Not-for-profit bulletin - Checkup Australia...w:\matter\270381\256551.doc Not-for-profit bulletin...

$: Not-for-profit bulletin - Checkup Australia...w:\matter\270381\256551.doc Not-for-profit bulletin November 2012 4 (2) To obtain tax exemption, all entities, whether charities or otherwise,$
19 November 2012

Not-for-profit bulletin

In this bulletin:

• ACNC Bill is passed

• Not-for-profit sector tax concession working group discussion paper

Contact Paul Paxton-Hall Director Level 10, 15 Adelaide Street, Brisbane Qld 4000 Telephone: 07 3007 9250 Email: [email protected]

w:\matter\270381\256551.doc Not-for-profit bulletin November 2012

Contents

1. ACNC Bill is passed .................................................................................................... 1

2. Not-for-profit sector tax concession working group discussion paper .......................... 2

3. Conclusion .................................................................................................................. 9

Schedule 1 Summary of reforms .......................................................................................... 10

w:\matter\270381\256551.doc Not-for-profit bulletin November 2012 1

1. ACNC Bill is passed

1.1 The ACNC Bill passed through the parliament on Thursday 1 November 2012. Royal proclamation has yet to be granted but reports are that the Australian Charities and Not-for-Profits Commission will commence operation in early December this year.

1.2 I commented in some detail on the Australian Charities and Not-for-Profit Commission Bill in my July 2012 bulletin available at http://www.foxthomas.com.au/wp-content/uploads/2012/11/NFP-Bulletin-July-2012.pdf. The thrust of the original Bill was unchanged. However, there were certain amendments made through the Senate designed to improve the ACNC's focus on red tape reduction and heighten the benefits that the new law will give to charities.

1.3 Relevant amendments are:

(1) Warning and breach notices will usually be published in a charity's public register record although there is some discretion as to whether the ACNC Commissioner will choose to publish a notice depending on the circumstances. This measure is designed to protect the reputation of charities where a breach of the Act is minor or has otherwise been resolved.

(2) We have yet to see the regulations that will affect not-for-profit governance and external conduct standards. Regulations changing governance or external conduct standards must be approved by parliament. Governance or external conduct standards must only be made after appropriate consultation with the not-for-profit sector, experts in the field, the Commissioner and entities likely to be affected by standards.

(3) Governance standards must be based on achieving an end result such as increased accountability to members, rather than prescribing how charities are to achieve the result. The intention here is to permit the legislation to cater for the great diversity of Australian charities.

(4) The ACNC Commissioner will be required to report on the ACNC's progress in reducing red tape as part of its annual report to parliament.

(5) The maximum annual revenue allowed for the DGR funds of basic religious charities will increase in line with indexation of "small registered entity" thresholds.

(6) Better transitional arrangements for entities which have associated public benevolent institutions or health promotion charities to ensure that PBIs and health promotion charities keep their tax concessions.


2. Not-for-profit sector tax concession working group discussion paper

2.1 Background

(1) The tax concession working group was established in February 2012 by the then Assistant Treasurer the Hon Mark Arbib, with terms of reference requiring it to consider ideas for better delivering the support currently provided through tax concessions to the not-for-profit sector.

(2) The working group was required to have regard to the Productivity Commission's 2010 report Contribution of the Not-for-Profit Sector as well as relevant international experience in developing its recommendations for tax reform.

(3) The discussion paper was released earlier this month and seeks sector and public comment by 17 December 2012. Submissions can be emailed to: [email protected].

(4) The working group is required to report in final form to the government by March 2013.

2.2 Introduction

(1) In setting the scene for the discussion paper, the working group states that the government has estimated that in 2011-2012 it provided around $4B for quantifiable support to the not-for-profit sector by way of tax concessions. There is also a substantial amount of unquantifiable support which is understood to run into several billions of dollars in total also.

(2) The government's focus on effective tax concessions for the not-for-profit sector is part of its overall reform agenda for the sector. This total package of reform includes:

(a) the establishment of the Australian Charities & Not-for-Profit Commission;

(b) not-for-profit tax concessions and unrelated business income;

(c) the introduction in 2013 of a statutory definition of "charity";

(d) the review of governance standards for the not-for-profit sector as part of the ACNC Act and regulations (to commence in 2013);

(e) changes to special conditions for tax concession entities including refinement of the "in Australia" test; and

(f) review of fundraising regulation.

It is a substantial package indeed.


(3) In setting the scene for the working group's discussion paper, Table A of the paper identifies existing tax concessions for the main types of not-for-profit entities as:

(4) Of course not-for-profit tax concession arrangements are an interesting compromise between politics, philanthropy and revenue collection. The paper makes the case that the reasons for providing tax concessions are:

(a) concessions are a form of government assistance to worthy causes;

(b) concessions are a form of payment or subsidy for the delivery of public benefit provided by the not-for-profit sector on behalf of government i.e. the fiscal rationale for tax concessions because the sector saves government money; and

(c) income tax is borne by individuals in society and is imposed on entities as proxies for those individuals. Charities exist for a purpose of public benefit rather than private benefit and so, it is argued, should not be drawn into the tax régime.

