Treasury Submission - 'in Australia' tax concession conditions

Submission to The Treasury

Restating the ‘in Australia’ special conditions for tax concession entities

August 2011

Introduction

This submission briefly outlines some of the key issues for Australia’s not-for-profit sector in response to the release by Treasury of draft legislation that will restate the 'in Australia' special conditions for tax concession entities.

This submission has been prepared with the members of the Community Council for Australia (see Attachment 1 listing of CCA members) as well as other key organisations in the not-for-profit sector, academics, lawyers, government officials, and key policy advisors.

It is important to note that this submission does not over-ride the policy positions outlined in the individual submissions from CCA members.  In endeavouring to provide concise and useful input in response to the Treasury Exposure Draft and Explanatory Memorandum, this submission is divided into the following sub headings:

• Introduction
• About CCA
• Executive Summary and Recommendations
• The Broader Policy Context
• Changes to the definition of ‘non-profit’
• ‘In Australia’ compliance (income tax exemptions)
• Transfer of funds by exempt entities
• Use of income and assets for ‘sole’ purpose
• Other compliance requirements in the legislation
• Timing  
• Conclusion

The CCA welcomes this opportunity to comment on the exposure draft and commends the Treasury for engaging in this consultation process.  CCA would be more than willing to engage in further discussion about any of the issues raised in this submission.

 

The Community Council for Australia

The Community Council for Australia is an independent, non-political member-based organisation dedicated to building flourishing communities primarily by enhancing the extraordinary work and effort undertaken within the not-for profit sector in Australia.  CCA seeks to change the way governments, communities and the not-for-profit sector relate to one another.  This includes establishing a regulatory environment that works for community organisations and not against them.

The mission of CCA is to lead by being an effective voice on common and shared issues affecting the contribution, performance and viability of not-for-profit organisations in Australia through:

• providing thought and action leadership
• influencing and shaping sector policy agendas
• informing, educating, and assisting organisations in the sector to deal with change and build sustainable futures
• working in partnership with the government, the business sector, and the broader Australian community.

 

Executive Summary and Recommendations

CCA supports the apparent policy intent of the draft legislation that is to ensure income tax exempt entities generally must be operated principally in Australia and for the broad benefit of the Australian community.  Likewise, deductible gift recipients (DGRs) generally must be operated solely in Australia and for the broad benefit of the Australian community.

CCA believe it is appropriate to ensure that taxation concessions to charitable and not-for-profit organisations are properly targeted and that funds remitted overseas (whether through the established overseas aid and development framework, or in any other way) are not used for improper purposes.

CCA is concerned that the exposure draft goes further in changing the definition of what is a not-for-profit entity more broadly, and seeks to apply significant new rules on the way not-for-profits carry out their activities and distribute funds to achieve their charitable purpose.   The draft legislation will impose significant restrictions on the activities of not-for-profit organisations and create more compliance costs and regulation requirements.  The way in which the proposed changes will be regulated is unclear from the Explanatory Memorandum.  The impact of the proposed changes on the sector must be better understood and articulated.  These concerns are discussed further below.   To this end, CCA make the following ten recommendations:

