The House of Representatives agreed to the senate amendments to the Australian Charities and Not for Profit Commission (ACNC) Bills on Thursday 1 November 2012. The Bills are currently awaiting Royal Assent.
Described as an “historic day” by the Hon David Bradbury MP, Assistant Treasurer the Bills establish the Australian Charity and Not For Profit Commission as an independent national regulator for charities. The Government will announce the commencement date in the coming weeks however, it is expected the start date for the new regulator will be December 2012.
The ACNC - a new regulator
The ACNC is the new regulatory body that will be responsible for regulating charities. It will also:
- provide a central point for the registration of Australian charities. At its commencement the ATO will transfer all registered charities over to the ACNC;
- determine charitable status and public benevolent institution status. Any new applications will be dealt with by the ACNC. It will be possible to appeal against the decisions of ACNC to the Administrative Appeals Tribunal;
- implement a “report once use often” reporting framework;
- have a role in promoting the reduction of regulatory burden;
- collect reporting information from charities to build a Public Information Portal over time, for use by the Australian community;
- provide education and guidance to the sector and the general public to promote compliance and transparency; and
- enquire into allegations of misconduct and inappropriate activities by charities, and be supported by powers to investigate and enforce.
Further the legislation provides specific provisions on duties of directors, it requires charities to comply with external conduct rules, to satisfy governments obligations under treaty. It sets out reporting thresholds, offences and penalties for non compliance which ultimately in extreme cases result in revocation of charitable status.1
The implementation task force has emphasised its role in assisting the sector through education and guidance rather than a heavy handed punitive approach.2
The Continuing Reform Agenda
The establishment and commencement of the ACNC is only the beginning of the reform process.The reform can be split into 2 sections.
Reform outside ACNC:
- ATO – The Not-For-Profit sector Tax Concession Working Group issued a Discussion paper last week titled, “Fairer, simpler and more effective tax concessions for the not-for-profit sector” submissions are due by 17 December 2012. There are a series of policy consultation questions which seek views on whether schools should be included in an extended DGR status. See paragraphs 68 to 84 and consultation questions 11 to 14 inclusive.
- introduction of statutory definition of charity;
- C’th Government – working with States and territories via COAG NFP working group and fundraising group to harmonise fundraising laws and reduce duplicate reporting requirements over state and federal jurisdictions; and
- ASIC – review of companies limited by guarantee and transfer them from ASIC to ACNC.
Reform arising from the ACNC Legislation – includes:
- reduction of red tape;
- introduction of reporting framework;
- introduction of governance standards; and
- review of registration based on new statutory definition of Charity once it is introduced.
How does this affect your school?
If your school is already endorsed as a charity by the ATO it will automatically be registered as a charity with the ACNC from its commencement. You will not need to make a new application for registration, however, registration will give rise to some new ongoing obligations in relation to reporting information. The detail of this is yet to be resolved, but all registered entities must provide the ACNC with an annual information statement in relation to 2012 -2013 year.
All registered charities will be expected to report basic non financial information about their operations for the previous year and comply with governance standards.
Further information about the actual reporting requirements will be made available by the ACNC as soon as the regulations are drafted – after relevant consultation with the sector.
Whilst all organisations already endorsed as charitable by the ATO will automatically be transferred to the ACNC on its commencement, the introduction of a proposed new definition of charity by 1 July 2013 will have consequences for registered charities after that date as part of the mandate of ACNC includes review of existing registered charities to ensure compliance with the new definition.
UK Independant Schools case
In the UK the statutory definition of charity contains a public benefit requirement for all heads of charity including advancement of education.
This case concerned the effect of the public benefit requirement on independent schools which charge fees.
The decision of the Upper Tax Tribunal and Chancery Chamber in the case of the Independent Schools Council v The Charity Commission for England & Wales was published on 13 October 2011 concerned two related (but separated) sets of proceedings.
The first was an application by the UK Independent Schools Council seeking an order to quash certain parts of guidance issued by the UK Charity Commission on the basis it included errors of law in respect of the public benefit requirement as applied to charities which charged fees for their charitable activities, and in particular as applied to independent schools.
Secondly was a reference by the UK Attorney General of several detailed questions concerning a hypothetical independent school. In summary, the questions concerned issues of charity law and fees, specifically whether schools that charged fees that:
- could not be afforded by a significant population of England and Wales; or
- represented the cost of provision of education;
would be considered charitable?
The questions also raised issues about the types of activities undertaken by hypothetical schools and whether the activities could be taken into account for determining charitable status of the schools. The activities considered were:
- provision of scholarships and bursaries ( how many and how much is enough to establish a charitable status?);
- making school facilities available to others (wider than pupils); and
- making public educational resources.
The central issues of the case concerned:
- what the governing instrument of a school needs to provide in order for the school to be capable of being a charity; and
- what a school actually needs to do to be seen as operating for the public benefit to fall within the definition of charity?
