind include:

• Lessee – who is the lessee in relation to the Charity? If the proposed lessee is a related party to the charity, then you should seek legal advice to ensure that you are not breaching your charitable purpose and that the lease is at market rates (or rates more beneficial to the charity).

• Term – when will the lease commence? When will the lease expire? Will there be any options for the Tenant to extend the term? Charities should be very careful in ensuring that the term for which property will be leased out is reasonable, and that the term’s length does not bring about any unintended consequences (for example, Queensland’s deemed subdivision laws for leases over a part of a parcel of land where the lease extends for a term beyond 10 years).

• Type and Description of Property – is the lease for residential property, commercial property or for personal property? If commercial, will the lease be for a retail shop, or will it be for some other kind of commercial space? Is the lease for the whole or part of the property, and in what state or territory is the property located, Specificity in the description of leased property is essential, and depending on the nature of the property being leased the lease agreement may be governed by different rules and laws.

• Rent and Outgoings – how much rent will the Tenant pay, and how will this be calculated? Will usage costs for critical services such as water, electricity and air-conditioning be included in the rent, or will the Tenant pay for these separately? Typically, charities should ensure that the rent and outgoings amounts are set high enough to cover its costs for maintaining the property (plus some), but not so high as to be uncommercial. This is especially important for charities registered with the Australian Charities and Not-for-profits Commission (“ACNC”), given requirements of Directors of registered charities to act in the best interests of the charity. This means that generally any lease terms should be on market terms or on terms more favourable to the charity. Consider taking specialised financial advice on these aspects.

• Rent Review – How will the rent increase in each year – will it be annual increases in accordance with CPI? Will it be fixed percentage increases every period of time? Charities should ensure that rental increases maintain the value of the rent and keep up with the rising costs of living. A charity should seek financial advice to determine an appropriate figure.

• Permitted Use – for what purposes is the Tenant intending to use the premises? Can the property be lawfully used for that purpose? Does the charity wish to restrict the Tenant’s use of the property for particular purposes? For leases of commercial land, also consider whether the Tenant is to receive Exclusive Use – i.e. will the Charity guarantee to the Tenant that it will not lease another part of the property to a business similar in nature to the Tenant’s.

• Privacy – if a charity leases its property, the Tenant will often require quiet enjoyment of the property free from unreasonable interference from the Lessor. How much will these privacy conditions impact upon the charity’s operations if the charity cannot access/use the property?

• Retail Shop Leases – are the premises caught by your state’s respective retail shop lease legislation? If so, there are implications for the form of the lease and the disclosures you must make to the lessee. You should seek legal advice to determine whether these rules apply and how to comply with them.

• Insurances, Maintenance and Damage to Property – who is responsible for rectifying damage to a property and ensuring the property is maintained to an appropriate standard? Who will revert the property to its original condition at the end of the lease? Who bears the costs of taking out insurances over the property? Clarity on the answers to these questions are important to ensure each party understands its rights and obligations under the lease.

• Prior Encumbrances – are there any encumbrances (such as mortgages, security interests or caveats) on the property title which may act as a barrier to the charity leasing out its property? These may need to be resolved prior to a lease agreement being signed.

• Implication for State Land Tax exemptions – If you are currently recipient of state land tax exemptions as a charity, then you should seek legal advice to ensure that the proposed lease does not jeopardise any ongoing entitlement to such an exemption.

• Termination Rights – In what circumstances does the charity wish to be able to terminate the lease with the Tenant? Are there any actions of the Tenant which would justify immediate termination by the charity? Are these terms fair and reasonable?

• Security – How will the charity ensure that the obligations of the Tenant will be fulfilled? Will a bank guarantee, a security bond, or a personal guarantee be required from the Tenant as collateral?

• Sub-letting and Assignment – will the Tenant be permitted to assign or sublease their rights under the lease to a third party? Must the third party be approved by the charity prior to the Tenant entering into an agreement to sublet/assign.

• NSW Schools and Education Act considerations – Before looking to lease a property owned by a school in NSW, careful consideration will need to be given to compliance with the Education Act and, relevantly, compliance with the section 83C components of the Act.

Before you sign any form of leasing arrangement, it is always prudent (and, in some cases, necessary) to obtain specialised legal advice from a qualified professional. The experienced team at Vocare Law can assist you with preparing a lease agreement that is tailored to suit your charity’s needs. Contact us today on 1300 862 529 or send us your enquiry here. We look forward to meeting with you.

This article was written by Jackson Litzow & Simon Mason.

Covid-19 impact on Small Businesses in Australia  

The international COVID-19 Pandemic has had a significant impact on the operations and financial viability of many small businesses. Small businesses make up a large percentage of businesses in Australia and are a vital part of the economy. In response to the challenges posed, the Australian Government has introduced insolvency reforms to provide aid and assistance during this difficult and uncertain time.  

