Australia's Third Sector
This Chapter sets out the terminology that will be used
throughout the report. The definitions of terms as they relate to tax
concessions afforded the Sector are discussed in Chapter 8. In addition, this
Chapter provides a descriptive statistical analysis of the Third Sector in Australia
and provides insight into the Sector's value. It highlights the variability
within the Sector in terms of differences of size relating to revenue, staffing
and resources. It also highlights Australia's existing deficiencies in
quantifying the contribution of the Sector.
What is the 'Third Sector'?
For analytical purposes the scholarly literature often divides
society into four sectors:
non-government, voluntary, intermediary (Third Sector)
The Third Sector in Australia sits alongside the government and
private sectors. Third Sector organisations may receive government funding to
provide public services, but they are not part of government. Similarly, Third
Sector organisations may charge for business services, but are not part of the
business sector because their primary aim is not to generate profits for their
Broadly, Third Sector organisations comprise charities, churches
and religious organisations; sporting organisations and clubs; advocacy
groups; community organisations; cooperatives; trade unions; trade and
professional associations; chambers of commerce; welfare organisations; and
service providers, which can be divided into three clear classes of
organisations – Mutuals, Social Enterprises and Not-For-Profits.
In the past, the Third Sector has commonly been referred to as
the 'Not-For-Profit Sector', used interchangeably with the term 'Non-Profit
Sector'. In their submission to this Inquiry, the Fundraising Institute
Australia (FIA) made the following statement:
Let’s decide the name of the sector!
Currently nonprofit and not-for-profit, along with a number of
other terms – NGO, INDGO, NPO, NFP, for social purpose, third sector
organisations, voluntary organisations (VO)- are widely used.
The Federal Government has introduced voluntary sector and more
recently third sector.
The term 'Third Sector' is used in this report to highlight firstly
the fact that the Third Sector can consist of technically more than 'traditional'
Not-For-Profit Organisations, and secondly to follow the lead of countries
which have already undertaken Third Sector reform with demonstrated results.
The term 'Third Sector' is now widely used internationally, and the UK has an
Office of the Third Sector (OTS) which sits within the Cabinet Office. It also
avoids naming the Sector by saying what it is not.
The Third Sector in the UK has a broader definition than what may
be commonly applied to the Sector in Australia. The Third Sector includes
finance mutuals and trading cooperatives, and Not-For-Profit Organisations
(distinct from the misnomer 'Not-For-Profit Sector').
The OTS regulates the organisations which share the following
The term encompasses voluntary and community organisations,
charities, social enterprises, cooperatives and mutuals both large and small.
Finance mutuals and trading cooperatives
Finance mutuals and trading cooperatives are sometimes excluded
from consideration with other Third Sector organisations in Australia.
According to the Australian Taxation Office (ATO):
The Tax Office accepts an organisation as Non-Profit where its
constituent or governing documents prevent it from distributing profits or
assets for the benefit of particular people – both while it is operating and
when it winds up. These documents should contain acceptable clauses showing the
organisation’s Non-Profit character.
However, Professor Mark Lyons argues that there is:
[A] group or class of third sector organisations that permits
the distribution of net assets to members if the organisation is wound up, or
taken over. The most numerous of these are in the finance and insurance
industries: credit unions, (some) building societies and mutual insurers. They
are known generally as finance mutuals. Others are known as trading
cooperatives. These are established by their members to process or market the
product of their labour or to strengthen their power as consumers in particular
Finance mutuals are currently regulated by the Australian
Prudential Regulation Authority (APRA). While very similar to other
cooperatives, such as those providing child or health care, or housing or
hospitality services (such as clubs), the descriptor 'Not-For-Profit' does not
sit perfectly with such organisations because of their winding-up clause.
Neither do these organisations belong as part of the Government or Business Sectors.
However, the purpose of finance mutuals and trading cooperatives aligns more
closely with other Not-For-Profit Organisations, and the winding up value of finance
mutuals and trading cooperatives does not have a bearing on their day to day
operations. This reinforces the justification of the term 'Third Sector' as the
best overarching name.
