A recent state duty case in New South Wales sheds some light on the meaning of the word ‘non-profit’ in the context of close family control and significant dealings with related for profit entities.
Mr H was a retired teacher and pastor with the Seventh-Day Adventist Church and his wife was a registered nurse in aged care facilities. They went into business in 1991 providing home care services and in 1998 incorporated a company limited by guarantee, KinCare Limited (KinCare). The members of the company limited by guarantee were H family members and proprietary limited companies controlled by H family members.
The constitution of KinCare contained objects which were charitable and standard not-for-profit clauses. It registered with the ACNC as a public benevolent institution, a charity, and also received state duty exemptions in New South Wales.
The bulk of KinCare’s income came from government departments. The funds were to provide home based care to aged people and people with disabilities. However, it contracted with its related for-profit companies for the provision of field staff. The rates were equivalent to those charged to third parties for the same services. KinCare also provided administrative services to the related for-profit companies which was paid for by the for-profit entities. Further, KinCare provided loans and guarantees to for profit companies on commercial terms and interest rates.
The NSW Chief Commissioner of State Revenue (the Commissioner) decided that with effect from 1 July 2008, wages paid by KinCare were not exempt wages, and assessed KinCare to payroll tax of $3,238,157.10 for the financial years between 30 June 2009 and 30 June 2014. One of the claims was that KinCare was not a non-profit organisation within the meaning under former s 10(1)(j)of the Pay-roll Tax Act 1971 (NSW) (now repealed). There were other issues before the court, but for the purposes of this bulletin, only the ‘non-profit’ issues are examined.
The term ‘non-profit’ was not specifically defined for the purposes of the NSW Act. This is not unusual as ‘not-for-profit’ is not defined for the purposes of the Charities Act, the ACNC Act or the Income Tax Acts.
The notion of ‘not-for-profit’ or ‘nonprofit’ is a neologism being invented by the law and economics discipline after the Second World War, but it has come into popular usage.
The common law meaning of not-for-profit has been adopted administratively by the Australian Taxation Office (ATO) and is stated as:
An organisation is not charitable if it is carried on for the purposes of profit or gain to particular persons including its owners or members … We regard an organisation as being non-profit where, by its constituent documents or by operation of law (for example, a statute governing an organisation), it is prevented from distributing its profits or assets for the benefit of particular persons while it is operating and on winding up.
An organisation can make a profit or surplus, but it must be effectively restrained from ever being able to give that surplus to its members, controllers or others.
It is not enough for an organisation without a suitable clause in its constitution to have never distributed profits or assets to others. It is the capacity to do so, not history, that is the critical issue.
There have been a number of cases recently involving the nature of a nonprofit entity. They have suggested a two pronged test:
firstly, does the constitution have the correct clauses; and
secondly, a broader test of the actual conduct of on organisation is considered by reference to the surrounding circumstances.
It was common ground that KinCare satisfied the first constitutional test, but did they satisfy the second test? That is, what was the true characterisation for which KinCare was currently being conducted?
The Commissioner agreed that the constitutional non-profit clauses and objects of KinCare were in order.
However, on the broader test, it was claimed that KinCare was not in an arm’s length relationship with the related for profit companies because the members of H family, directly or indirectly, controlled all the companies.
The court found that KinCare was not carried on for the benefit or gain of a particular individual after a detailed analysis of the financial accounts with the assistance of expert witnesses.
The provision of administrative services by KinCare to the for profit companies, hire of labour, interest on loans and guarantees were all at arm’s length and for market rates. It was not a breach of the non-profit constraint on the company. Further, there was no evidence of any informal distribution of profits from Kincare to any person or organisation.
The Judge wrote in summary:
On any fair view of the evidence, KinCare was being “carried on” throughout the relevant period for the purpose of providing home care services to its aged, disabled and Aboriginal and Torres Strait Islander clients in accordance with its Commonwealth and NSW Government grants and not for the benefit of members of the [H] family. The only matters on the evidence capable of being described as benefits conferred by KinCare upon related entities were incidental to that purpose.
This case illustrates a complex structural planning arrangement involving a non-profit and related for-profit entities that are closely controlled by a family.
For the arrangement to be successful and withstand challenges from the revenue authorities, it required that the non-profit entity not only had the appropriate constitutional provisions but also satisfied a broader inquiry into its actual functions.
The broad inquiry will consider the true characterisation of the surrounding transactions and whether they indicate that the organisation is being conducted for its stated and approved purposes or for some other purpose. The critical issue, in this case, was the adherence to commercial and arm’s length dealings between the non-profit entity and the for-profit companies in all cases.
 KinCare Community Services Limited v Chief Commissioner of State Revenue  NSWSC 182
 Australian Taxation Office 1997, Taxation Ruling, Income Tax: exempt sporting clubs, TR 97/22, states that, where the law or the constituent document does not prohibit distributions, it is a question of fact in each case as to whether an organisation can still be not-for-profit.
 Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010} FCA 508; Grain Growers Ltd v Chief Commissioner of State Revenue  NSWSC 925.