Every week more than 400,000 people walk through the doors of a neighbourhood house. There are over a thousand across the country serving crucial roles in local communities: providing inclusive spaces for social connection, opportunities for learning and support, and acting as the first point of contact for people facing hardship, especially in rural and regional areas.
Many neighbourhood houses approach our Not-for-profit Law advice service with the same question: how can we get DGR status?
In this article we answer some frequently asked questions to give neighbourhood houses an understanding of the opportunities and challenges they may face in obtaining DGR status, and outline help that Not-for-profit Law can provide.
DGR laws are extremely technical and complex. In this article we have simplified our explanation of DGR laws to make it easy to understand, but this should not be relied on as legal advice.
What is DGR status?
DGR stands for ‘deductible gift recipient’. DGR is a special federal tax status granted to certain registered charities by the Australian Tax Office (ATO).
In an increasingly difficult funding environment, DGR status is desirable for neighbourhood houses because:
- it offers an incentive to donors, who can donate to a neighbourhood house and claim it as a deduction on their own income tax return, and
- it makes a neighbourhood house eligible for a larger variety of philanthropic grants.
There are over 50 different DGR categories set out in the tax law, each with its own definition, eligibility requirements and application process.
How hard is it to get DGR status?
The DGR system has become very complicated. A recent Productivity Commission report said “…the arrangements that determine which entities can access DGR status are poorly designed, overly complex and have no coherent policy rationale. This creates inefficient, inconsistent and unfair outcomes for charities, donors and the community.”
It is possible for some neighbourhood houses to get DGR status, but unfortunately many have difficulty as they don’t fit neatly into one of the existing DGR categories. We explain some of the reasons why in the table below.
What DGR categories are most relevant to neighbourhood houses?
The most relevant DGR categories for neighbourhood houses are the public benevolent institution (PBI) category and community shed category.
What is it?
Public benevolent institution (PBI)
A PBI is a registered charity that exists to provide relief of poverty, sickness, destitution, helplessness, suffering, misfortune, disability or distress (referred to in this article as people in benevolent need.)
PBI is one of two DGR categories that come with a fringe benefit tax (FBT) exemption. This allows an organisation to offer generous salary packaging to staff at no cost to the organisation.
Community shed
A community shed is a registered charity whose dominant purposes are to advance mental health and prevent or relieve social isolation. A community shed does this by providing a physical location where it supports people to undertake activities or work on projects in the company of others.
This category was created in 2020 primarily to provide endorsement to men’s and women’s sheds, but technically any organisation that meets the criteria could be endorsed as a community shed.
This category does not come with an exemption from FBT, but because registration as a charity is a requirement, an FBT rebate is an option.
Relevant regulators:
Public benevolent institution (PBI)
A PBI must be registered under the charity subtype ‘PBI’ to be eligible for endorsement by the ATO. This is because PBI is a DGR category as well as a subtype of charity. In practical terms, this means that:
- the Australian Charities and Not-for-Profits Commission (ACNC) decides whether an organisation is eligible to be registered under the PBI charity subtype, and
- if the organisation is registered by the ACNC as a PBI (and satisfies other ATO requirements) the ATO will endorse the registered charity with DGR status.
Community shed
A community shed must be a registered charity to be eligible for DGR endorsement by the ATO. In practical terms, this means that:
- the ACNC decides whether an organisation is eligible to be registered as a charity, and
- if the organisation is registered (or in the process of registering as a charity), the ATO decides whether an organisation is eligible to be endorsed as a DGR under the community shed category.
Key features:
Public benevolent institution (PBI)
Unless the whole or vast majority of the community is in benevolent need, an organisation will not be eligible for endorsement if it helps the community at large. This is because the relief provided by the organisation must be targeted or directed to people in benevolent need. For example, a computer skills class open to all members of a local community compared to a computer skills class targeted at young people from refugee backgrounds.
Examples of ACNC recognised groups ‘in need’ are people in poverty, people living with disability, Aboriginal and Torres Strait Islander people, refugees and asylum seekers, people who face barriers to employment, people experiencing domestic violence and elderly people who need support with completing daily tasks.
Community shed
A community shed has dominant purposes of advancing mental health and preventing or relieving social isolation. A community shed can have a separate purpose provided it is only minor in nature. A community shed must either have membership that is open to everyone, or membership that is open to people of a certain gender, Aboriginal or Torres Strait Islander people, or both.
The location where community members gather to do activities or undertake projects together must be a physical location (rather than online).