 

Previous Insolvency Framework  

As the most sweeping insolvency reforms in the last 30 years, the changes provide flexibility for small businesses seeking to restructure or wind down. [1] These changes are welcomed, as the approach outlined in Part 5.3A of the Corporations Act 2001(Cth) have been particularly complicated and expensive.  

 

2021 Insolvency Reforms  

Taking effect on 1 January 2021, The Corporations Amendment (Corporation Insolvency Reforms) Act 2020 (Cth) includes (but not limited to) the following changes:  

• • Debt Restructuring Options for Small Business  
  • Simplified Liquidation Procedure 

 

What small businesses are included in the reforms?  

Pursuant to the reforms, a small business is defined as:  

• • Incorporated Small Business (with company structure) 
  • Liabilities less than $1 million  

We commend these reforms as these changes maximize control during the difficult process of debt restructuring and conclusion of small businesses. 

 

If you require any assistance with managing or winding down your small business, please feel free to contact our office and speak with a  Business Development Officer  on (07) 3252 0011 to discuss your matter today.

 

Other Related Articles  

https://corneyandlind.com.au/commercial-litigation/covid-19-insolvency/

https://corneyandlind.com.au/commercial-litigation/covid-19-resolving-lease-disputes/

https://corneyandlind.com.au/litigation/recession-looming-is-voluntary-administration-an-option-for-my-business/

 

Footnotes  

[1] Media Release – Insolvency Reforms Pass Parliament  

 

Preserving Charitable Assets within Charitable Purposes

 

Cy Pres (pronounced Sigh Pray) is not a phrase you hear often, and yet applications to the Court for a Cy Pres Order are increasingly common.

Cy Pres is a phrase we have adopted from the French meaning, “as near as possible” to the original intention. (Don’t believe us? Check it out!)

Most people are familiar with the concept of a trust – usually established when one person or entity (settlor / donor) gives money to another person (the trustee), and directs that they use it for a specific purpose (the terms of the trust) or for the benefit of a specific person or entity (a beneficiary).

A trust is a charitable trust when it is established for charitable purposes (objects).

A Charitable trust can be defined as, “A purpose trust that is directed to exclusively charitable purposes (Leahy v A-G (NSW) (1959) 101 CLR 611) and that exhibits public benefit (Attorney-General (NSW) v Perpetual Trustee Co Ltd (1940) 63 CLR 209).” (Encyclopaedic Australian Legal Dictionary, Lexis Advance)

A charitable trust may be quite general (for example for the relief of poverty) or highly specific (for example the care of the aged in a specific geographic region).

Charitable trusts need not have any vesting date, and may exist in perpetuity.

Things change. Charities cease to exist and sometimes specific charitable trust obligations become impossible to perform.

For example care facilities run by charities are sometimes sold to for-profit operators. These changes may make the original intended performance of the terms of the charitable trust impossible or impractical.

Sometimes the terms of the charitable trust have an express power of amendment but often they don’t (especially when the charitable trust is embedded in a Will, known as a testamentary charitable trust).

The law favours charities and seeks to save / uphold charitable trusts. And so, in such cases there is an ability to apply to the Court for an Order from the Court to apply the trust property “Cy Pres”, or as near as possible to the original charitable intent of the trust.

Section 105 of the Trusts Act 1973 (Qld) provides that the Supreme Court of Queensland may make orders allowing the trust property to be applied Cy Pres , including in circumstances where The original (charitable) purposes cannot be carried out, or can not be carried out according to the directions given.

In fact, the trustee of a charitable trust is under an obligation, where the terms of a trust cannot be carried out, to apply to the Court for an Order to enable property to be applied Cy Pres, or be at risk of personal liability by acting in breach of trust.

In Queensland, a Cy Pres application usually made by the trustee of a trust, application may also potentially be made:

• • by the Attorney-General or person authorised by the Attorney-General;

• • by the charity, or any trustee of the trust; and

• • by any person interested in the due administration of the trust.
    (Source: s 106(2) of the Trusts Act 1973 (Qld))

Here at Corney & Lind Lawyers, we have recently had the privilege of assisting a client with several Cy Pres applications in the Supreme Court in 2018 which have all resulted in successful orders being granted in the terms sought the preservation and protection of charitable assets within charitable purposes.

His Honour Justice Bond observed that he’d seen very few such applications over the course of his practice, and yet he had dealt with a number in the month prior to the hearing of these applications!

Although many decisions made as a result of applications for Cy Pres orders are not published by the Court, a brief look at the range of published decisions shows that there are a variety of applications coming before the Court for a wide variety of reasons.

These applications can be complex, but with a wealth of experience in both litigation and charity law, the specialist charity and NFP law team here at Corney & Lind Lawyers are well placed to advise and represent applicants in Cy Pres matters.

