From Idea to Impact: What Prospective Community Charities Need to Know
Common in the not-for-profit space, deductible gift recipient (DGR) status allows organisations endorsed by the Australian Taxation Office (ATO) to receive donations which donors may then claim as tax deductions.
DGR endorsement is limited to specific categories (such as, among others, health, education and cultural organisations), each with its own eligibility requirements and permitted purposes. From July 2024, a new DGR category is available: community charities.
Item 1 DGRs (also referred to as DGR-1 or “do-ers”) have long been distinguished from Item 2 DGRs (often referred to as DGR-2 or “givers”). DGR-1 entities offer direct relief whilst DGR-2 entities raise and distribute funds to DGR-1 entities.
Community charities are not confined to a single DGR category and can engage in charitable activities alongside fundraising, essentially acting as a hybrid of both DGR-1 and DGR-2.
This is an attractive option for organisations seeking to broaden their philanthropic and charitable impact. For example, a foundation may promote environmental protection alongside a particular art form (music, film, photography, etc), and concurrently raise and distribute funds to other charities with a similar mission.
Requirement for community charities
To be eligible as a community charity, an organisation must:
be established and operated on a not-for-profit basis
register as a charity with the Australian Charities and Not-for-profits Commission (ACNC)
be specified in a ministerial declaration
ensure its governing documents reflect community charity status
ensure each director (for a company) or trustee (for a trust) agrees to comply with the Taxation
Administration (Community Charity) Guidelines 2025
for community charity trusts, ensure the trustees are constitutional corporations, and
for community charity corporations, be either a constitutional corporation or another eligible body corporate.
A constitutional corporationis either:
a foreign corporation, or
a trading or financial corporation formed within the limits of the Commonwealth.
In other words, the trustee/s or company must be an Australian organisation predominantly and substantially trading or engaging in financial activities or be a foreign corporation.
Governance documents
The purposes of the organisation must be clearly established in its governance documents (i.e. trust deed or constitution).
The charity must operate to:
provide money or benefits to a DGR, and
engage in a principal DGR activity or pursue a DGR principal purpose.
This dual-purpose is a defining feature of the community charity category and should be clearly reflected in the organisation's governing documents and operations.
Importantly, community charities cannot offer money or benefits to an ancillary fund or other community charity.
The usual not-for-profit clause should be inserted alongside provisions prohibiting distributions to members. In the event the organisation is wound up or its DGR status is revoked, the provisions of its governing documents must require surplus assets to be transferred to another DGR with similar purposes.
The governing documents must provide for a minimum annual distribution of at least 4% of the market value of the organisation’s net assets each financial year.
Steps for becoming DGR endorsed
Ensure the entity has an active ABN
Ensure the governing documents meet the legal requirements for a community charity, including the requisite purposes, activities, not-for-profit and winding-up clauses
Submit a proposal for a ministerial declaration through the Treasury website
Apply for charity registration with the ACNC (if not already registered)
Apply to the ATO for DGR endorsement as a community charity
Ministerial declaration proposal
Before applying for DGR endorsement, an organisation must be specified in a ministerial declaration. This requires a written proposal to Treasury. Importantly, the proposal for ministerial declaration should include, among other things, an estimation of anticipated donations (and the source of those donations) for the first 5 years from the time the organisation anticipates being endorsed as a DGR.
Key takeaway
The community charity structure offers charities a flexible alternative to traditional DGR categories. While the structure presents exciting opportunities for the not-for-profit sector, organisations should carefully consider eligibility and requisite wording for governance documents as well as the ongoing distribution requirement.
If you would like advice on community charities, please contact our commercial team.
Paul Gray
Principal
T: 03 5225 5231 | M: 0414 195 886
E:pgray@ha.legal
Ella Handreck
Lawyer
T:03 5225 5206
E: ehandreck@ha.legal
Prepared with the assistance of Charlotte Newman, Paralegal, and Angelina Hogan-Fox, Law Graduate.