1. First do no harm.  Any new proposals must be tested against possible negative impact on the broad range of not-for-profit organisations seeking to better serve their communities.
2. Any new regulatory proposal must reflect the government commitment to reducing red tape and compliance costs for not-for-profit organisations.
3. The well-established framework of regulation that applies to overseas aid and development organisations should be recognised in oversighting the credible work of overseas missions. Likewise, the existing self-regulation practices of the overseas aid sector, as well as other internal governance arrangements that charities have in place, must be recognised.
4. Proposed government reforms to the definition of charity and the establishment of a new regulator for the not-for-profit sector announced in the 2011-12 Budget should be the first option in addressing issues where organisations inappropriately use tax concessional money. 
5. Distributions by exempt organisations to their owners or members should be allowed, if their owners or members are themselves tax-exempt entities.
6. Funds derived by organisations as gifts and through government grants where no tax concession can be claimed should not be included in assessing if an organisation is operating principally ‘in Australia’.
7. Before any legislation is introduced which prevents the movement of funds from exempt to non-exempt organisations the sector must be fully consulted and the significant impact of such legislation is considered.
8. In regards to the use of an exempt entity’s assets and income, there must be allowances for incidental or minor activity that may occur outside an entity’s purpose.
9. The requirement that entities comply with all requirements in its governing rules should be revisited to consider existing governance regimes, the impact on new organisations and organisations without separate governing rules and ensure that a single breach does not remove an organisation’s exempt status. 
10. Any changes in legislation commence 12 months after they receive Royal Assent or alternatively transitional provisions be introduced to allow entities 12 months to endorsement to restructure their activities to comply with any new regime.

 

The Broader Policy Context

It is an unprecedented time of reform in the Australian not-for-profit sector.  The signing of the first National Compact between government and the Australian not-for-profit sector just over 12 months ago heralded a new approach by government to both acknowledge and support the role of not-for-profit organisations in Australia.  The establishment of an Office for the Not-for-Profit Sector within the Department of Prime Minister and Cabinet, the establishment of the Not-for-Profit Reform Council and the proposed establishment of the new Australian Charities and Not-for-profits Commission (ACNC) all represent significant positive changes in the relationship between government and the not-for-profit sector, and a commitment to necessary and overdue regulatory reform.

Recent reviews including the Productivity Commission Report into the Contribution of the Not-For-Profit Sector in 2010, Senate Inquiry into Disclosure Regimes for Charities and not-for-profit organisations 2008, and the review of Australia’s Future Tax System 2010, all made recommendations about the need for reform within the NFP sector and within government, most of which have been supported by governments, the not-for-profit sector and key stakeholders.

It is now acknowledged that promoting and supporting the not-for-profit sector is critical to building a more resilient and productive Australia.  The not-for-profit sector contributes $43 billion to the economy, employs nearly 900,000 Australians and involves over 4 million volunteers.  The Assistant Treasurer Bill Shorten described the sector as ‘punching well below its weight’ in terms of its contribution to the economy, to employment, to community life and the realisation of community values in Australia. 

The current Federal Government has committed to promoting social enterprise, reducing compliance costs for not-for-profit organisations, encouraging a diversification of financing options to build a more sustainable funding base, streamlining and refining the regulation of not-for-profits and charities, developing a clearer definition of charities, establishing less bureaucratic reporting requirements while building community transparency, and working to improve relationships between government and the not-for-profit sector (see Attachments 2 and 3).  

In March 2009, one year before the National Compact was signed, the Commonwealth and the Australian Council for International Development (ACFID) entered into a Partnership Agreement to fulfil the Commonwealth’s desire to work more closely with Australian non-profit development sector.  Its stated aim was to ‘foster effective and innovative approaches which harness the capacities and networks of federal government agencies and non-government organisations to maximise Australia’s contribution to international development’.

The Overseas Aid Gift Deduction Scheme (OAGDS) administered by AusAID enables donations collected by organisations for their overseas aid activities to be tax deductible. It is accepted as a well-established and transparent process.  It is supported by a strong commitment by overseas aid organisations to integrity and accountability through best practice self-regulation through the ACFID Code of Conduct. AusAID accreditation requires adoption and compliance with the code. A new code will come into effect in January 2012, representing an ongoing commitment to best practice self-regulation. 

These important commitments are not acknowledged in The Treasury Explanatory Memorandum, despite the fact that they represent a significant change in the way Government and not-for-profits have agreed to interact in the future.  Policy goals that are ignored or not enacted cease to be policy goals.  Government has announced their policy intentions and signed the National Compact in good faith.  Their commitment must be reflected in the practice of their Departments.  It is critical that any proposed new regulatory imposition on not-for-profit organisations is informed by this agreed broader policy context. 