Challenges:
Public benevolent institution (PBI)
Put simply, the test can be described as all or nothing: an organisation will not be eligible if it is “mostly” a PBI. This means, to be eligible, a neighbourhood house will need to focus its efforts on helping those who are most in need in the community. It can’t have broader community development and social inclusion activities that don’t have a clear and evidenced link to providing benevolent relief. For example, an all-abilities inclusive yoga class versus a food pantry for people receiving Centrelink payments.
A neighbourhood house will need to be thoughtful when engaging in activities that seek to prevent disadvantage. The ACNC accepts that some, but not all, preventative activities are benevolent. The legal test for this category comes from over 90 years of case law and is not summarised in legislation.
The ACNC has published extensive guidance (linked below) but the law is still not straightforward.
Community shed
The requirement for open membership means that this category is not suitable for organisations that prefer to have a small or restricted membership (for example, where the board are the only members). A neighbourhood house will need to put thought into how it documents its open membership in its constitution or an accompanying policy.
The ‘dominant purposes’ requirement means that the majority of an organisation’s work must consist of facilitating activities and projects for people to do at the physical location in the company of others. There is some flexibility to do other activities (for example, food relief, information and referrals, or provide Centrelink services) but these other activities can’t be so significant that they amount to something more than a minor purpose.
Fictional examples of neighbourhood houses that may be eligible for endorsement:
Public benevolent institution (PBI)
Placedale Neighbourhood House seeks to address structural disadvantage and empower people facing hardship in its local community by providing benevolent relief to people in need. It:
- operates a food panty and weekly free community lunch
- provides financial counselling and no interest loans for people facing financial hardship
- facilitates peer support groups for people with addiction
- runs a youth club for young neurodivergent people to build social skills and friendships
- provides free supported playgroups for families with complex needs, and
- runs a community garden that grows vegetables for the food pantry.
Community shed
Hometown Neighbourhood House has a purpose of advancing mental health and relieving social isolation by maintaining a space where people can work on activities or projects in the company of others and feel part of their community. The community space is used to host a range of activities such as:
- a mental health information service
- exercise, art, and conversational English classes
- a coffee cart run by members, open Tuesdays & Thursdays
- free or low-cost lessons in budgeting and financial literacy
- peer support groups for people with addiction
- a drop-in youth centre for teenagers to socialise and do homework together in a safe space, and
- a community garden and monthly gardening and sustainability workshops.
Preconditions:
Public benevolent institution (PBI)
To be eligible, a neighbourhood house must also:
- Have an active ABN
- Be established and operated in Australia
- Be a registered charity
- Demonstrate its character as a public institution
- Have a governing document demonstrating a compatible purpose and an appropriate DGR winding up and revocation clause
Community shed
To be eligible, a neighbourhood house must also:
- Have an active ABN
- Be established and operated in Australia
- Be a registered charity
- Demonstrate its character as a public institution
- Have a governing document demonstrating a compatible purpose and an appropriate DGR winding up and revocation clause
Where to find more information:
Public benevolent institution (PBI)
- Not-for-profit Law’s Guide to DGR status and DGR Tool available here
- The ACNC’s factsheet and Commissioner’s Interpretation Statement: Public Benevolent Institutions
Community shed
- Not-for-profit Law’s Guide to DGR status and DGR Tool available here
- The ATO’s guidance on community sheds
My neighbourhood house wants to apply for DGR as a PBI or community shed: what should we do?
We recommend that you:
- Check that your neighbourhood house meets the preconditions listed above.
- Familiarise yourself with the available DGR categories and involve the board early to ensure they understand and accept any limitations that endorsement could have on your house’s future activities.
- Get legal advice about your eligibility and any changes to your constitution that may be required to support an application for DGR endorsement.
- Be prepared to explain how your neighbourhood house’s history, activities and strategy fit within your chosen DGR category and ensure your website is consistent with this narrative.
- Arrange for a legal review of your DGR application before submitting it to the correct regulator.
- Allocate sufficient internal resources to the application process and understand that the above steps will take time.
Many neighbourhood houses are eligible for our free legal advice service. Simply answer a few questions to find out if your organisation is eligible for advice.
My neighbourhood house doesn’t fit into these categories. What are our options?
There may be other ways to benefit from DGR endorsement if your house as a whole is not eligible. For more information, see Part 1 of our Guide to DGR status.
Our campaign to Unlock DGR
An overly complex, ineffective, and unfair DGR system is holding charities back. That's why we've launched our latest campaign: Unlock DGR. We’re calling for a fairer, simpler system - one that unlocks giving, reduces red tape, and supports more charities that are making a difference.
