Treasury's Not-for-profit Reform Newsletter, Issue 1

Message from Bill Shorten
Assistant Treasurer and Minister for Financial Services and Superannuation

I am very pleased to welcome you to the first issue of Treasury’s Not-for-profit Reform Newsletter.

The Government is undertaking a significant reform agenda of the not-for-profit (NFP) sector that we announced in the May Budget to ensure the integrity, viability and reputation of the sector. The first stage of reforms are the establishment of the Australian Charities and Not-for-profits Commission (ACNC), the better targeting of NFP concessions, and the introduction of a statutory definition of ‘charity’.

We are committed to consulting with the sector at every stage of the reform process and Treasury’s newsletter is part of that process.

This newsletter is about helping to ensure that the NFP sector is kept in the loop as to what reforms are being undertaken and their progress. It will be just one of the ways the Government will work to ensure that the sector is well informed about the measures that will affect them.

I have declared openly my respect and admiration for the work that is undertaken by the sector, and it is for this reason that I wish to be clear that the reforms we embarked upon at the Budget are designed to ensure the integrity, viability and reputation of this sector.

Real reform is never easy and the NFP sector may not necessarily welcome each and every change, but I’m confident the overall reforms will strengthen the sector, reduce red-tape, improve transparency, accountability and fairness, and provide a sustainable and modern framework in which the sector can continue to grow.

The reform agenda — an overview

The Government has a broad reform agenda for the NFP sector. In the May Budget, the Government announced a number of measures as part of its commitment to drive major reforms in the NFP sector and to deliver smarter regulation, reduce red tape and improve transparency and accountability for the sector.

The Government will establish a national NFP regulator, the ACNC, by 1 July 2012. Over time, the ACNC will provide a ‘one-stop shop’ for regulation and reporting for the sector. It will initially be responsible for regulation of NFPs, including charities and community organisations at the Commonwealth level. It will provide education and support to the sector, and implement a public information portal. Susan Pascoe AM has been appointed as Chair of the Implementation Taskforce for the ACNC. This newsletter in coming editions will provide more information on this important reform.

The Government will also introduce astatutory definition of ‘charity’ to take effect from 1 July 2013. The current definition of charity is based largely on over 400 years of common law. It is complex, inconsistent between Australian jurisdictions, outdated, and creates considerable uncertainty for the sector. A statutory definition will clarify the key principles of the common law, be more accessible to the charitable sector, reduce their administrative costs, and provide greater clarity. A public consultation process is scheduled for late in 2011.

The Government is also better targeting tax concessions for NFPs — this is discussed in more detail below.

Another important way that the Government is working with the sector is through the Not-for-profit Sector Reform Council, which was announced in December last year. The Reform Council, comprised of respected and experienced representatives of the NFP sector, is playing an important role advising the Government on strengthening the sector through smarter regulation, reduced red-tape, and greater transparency and accountability.

Many NFPs now operate across jurisdictional boundaries in Australia. The regulatory overlap between Commonwealth, state and territory jurisdictions has resulted in high regulatory burdens and Commonwealth level reforms alone cannot reduce these burdens on the sector. Therefore, the Government will progress national regulation and a national regulator for the NFP sector through the Council of Australian Governments (COAG). COAG is already working to reduce the regulatory burdens on the NFP sector by harmonising fundraising legislation across jurisdictions.

Better targeting of tax concessions

Ambitious Reforms To Secure A Not-for-profit Future

By Bill Shorten, Assistant Treasurer and Minister for Financial Services and Superannuation

For over a decade the Australian NFP sector has loudly demanded significant regulatory reform to allow it to get on with its most important job: delivering services to those in need and making a difference in our communities. 

There are about 180 individual regulations facing just charities in Australia, across all levels of Government (not to mention regulations applying to not-for-profits more broadly). That’s ridiculous and a consequence of piecemeal regulatory development through different state jurisdictions and the courts.

In this year’s Budget, the Government announced three reforms to ensure the sustainability of the NFP sector and improve its effectiveness: the better targeting of not-for-profit tax concessions, the ACNC, and the introduction of a statutory definition of ‘charity’. 

Given the decades of inaction on this front, I make no apology for getting on with the job of reform. Changes are needed across all levels of government and we need momentum to ensure that real reform doesn’t languish for another decade. But I also recognise that if the reforms are to be sustainable and workable, they will need to be owned by the sector and government – not government alone.

That’s why I’ve spoken with dozens of organisations from the sector since Budget night, and why we are conducting detailed public consultations around all of the Budget measures. By and large, I’ve been overwhelmed by the positive response I’ve received, particularly for the establishment of the ACNC. The sector is excited to be moving forward, and to have people of the calibre of Susan Pascoe and Robert Fitzgerald to lead the Commission.

But I also realise that some organisations have concerns, especially around the better targeting of tax concession reforms we’ve announced.