The UK Independant Schools Council sought certainty via the case of its members to charitable status. The Tribunal was unable to deliver such certainty, identifying some key elements that the governors of independent schools must consider in determining whether their school will satisfy the public benefit requirement of the statutory definition of charity and saying that each school must review their own circumstances.3
Prior to the Introduction of the Charities Act in 2006 in the UK the position for schools was the same as it is at the present for us here in Australia. That is that an Independent School charging full fees and providing a conventional programme of education, which was not simply a profit making institution, was ipso facto a charity – regardless of whether it provided other facilities beneficial to the community.4
The case involved the Tribunal testing that view to see whether it was in fact necessary for a school to provide some bursaries or some facilities for the benefit of the community in order to be acting properly in accordance with its charitable objects and what difference the 2006 Act made to this position.5
The case sets out the proposition that the 2006 Act merely codifies the common law at the time of its enactment and that in fact the common law required all charities to have a public benefit element in order to be charity.
The Tribunal identified two parts of the public benefit test:
- the first part concerned whether the purpose of the charity was for the public benefit. It was agreed that charities which have purposes for the advancement of education pass the first part of the test (so long as the type of education was for the public benefit ie a school for training pick pockets would not pass) because it is in the public benefit to have education; and
- the second part those who may benefit from carrying out of the purpose must be sufficiently numerous as to constitute a section of the public.6
The effect of codification of the common law in the UK was to require charitable independent schools to justify their charitable status by reference to the two aspects of the public benefit test, in a way they had not been required to do so before.
The key issues of interest arising from the case are:
- understanding the purpose for which the school is established – it must be charitable in nature. Usually reflected in a written constitution. Where there is no written constitution or an incomplete one, it is necessary to establish purpose by looking at the entirety of the evidence. This means that if the constitution restricts the admission of students to such an extent (whether by payment of fees so high no ordinary person could afford as per the case example or some other criteria which limits the reach of the charity to the extent it cannot be considered public) the public benefit test cannot be satisfied, it will not be charitable7; and
- understanding the activities of the school – this can be an essential part of showing the public benefit aspect of the test.8
The Tribunal gave the following examples of activities schools can use to demonstrate public benefit and the weight of those activities in determining a public benefit:
- provision of scholarships and bursaries;
- arrangements under which students from local state schools can attend classes in subjects not otherwise readily available to them;
- sharing of teachers or teaching facilities with local state schools;
- making available (whether on the internet or otherwise) teaching materials used in the school;
- making available to students of local state schools other facilities such as playing fields, sports halls swimming pools or sports grounds; and
- making those facilities available to the community as a whole.9
Most weight goes to the first 4 examples where they constitute “direct” as opposed to “indirect” benefits. The latter are indirect benefits and alone would be insufficient to establish operation in accordance with a charitable purpose. A school may well do other things to show it operates in the public benefit. Boarding facilities, community programmes and education of broader public via public interest lectures are all examples.
It is noteworthy the Tribunal observed, “It might indeed be said, ..., that the provision of private education is a considerable benefit to the community, in that each school takes students out of the state sector who would otherwise have to be educated at the expense of the state. Across the whole independent sector that amounts to some hundreds of thousands of students.” 10
The Tribunal also said each school must consider its own factual circumstances. The test is, what would a trustee, acting in the interests of the community as a whole, do ( taking into account all the circumstances of the school) and ask what provision should be made once the threshold of benefit going beyond the de minimis or token level had been met. It said, “It is not possible to be prescriptive about the nature of the benefits which a school must provide to the poor nor the extent of them”11.
Lessons for Australian Schools
Similar issues may arise for schools in Australia if the new statutory definition includes a public benefit requirement for all categories of charitable purpose including advancement of education. As we have seen from the case above the inclusion of the public benefit requirement was not considered something new imposed by the enactment of the 2006 legislation but a codification of what was the common law at the time. This could arguably be the case in Australia as well.
The trigger for change for schools in Australia will be the review by the ACNC of charitable status once the new statutory definition of charity is introduced by Parliament. Presuming that a broad public benefit test is introduced into the definition of charity, then unless the Australian Act makes a carve out or an exemption for Independent Schools then proof of the public benefit element will become an issue for you all.
The Australian Independent Schools Council (ISC) has made submissions calling for exemption in December 201112. The consultation and drafting on the new statutory definition will continue. I urge you all to become educated about these issues and ensure you participate in the consultation process whether in your own individual capacity or in support of ISC or other bodies that share your issues and concerns.
If the change does go ahead it means that schools will have to show the public benefit of their operations in both aspects of the test. There will be no set formula to do this. It will come down to the provisions of your schools constitution and what as a matter of practice your school does, whether it is in the nature of activities set out in the case example above or by other activities.
In many respects you need to start thinking now about how your school does give public benefit and how you can best report and show case these activities.
What should your organisation be doing to prepare for change?
Keeping up to date with the proposed legislation and consequential changes is a first step. We refer you to the current ACNC website where you can research the topic, a dedicated website will be released upon its launch. Click here for the ACNC website.
At the time of change over the ACNC will contact you and commence a dialogue to process and manage change.
In anticipation of the new regulator and reporting requirements this is a good time to review what information you collect throughout the year to ensure ease of satisfying the new non financial information reporting requirements.
It is also a good opportunity to review and where appropriate update your governance arrangements to ensure best practice.
In anticipation of the new statutory definition of charity it is also a good time to review your constitution to ensure its charitable objects are clearly and accurately expressed and will withstand any proposed changes to the definition of charity.
In light of the UK Independent Schools case it is a good time to review the activities of your school so you can be clearly seen to be operating for the public benefit and decide how you can best report on and show case these activities.
I encourage you to become involved in the consultation process as it evolves. The tax concession paper mentioned above is an important first step.