ACNC Charities Part III: Public Benevolent Institutions

 

This article (Part III) will outline what Public Benevolent Institutions (“PBI“) are, prerequisites for entities seeking to become PBIs, and some of the advantages of becoming PBIs.

In Part I of this series, an entity meeting the Australian Charities and Not-for-profits Commission’s (‘ACNC’) prerequisites can register with the ACNC as a charity, leading to entitlement to a range of tax exemptions and concessions if registered successfully.

In Part II, we outlined that many ACNC-registered charities might also choose to apply for Deductible Gift Recipient (‘DGR’) status for their entire entity or a particular arm of their entity’s functions – enabling donors to deduct these donations from their personal income for tax purposes (which often encourages more frequent and substantial donations from donors).

However, very specific charities meeting stringent threshold requirements might choose to apply to the ACNC for Public Benevolent Institution (“PBI”) status.

 

What are Public Benevolent Institutions? 

A Public Benevolent Institution is one of the 14 subtypes of charities recognized by the ACNC under section 25-5 of the Australian Charities and Not-for-Profits Commission Act 2012 (Cth) as being eligible for registration as a charity. PBIs differ from other charitable subtypes in that their main purpose is to relieve the poverty, sickness, disability, destitution, suffering, misfortune, helplessness and/or distress of people in need. [i] Put simply – PBIs provide “benevolent relief to people in need”.[ii]

Typical examples of PBIs might include:[iii]

• • Entities that provide housing assistance to people suffering from poverty;

• • Entities providing support services for people with a disability;

• • Particular types of aged-care services – normally situations where aged-care services are provided on a not-for-profit basis; and

• • Hospitals meeting PBI prerequisites.

 

Advantages of Becoming a Public Benevolent Institution 

Public Benevolent Institutions have an extensive range of taxation benefits potentially available to them. These can include:

• • All Commonwealth taxation benefits generally available to charities (such as income tax exemption, refunds of franking credits, and GST concessions for charities);

• • DGR endorsement and a DGR category specifically for PBIs (provided that the PBI meets the requirements for DGR endorsement – see Part II); and

• • Fringe Benefits Tax exemptions.

 

Prerequisites of Becoming a Public Benevolent Institution 

Because of the substantial benefits and tax exemptions/concessions available to Public Benevolent Institutions, the threshold requirements for any entity to obtain PBI status are significantly higher than for obtaining other types of charitable statuses. An entity will only be granted PBI status once registered by the ACNC as a PBI.

Registration requires an entity to:

1) be a charity (according to the legal meaning of “charity”);

2) be an institution;

3) have benevolent relief as its main purpose; and

4) provide the benevolent relief to people in need.

In considering whether the organisation will meet the PBI registration requirements, the ACNC will consider material such as the entity’s governing documents, financial statements, operational plans and activities amongst other things.

 

1. Entity is a “Charity”: 

See Part I as to what it means for an entity to be legally recognized and registered as a “charity” with the ACNC.

 

2. Entity is an “Institution”: 

The entity seeking PBI status must be an “institution” – this normally being “an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc”.[iv]

An “institution” can be an entity such as a corporation, trust or unincorporated association with its own separate identity, that:[v]

• • Either:

    • • Has its own activities or provides its own services;
    • • Participates in a relationship of collaboration with other entities that is organized and conducted for / promotes benevolent relief; or
    • • Engages other people or entities to engage in activities on its behalf;

• • And:

    • • Is not merely a fund; or
    • • Does not simply manage trust property that is used for benevolent purposes.

• • And:

    • • “Brings into being the charitable purposes and intentions of its founders.”[vi]

 

3. Benevolent Relief as the entity’s Main Purpose:

The charity must have, as its main purpose, to provide “benevolent” relief to people in need. This is not necessarily limited to providing financial relief, but rather also extends to other types of relief (relief from sickness, disability, destitution, suffering, misfortune or helplessness, poverty or distress).[vii] The PBI can have additional purposes, provided that these purposes are “ancillary” or “incidental” to the main benevolent purpose.

Benevolent purposes are exclusively human needs (such as relieving human poverty, human health, human suffering etc.), and these human needs can exist overseas. However, this means that any organisation that provides relief to the suffering of animals will unlikely be registrable as a PBI.[viii]

Furthermore, the ACNC indicates that the level of distress suffered by the people in need that the entity seeks to relieve will also be relevant to the ACNC’s assessment of whether the entity is registrable as a PBI. The ACNC describes the requisite level of distress suffered by the disadvantaged people as needing to be:[ix]

• • Significant enough (and the circumstances difficult enough) to arouse compassion in people in the community;[x]

• • Beyond the suffering experienced as part of “ordinary daily life” (which are distresses that a person would normally be able to get through themselves after enough time has passed);[xi] and

• • Concrete enough – aimed at helping people who are recognisably in need of benevolence.