The committee received little evidence throughout the course of
the inquiry about the disclosure regimes of finance mutuals, trading
cooperatives or trade unions specifically. Therefore, the committee is unable
to provide recommendations with respect to these organisations.
Discussions henceforth will focus on Not-For-Profit Organisations
which do not completely comprise the Third Sector, but form a major subset
The terms of reference set for the committee's Inquiry ask that
contributors consider 'models of regulation and legal forms that would improve
governance and management of charities and Not-For-Profit Organisations and
cater for emerging social enterprises'. According to the Associations Forum:
We assume “social enterprises” to be either private companies
that have been established to assist community causes or Not-For-Profit
Organisations that have been recently set up, often by a person called a
It seems the term social enterprise is new language to describe
what has been happening in Australia for many decades: Not-For-Profit
Organisations are established for a cause.
Social Enterprise Hubs Australia, an organisation established and
run by Social Ventures Australia (SVA), describes the role of social
Many individuals find themselves excluded from mainstream life
and employment due to disability, illness or other disadvantage. Businesses
that operate for the primary purpose of employing such individuals are known as
social enterprises. These enterprises play an important role in overcoming
social exclusion and providing real jobs to marginalised Australians.
In its submission to the committee, SVA states that, in the US
and the UK:
...specific legal structures have recently been created which
allow for hybrid investment models and tax incentives for social investors. We
believe this needs to be considered and developed for the Australian market to
encourage investment in the not for profit sector.
The committee notes that the majority of submissions received did
not address the issue of social enterprises. On this basis, the committee is
unable to specifically comment on issues relating to social enterprises in this
report. However, it acknowledges that social enterprises form a part of the
Third Sector, and believes that further research must be undertaken with
respect to this category of organisations. This role should be undertaken by government.
Not-For-Profit Organisations are a subset of the Third Sector. Recommendation
1 from the Charities Definition Inquiry advocated the replacement of the term 'Non-Profit'
by the term 'Not-For-Profit'. That Inquiry heard that there was confusion among
members of the community, some of who argued that a Non-Profit organisation
should generate no surpluses at all, whereas, in reality, many of these
organisations, including charities, 'carry on commercial activities or make
investments in order to maximise the income available for it to carry on its
However, the committee found that the use of 'Not-For-Profit'
still attracts criticism within the sector. Organisations such as Philanthropy Australia
have argued that the term Not-For-Profit is deceptive, because it creates 'the
perception that profit is not necessary to these organisations'.
Similarly Vittoria Borazio of Youth Off The Streets believes that the term is
misleading for the general public, who may think that Not-For-Profit is another
way of referring to a charity.
In adopting this term, the committee accepts that not all stakeholders will be satisfied.
Subgroups of Not-For-Profit
Not-For-Profit Organisations can be divided into further
subgroups – those that are charities in the existing system, and those that are
not. The committee recognises that there are other ways to break down Not-For-Profit
Organisations, including dividing the Organisations according to whether they
are Community Sector, Charities under the popular definition, Charities under
the legal definition, Public-serving groups, member-serving groups or other.
There is currently no statutory definition of charity in
existence in Australia. The common law meaning of charity applies,
based on over 400 years of legal precedent. The Australian Macquarie Dictionary
defines a charity as:
almsgiving; the private or public relief of unfortunate or
needy persons; benevolence.
something given to a person or persons in need; alms.
a charitable act or work.
a charitable fund, foundation, or institution.
benevolent feeling, especially towards those in need.
The Australian Taxation Office (ATO) has issued a ruling defining
a 'charity' for tax purposes. A charity endorsed by the ATO may be eligible for
tax concessions or exemptions that are unavailable to other Not-For-Profit
Organisations. The ATO states that an organisation is a charity if:
it is an entity which is also a trust fund or an institution
it exists for the public benefit or the relief of poverty
its purposes are charitable within the legal sense of that term
it is non-profit, and
its sole purpose is charitable.
Non-charities are those organisations generally run for and by
their members, such as local sporting clubs or community associations. Unlike
charities, non-charities may be purely informal, operating without
Diagram 2.1 demonstrates the relationship between organisations
within the Third Sector. The committee has provided this basic overview of the
Third Sector, aware that the importance of definitions to the Sector lies in
the ramifications that a given definition holds for an organisation in respect
to its eligibility for tax concessions.
