The Federal Government announced its intended reforms to the Not-for-Profit (NFP) sector of the Australian economy as part of the 2011/2012 budget. It aims to deliver smarter regulation, reduce red tape and improve transparency and accountability for the sector. Throughout 2012 the reforms have been taking shape, following a community and sector consultation process that took place in 2011.
The Australian Productivity Commission has identified that the NFP sector occupied over 4.1% of Australia’s GDP in 2006-7, and that in 2010 alone more than 4.6 million Australians volunteered in the sector.
What is a Not-for-Profit?
The question of what is, or what should be, classified as a ‘Not-for-Profit’ organisation lies at the heart of the current reforms. The government will introduce a statutory definition of ‘charity’ to take effect from 1 July 2013.
Statutory definition of charity
The statutory definition of ‘charity’ has not yet been finalised. Treasury has received over 200 submissions in response to its consultation paper ‘A Definition of Charity’ dated 28 October 2011.
The key issues are:
- The definition of Charity as having an ‘only’ or ‘exclusively’ charitable purpose, but with allowance for activities in aid of the charitable purpose
- Provision for peak bodies to be included as charities
- Familial ties not disqualifying beneficiaries in all cases
- The meaning of ‘public benefit’.
As part of the reform package the Government will establish a new independent statutory office, the Australian Charities and Not-for-Profit Commission (ACNC), which will commence on 1 October 2012.
The function of the ACNC will be as a regulator and reporting entity. It will aim to provide good governance, accountability and transparency for the sector generally, and move towards a truly national system of regulation. One of the deficiencies of the current system, targeted by the reforms, is the duplication and red tape involved with NFPs having to comply with inconsistent Commonwealth, State and Territory laws while operating across jurisdictional boundaries.
The mechanics of the reform
The government has established an Implementation Taskforce for the ACNC. As well as community and sector shareholder engagement, the Federal Government has progressed the reforms through the Council of Australian Governments, the Australian Taxation Office, the Not For Profit Sector Reform Council and the NFP Sector Tax Concession Working Group.
The financial impact
The Australian Government directly supports Not-for-Profits through grants and service funding and indirectly through tax concessions. The costs of these measures to the budget bottom line is estimated by Treasury to be in the order of $4 bn per annum. In implementing the reforms Treasury aims to ensure that only those entities that are truly charities or other Not-for-Profit organisations avail themselves of favourable tax treatment.
The reforms also propose to tighten the rules around with NFPs become entitled to claim income tax concessions for unrelated commercial activity.
Treasury has identified the following next steps:
- Further targeted consultation on the ACNC Bill
- Public consultation on ACNC regulations
- House of Representatives Standing Committee on Economics inquiry into the ACNC legislation
- Public consultation on the exposure draft for better targeting tax concessions
- Consultation on the exposure draft of the Charities Bill in the second half of 2012.
Why is this important?
The reforms are significant, and could have broad ranging consequences. If your business or organisation currently receives favourable tax treatment for some of its activities on the basis of them being charitable in nature, it is worthwhile to keep abreast of the changes to avoid any unpleasant surprises in the future.