2.3 Income tax exemption and refundable franking credits

(1) The Tax Act allows income tax exemption for a range of not-for-profit entities; including charities. But it also includes certain other organisations such as public and not-for-profit hospitals, entities that promote animal racing, art, games, sport, literature and music. For charities to be entitled to exemption they must be endorsed as charities under Division 50 of the Tax Act. Endorsed charities are entitled to a refund of franking credits. This benefit is not available to all tax exempt NFPs. Tax exemption applies not just to income, but also to statutory income i.e. capital gains tax.


(2) To obtain tax exemption, all entities, whether charities or otherwise, must be not-for-profit. Indeed, this aspect is part of the government's legislative reform program with a Bill in parliament at the present time intended to provide a statutory definition for the term "not-for-profit".

(3) The discussion paper identifies that, relevant to income tax concessions, are concepts of fairness, simplicity and effectiveness as the driving principles behind the concession structure. With those principles in mind the paper poses some questions around the current tax exemption framework; namely:

• what criteria should be used to determine whether an entity is entitled to income tax exemption;

• are the current categories of income tax exempt entity appropriate;

• should additional special conditions apply to income tax exemption e.g. should the public benefit test be extended to entities other than charities;

• does the tax system create particular impediments for large or complex NFPs;

• should other types of NFPs also be able to claim a refund of franking credits other than endorsed charities;

• should the ability of tax exempt charities and DGRs to receive refunds for franking credits be limited;

• should the ATO endorsement framework (to be taken over by the ACNC) be extended to include NFP entities other than charities;

• should the threshold for income tax exemption for taxable NFP clubs, associations and societies be increased beyond the current threshold of $416.

(4) These reform options, measured against the working group's guiding principles can be identified as follows:


2.4 Deductible gift recipients

(1) The discussion paper makes the point that in 2009/2010 around 4.4M individual taxpayers claimed a deduction for gifts to DGRs with total donations of $2B having been made. The estimated cost to the government of this benefit was approximately $910M in the 2011/2012 financial year.

(2) Tax deductibility for gifts made to certain types of charities evolved during the 20th century. Endorsement as a deductible gift receipt is made pursuant to Division 30 of the Tax Act – a separate division entirely from Division 50 which deals with tax exemption. Endorsement of an entity as a DGR is "entity-based" rather than being "activities-based". Indeed, it is that aspect of the current endorsement process that has come in for considerable criticism because some organisations will be entitled to endorsement under different heads outlined in Division 30. Generally, an organisation running different activities as shown in Division 30 need to have respective activities split into different entities all of which need separate endorsement. For a number of indigenous organisations this has been most problematical.

(3) There are around 50 general DGR categories in Division 30 grouped into 14 overarching categories which include:

• health;

• tertiary education and residential education institutions;

• research;

• ancillary funds;

• welfare and rights;

• environmental organisations;

• cultural organisations; and

• international affairs.

(4) Public benevolent institutions (PBIs) fall within the "welfare and rights" category; they are the most common type of DGR. However, the notion of what comprises a PBI has been interpreted strictly by the Courts over the years requiring, as it does, the direct provision of services by an institution for the relief of needs that require benevolence.

(5) For 4 types of DGR, Ministerial approval is required for entry on 4 different DGR registers. These are:

(a) Register of Environmental Organisations;

(b) Register of Harm Prevention Charities;

(c) Register of Cultural Organisations; and

(d) the Overseas Aid Gift Deductibility Scheme.

(6) The process of being registered on, say, the Overseas Aid Gift Deductibility Scheme, is very protracted and complicated. The government is keen to


simplify and streamline the application and endorsement processes for these 4 registers.

(7) As well, entities can become DGRs by requesting specific DGR listing in Division 30. There are approximately 200 entities that are specifically mentioned in Division 30 of the Tax Act. The process of becoming specifically endorsed is resource-intensive because organisations have to satisfy the government that they:

(a) do not fit within one of the general DGR categories;

(b) operate for the broad public benefit; and

(c) are unique and exceptional.

The process is necessarily political and has been criticised for that reason.

(8) The working group raised a number of concerns with the existing DGR framework by identifying that:

(a) Many entities which are entitled for income tax exemption are not eligible for DGR status (in the charitable context, DGR status is, generally speaking, limited to PBIs or what are called "necessitous circumstances funds").

(b) Overlapping categories of entity type are, as I have mentioned, also problematical. For example, it would not be unusual for an entity to be involved in one of the general health DGR categories as well as, for example, being involved in education.