The Australian Bureau of Statistics utilises the International
Classification of Non-Profit Organisation (ICNPO) in its classification of
'types' of not-for-profit organisation. The ICNPO is a statistical standard
for the development of data on not-for-profit institution, developed by the
United Nations for its Handbook on Non-Profit Institutions in the System of
National Accounts. Under the INCPO, Not-For-Profit Organisations are included
in one of 12 groups, including:
Culture and Recreation
Education and Research
Development and Housing
Law, Advocacy and Politics
Philanthropic Intermediaries and Voluntarism Promotion
Business and Professional Associations, Unions
Not Elsewhere Classified
Each of these groups are broken down into subgroups. For example,
Group 3, Health, is divided into subgroups: Hospitals and rehabilitation; Nursing
homes; Mental health and crisis intervention; and Other health services.
The United Nations notes the advantages of this modular approach in
ICNPO makes it possible to group and regroup organizations in
order to shed light on components and dimensions of the non-profit sector that
might be important for national or comparative purposes.
However, the INCPO is limited in its use for comparative purposes
in Australia due to the unavailability of some data (discussed later in this
Chapter). The value of using INCPO as a system in Australia is also restricted
given that it fails to differentiate between charities and other Not-For-Profit
Organisations. The necessity of maintaining a notional divide between charities
and other Not-For-Profit Organisations, which are subsets of the larger Third Sector,
is important to this Inquiry given that disclosure regimes may differ according
to the subset of origin.
Size and economic contribution of the Sector
According to the National Roundtable for Nonprofit Organisations
(NRNO), in 1999-2000 the Sector 'made an economic contribution larger than the
communications industry and about equal to that of the agriculture industry; a
contribution almost twice as large as the entire economic contribution of the
state of Tasmania'.
The NRNO estimates that there are as many as 700,000 Not-For-Profit
Organisations in Australia today, 'most of which are small and entirely
dependent on the voluntary commitment of members'.
Despite this statistic, Australia has never undertaken a
comprehensive survey of the Sector, including large and small, incorporated and
unincorporated organisations. This is likely to be due to the lack of any
central body or register which can track most of the Third Sector organisations
in existence in Australia (or at least all Not-For-Profit Organisations) and
their sheer number.
There are so many of the kitchen table operations. I have a
holiday house down on the Gippsland Lake and there is a permanent population
down there of 710 people, but they have got 73 little clubs and organisations.
What do we know?
In 1995, the Industry Commission published a report entitled Charitable
Organisations in Australia which was intended to strengthen the
contribution which the charitable sector makes to Australia. Organisations such
as those dedicated to the supply of health, education and religious services
were not included in the Inquiry, being outside the given terms of reference.
However, the authors encountered difficulties even in determining the size of
that smaller part of the sector, noting that:
There are considerable difficulties in specifying the structure
and size of the community social welfare sector; let alone the various
sub-sectors. The sector is comprised of many diverse organisations that provide
different combinations of services and derive income from various sources.
Because no public authority imposes uniform standards of
financial reporting on CSWOs, there is a lack of statistical data on the
sector. Comparable data is therefore difficult to obtain. Previous studies of
the sector have adopted different classification systems or defined the sector
Despite difficulties in determining the size of that sector
(labelled as Community Social Welfare Organisation (CSWOs)), the Inquiry
determined that its combined total annual expenditure was $4.8 billion in
1993-94 (equivalent to 1 per cent of GDP), of which $2.7 billion was from
government funding. The report indicated that the sector employed approximately
In 2002, the ABS published the Non-Profit Institutions
Satellite Account for the year 1999-2000. According to the Satellite
Account, total income from Not-For-Profit Organisations in that year was
$33.5 billion (equivalent to 5 per cent of GDP), most of which was generated
through the sale of goods and services. The sector employed 604,000 persons in
1999–2000, representing 6.8% of total employed people in Australia. The number
of volunteers working in the sector was not recorded; however volunteers worked
558 million hours, the equivalent of 285,000 equivalent full time employees.
