The impact of registered charity status and tax concessions

Commercialising intellectual property is vitally important for innovation and funding within the tertiary sector.

Various models can be adopted, but often universities collaborate with other organisations during commercialisation. Depending on the context, collaborators might be for-profit or not-for-profit organisations and could include public and private sector funders, industry partners, research institutes and other charities. This means that the purposes and interests of the participating parties will not always be perfectly aligned.

When entering research and commercialisation arrangements, particularly those involving collaboration, it is critical that universities are mindful of:

• the requirements they must meet on an ongoing basis to maintain registration as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and endorsement by the Australian Taxation Office (ATO) for various Federal tax concessions (including income tax exemption, GST concessions and deductible gift recipient (DGR) status); and
• the desire on the part of some funders for donations to satisfy the criteria for being a 'gift' in relation to which the donor might seek to claim a tax deduction.

ACNC registration status: core requirements for universities

Of the requirements which must be met by charities to maintain ongoing ACNC registration, the following are key in the context of collaborative research and commercialisation arrangements in the tertiary sector:

1. The activities which the university engages in must:

1.1 further its charitable purpose; and

1.2 be consistent with the requirements of its charity registration subtype (which for a university would be 'advancing education'); and

1.3 the university must ensure that it applies its income and assets to further its charitable purpose (which for a university would usually encompass teaching and research).

In addition, a registered charity is required to take reasonable steps to ensure their responsible people are subject to, understand and carry out the duties set out in ACNC Governance Standard 5. These duties include acting honestly and fairly in the charity's best interests and for its charitable purposes.

These requirements mean that the role, contribution and rights of a university under a proposed collaborative research and commercialisation arrangement need to be carefully assessed, fully understood and clearly documented.

In this context, universities should consider the following:

1.4 What is the university's role and contribution under the collaborative arrangement? It should further the university’s purpose and advance education.

1.5 What is the level of involvement or oversight that the university has in the research? The greater the involvement or oversight of the university in the research, the stronger the argument that the research is consistent with the university's charitable purpose and the charity subtype of advancing education.

1.6 What is the level of involvement or oversight that the university has in relation to the use and application of resources? Greater involvement or oversight should assist the university being able to establish that its resources are being applied in a way which is consistent with its charitable purpose.

1.7 What mechanisms are in place to ensure the use and management of funds is consistent with the university's purpose and the advancement of education? For example, does the university control the funds or is the use and management of funds addressed in an agreement between the parties?

1.8 Where a university employee holds dual appointments (one with the university and another with the collaborator), in what capacity do they participate in the collaboration? Where research is undertaken as an employee of another organisation, there may be an issue regarding whether the research is in fact undertaken in furtherance of the university's purpose and in its best interests.

1.9 Does the university have an interest in, or benefit from, the research results or outputs? If it does, this will be relevant to establishing that the research activity and the associated use of university resources is in the best interests of the university.

1.10 How does the university use the results of the research to advance education? This will be relevant to establishing that the research furthers the university purpose and advances education.

1.11 Given the potentially diverse purposes and interests of the parties, can the use and management of the resources of the university and the rights of the university agreed as part of a particular collaboration be justified as being in the best interests of the university? There may be a question regarding whether third parties (as opposed to the university) benefit from the research.

Maintaining ATO concessions: income tax exemption and DGR

To maintain income tax exemption, a university must apply its income and assets solely for its purpose. This requirement arises under the Income Tax Assessment Act 1997 (Cth) and operates in parallel with the ACNC registration requirements outlined above.

This separate requirement means that, in addition to the ACNC, the ATO will be interested in ensuring that collaborative research and commercialisation arrangements which might involve parties with diverse purposes and interests, provide an appropriate framework for the use and application of university resources in a manner which is consistent with, and in furtherance of, the purpose of the university.

Characterising donations as ‘gifts’

Many universities will also have been endorsed by the ATO as a DGR. DGR endorsement produces the very real benefit of tax-deductible donations as a potentially valuable source of funding (as well as ancillary fund distributions). However, only donations that meet the criteria for being a 'gift' made to a DGR are tax deductible. Accordingly, where this type of funding is in play, the collaborative research and commercialisation arrangement should support the characterisation of the donation as a gift.

Where characterisation of a donation as a gift is important, universities should consider the following:

• Donors may express a preference in relation to the use of the funds donated but a university should retain unfettered discretion and not be subject to an obligation regarding the use/application of the funds. A failure to do so would create a risk that the donation would not meet the criteria for being a gift.
• The university should obtain a beneficial interest in the funds and not merely a conduit for funding to be passed onto another organisation. If this does not occur, one of the key criteria for being a gift would not be met.

If these requirements are not met, the ACNC and the ATO have the power to revoke registration and endorsements. It is vitally important that universities are mindful of their obligations when developing and documenting collaborative research and commercialisation models and associated funding arrangements.