Treasury's Not-for-profit Reform Newsletter, Issue 3

Message from Mark Arbib
Assistant Treasurer and Minister for Small Business and Minister for Sport

This time of year is a time to think about those in our community who are vulnerable. The not-for-profit (NFP) sector plays an important role at this time of year helping those who are less fortunate in our community.

As this is the first NFP Reform Newsletter I am contributing to, I would like to take this opportunity to convey to you, my committment to the important reform agenda that is underway. I would like to express my thanks for the work already done, and the active engagement that the sector has shown to the reform process. Such engagement is key to ensuring the success of any reform process. The NFP sector is a vital part of the Australian community, and I look forward to working with the NFP sector in 2012 on the Government's reform agenda.

On 8 December 2011 the former Assistant Treasurer released a Consultation Paper on a Governance Framework for the sector. Submissions to this paper were due on 20 January 2012.

However, after discussions with the sector I am extending the deadline to 27 January 2012. The Government acknowledges that this is still a tight timeframe for any consultation. However, it is important that the principles of a governance framework are worked out, so that they can be included in the legislation for the Australian Charities and Not-for-profits Commission (ACNC), which is due to go before Parliament in the first quarter of 2012.

On 9 December 2011 the Government also released an exposure draft of the ACNC legislation, which is the latest element of a consultation process that started in January this year. Submissions on the legislation will also be extended to 27 January 2012.

There is still much to do before 1 July 2012, when the ACNC becomes operational, along with work on other NFP reforms, like the introduction of a statutory definition of charity. I look forward to working with the sector next year as we move into the next phase of the NFP reform agenda.

I wish all of you a safe and happy Christmas and New Year.

Accounting stanrds for NDPs - update

There are a number of issues around accounting standards for the NFP sector in Australia. This article aims to outline some of those issues and the work being undertaken to address them.

The Australian Accounting Standards Board (AASB) is currently undertaking work aimed at making improvements to general purpose financial reporting by NFP entities to provide donors and others with financial reports that are more useful and easier to understand.

General Accounting Requirements

Where an NFP is required to report, has users dependent on general purpose financial statements for their decision-making, and prepares general purpose financial statements, AASB Accounting Standards apply. The standards deal with the fact that NFPs differ from for-profit entities in some key aspects. The standards do this by requiring an NFP to account for a transaction in the same way that a for-profit entity would account for it, unless there is an NFP-specific reason to do something different. This reflects a view that transactions with the same underlying economics should be accounted for in the same way, irrespective of the nature of the entity entering into the transactions.

The key benefit of this approach is that the information in financial reports is relevant to users, and users and preparers of financial reports need to only understand one set of accounting standards, with only a limited number of 'modifications' to address NFP-specific issues. The approach also provides greater efficiency in standard setting.

There have been some calls from some areas in the NFP sector for a sector-specific accounting standard that fundamentally differs from for-profit requirements. Developing such a sector-specific standard would present its own challenges, and would not necessarily achieve benefits for the sector or the users of financial reports.

A separate accounting standard for NFPs could potentially increase the level of complexity NFPs need to deal with. Further it could make it difficult for NFPs to attract qualified accountants to the sector, as they would need to have specialist knowledge of a different set of standards, and would not necessarily be able to apply existing knowledge and skills.

The AASB's approach acknowledges that in some circumstances NFPs have a need for a standard or a modification to a standard to explicitly accommodate NFP-specific circumstances. To that end, the AASB is examining the below issues in relation to standards for NFPs.

Accounting for Income of NFP Entities

The AASB Standard for accounting for contributions (which include donations to a charity), known as AASB 1004 Contributions, is sometimes criticised by practitioners, due to concerns that it requires income to be booked too early. There is concern that this might mislead potential donors to think that an entity has more funds than it actually does, thereby making it harder for it to attract further income.

The AASB has been reviewing AASB 1004 through proposals in its June 2009 Exposure Draft AASB ED 180 Income from Non-exchange Transactions (Taxes and Transfers). In particular, it has been examining when an NFP should be required to book income. Some of the proposals were not supported by the submissions. In light of this, the AASB is now working on a different approach, based on the principles being developed by the IASB in its work on a Standard for Revenue from Contracts with Customers, modified where necessary for NFP-specific issues. This approach is being referred to as a 'performance obligations' approach, whereby income is booked as being earned when performance obligations are fulfilled.

Under this approach, in some instances the income would be booked later than under AASB 1004. Many practitioners would regard such an outcome as providing a more relevant depiction of the NFP's income, and therefore its performance and financial position.

The AASB expects to issue an Exposure Draft of this approach in 2012.

