How do tax considerations shape

the legal structure and activities of

social enterprises?

Danielle Mawer, Associate

John King, Consultant

Prolegis Lawyers

Overview

How do tax considerations shape the legal structure and

activities of social enterprises?

1. What is a social enterprise?

2. Why do tax considerations matter?

3. When will a social enterprise be a charity? The

significance of Word Investments case (2008)

4. What are the typical legal structures of social

enterprises?

5. What are some real life examples?

1. What is a ‘social enterprise’?

The buzz words!

‘charity meets business’, ‘for-purpose business’

‘a marriage between a social purpose and the market’

No specific legal structure or definition (yet)

Key elements –

1. Economic, social, cultural or environmental mission;

2. Trades to fulfil its mission;

3. Derives a substantial portion of income from trade; and

4. Reinvests the majority of its surpluses into fulfilment of its

mission.

1. Mapping the sector

Mapping the sector (FASES Report 2010):

Social enterprises can be for-profit or not-for-profit

Some not-for-profits may be charities…

Est. 20,000 social enterprises

62% are at least 10 years old

It is not a new concept

1. Models of social enterprise

1. Employment model

2. Goods/services model

3. Profit generation model

2. Why do tax considerations matter?

Availability of charity tax concessions can be critical to

financial viability and success

Charities have some of the most preferential tax treatment

in Australia

Income tax exemption

FBT exemption/rebate

GST concession

Payroll tax exemption

Stamp duty/land tax exemptions

‘Charity’ is a technical legal term

3. When is a social enterprise a charity?

Charities Act 2013 (Cth) defines ‘charity’ as an entity that is:

Not-for-profit;

Only ‘charitable purposes for the public benefit’ or purposes

incidental or ancillary;

No disqualifying purpose: unlawful, contrary to public policy,

or political partisan; and

Not an individual, political party or government entity.

Charitable purposes are defined in section 12.

A entity will lose its charity status if it has a non-charitable

purpose. Can a charity have a commercial activities?

3. When is a social enterprise a charity?

Word Investments (2008) (High Court)

Issue: Can a commercial trading organisation be a

‘charitable institution’ under revenue legislation?

3. When is a social enterprise a charity?

Is Word a charitable institution?

Word Investments Ltd Wycliffe Bible

Translators Australia

charity

Wycliffe Bible

Translators

(International)

charity

3. When is a social enterprise a charity?

Word Investments (2008)

HCA: Yes. Whether or not a social enterprise is a charity will

depend on whether its commercial activities are in pursuit of a

charitable purpose.

3. Significance of Word Investments

Should we tax the unrelated business activities of

charities? Is there an uneven playing field?

Charities do have a tax advantage over non-charities - this

will often shape the structure of social enterprise.

4. What are the typical structures?

No ‘social enterprise’ structure in Australia (yet)

Typical structures include:

1. Not-for-profit charity structure

company limited by guarantee or incorporated association

ideal for not-for-profit endeavours

may have commercial activities in pursuit of charitable

purposes (Word Investments case).

must not have any non-charitable purposes

enterprise may be an internal division of an existing charity

cannot access equity funding

2. For-profit company structure

often PTY LTD

flexible structure understood by financiers and business

may raise capital via equity investment

may issue dividends to shareholder investors, but must

reinvest majority of profits in enterprise

4. What are the typical structures?

3. Hybrid structure

combines for-profit and not-for-profit structures

models includes:

social enterprise as a subsidiary of a charity – where a charity

acquires a business or sets up a private company

social enterprise with multiple shareholders to raise capital

opportunities for impact investing = social + financial return

the social enterprise is a tax paying entity but:

may make tax deductible donations to DGR shareholders; and/or

shareholders may apply for refunds of franking credits (where

they are income tax exempt)

4. What are the typical structures?

4. What are the typical structures?

Hybrid legal structure

Image Source:

JusticeConnect

5. Real life examples: GoodStart

Example of a trading charity that delivers childcare services

Mission: ensuring children have learning, development and

wellbeing outcomes they need for school and life.

Arose out of collapse of ABC Learning in 2009

4 charities est. a CLG charitable institution

Raised capital via layered investment approach

Payroll tax exemption ($20m pa) was key to success

5. Real life examples: GoodStart

GoodStart

Charity

Charity 1 Charity 2 Charity 3 Charity 4

25% 25% 25% 25%

100% debt financing

to raise $95m to

acquire 678 centres,

plus $70m in other

NAB facilities

5. Financing the GoodStart deal

Source: Social Ventures

Australia, ‘GoodStart: A social

investment story’, 8:

http://socialventures.com.au/as

sets/Goodstart-report-Final.pdf.

5. Real life examples: GoodStart

GoodStart is the largest social enterprise in Australia

Provides services to over 72,000 children via 660 centres

Proudly markets itself as a social enterprise:

‘As a social enterprise, Goodstart is a not-for-profit

organisation that operates with strong business

disciplines. We reinvest operating surpluses in our

network, our people and our purpose – for the

benefit of every child and their early learning.’

Example of a charity establishing a social enterprise

utilising a hybrid structure to raise capital

Mission: To stop youth homelessness by offering

disadvantaged youth a supported pathway from the street

to a sustainable livelihood.

‘Stable self, stable job, stable home’

Started when a PBI wanted to

purchase a business and needed $300K

Established STREAT Enterprises Pty Ltd

5. Real life examples: STREAT Cafe

5. Real life examples: STREAT Cafe

Image Source:

JusticeConnect

Advantages of hybrid structure:

transferred risk and liability to STREAT Enterprises Pty Ltd

Provided access to $300K

enabled STREAT Ltd to remain a PBI and take advantage

of tax concessions

STREAT Enterprises returned 7% to investors in first year.

It now has 7 businesses, 230 youth in its programs, and is

establishing a training academy

5. Real life examples: STREAT Cafe

Any questions?

Danielle Mawer, Associate

John King, Consultant

Prolegis Lawyers

p + 61 2 9466 5222 | f + 61 2 8920 0126 |

e jking@Prolegis.com.au | dmawer@prolegis.com.au

www.prolegis.com.au

© Prolegis Lawyers

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax

Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and

opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries

in making any decisions concerning their own interests.