At the very least, the broader commitment of government to strengthening the not-for-profit sector needs to be reflected by adopting the following three recommendations:

1. First do no harm.  Any new proposals must be tested against possible negative impact on the broad range of not-for-profit organisations seeking to better serve their communities.
2. Any new regulatory proposal must reflect the government commitment to reducing red tape and compliance costs for not-for-profit organisations.
3. The well-established framework of regulation that applies to overseas aid and development organisations should be recognised in oversighting the credible work of overseas missions. Likewise, the existing self-regulation practices of the overseas aid sector, as well as other internal governance arrangements that charities have in place, must be recognised.

 

Changes to the definition of ‘not-for-profit’

The draft legislation introduces a new definition of ‘not-for-profit’ entity (Paragraph 27: section 995-1(1)). On a first reading this change seems to be a simple replacement of the term non-profit company with not-for-profit entity, but the new definition of not- for-profit entity applies a broader definition.  This definition will impact on entitlements under other tax Acts.

The non-profit company definition states that activities cannot be carried on for profit or gain to its individual members.  The new definition extends this to ‘particular entity’ which includes owners and members under the definition of not-for-profit.  Distributions can also not be made to ‘particular entities, including its owners or members’ under the not-for-profit definition. It is unclear what a ‘particular entity’ is and no definition is given.  

The new definition will prevent a not-for-profit from distributing its profits or applying its assets to its owners or members.  Previously, not-for-profits have been able to distribute or apply assets to their owners or members to further their purpose.  This ability should be retained if their owners or members are themselves tax-exempt entities, and if the appropriate distribution advances the purpose of the entity.

Such transfers are common by not-for-profits.  For example, where a not-for-profit establishes a subsidiary to undertake a particular project or engage in fundraising.  If the draft legislation is enacted it will prohibit the transfer of property or assets between entities where one are the owner or member of the entity.  This will also prevent the transfer of property and assets to parent organisations.

It could also preclude the setting up of subsidiary organisations to support the charitable purposes of another specific organisation, while recognising this could still occur through the concepts of charity law, it is not explained in the Explanatory Memorandum how this will be regulated.

Potentially therefore, if a not-for-profit seeks to assist or distribute profits or assets to another entity, which is not an owner or member, this could taint its not-for-profit status.

It is also uncertain why the draft exposure legislation establishes a new definition of not-for-profit before the implementation of the ACNC and the process to introduce a statutory definition of ‘charity’ applicable across all Commonwealth agencies from July 1st, 2013.

To reduce uncertainty within the not-for-profit sector it is recommended:

1. Proposed government reforms to the definition of charity and the establishment of a new regulator for the not-for-profit sector announced in the 2011-12 Budget should be the first option in addressing issues where organisations inappropriately use tax concessional money. 
2. Distributions by exempt organisations to their owners or members should be allowed, if their owners or members are themselves tax-exempt entities.

 

‘In Australia compliance for income tax exempt entities

The draft legislation removes income tax exemption for any organisations with significant overseas operations or control that is established to benefit non-Australians, except organisations granted DGR status (Paragraph 73: section 73 (50-50).

Organisations must:

• Operate principally in Australia
• Pursue its purposes in Australia

There is no single test to determine these requirements but will be based on a mixture of factors such as:         

• Where an entity incurs expenditure;
• Where the entity undertakes its activities;
• Where the entity is properly located;
• Where the entity is managed from;
• The location of the entity’s residence and employees; and
• Who benefits from the entity’s activities.

The explanatory memorandum suggests that if less than 50% of operations or purposes are pursued in Australia the organisation will not be considered to operate ‘principally in Australia’.

Again, this could be interpreted that any degree of overseas management could jeopardise the tax exempt status of an entity.

