The complete introductory guide to deductible gift recipients (DGR) - Part 2

23 Apr 2020
Part 2 - Getting into the detail

Welcome to part two of the complete introductory guide to deductible gift recipients (DGR).

If you missed part one, we recommend you jump back a step, just to get an idea about what DGR endorsement is, why organisations like to have it and other general background information that will help you get a better understanding of this DGR thing.

This part, part two, digs a little deeper and explores:

  • explores why you might not need DGR endorsement after all;
  • describes the different categories of DGR and the difference between type 1 (DGR1) and type 2 (DGR2);
  • describes the difference between whole of DGR endorsement and, what might loosely be called, part-organisation endorsement.

Part three focuses more on the practical side of things and gives more detail on applying for DGR endorsement and explains why you might not be successful and what to do about it if your application is declined.

Types and categories of DGR endorsement

3.1 Overview

There are more than 50 different categories of DGR endorsement grouped under the broad headings of:

  • health
  • education
  • sport and recreation
  • public and private ancillary funds
  • research
  • welfare and rights
  • defence
  • culture
  • fire and emergency services
  • environment
  • the family
  • international affairs.

Each of the above broad categories house a number of DGR options, each of which has its own eligibility and ongoing compliance requirements.

Many of the DGR categories are assessed and administered by the ATO but some are assessed and administered by other government agencies, for example:

  • the Department of Foreign Affairs and Trade administers overseas aid funds
  • the Department of Social Services administers harm prevention charities
  • the Department of the Environment administers environmental organisations through the Register of Environmental Organisations (REO)
  • the Office for the Arts within the Attorney-General's Department administers cultural organisations through the Register of Cultural Organisations (ROCO).

Government names and responsibilities seem to change with common regularity , so the names listed above may change from time to time.

DGR endorsement can be for:

  • the entire organisation – often referred to as 'whole of organisation endorsement'; and
  • a part or subset of the organisation, often referred to as 'endorsement for the operation of a fund, authority or institution'.

3.2 Whole of organisation DGR endorsement

If you would like to receive tax deductible gifts and contributions to fund and support the full scope of work that your organisation does, then 'whole of organisation' endorsement is what you want! It is kind of self-explanatory. An organisation with whole of organisation DGR endorsement is endorsed to receive tax deductible gifts for all of what it does. That is, there is no need to isolate tax deductible gifts from the organisation's other money – though you may choose to continue to track and identify the DGR funds received through your accounting lines, and you may in fact be required to under the terms of a funding grant.

This will all make a little more sense once you contrast it with part DGR endorsement, discussed below.

The main whole of organisation endorsement categories are:

  • public benevolent institution (PBI)
  • health promotion charity (HPC)
  • charitable services institution (CSI) – and no, has nothing to do with Crime Scene Investigation!

3.3 Endorsement to operate a DGR – part endorsement

Sometimes it is not possible to receive DGR endorsement for the entire scope of activities that your organisation is doing, or hopes to do. But don't give up!

It is sometimes possible for a part, or portion, of what your organisation is doing to be eligible to receive tax deductible gifts or contributions.

  • The most common funds for which an organisation is endorsed as a DGR to operate are:
    school/college building funds;
  • scholarship funds;
  • public library funds;
  • developing country relief funds (also known as 'overseas aid funds'); and
  • necessitous circumstances funds.

Then, just to make things a little more complicated, some categories of DGR require an organisation to be listed on a particular register maintained by a government department and to operate a public fund. See part 5.7 for a little more detail.

3.4 DGR 1 and DGR 2

When referring to deductible gift recipients, you may see or hear the terms "type 1" and "type 2" DGR (or DGR1 and DGR2). These terms stem from where the related legal provisions are located in the Income Tax Assessment Act 1997 (Cth).

But rather than get bogged down in the tax law, what you really need to know is that these terms relate mainly to how the money received by the organisation can be used.

(a) DGR 1

While perhaps an over-simplification, broadly speaking, a DGR1 is an entity that directly engages in activities (a 'doer' you could say). The vast majority of organisations that are endorsed as a DGR will be a type 1 DGR.

(b) DGR 2

On the other hand a type 2 DGR fulfils its own purpose by empowering and supporting other organisations – through the giving of grants for instance (a 'giver' you might say). DGR2 organisations are generally only allowed to give funds and support to DGR1 entities. Public ancillary funds and private ancillary funds are examples of DGR2 entities.

4. Is a DGR endorsement absolutely necessary?

4.1 Overview

So after all that, do you really need DGR endorsement at all? Let's see!
While in some cases an organisation's viability will depend on obtaining and maintaining DGR endorsement, in many circumstances it is, while desirable, not essential. This is because there are a good number of fundraising and revenue raising opportunities that do not require DGR endorsement. Yep, you heard correctly. DGR is not always necessary and seldom is it the panacea to an organisation's funding difficulties, at least not on its own!

Let us explain ...

Even if you are endorsed as a DGR, for a gift to be tax deductible, it must be a genuine gift. That is, it must be given freely for no material reward. Basically, if a giver gets something material in return for a gift, the gift cannot be claimed as a tax deduction and the organisation cannot give a tax deductible receipt. This is so even if that organisation is a DGR.

For example, a tax deductible receipt cannot be given for:

  • raffles and lotteries
  • the sale of merchandise (unless it is of low value and of limited utility – such as stickers)
  • membership fees
  • conference attendance fees
  • sponsorship
  • philanthropic and government grants
  • fundraising events (such as a dinner or golf day)
  • gifts from overseas donorscommercial enterprise

So it is open to any not-for-profit or charitable organisation, DGR or not, to raise money in these ways.

Also, a good number of charitable foundations, trusts and other similar philanthropic givers will give donations and grants to registered charities even if they are not endorsed as a DGR. There are even some corporate foundations out there that, because of the way they are set up, can pretty well give to any organisation they want.

Lastly, let's not forget that an organisation can still receive gifts even if it is not a DGR, it just cannot give a tax deductible receipt.

4.2 Tax deductible contributions

Important note: While we don't want to over complicate things here, we also don't want you to accuse us of leaving something out! As well as deductible gifts, a DGR endorsed entity can receive tax deductible contributions.
In brief, tax deductible contributions come into play in relation to fundraising dinners and similar events and fundraising auctions. If the right balance is struck between the true value of the item being purchased and the amount actually paid, then the difference between these 2 amounts can be tax deductible. Keep an eye out for our poston deductible gifts and deductible contributions for more info. You can also check out what the ATO has to say here.

4.3 People will probably give anyway right?

Yep, I have observed that if someone wants to give to a charity then they will, regardless of whether the organisation has DGR endorsement. It is the passion, purpose and work of the organisation, not its DGR endorsement that attracts gifts.

Though it would be true to say that that same person is likely to give more if the recipient is a DGR.

Time to continue to part three where we get all practical like.

Author: Darren Fittler
Darren Fittler is one of Australia's leading lawyers specialising in serving charity and not-for-profit organisations for more than 15 years.

You can find out more about Darren Fittler here.