However, the Satellite Account warns that it 'does not attempt to
measure the universe of entities that could be legally defined to be NPIs'. The
report excludes organisations that are mainly controlled by the government,
such as universities and hospitals that are run by religious orders but funded
by the government. Units operating in the finance and insurance industry and
other trading cooperatives are not included in this satellite account as they
are in the commercial sphere and are primarily guided by commercial goals and
considerations. The ABS concludes the discussion on the validity of inclusions
within the definition by saying that 'the scope of NPIs to be included in a NPI
satellite account is worthy of further consideration'.
The ATO has registered approximately 190,000 Not-For-Profit
In a recently released statistical study, the ABS found that there were 40,976 Not-For-Profit
Organisations registered for an Australian Business number in June 2007,
employing 884,476 people with another 2,434,815 people volunteering in the
sector. It also found that the sector received $74.5 billion in income in the
2006-07 financial year.
These figures exclude Not-For-Profit Organisations with an annual turnover of
less than $150,000 which are not required to register for an ABN, although some
may have chosen to do so. There are also an additional 147,000 incorporated
associations and co-operatives registered with state regulators. Statistics
relating to income and employment are not available for these organisations
using a registered incorporated structure.
Mr A.D. Lang, representing the Law Council of Australia warns that:
If you look at those figures superficially...you will get a
completely misleading picture of the sector. What is not made explicit in the
data that has been released is that they only include a sample selected by the ABS
of those organisations that are registered under the Australian Business
Register. The picture that those statistics gives is quite misleading, and that
is a real issue in terms of trying to have a proper debate about the sector...
How big are Not-For-Profit
Organisations may have differing reporting requirements according
to their size and legal structure. The most common descriptor used by
respondents to this inquiry was to characterise Not-For-Profit Organisations as
'small', 'medium' and 'large'. The Corporations Act 2001 (Cth), to which
some Not-For-Profit Organisations are subject, describes a small company as
one which satisfies two of the three following conditions:
(a) the consolidated revenue for the financial year of the
company and the entities it controls (if any) is less than $25 million, or any
other amount prescribed by the regulations for the purposes of this paragraph;
(b) the value of the consolidated gross assets at the end of
the financial year of the company and the entities it controls (if any) is less
than $12.5 million, or any other amount prescribed by the regulations for the
purposes of this paragraph;
(c) the company and the entities it controls (if any) have
fewer than 50, or any other number prescribed by the regulations for the
purposes of this paragraph, employees at the end of the financial year.
In a 2004 report detailing the findings of national survey of
not-for-profit companies limited by guarantee, Woodward and Marshall noted
that, using the definitions within the Act, 88% of their respondents would be
classified as 'small' for the previous financial year.
Within the third sector itself, the authors concluded that:
Just under a third of NFP organisations surveyed (30%) had an
income of less than $100,000 in the last financial year, and just over a half
(53%) had an income of less than $500,000. These proportions give an indication
of what might be a useful figure when distinguishing between large and small
organisations for regulatory purposes. Only 36% of organisations surveyed had
$1 million or more gross income in the last financial year.
Other submissions to the current Inquiry suggested alternative
descriptors and definitions. For example, the CPA Third Age Network Committee
recommends that associations that are not prescribed associations in line with
the Victorian Associations Incorporation Act 1991 (organisations with a
gross annual revenue under $200,000 and gross assets under $500,000)
be labelled as 'Micro' Not-For-Profit Organisations.
'Reach' of Not-For-Profit
Not-For-Profit Organisations can also be defined in terms of
their 'reach'. The majority of Not-For-Profit Organisations in Australia are
'micro' organisations, operating within a local area and run by local
volunteers. However, Not-For-Profit Organisations in Australia are probably now
less likely to be based purely within a single state, and more likely to
operate at a national level. A number of Australian Not-For-Profit
Organisations (mainly charities, such as Oxfam Australia and the Australian Red
Cross) also participate in overseas as well as domestic operations.
