In June 2011, the Law Reform Commission of Hong Kong (LRC) published its proposals for the reform of charity law in Hong Kong. Curiously, Hong Kong has no dedicated charity legislation and this most modern of Asian cities, now a Special Administrative Region of the People’s Republic of China (PRC), relies on the Charitable Uses Act 1601, an English Act of Parliament passed in the reign of Elizabeth I, for its definition of charity.

Under article 18 of the Basic Law (Hong Kong’s constitution), the rules of common law and equity that existed prior to the resumption of Chinese sovereignty in 1997 remain in force. Therefore, the LRC looked at a wide range of common-law jurisdictions, including England, Ireland, Australia and New Zealand, to come up with proposals tailored to Hong Kong’s needs. The LRC’s report divides into four parts: the definition of charitable purpose, the duty of charity trustees to account, regulation and fundraising.

The LRC paper proposes there should be 13 heads of charity, including the four existing charitable purposes – the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community. New heads include the advancement of arts, culture, heritage or science; the promotion of equality; and the advancement of environmental protection or improvement.

The report is ambivalent about whether the advancement of human rights should be a charitable purpose. It points out that charities should avoid becoming involved in politics and concludes this section by inviting the public’s views. Hong Kong possesses human rights legislation that, while not based on the European Convention on Human Rights, is in many ways similar to the UK’s Human Rights Act 1998. However, given that Hong Kong’s political development remains contentious, the LRC’s caution is understandable.

The report recommends that all charitable organisations that appeal to the public for funds or to seek tax exemption should be required to register with a newly proposed charity commission. This would entail all registered charities filing an annual activity report covering matters such as the charity’s main activities undertaken during the year, and changes in directors, charitable objects or registered office.

Charities with an annual income exceeding HKD500,000 (about USD64,000) will be required to file an auditor’s report and financial statements. It is sensible that the duty to account be proportionate to the size of the charity and it is hoped the two-tier approach will enable this to happen. These requirements depend on registration, so a privately funded charitable foundation that neither seeks tax exemption nor solicits funds from the public can avoid filing accounts.

The number of such foundations in Hong Kong is increasing as the territory’s successful entrepreneurs venture into philanthropy. Given that the highest personal income tax in Hong Kong is only 15 per cent, such entrepreneurs may be prepared to forgo tax relief in exchange for privacy.

The LRC recommends the establishment of a charity commission to regulate the sector, similar to the Charity Commission for England and Wales. The new commission will have the power to investigate charities and obtain information. In appropriate cases it can deregister a charity, refer suspected criminal offences to law enforcement agencies and take steps for the protection of charity property, including, if necessary, appointing more charity trustees, suspending or removing trustees, and restraining the disposal of charity property. The LRC also proposes giving the new charity commission powers to make cy près schemes, similar to the control of the Charity Commission.

Under the cy près doctrine the court (and potentially the new charity commission) can vary the objects of a charitable gift in a charitable trust or a will. It will do this if, for example, the donor’s original objects have become impossible to fulfil or are outdated. This may be because the donor has provided insufficient funds to achieve their desired object or because the charitable purpose has become obsolete. Examples include gifts to combat a disease that has been eradicated by the time of the donor’s death, and gifts for charities or institutions that no longer exist when the gift should take effect.

In such cases, the court’s policy is to save the gift for charity, if possible. It often does this by relying on the principle of general charitable intent to prevent the gift failing and passing to the next of kin or on resulting trust in favour of the donor. Currently in Hong Kong, only the court may make such schemes. Applications for cy près schemes in Hong Kong are virtually unknown, possibly because of the cost.

A number of observers in Hong Kong have indicated concern about these powers. The LRC proposes that their exercise be subject to a right of appeal by those adversely affected. This appeal is likely to be to the Court of First Instance (part of the High Court of Hong Kong). Small charities will be concerned about the legal cost of pursuing these appeals. One possibility is legal aid. Another option may be to establish a tribunal to hear such matters, as has been done in England. However, judging by recent cases before that body, the cost of an appeal to such a tribunal may not be much less than one to the court.

One important theme of the report is that regulation should be a one-stop shop. At present, the Inland Revenue Department deals with applications for exemption from tax but otherwise provides scant sector regulation. This calls into question whether it should have a continuing role relating to charities. Tax-exemption could be bestowed on a charity by operation of law, following registration with the new commission.

If such a charity later departed from its charitable objects (jeopardising its charitable status and its exemption from tax), this could initially be a matter for investigation by the new charity commission. This body could pass its findings to the Inland Revenue Department, if necessary. The Inland Revenue’s acquired experience may be useful under the proposed new regulatory regime, however, and the Hong Kong government will have to proceed with caution when deciding the allocation of responsibilities between the Inland Revenue and the new commission.

Approving fundraising applications involves a variety of government bodies, and it is hoped that the new regulator will be the sole agency charged with overseeing the sector. At present, permission to hold collections in a public place, such as on a flag day, requires an application to the Social Welfare Department. Raising funds through a lottery needs a licence from the Commission for Television and Entertainment Licensing, and selling things on the street needs a licence from the Food and Environmental Hygiene Department. Costs for charities would be reduced if these procedures could be streamlined and placed in the hands of the new commission. The LRC report also recommends that the new regulator introduce a code of practice to encourage professional fundraisers.

The consultation for the reforms ended on 31 October 2011. Although the report has been well received, some were concerned that the Hong Kong government may interfere unnecessarily in charities’ affairs. There is no evidence that the government had this intention, and most professional observers with experience of charities in other jurisdictions believe proper regulation is essential to maintain the confidence of donors and thus the health of the sector.

Although Hong Kong has so far been spared scandals about badly run charities and dishonest charity trustees, there is no room for complacency. Indeed, it is hoped the reforms will encourage greater use of Hong Kong charities to support causes in mainland PRC, which lacks effective charity legislation.

Following the consultation, the government will take some time to publish its final proposals. Assuming this goes well, a Charities Bill will be introduced into the Hong Kong Legislative Council. Hopefully the legislators will support the proposed reforms, but it could be another two years before a Hong Kong Charities Act passes into law.