The Government directly supports not-for-profits through grants and service funding and indirectly through a variety of tax concessions. Funding for the sector through tax concessions comes at a cost to the budget bottom line - quantifiable tax expenditures in 2010-11 are estimated to be $3.3 billion, but this does not include unquantifiable expenditures including forgone income tax which is estimated to be at least $1 billion per year but could be significantly more.

Reform of tax concessions available for unrelated commercial activities serves two core purposes: it prevents the gradual erosion of the tax base through concessional treatment for activities that bear no relationship to a ‘charitable’ or a core not-for-profit activity, and it ensures that valuable tax concessions are not provided to organisations that chose, for all intents and purposes, to run a purely commercial business.

This in no way means the Government does not support not-for-profits diversifying into commercial activities to supplement and strengthen their revenue streams. In fact, we encourage it. But the policy intent that underpins the tax concessionality of such activities is that taxpayers are supporting activity for the good of the country and the community: not activities which could be dubiously linked to a NFP cause in order to avail themselves of a tax break.

The evidence presented to Government of potential abuse in this regard suggested that, without prompt action, there was a significant risk that tax concessions would become skewed towards activities that did not match this policy intent.

Accordingly, NFP entities will be required to pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose. That is, entities who do not direct their earnings back to their altruistic purposes will have to bear a measure of income tax on those earnings. Those NFPs entities who undertake unrelated commercial activities will also not have access to FBT, DGR or GST concessions in support of those unrelated activities.

Importantly, activities that are ‘related’ to an altruistic or charitable cause will remain exempt from income tax, a reasonable threshold will exclude small scale activities, and unrelated commercial activity from pre-Budget night will effectively be grandfathered for the time being. 

Change is never easy and some in the sector have sought to avoid change, fearing life will become harder for the vast majority of NFPs who are doing the right thing and using their tax concessions to benefit the community. The legal eagles have also been circling the sector, raising some concerns that are legitimate and some that are more likely tinged with a degree of professional self-interest.

Consistent with these concerns, some have claimed that the proposed reforms are as an attack on the mainstream religions.

Nothing could be further from the truth. Religious institutions are, and will always be, important in the fabric of Australian society. I am confident that these reforms will not cause significant detriment to the ability of churches to continue to deliver the vital community services that they have done for hundreds of years.

Likewise, I consider that the vast majority of commercial activities conducted by NFPs – such as health and aged care, child care and enterprises staffed by people with a disability – will not be subject to any additional tax. The sector should be comfortable that work related to a core not-for-profit or charitable purpose will continue to receive the benefit of tax concessions, and other unrelated commercial activities will also receive concessions if the earnings are being directed to an altruistic purpose.

I am also aware of concerns around timing issues that may arise when profits are temporarily retained in an unrelated commercial entity. Namely, that there are situations where a not for-profit will be required to retain earnings in its commercial arm for a period greater than one financial year. We have heard these concerns and will consider them as we begin the process of developing exposure draft legislation. We will continue to talk to the sector before final legislation is resolved.

The Government will continue to consult with the sector on the best way to implement these reforms, whether there are any unintended consequences, and what guidance will be required.

We’ll develop guidance materials, factsheets, rulings and whatever else is needed to assist not-for-profits to comply with the new arrangements. We’ll make sure that the compliance burden is kept to a minimum - for reasons of efficiency and cost effectiveness, our tax system operates on a self-assessment basis, and these changes will too. We have already made a significant commitment in these areas through our establishment of the first ever National Compact between the government and NFPs.

The Gillard Government is ambitious for a society underpinned by equality of opportunity, where people don’t get left behind. The NFP sector is a pivotal partner in realising this vision.

Real reform is never easy and the not-for-profit sector may not necessarily welcome each and every change, but I’m confident the reforms are in the overall interests of the not-for-profit sector, government and the Australian community, and will ensure that the sector is well placed to work on delivering this vision for generations to come.

Treasury’s role in the reform process

Treasury is responsible for working with stakeholders to develop the policy and legislation that will support the Government’s NFP taxation and regulation reform agenda.

Treasury will carry out public consultation over the next 12 months on a number of aspects of the reforms. Additional information can be found at the end of this newsletter.

The Implementation Taskforce

The Assistant Treasurer, Bill Shorten, announced on 4 July 2011 the appointment of Susan Pascoe AM as the Chair of the Implementation Taskforce for the ACNC.

The Implementation Taskforce’s role is to work with the Australian Taxation Office (ATO) to ensure that all the administrative arrangements are in place so the ACNC is ready for operation by 1 July 2012. The ACNC will consult on developing a single general reporting framework for the sector and information portal requirements. The ACNC will also develop educational materials for the sector to support them in their important work.

What happened in September?

9 Sept: Workshop with NFP Sector Reform Council on NFP reforms, including the regulator, governance, fundraising and companies limited by guarantee.
20 Sept: Consultation on NFP reforms with ATO’s Charities Consultative Committee.
21 Sept: Consultation on NFP reforms with ATO’s Clubs Forum.
21 Sept: Exposure draft legislation to improve the integrity of public ancillary funds introduced into Parliament.
22 Sept: Workshop on NFP reforms with the NFP Sector Reform Council.
23 Sept: Australian Charity Law Association Conference.