Disclosures by NFPs

The AASB has issued AASB 1053 Application of Tiers of Australian Accounting Standards. This introduces a second, less onerous, tier of general purpose financial reporting requirements, but retains the full recognition and measurement requirements of Australian Accounting Standards. Most importantly it substantially reduces disclosure requirements for NFPs. The application of the second tier is however subject to the requirements that might be imposed by other regulators. In addition to the second tier initiative, the AASB plans to further examine opportunities for reducing the disclosure burden on NFPs.

Furthermore, the AASB is looking at the information needs of users of financial reports with a view to exploring what useful information is not currently required to be disclosed and considering whether to develop requirements or other guidance to fill the gaps. An example of this work is the AASB's Service Performance Reporting project.

Service Performance Reporting

This project is examining issues related to the reporting of inputs, outputs, outcomes and performance measures – not just financial information. The AASB is looking at what role it should play in specifying mandatory or non-mandatory non-financial disclosures that would provide input for decision makers.

To date a significant amount of research has been done on existing service performance reporting in various jurisdictions. This research provides a basis for benchmarking the development of principles for service performance reporting.

Concluding comments

The work the AASB is undertaking on the recognition of income, reducing the disclosure burden and service performance reporting (further details are available at www.aasb.gov.au) demonstrates that the AASB regards the NFP sector as a significant sector in the Australian economy that warrants particular attention. The AASB will continue to consult closely with the NFP sector, and has formed a project advisory panel to assist in this.

Setting clearer standards for governance of NFPs

On 8 December 2011, the then Assistant Treasurer, the Hon Bill Shorten MP, released a consultation paper what the core organisational governance principles should be for registered NFPs.

Governance affects many aspects of a NFP's operations. While most NFPs have effective governance policies in place, some do not. By streamlining governance arrangements, NFPs will be able to spend less time complying with duplicative or burdensome arrangements, and more time helping the community.

The ACNC, as regulator of the NFP sector, will work to improve public trust and confidence in the sector, through promoting good governance, accountability and transparency.

The Final Report of the Scoping Study for a National Not-for-profit Regulator (Final Report) highlighted the concerns of the NFP sector about duplicative, burdensome and unclear governance requirements across all Australian jurisdictions. It also found that a principles-based approach to governance would be largely welcomed by the sector.

Centralising and simplifying existing arrangement would assist in reducing red‑tape and minimising the compliance

burden for the NFP sector. The outcomes of the consultation paper will help form the governance requirements for registered entities in the ACNC legislation, starting from 1 July 2012.

The new governance arrangements will apply from 1 July 2012, the same time the (ACNC) commences operations. Appropriate arrangements will be put in place to allow a smooth transition for existing entities.

See Frequently Asked Questions for information on what is principles-based law.

Seeing the big picture – how do all the NFP reforms relate?

With such a large reform agenda for the NFP sector it is easy to lose sight of the aim of reform, and how individual reforms relate to each other. As we gear up for the establishment of the ACNC, it is a good time to examine the relationship between each of the reforms.

Exposure Draft:  Australian Charities and Not-for-profits Commission Bill

An exposure draft of legislation to establish the ACNC, along with related explanatory materials, was released on 9 December 2011 following almost a year of detailed consultations and discussions. The closing date for submissions is now 27 January 2011.

The ACNC Bill will establish the ACNC as a Commonwealth statutory office, legislate the ACNC's overarching objective and responsibilities, set out the regulatory responsibilities of registered NFP entities, and the powers required by the ACNC to fulfil its overarching objective and responsibilities. The ACNC will operate from 1 July 2012.

Better Targeting of NFP Tax Concessions

In the 2011-12 Budget, the Government announced the measure to better target NFP tax concessions. The aim of the measure is to protect the integrity of the NFP sector and the revenue base by ensuring that valuable tax concessions are utilised in direct furtherance of the purposes for which they were provided, rather than to support unrelated businesses operated for the purpose of raising money. The measure is applicable from 1 July 2011 for unrelated commercial activities that commenced after 10 May 2011 and transitional arrangements will apply for pre-existing unrelated commercial activities. The ATO will be responsible for administering the changes.

The measure will affect the way in which the tax system applies to certain NFP entities.  It will not, however, alter the ACNC's consideration of whether an entity is a charity or other NFP entity.

Further consultation on this measure is proposed for early 2012.

Introducing a statutory definition of charity

A statutory definition of charity will be introduced for all Commonwealth purposes, effective from 1 July 2013. It will contain the current key common law principles of charity. The definition will provide a clear framework for both the public and regulatory agencies for recognising entities as charitable, and greater clarity and certainty to the sector. The definition will be administered by the ACNC, which will be responsible for registering charities.