Who represents Not-For-Profit
A number of peak bodies operate in Australia for Not-For-Profit
Organisations. Notably, these include: the Australian Council for International
Development (ACFID), which is 'an independent national association of
Australian non-government organisations working in the field of international
aid and development' with a membership of 68 organisations;
the Australian Council of Social Service, which is the peak council of the
community and welfare sector, and Fundraising Institute Australia (FIA), the
peak body for fundraising in Australia. According to FIA:
Our members are both individual – some 1,700 individual members
working in around one thousand charities and nonprofit organisations – and
organisational – more than 80 organisational members with a combined turnover
in excess of $1.1billion and thousands of staff.
However, given the 700,000 Not-For-Profit Organisations estimated
to be operating in Australia, the vast majority of not-for-profits are not
members of a peak body. The CPA Third Age Network Committee claims that it is
unaware of any peak body representing small Not-For-Profit Organisations. It
attributes this to 'the extraordinary diversity of purposes, huge number of
entities, national geographic spread and very small size'
of Not-For-Profit Organisations. If this is the case, large Not-For-Profit
Organisations have a vehicle which can defend their interests; but smaller
organisations are unlikely to receive the same level of advocacy.
Although the Committee heard that the Sector is funded largely by
the government through contracts and grants to carry out a variety of tasks
within the local community, Professor Lyons estimates government funding is
only a third of the overall income of the Sector.
'Government funding' in this context does not include the indirect support that
Not-For-Profit Organisations receive through their eligibility for tax
concessions and exemptions. The committee heard that, excluding GST concessions,
tax forgone by Not-For-Profit Organisations in 2007-08 is 'expected to cost
[the Government] $890 million'.
In utilising the available concessions and exemptions, these organisations may
not have the same operating costs as businesses.
Other funding for the Sector comes through the sale of goods and
services, donations, bequests, fundraising and corporate sponsorship. From
research on philanthropy in Australia, it was found that:
In 2005, Australians donated $5.7 billion to non-profit
A further $2 billion was provided by Australians who bought
raffle tickets, or attended charity auctions and similar events
Not all donations made to Not-For-Profit Organisations can be
claimed as tax deductions. In 2004/05, $1.47 billion was claimed, which seems
to indicate that Australians do not donate to Not-For-Profit Organisations
primarily to receive tax concessions. Indeed, the Giving Australia
Report 2005 concludes that, based on an estimate of donations by
individuals, only one in four of these donations is ever claimed as a tax
Submitters to this Inquiry highlighted the value of the
contribution made by volunteers within the Sector:
During 2004, 6.3 million Australians, 41% of adults, volunteered
a total of 750 million hours of labour for non-profit organisations of all
This voluntary contribution was equivalent to an additional $13.3
billion donated to the non-profit sector
In 1999-2000, when the contribution of volunteers (then estimated
at $8.9 billion) is added to the financial data, Australia’s non-profit sector
contributed $42 billion to the national economy. This was equivalent to the
contribution of the mining industry
The latest ABS Voluntary Work, Australia Survey (2006) has shown
that volunteering figures have decreased. In 2006 5.4 million people (34% of
the adult population) volunteered 713 million hours of time.
Despite figures indicating a recent drop in volunteering hours,
volunteering remains a significant way in which Australians support Not-For-Profit
Organisations. The committee heard that volunteering figures have the potential
to increase, as a toughening economic climate means that people may volunteer
more in lieu of providing financial donations.
The committee notes that the figures describing volunteering
hours may not be precise, since the value of volunteering to micro
organisations cannot be effectively captured. Evidence provided to the
committee suggests that even large organisations have no processes in place to
actively quantify the contribution of volunteers.
The committee notes the estimates provided of the size of the Third
Sector in Australia but also notes that the data is incomplete and fractured.
The committee notes that to maximise the effectiveness of government policy in
relation to social inclusion, it would be useful to gain an accurate picture of
the Third Sector in Australia through improved data collection.
However, the committee declines to make a specific recommendation
in relation to this issue at this time. In the current environment, the
committee believes that an accurate descriptive analysis of the Sector is
impossible to achieve. However, Chapter 6 contains a recommendation which may
allow for the capture of information relating to all of these organisations.
The committee recommends that all Australian Governments agree on
common terminology for referring to organisations within the Sector.
Governments should also develop a common meaning for terms referring to the
size of these organisations, including 'micro', 'small', 'medium' and 'large'. This
standard terminology should be adopted by all government departments.
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