It is also worth noting the current taxation regime is based on principles of self-assessment and the introduction of new tests will increase the reporting onus on organisations.  CCA is seeking a better and more complete explanation about how these determinations be made in a fair and proper manner and  what processes will be used to regulate compliance.  Clear guidance and advice will be paramount to reduce uncertainty across the sector.

The repeal of section 50-75 of the Income Tax Assessment Act removes the previous provision that  donations and government grants were not taken into account in determining whether a not-for-profit entity was operating principally ‘in Australia’.  The policy rationale for this change suggests at paragraph 1.39 of the Explanatory Memorandum to ‘ensure tax concessional money stays within the exempt entity framework and gets used principally in Australia for the broad benefit of Australians’.  This rationale is flawed as resources received by organisations from which no tax deduction is claimed, particularly gifts and government grants, cannot be treated as ‘tax concessional money’.

It is therefore recommended that:

1. Funds derived by organisations as gifts and through government grants where no tax concession can be claimed should not be included in assessing if an organisation is operating principally ‘in Australia’.

Transfer of funds by exempt entities

Under the draft legislation, exempt entities can only donate to other ‘exempt entities’ (Section 50-5 2 (c)). Similarly, Deductible Gift Recipients (DGRs) are prohibited from donating money or property to any entity that is not a DGR. (ITAA 1997, Section 30-18 (3)).

This will have significant impact for many organisations to give donations to individuals and organisations who do not have exempt status but through which the organisation is advancing its charitable purpose.

CCA notes the explanatory memorandum or draft legislation does not offer a definition of “donate” in the draft legislation.  The explanatory state that “a donation does not include payment for goods or services to another entity made in pursuing its own purposes.”  It is not clear from the explanatory memorandum that this meaning will apply to DGRs.

The draft legislation does also not make it clear if certain overseas activities such as investment activities, which assist DGRs to pursue their purpose, are permissible.

Organisations could be placing their exempt status at risk if they donate to organisations that no longer meet the in-Australia requirements, overseas organisations that are not prescribed, individuals within the community that organisations are seeking to assist, organisations not yet established or endorsed, start-ups for social enterprises, and public benevolent institutions that do not have exempt status, or non-exempt entities like universities or colleges.

Likewise, money raised for particular ‘causes’ by an exempt organisation could be affected.

It is not clear if this change could also impact on the DGR category of Necessitous Circumstances Fund whereby organisations give monetary gifts to individuals in necessitous circumstances.

It is therefore recommended:

1. Before any legislation is introduced which prevents the movement of funds from exempt to non-exempt organisations the sector must be fully consulted and the significant impact of such legislation is considered.
    

 Use of assets and income for entity’s ‘sole’ purpose

Section 50-50(3) (b) of the draft legislation requires income or assets of organisations to be used solely to pursue an entity’s purpose, for which it was established.

If taken literally this could remove the exemption status if any income or assets are used for other incidentally for other purpose.  Charitable organisations may provide a service or shelter to people who fall outside their main target group either unintentionally or because a person is in great need and the charity feels it must act.

A better and more flexible approach could be to use the term predominately instead of solely, or allow for incidental or minor activity outside an entity’s purpose.  This interpretation of solely has been used in Tax Ruling TR 2011/D2.

It is therefore recommended that:

1. In regards to the use of an exempt entity’s assets and income, there must be allowances for incidental or minor activity that may occur outside an entity’s purpose.

Other compliance requirements for not-for-profits

In addition to operating ‘in Australia’, entities must also ‘comply with all the requirements in its governing rules’ (Section 50-50 3(a)).

This implies the Commissioner, or ACNC when established, could remove an entity’s tax exempt status if there is a breach of its constituent documents, however minor it may be.

A single breach may lead to removal of exemption status.

This requirement assumes an organisation cannot change its governing rules.

It also does not allow for organisations that do not have separate operating rules, as they come under the umbrella of organisations.  This should be reflected in the draft legislation.