Consultation on a discussion paper closed on 9 December. An exposure draft of a proposed definition will be released for public consultation around mid-2012.

The ATO will accept an ACNC determination of charity status. The ATO will then apply the special tax specific conditions (such as the 'in Australia' conditions) before endorsing a charity for access to tax concessions.

Review of governance arrangements

The Government announced in the 2011-12 Budget a number of reviews of aspects of the regulation of the NFP sector, including a review of the governance obligations appropriate for NFP entities.

The intent of the governance review is to centralise and simplify the existing arrangements in order to reduce red tape and minimise compliance burdens for the sector. The Government is currently consulting on what the core organisational governance principles applying to registered NFPs should be. The outcomes of the governance review will help form the governance requirements for registered entities in the ACNC legislation, starting from 1 July 2012.

The consultation paper was released on 8 December 2011. Submissions on the consultation paper close now on 27 January 2012.

Reducing regulatory duplication review

Commonwealth agencies are currently undertaking a review of all NFP regulation at the Commonwealth level. This review is exploring mechanisms to minimise any duplication of regulatory responsibilities between existing regulators and the soon to be established ACNC, to ensure that the ACNC is created as a 'one-stop shop' regulator for the NFP sector.

Restating and standardising the special conditions for tax concession entities

The former Assistant Treasurer released for public consultation an exposure draft of legislation to restate the 'in Australia' special conditions for tax concession entities by ensuring that income tax exempt entities generally must be operated principally in Australia and for the broad benefit of the Australian community, and that deductible gift recipients generally must be operated solely in Australia and for the broad benefit of the Australian community.

The exposure draft also standardises the term 'not-for-profit', replacing the defined and undefined uses of 'non-profit' throughout the tax laws. Consultation closed on 12 August 2011. A second exposure draft for consultation is expected in early 2012.

Working with the States and Territories towards national regulation

As part of the 2011-12 Budget, the Government announced that it would begin negotiations with the States and Territories on national regulation and a new national regulator for the sector, as it considers that the greatest reduction in red tape can only be achieved with national coordination. Since then, the Commonwelath and the states and territories have come together to establish the Council of Australian Governments (COAG) NFP Reform Working Group with representatives from the Commonwealth, State and Territory governments to progress the national NFP reform agenda and consider the harmonisation of regulation for the NFP sector across Australia.

The Working Group will regularly report to COAG, through the Standing Council for Federal Financial Relations, about its progress.

ACNC Taskforce Discussion Paper: Implementation Design

The ACNC Discussion Paper has been released to seek feedback on the design of administrative systems of the ACNC. The paper discusses the design and implementation of the new reporting framework for charities that will be administered by the ACNC and is a central platform for the Government's vision of 'report once-use often' reporting for the NFP sector. The paper also seeks comments on the ACNC's public information portal, and the ACNC's educative role.

Submissions on the discussion paper close on 27 February 2012.

Consultation paper: Review of fundraising regulation

The Government announced in the 2011-12 Budget that it will undertake negotiations with the States and Territories on national regulation for the not-for-profit sector with the aim of minimising reporting and other regulatory requirements through coordinated national arrangements. One part of these negotiations involves the development of a national approach to charitable fundraising regulation. A charitable fundraising discussion paper is expected to be released in early 2012 canvassing options for a new national approach to charitable fundraising regulation.

Consultation paper: Review of Companies Limited by Guarantee

The Government announced in the 2011-12 Budget a number of reviews of aspects of the regulation of the NFP sector, including a review of the company limited by guarantee structure and its continuing appropriateness for NFP entities. A discussion paper is to be released for consultation in early‑2012. This review will assist in determining whether there are any barriers for NFP entities using this structure.

How do all these elements of the reform agenda fit together?

Over the page we have developed a diagram to graphically demonstrate how the each element of the reform agenda fits together.

As you will see, the reform agenda is ambitious with many separate but interrelated moving parts.

Getting up to date – are your entity's details up to date?

From 1 July 2012 many of the functions currently undertaken by the Australian Taxation Office (ATO) in relation to the administration of charitable endorsement will be undertaken by the ACNC. In preparation for this transition the ATO is encouraging all charities and NFP entities to ensure that their details are up to date, particularly their contact details.

When the ACNC starts operation on 1 July 2012, the responsibility for determining charitable status will move from the ATO to the ACNC. Those entities currently endorsed as charities by the ATO will become registered by the ACNC.

This will be a seamless transition, but will be greatly assisted if the details of entities are as up-to-date as possible.

