Budget 2011–12: Not-for-profits: regulation and taxation
Steve O’Neill and Matthew Thomas
Australia’s not-for-profit (NFP) sector is made up of around 600 000 organisations. Of these, some 59 000 are economically significant, contributing $43 billion to the nation’s annual gross domestic product. Despite the size of the NFP sector and its economic contribution, over the years successive governments have failed to develop a national and whole-of-government perspective on the sector and its regulation. As a result, regulation of the sector has been allowed to develop into what one prominent commentator has described as ‘a mess’.
- there is a range of different ways to incorporate a NFP organisation
- fundraising regimes differ across the states
- there is no one set of accounting standards or uniform standard for reporting
- the taxation laws applying to NFP organisations are haphazard, making it difficult to determine what the sector is worth and how much tax is forgone through concessions
Generally speaking, the confused regulatory environment makes for a NFP sector that is not as efficient as it could be and makes it confusing for the public to know which organisations they should trust when making donations. It has been broadly agreed for some time that regulation of the sector is in need of major reform.
On gaining office in 2007, the Rudd Government committed to the development of a new, more collaborative and productive relationship with the NFP sector. To this end, among other things, the Rudd-Gillard Government:
- appointed a Parliamentary Secretary for Social Inclusion and the Voluntary Sector
- removed ‘gag’ clauses in government contracts with the sector which threatened to cut off government funding and grants where organisations were openly critical in the media of government policy
- commissioned the Productivity Commission to develop a tool to measure the direct and indirect contributions of the sector to the economy
- developed a National Compact with the sector that defines ‘the rules of engagement’ and provides a basis for improving the policy, programs and services for Australia’s communities
In its response to the Productivity Commission report, and in the context of the 2010 Federal Election, the Government committed, if re-elected, to:
- establish a new office for the NFP sector, located within the Department of Prime Minister and Cabinet
- commence a scoping study to determine the role and design options for a national ‘one-stop-shop’ regulator for the sector to remove the complex regulatory arrangements currently in place and streamline reporting arrangements
- harmonise and simplify Federal, State and Territory Government regulation of the sector
- reduce red-tape for government-funded NFP organisations by developing a common form contract or ‘master agreement’ and reviewing tendering, contracting and acquittal arrangements between the Australian Government and NFP organisations to streamline and reduce burden commensurate with risk
The establishment of a national ‘one-stop-shop’ regulator for the NFP sector has been recommended by a number of reviews of the sector or its taxation arrangements in recent years. 
For example, the Henry Review recommended that:
... a national charities commission should be established to monitor, regulate and provide advice to all not-for-profit (NFP) organisations (including private ancillary funds). The charities commission should be tasked with streamlining the NFP tax concessions (including the application process for gift deductibility), and modernising and codifying the definition of a charity.
The measures in this Budget go some way towards implementing the above recommendation, including its suggested development of a statutory definition of ‘charity’, as well as the Government’s election commitments.
The Government will establish a new independent statutory agency—the Australian Charities and Not-for-profits Commission (ACNC)—by 1 July 2012. The ACNC will assess the charitable status of NFP entities for all Commonwealth purposes and provide education resources to the NFP sector. The responsibility for determining ‘charitable, public benevolent institution, and other not-for-profit status for all Commonwealth purposes’ will be that of the ACNC Commissioner alone. The Budget provides $53.6 million over four years for the establishment of the ACNC and for related structural changes to the Australian Tax Office (ATO). An implementation taskforce is to be set up in Treasury from 1 July 2011 to facilitate the establishment of the ACNC.
The ATO will terminate its role in determining charitable status, but will continue to administer NFP tax concessions in preparation for the establishment of the ACNC. The ATO will also assist the ACNC with its corporate services.
The Government is to undertake negotiations with the states and territories on national regulation and a new national regulator for the sector, ‘with the aim of minimising reporting and other regulatory requirements through coordinated national arrangements’. This measure is expected to result in additional tax revenue of $41 million over four years through increased compliance activity.
Another area in which the Government is to consult with the states and territories is the development of a definition of ‘charity’ that may be applied consistently across all jurisdictions. This statutory definition is likely to take into account the findings of the recent High Court decision that activist group Aid/Watch is a charitable institution, and thus eligible for tax concessions. The definition, to be applied to all Commonwealth laws, is to take effect from 1 July 2013. An additional $2.9 million over four years has been allocated to the ACNC to implement changes associated with the adoption of a uniform definition of ‘charity’.
NFP income tax concessions will be reformed to ensure that they only apply to those activities that ‘directly further a NFP’s altruistic purposes’. This means that NFP entities will pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose (that is, the earnings they retain in their commercial undertaking). The new arrangements will commence on 1 July 2011, affecting only new unrelated commercial activities commencing after 10 May 2011. Commercial activities that further a NFP entity’s altruistic purposes and small-scale and low-risk unrelated commercial activities will not be affected by the reforms. NFP entities with existing unrelated commercial activities will initially be able to continue to use their tax concessions to support these activities.
Unsurprisingly, there are likely to be a significant number of issues to be worked through with the implementation of the budget measures and ongoing NFP sector reforms. For example, following the announcement of the budget measures, Catholic Health Australia Chief Executive, Martin Laverty, expressed concerns that the measure restricting tax concessions to only those activities that contribute to a NFP’s altruistic purposes could have a significant negative impact on his organisation. While the tax treatment of the hospitals themselves will not be influenced by the changes, the businesses (like cafes) that are run in the hospitals could be forced to pay taxes. This, Laverty argues, could result in less money for the health care services that are a part of the organisation’s religious ethos. While hospitals run by church groups and other larger NFP organisations that run businesses are likely to be the object of some scrutiny where it comes to their tax-exempt status, most NFPs will probably not be affected by the changes. As a result, the measure appears to have gained the broad support of the NFP sector.
Generally speaking, the measures represent the first major steps towards substantive NFP sector reforms—reforms that are, arguably, well overdue.