It also does not allow for procedural irregularities in the management of an organisation, which can happen in any organisation without knowledge of the Board of Directors or senior management.  Likewise, improper behaviour of Board Directors may not reflect on the organisation’s integrity as a whole.

Finally, these new requirements do not acknowledge the existing governance regimes that apply to entities at multiple levels in regards to their governing rules e.g. Corporations Act.  This new requirement will also give the Commissioner greater powers where they already apply elsewhere. The proposed changes will inevitably increase the reporting obligations of organisations, contrary to government commitments to reduce the reporting burden for not-for-profit organisations.

It is therefore recommended that:

1. The requirement that entities comply with all requirements in its governing rules should be revisited to consider existing governance regimes, the impact on new organisations and organisations without separate governing rules and ensure that a single breach does not remove an organisation’s exempt status. 

 

Transition period for entities who do not meet the ‘in Australia’ special conditions

Entities which no longer meet the draft ‘In Australia’ special conditions will become subject to a number of taxes and will need a period of time to adjust to any new regime.

It is therefore recommended:

1. Any changes in legislation commence 12 months after they receive Royal Assent or alternatively transitional provisions be introduced to allow entities 12 months to endorsement to restructure their activities to comply with any new regime.

Conclusion

CCA supports the policy goal of ensuring the proper targeting of tax concessions for the broad benefit of Australian community.

CCA is concerned that the consequences of the proposed legislation will place significantly more restrictions on not-for-profit organisations doing invaluable work.  The proposed changes also may call into question the activities of all not-for-profit organisations, going beyond the overseas aid sector.

Some of these far reaching changes include the introduction of a new definition of not-for-profit entities, distribution of income and assets to non-exempt entities and the stricter conditions on how entities can provide services or use assets.

CCA is concerned that this legislation will inevitably result in greater reporting and compliance requirements for not-for-profits, as well as impose additional and inflexible rules on not-for-profits.

CCA calls on policy makers to be mindful of the principles of the National Compact signed up to in good faith by the sector and government including commitments to reduce compliance costs and red tape for the not-for-profit sector.  

Proposed government reforms to the definition of charity and the establishment of a new regulator for the not-for-profit sector should be the first option in addressing issues where organisations inappropriately use tax concessional money. 

Greater clarification of the intent of the proposed policy changes is also critical to reduce uncertainty within the sector as well as information on how the changes will be regulated. 

CCA recommends further consultation with the sector as the legislation is developed.

CCA welcomes any opportunity to be involved in future consultations or any other discussion process.

 

 

 

 

 

Attachment 1

 

List of Members of the Community Council for Australia

As at 10 August 2011

 

 

1. Aboriginal Employment Strategy Ltd. – Danny Lester
2. Alcohol and other Drugs Council of Australia – David Templeman
3. Alcohol Tobacco and Other Drugs Association ACT – Carrie Fowlie
4. Associations Forum Pty. Ltd – John Peacock
5. Australian Indigenous Leadership Centre – Rachelle Towart
6. Australian Institute of Superannuation Trustees – Fiona Reynolds
7. Australian Major Performing Arts Group – Susan Donnelly (Director)
8. Connecting Up Australia – Doug Jacquier
9. Good Beginnings Australia – Jayne Meyer Tucker (Director)
10. GoodStart Childcare Ltd. – Julia Davison
11. HammondCare – Stephen Judd (Director)
12. HETA Inc. – Sue Lea
13. Hillsong Church – George Aghajanian
14. Illawara Retirement Trust – Nieves Murray
15. Lifeline Australia – Dr Maggie Jamieson
16. Maroba Lodge Ltd. – Viv Allanson
17. Mental Health Council of Australia – Frank Quinlan
18. Mission Australia – Toby Hall (Director)
19. Musica Viva Australia – Mary Jo Capps (Director)
20. Opportunity International Australia – Rob Dunn
21. Philanthropy Australia – Deborah Seifert
22. RSPCA Australia – Heather Neil (Director)
23. Social Ventures Australia – Michael Traill
24. Surf Life Saving Australia – Brett Williamson (Director)
25. The ANZCA Foundation – Ian Higgins
26. The Benevolent Society – Richard Spencer (Retiring Director)
27. The Big Issue – Steven Persson (Director)
28. The Centre for Social Impact – Peter Shergold
29. The Smith Family – Lisa O’Brien (Director)
30. The Ted Noffs Foundation – Wesley Noffs
31. Volunteering Australia Inc. – Cary Pedicini
32. Wesley Mission – Keith Garner (Director)
33. WorkVentures Ltd. – Arsenio Alegre
34. World Vision Australia – Tim Costello (Chair)
35. YMCA Australia – Ron Mell