To help the ATO protect your entity's privacy and provide office bearers with access to the information they need to perform their duties, please notify the ATO of any changes to your entity's registration details.

If you are an authorised contact person that the ATO has on its records for your entity's ABN, or would like to check whether you are the contact person, you can phone the ATO on 1300 130 248. If you are not an authorised contact person, you will need to ask for a Change of registration details form (NAT 2943) using the self‑help phone number 1300 720 092.

The fact sheet "How do you ensure we can speak to your organisation's representative?" (NAT 7605) explains in further detail how to notify the ATO of any changes. This can also be found by searching the ATO website with the title of the factsheet.

Update on Public Ancillary Fund reforms

The Public Ancillary Fund Guidelines 2011 have recently been registered on the Federal Register of Legislative Instruments and can be found on the ComLaw website.

The guidelines take effect on 1 January 2012.

What happened in the last month?

Treasury

November:

• 21 November: Statutory Definition of charity – technical experts forum
• 22 November: ATO's Charities Consultative Committee meeting
• 23 November: ATO's Clubs Consultative Forum

December:

• 6 December: Attended the Australian Charity Law Association half day Conference
• 9 December: Release of exposure draft legislation for the ACNC
• 13 December: ACNC legislation and governance discussion with the Not-for-profit Sector Reform Council (Canberra)
• 14 December: ACNC legislation and governance forum (Melbourne)
• 15 December: ACNC legislation and governance forum (Canberra)

Ongoing consultations with various experts in the NFP sector.

What's coming up in the next 12 months?

Public consultations

• Second exposure draft of restated and standardised special conditions that apply to tax concession entities and definition of NFP: expected early 2012
• A national approach to fundraising regulation:
  discussion paper: expected early 2012
• Better targeting of tax concessions:
  exposure draft: expected early 2012
• Review of corporations limited by guarantee: expected first half of 2012
• Introducing a statutory definition of 'charity':
  exposure draft legislation: expected first half of 2012

What is due in January 2012?

• 27 January: Submissions due on review of NFP governance arrangements.
• 27 January: Submissions due on exposure draft legislation for the ACNC.

ACNC Implementation Taskforce

Community Engagement – Phase 1

In November, invitational Round Tables were held, and discussed reporting practices, technical capabilities in portal design, and best practice around regulatory education and advice. The forums comprised academics, public servants,

NFP regulators, NFP and professional peak bodies. More information is available at Roundtable Consultations.

Discussion Paper

A Discussion Paper was released on 9 December 2011, drawing on the issues and themes raised in Roundtables. The sector and the public are invited to comment on the paper by 27 February 2012. Details are on the ACNC taskforce website.

Recruitment

The ACNC is currently undertaking a recruitment process for individuals who are interested in joining the ACNC at its formation. Further information can be obtained by contacting the recruitment agency who is acting on behalf of the ACNC.

Community Engagement Phase 2

A series of Community Consultations will take place across Australia commencing 30 January 2012, to complement the release of the ACNC Implementation Taskforce Discussion Paper. Registrations are now open. Dates and location details are available at ACNC community consultations.

Frequently Asked Questions

In this section we 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.

What does a principles-based approach to governance mean?

A principle in this context is a rule set out in legislation which specifies the outcome that we want registered entities to achieve, rather than the mechanism that achieves it. A principles-based approach expresses the outcome at the highest possible level rather than itemising a list of outcomes for every conceivable case. This allows entities to choose how they wish to implement their governance rules.

Principles-based governance requirements take into consideration proportionality, and allow smaller NFPs, who often lack the resources to develop detailed and prescriptive governance policies, to still uphold good governance procedures and meet ACNC requirements. A principles-based approach means that what procedures a small entity put in place to meet the governance requirements will not be the same as what procedures a large entity must put in place.

Definition of charity – statutory vs codification

Codification is the process of enacting a statute that collects and restates the whole source of pre-existing law in a single document—when that pre-existing law is common law, the common law may remain relevant to the interpretation of these statutes.

However, the process of codification displaces prior statutes and case decisions. Thus, when a state codifies laws, the

statutes contained within the new code supersede the laws that had been in place prior to the codification.

The introduction of a statutory definition will only clarify the existing common law principles of charity into a statute. It will not replace the existing common law, but will build on it to provide greater clarity and certainty to the charitable sector.

A statutory definition of charity can be altered by Parliament over time, ensuring it remains appropriate, and reflects community needs and expectations.

As a government entity, how do these reforms affect me?

These reforms will not affect government entities. Government entities will still need to contact the ATO about access to tax concessions under the relevant provisions of the tax law.

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.

You'll soon be able to follow us on Twitter.