There have been some important developments in the Federal Government's ambitious reform agenda for the not-for-profit sector, even while the centrepiece of those reforms experiences continuing deferrals.
The good news on the Federal Government's ambitious Not-for-Profit sector reforms is that recent months have revealed some important developments, providing some comfort to those who are concerned that the reforms would simply add to the existing regulatory burdens on the sector. These include amending the tone and scope of proposed legislation, greater clarity on the process for agreeing governance standards and promising signs of harmonising regulatory requirements.
The bad news, however, is that there is lingering uncertainty as to whether the reforms will eventuate. In particular, legislation to establish the Australian Charities and Not-for-profits Commission (ACNC) remains stalled in Parliament with a vote expected in the next few weeks. The result is that the centrepiece of the reform program, the new charities regulator, is not likely to commence until at least December 2012, if the legislation passes.
This article highlights some of the most important recent developments.
ACNC legislation improved but delayed
Legislation to establish the ACNC was introduced to Parliament in August 2012, passed by the House of Representatives in September and remains before the Senate. It is understood that the Federal Opposition does not support the legislation in its current form and the Australian Greens have indicated that they support the passage of the legislation subject to certain changes being made.
During several rounds of consultation, concerns were raised that early draft legislation carried a punitive tone and little assurance that the ACNC would work with charities to educate them and improve their operation. Issues were also raised that insufficient information was being provided for proper consultation to occur. Many of the concerns raised have been dealt with in the current versions of the legislation.
If they proceed in their current form, the main features of the regime to be established by the Australian Charities and Not-for-profit Commission Bill 2012 and Australian Charities and Not-for-profit Commission (Consequential and Transitional) Bill 2012 are:
- Charities only: The ACNC will register charities only in its first phase – not-for-profit bodies which are not charities will not be affected. Charities will need to be registered with the ACNC to gain access to Commonwealth tax concessions and other Commonwealth benefits available to charities.
- Automatic transfer of registration: Organisations currently registered as charities with the Australian Taxation Office will automatically become registered with the ACNC (unless they choose to opt out).
- Annual information statements: Registered charities will be required to provided annual information statements to the ACNC from the 2012-13 financial year, with the first due in December 2013 for most charities.
- Financial reporting: Registered charities will be required to provide financial reports from the 2013-14 financial year, with the first due in December 2014 for most charities. Auditing and review of the reports will depend on revenue only, not deductible gift recipient status. Entities with revenue between $250,000 and $1 million can choose to have their financial reports audited or reviewed and entities with revenue of greater than $1 million must have their financial reports audited. Charities that have substituted accounting periods will need to notify the ACNC of this within six months of its commencement to have these periods automatically recognised.
- Public register: To increase the transparency of charitable bodies, the ACNC will maintain a register of information on registered charities accessible via its website. The register will include contact details of the charities (though not contact details of directors or other responsible persons), financial reports and details of compliance action taken by the ACNC. The ACNC will have the power not to make information public in certain circumstances and it is expected that regulations will be made to exempt private ancillary funds from these requirements.
- Governance and external conduct standards: Compliance with governance standards and standards for dealings outside Australia will be a prerequisite for registration and failure to comply can result in a charity's registration being revoked. These standards are to be set out in regulations to be made after the legislation passes. The regulations have not yet been made public but the legislation will require the Government to consult with the sector before it makes the regulations. Given the significance of these standards to continuing registration, it would have been preferable for them to be released for consultation earlier. As it stands, charities transitioning to the ACNC will need to continue to monitor this.
- Directors' liabilities: The regime governing personal liability of directors, trustees and other responsible persons of registered charities has been substantially changed since the early drafts of the legislation. Directors of incorporated charities will not be generally responsible for the obligations of the charities but may be personally liable to pay amounts due under the legislation in limited circumstances. However, trustees, directors of trustee companies and members of committees for unincorporated associations may be personally liable for obligations in a broader range of circumstances.