What’s coming up in the next 12 months?

Public consultations

• Introducing a statutory definition of ‘charity’: consultation paper — expected October 2011
• Second exposure draft of ‘In-Australia’ special conditions and definition of not-for-profit: expected – expected late 2011
• Better targeting of tax concessions: exposure draft — expected late 2011
• A national approach to fundraising regulation: discussion paper — expected late 2011
• Legislation to establish the ACNC: exposure draft — expected late 2011
• Review of corporations limited by guarantee and governance arrangements for NFPs: late 2011
• Introducing a statutory definition of ‘charity’: exposure draft legislation— first half of 2012

Frequently Asked Questions

In this section we will answer some of the most commonly asked questions about NFP taxation and regulation reform. If you have a specific question, email us at NFPReform@treasury.gov.au.

Why has the Government decided to better target the NFP income tax concession to ensure that the profits of unrelated businesses are given to the altruistic purpose for which the tax concession was intended?

Evidence provided by the Commissioner of Taxation to the Government shows that the Word Investments decision has resulted in a substantial behavioural shift and is now being applied by charitable and income tax exempt entities in many more circumstances and with an increasingly broader scope than the Government initially considered would occur. The risk to the revenue of inaction is more than a billion dollars.

The Word Investments decision enables a charitable entity to operate an unrelated commercial activity, and retain its income tax endorsement so long as all proceeds of the commercial entity are directed towards the altruistic purpose at some point in the future. The decision also reinforces the ability of charities and other NFPs, including their unrelated businesses, to accumulate substantial income for many years without necessarily contributing to any altruistic purpose during that time. For example, an income tax exempt entity could acquire an existing commercial business and the only change that may occur is that that business would stop paying tax.

The Government supports the ability of NFPs to diversify their sources of funds, including through undertaking unrelated commercial activities. In deciding to better target NFP tax concessions, the Government has committed to providing statutory certainty that NFP entities can undertake unrelated commercial activities, and access income tax concessions if, like other businesses, the profits from those activities are directed to their altruistic purpose. 

However, a fiscally responsible Government needs to ensure that public monies and tax benefits are being used for the purposes for which they were intended. Most countries target their income tax concessions, and usually in a stricter manner than the Government is proposing for Australia.

While the Government supports the diversification of income sources by the NFP sector, there is a significant risk that the profits resulting from unrelated businesses may never be applied for charitable or altruistic purposes. For example, in cases where the unrelated business becomes insolvent, or where the accumulation was for a large infrastructure project which does not eventuate. 

To address this risk, and without limiting an NFPs ability to diversify its income sources, including through growing or purchasing unrelated businesses, or accumulating funds, the Government is targeting the application of the income tax concession to the point in time at which the profits of unrelated business activities are directly applied to the charitable or altruistic purpose.

Australia’s tax system has consistently high levels of voluntary compliance. This is due largely because the Australian public has confidence that our tax system operates fairly and the benefits it provides special groups are being used for the purposes in which it was intended. The Government acting to maintain those high levels of confidence.

What is the next step in the Better targeting of the tax concessions process?

Following the discussion paper consultation process, the Government engaged in a number of consultative forums and face-to-face meetings with NFP stakeholders and other interested parties. These included discussions with the NFP Sector Reform Council, as well as the Charities Consultative Committee and Clubs Forum run by the ATO. There were also meetings with various NFP sector experts including accountants, tax experts, lawyers, the arts sector and the community housing sector.

Treasury is currently developing options to implement the announced changes to the use of tax concessions by the sector, and will undertake targeted and intensive consultations with the sector in the coming months.

Where is the consultation process on the ‘In Australia’ special conditions for tax concession entities up to?

Initial consultation on the exposure draft legislation to reinstate the ‘In Australia’ special conditions for tax concession entities closed on 12 August 2011. 

The Government acknowledges that the released draft legislation had some issues. The Assistant Treasurer has asked Treasury to consult on a second exposure draft of the legislation, which is likely to address the vast majority of sector concerns. We expect to consult on the revised exposure draft later in 2011.

What is the consultation process on the Statutory Definition of Charity?

The Government is expected to shortly release a consultation paper on the key issues around a statutory definition of charity. The paper will provide the charity sector, the public and state and territory governments with an opportunity to comment on the form of a definition of charity and charitable purposes. Consultation on draft legislation is expected to occur in the first half of 2012. 

If I have further questions on NFP taxation and regulation reform, how do I get them answered?

There is one email address for all Treasury NFP reform issues and questions. Please email your question to NFPReform@treasury.gov.au.

How do I get added to the NFP reform mailing list?

Email NFPReform@treasury.gov.au, with your name, phone number and, if applicable, your entity.