 

 

 

Attachment 2

 

National Compact Extract: signed by sector organisations and Government 17/3/10

Shared principles of the National Compact

The Australian Government and the Third Sector will work together according to these principles to achieve their shared vision:

• We believe a strong independent Sector is vital for a fair, inclusive society. We acknowledge and value the immense contribution the Sector and its volunteers make to Australian life.
• We aspire to a relationship between the Government and the Sector based on mutual respect and trust.
• We agree that authentic consultation, constructive advocacy and genuine collaboration between the Sector and the Government will lead to better policies, programs and services for our communities.
• We believe the great diversity within Australia’s Third Sector is a significant strength, enabling it to understand and respond to the needs and aspirations of the nation’s varied communities, in collaboration with those communities.
• We commit to enduring engagement with marginalised and disadvantaged Australians, in particular, Aboriginal and Torres Strait Islander people and their communities.
• We recognise the value of our multicultural society and we will plan, design and deliver culturally responsive services.
• We share a desire to improve life in Australia through cultural, social, humanitarian, environmental and economic activity. To achieve this, we need to plan, learn and improve together, building on existing strengths and making thoughtful decisions using sound evidence.
• We share a drive to respond to the needs and aspirations of communities through effective, pragmatic use of available resources.
• We recognise concerted effort is needed to develop an innovative, appropriately resourced and sustainable Sector. 
• We acknowledge the need to develop measurable outcomes and invest in accountability mechanisms to demonstrate the effectiveness of our joint endeavours.

Priorities for action

Implementing the Compact principles will require coordinated engagement across Government and collaboration with the Sector to develop action plans.  These plans will detail how the Compact’s eight priorities for action, outlined below, will be met.

1. Document and promote the value and contribution of the Sector.
2. Protect the Sector’s right to advocacy irrespective of any funding relationship that might exist.
3. Recognise Sector diversity in consultation processes and Sector development initiatives.
4. Improve information sharing including greater access to publicly funded research and data.
5. Reduce red tape and streamline reporting.
6. Simplify and improve consistency of financial arrangements including across state and federal jurisdictions.
7. Act to improve paid and unpaid workforce issues.
8. Improve funding and procurement processes

 

 

Attachment 3

Statement of government support for PC recommendations (extract from the Communiqué from the second meeting of the Not-For-Profit Sector Reform Council, 18 May 2011)

With regards to the Productivity Commission research report, Contributions of the Not for Profit Sector, the Minister advised that the Commonwealth Government has accepted ‘in-principle’ all but one of the recommendations relating to the Commonwealth. The one recommendation not supported was recommendation 9.5 pertaining to program related social innovation funds. While encouraging greater innovation is critical, the Government believes this should be pursued in other ways.

All Commonwealth Government departments will appoint a Deputy Secretary as advocate with responsibility for supporting their agency’s contribution to, and adoption of new processes to reduce red tape, streamline reporting requirements and implement priority actions under the National Compact: working together. The Council strongly supported this decision, as it will provide a strong accountability mechanism for the National Compact and the Government’s reform agenda.

http://www.notforprofit.gov.au/node/140