(c) Another source of complexity relates to the status of funds. Some larger not-for-profit entities will frequently operate several DGR funds or institutions. The definition of "entity" in the Tax Act includes a trust but does not include a fund. Funds can be established either as separate entities, such as a trust or company limited by guarantee, or the entity itself may seek endorsement as a DGR for the operation of a particular fund or institution. This can become extremely confusing especially where an organisation, such as a church body, will auspice a range of different DGRs.

(d) The paper also refers to the regressive nature of the current tax deduction arrangements so that a flat deduction is given by both high and low income earners for money gifted to a DGR. There is debate as to whether a tax offset or tax rebate system would be more equitable than a straight deduction.

(e) The paper also considered just which entities should qualify for DGR status i.e. whether DGR status should be extended to all charities, most charities or confining endorsement to certain charitable activities.


(9) Consultation questions posed are:

(a) Should all charities be DGRs or should some entities that are charities (particularly those providing personal benefits such as religious organisations, charitable childcare services and primary and secondary education) be excluded?

(b) Should charities endorsed as DGRs be allowed to use DGR funds to provide religious services, charitable childcare services and primary and secondary education?

(c) Would DGR endorsement at the entity level, with restrictions based on activity, address the behavioural distortions in the DGR structure?

(d) If DGR status is extended to all endorsed charities, should this reform be implemented in stages over time?

(10) Other matters considered in relation to DGRs included:

(a) concessional arrangements for donations to private ancillary funds;

(b) tax incentives to encourage testamentary giving (on the basis that currently a bequest of a CGT asset creates a capital gains tax event unless the donee/beneficiary is a DGR);

(c) using the ACNC as a clearing house for donations to DGRs;

(d) simplifying property donation rules for gifts of property (as distinct from cash) to DGRs; and

(e) increasing the threshold for a deductible gift.

(11) A summary of DGR reform options is contained in Schedule 1.

2.5 Fringe benefits tax concessions

(1) Fringe benefits tax (FBT) exemption is the big issue driving DGR endorsement status as identified in the 2010 Productivity Commission Report.

(2) An endorsed charity that is not a DGR, may qualify for an FBT rebate up to a monetary limit per employee. Employers entitled to the rebate are entitled to have their liability to pay FBT reduced by a rebate equal to 48% of the gross FBT payable. This arrangement applies to churches, schools, scientific institutions and a range of other organisations.

(3) PBIs which have FBT exemption have the ability to engage in salary packaging worth up to around $4,300 per annum to an employee with a taxable income of $45,000. There are caps that limit concessional tax treatment. These are set at $17,000 per employee for hospital and ambulance services and $30,000 per employee for PBIs and health promotion charities.

(4) Clearly, there are significant advantages for a charitable organisation to be endorsed as a DGR because of the attraction of FBT exemption and the salary packaging opportunities that affords to its employees as opposed to rebate arrangements for charities which are not endorsed as DGRs.


(5) Importantly for the community services sector, PBIs and health promotion charities were required to be endorsed from 1 July 2005 to access FBT concessions. This caused considerable problems for a number of organisations at the time which had not been endorsed but were effectively operating on a self-assessment basis as auspiced PBIs.

(6) Table D in the discussion paper provides details of the main FBT concessions and is as follows:

(7) The benefit that a PBI derives through salary packaging of benefits for an employee is shown as follows:


(8) The paper notes a range of concerns with the current FBT tax concessions; namely:

(a) inconsistency of treatment i.e. that some people are entitled to a rebate whilst others to an exemption. The only entities where an exemption is available are PBIs, public and not-for-profit hospitals, health promotion charities, ambulance services and religious entities. Some tax exempt entities are entitled to a rebate, but not all;

(b) competitive neutrality arises where eligible entities compete with the for-profit sector e.g. private for-profit hospitals competing with not-for-profit and public hospitals, restaurants and bars that compete with rebatable clubs. Entities entitled to the exemption have a competitive advantage over for-profit organisations in hiring and retaining staff;

(c) use of concessions outside policy intent; the working group identified anecdotal evidence to the effect that some relatively high income individuals were receiving significant benefits from the use of uncapped meal and entertainment facility leasing concessions; and

(d) offering fringe benefit concessions is a compliance burden on eligible entities.

(9) Consultation questions on reform options include:

(a) What criteria should determine an entity's eligibility to provide exempt benefits to its employees assuming the current 2 tiered concession structure remains?

(b) What criteria should determine an entity's eligibility to provide rebatable benefits to its employees and should this be restricted to charities or extended to all not-for-profit entities?

(c) Should there be a 2 tiered approach in relation to eligibility e.g. should all tax exempt entities be eligible for the rebate but a more limited group be eligible for the exemption?

3. Conclusion

3.1 The working group's discussion paper is an important work that is likely to have big ramifications for the sector. The working group is wanting to hear from the sector so I encourage those affected to consider the working paper in greater detail and, if so minded, consider making a submission by 17 December 2012.


Schedule 1 Summary of reforms


Paul Paxton-Hall 14 November 2012

End of document

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