- Corporations Act amendments: For charities that are incorporated under the Corporations Act 2001, the ACNC will replace the Australian Securities and Investments Commission as the main regulator. Under consequential changes made in the ACNC legislation, these charities will report to the ACNC instead and a number of governance requirements in the Corporations Act will cease to apply over time, including a number of civil duties of directors and requirements in relation to holding meetings or notifying ASIC of certain events.
- Enforcement powers: The ACNC will have extensive powers of enforcement against non-compliant registered charities, including the ability to give directions to charities and suspending and removing directors or trustees. However, the circumstances in which these powers can be used and the organisations against which they can be used is more limited than in early drafts of the legislation.
Greater harmonisation in sight
One of the main goals for the ACNC at both Government and sector levels has been to reduce the regulatory burden on charities. This was to be done by creating a "Charity Passport" under a "report once, use often" model of regulation. However, there was a concern that, without greater co-ordination between Federal Government departments and between the Commonwealth and the States and Territories, the ACNC would simply be an additional layer of regulation into the foreseeable future.
Changes to the Corporations Act discussed above reduce the likelihood of unnecessary duplication between the ACNC and ASIC.
Other moves have also recently been made to reduce regulation and duplication, including:
- South Australia became the first jurisdiction to announce its harmonisation with the ACNC. SA announced on 11 October 2012 that it would amend its association incorporation and charitable collections legislation to harmonise reporting and authorisation requirements;
- reports under the Schools Assistance Act 2008 will be accepted by the ACNC as meeting financial reporting requirements under the ACNC legislation;
- on 17 October 2012, the Federal Government announced that the Commonwealth Grants Guidelines would amended to ensure that organisations seeking grants would not be asked for information that was already available to the Government through the ACNC.
Tax concessions changes deferred
The Government has previously announced two significant changes to criteria for accessing tax concessions.
- The "in Australia" requirements: The first reframes the current requirements for charities to be "in Australia" in order to access tax concessions. As currently proposed, the changes would require most income tax exempt bodies to operate and pursue their purposes principally in Australia and will require most deductible gift recipients to operate and pursue their purposes solely in Australia. These requirements are contained in the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012, which also contains a standardised definition of "not-for-profit entity" to be introduced across the tax and ACNC legislation. The Bill was introduced to Parliament alongside the ACNC legislation but has not been passed by the House. It is understood that the changes are not supported by the Federal Opposition or by the Australian Greens without further changes being made. The changes are expected to apply only from the date of Royal Assent.
- The "unrelated commercial activities" test: The second changes were proposed to address concerns that non-profit entities were inappropriately accessing tax concessions when engaging in commercial activities that were unrelated to their altruistic purposes. A consultation paper entitled "Better targeting of not-for-profit tax concessions" was released in May 2011 but there has been no public progress on this issue since that consultation concluded. The changes were originally expected to be effective from the date of announcement on 10 May 2011.
In addition, in February 2012, the Government established a Not-for-profit Tax Concessions Working Group to examine the range of tax concessions currently provided to not-for-profit organisations and identify simpler, fairer and more effective ways of delivering the support provided by those concessions. A consultation paper is expected to be released by the Working Group this month (October 2012) and may address the "unrelated commercial activities" test proposal.
Statutory definition of charity
The Government is also intending to introduce a statutory definition of charity to replace the current definition based on the Statute of Elizabeth of 1601 and centuries of common law development. No public progress has been made on this since the consultation following the release of the "A Definition of Charity" consultation paper in October 2011.
It is understood that the Government still intends to introduce the legislation to take effect from 1 July 2013. If the new definition is passed, it is expected that the ACNC will then begin to review registered entities to ensure they satisfy the new definition.
Keeping abreast of the continuing development of the Not for Profit reforms is a challenge for many charities. We expect we'll know within a few weeks whether the ACNC will be established and, if so, when. Even if it is established, registered charities will need to monitor the developments of the governance and external conduct standards which are a significant element of their entitlement to registration with the ACNC.
It is also hoped that the reforms continue with more States and Territories agreeing to harmonise their requirements and with greater certainty about changes to tax concessions and the statutory definition of charity in the coming months.