 

4. Provide the Benevolent relief to people in need

The services provided by the PBI must be relieving the poverty/distress suffered by the people in need – not merely providing services to people in need.

Benevolent relief can be provided by the PBI directly to the people in need or through associated entities.[xii] In the case of the latter, the ACNC consider whether the entity’s activities are organized and conducted for the purpose of relieving the poverty or distress of people in need.[xiii]

The relief that the Public Benevolent Institution provides must also be specific and tailored to a particular group of people who are recognised to be in need – it cannot be provided to the broader general community, as it is assumed that people in the broader community are not in need of “benevolent relief”.[xiv]

 

If you are investigating whether your charity would best operate as a Public Benevolent Institution, the friendly team at Corney & Lind Lawyers can help. Contact us today on (07) 3252 0011 or email us at enquiry@corneyandlind.com.au

 

Related Articles

https://corneyandlind.com.au/not-for-profit/charity-status/

https://corneyandlind.com.au/not-for-profit/deductible-gift-recipient-status/

 

Footnotes

[i] Perpetual Trustee Co Ltd v FC of T (1931) 45 CLR 224.

[ii] Australian Charities and Not-for-profits Commission (‘ACNC’), ‘Commissioner’s interpretation Statement: Public Benevolent Institutions’ CIS 2016/03 (Interpretation Statement, accessed 3 November 2022) < https://www.acnc.gov.au/tools/guidance/commissioners-interpretation-statements/commissioners-interpretation-statement-public-benevolent-institutions>.

[iii] ACNC, ‘Examples of Public Benevolent Institutions’, Public Benevolent Institutions and the ACNC (Factsheet, Accessed 19 September 2022) <https://www.acnc.gov.au/tools/factsheets/public-benevolent-institutions-and-acnc>; Australian Taxation Office, ‘Public Benevolent Institution’, Types of Charities (Webpage, 12 October 2016) <https://www.ato.gov.au/Non-profit/Getting-started/In-detail/Types-of-charities/Public-Benevolent-Institution/>.

[iv] Shorter Oxford English Dictionary; Young Men’s Christian Association of Melbourne v FC of T (1926) 37 CLR 351.

[v] ACNC, ‘Public Benevolent Institutions and the ACNC’, Factsheets (Factsheet, accessed 3 November 2022) <https://www.acnc.gov.au/tools/factsheets/public-benevolent-institutions-and-acnc>.

[vi] ACNC, ‘Commissioner’s interpretation Statement: Public Benevolent Institutions’ CIS 2016/03 (Interpretation Statement, accessed 3 November 2022) <https://www.acnc.gov.au/tools/guidance/commissioners-interpretation-statements/commissioners-interpretation-statement-public-benevolent-institutions>.

[vii] ACNC, ‘Commissioner’s interpretation Statement: Public Benevolent Institutions’ CIS 2016/03 (Interpretation Statement, accessed 3 November 2022) <https://www.acnc.gov.au/tools/guidance/commissioners-interpretation-statements/commissioners-interpretation-statement-public-benevolent-institutions>, cl 5.1.1.

[viii] FC of T v Royal Society for the Prevention of Cruelty to Animals, Queensland Inc 92 ATC 4441.

[ix] ACNC, ‘What is a ‘main purpose of benevolent relief’?’ Public Benevolent Institutions and the ACNC (Factsheet, Accessed 21 September 2022) <https://www.acnc.gov.au/tools/factsheets/public-benevolent-institutions-and-acnc>.

[x] Pay-roll Tax, Commissioner of (Vic) v The Cairnmillar Institute (1990) 90 ATC 4752.

[xi] ACNC, ‘Commissioner’s interpretation Statement: Public Benevolent Institutions’ CIS 2016/03 (Interpretation Statement, accessed 3 November 2022) <https://www.acnc.gov.au/tools/guidance/commissioners-interpretation-statements/commissioners-interpretation-statement-public-benevolent-institutions>.

[xii] FC of T v The Hunger Project Australia [2014] FCAFC 69.

[xiii] ACNC, ‘Does my charity have to provide benevolent relief directly?’, Public Benevolent Institutions and the ACNC (Factsheet, Accessed 19 September 2022) <https://www.acnc.gov.au/tools/factsheets/public-benevolent-institutions-and-acnc>; Australian Taxation Office, ‘Public Benevolent Institution’, Types of Charities (Webpage, 12 October 2016) <https://www.ato.gov.au/Non-profit/Getting-started/In-detail/Types-of-charities/Public-Benevolent-Institution/>.

[xiv] Australian Council of Social Service Inc v Commissioner of Pay-roll Tax (1985) 1 NSWLR 5