The current state of play
Before turning to these developments, it is helpful to briefly recall the current position of NFP entities under the tax law. Certain NFP entities can currently access tax concession including:

• income tax exemption
  
  
• fringe benefits tax (FBT) exemption or rebate
  
  
• goods and services tax concessions
  
  
• refundable franking credits for charities and deductible gift recipients.

The entities which are eligible to access these concessions are outlined in Division 50 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). With the exception of charities, entities may self assess their eligibility for these concessions. Charities are required to apply to the Commissioner for endorsement (we discuss the meaning of ‘charity’ further below).
Certain NFP entities may also be deductible gift recipients (DGRs), though the categories of DGRs are different to those of exempt entities.

The budget announcements
The main budget announcements were:

• establishment of the Australian Charities and Not-for-Profits-Commission (ACNC)
  
  
• better targeting of not-for-profit concessions (e.g. removing the income tax exemptions, FBT exemptions/rebates and GST concessions for the unrelated commercial activities of a NFP)
  
  
• introduction of a Statutory Definition of Charity.

The establishment of the ACNC is welcomed as it should streamline the reporting and regulatory process for NFPs.

However, the announcements to better target not-for-profit concessions and the introduction of a Statutory Definition of Charity pose significant risks and challenges for a number of NFPs. Therefore, it is very important for NFPs to be engaged in the legislative drafting process to ensure that the outcomes are fair and reasonable. As there is no legislation released there is a lot of uncertainty at the moment regarding how “commercial activities” should be carried out in the NFP space going forward.

This article will consider these announcements in further detail below.

Australian Charities and Not-For- Profits Commission (ACNC)
The Government proposes to establish the Australian Charities and Not-for-Profits Commission (ACNC), a new independent statutory agency which will be responsible for determining the legal status of groups seeking charitable, public benevolent institution and other not-for-profit benefits.

The ACNC will be set up in Treasury from 1 July 2011 to ensure it is ready for operation by 1 July 2012. The Commissioner of the ACNC will be appointed by the Government and will report to Parliament through the Assistant Treasurer. The ACNC Commissioner will have sole responsibility for determining charitable, public benevolent institution, and other NFP statuses for all Commonwealth purposes.

As a result of the establishment of ACNC the Tax Office will continue to focus on administering tax concessions to the NFP sector but will no longer determine charitable status, which will come into effect from 1 July 2012.

Targeting NFP concessions - Treasury’s consultation paper
On 27 May 2011 Treasury released a consultation paper on better targeting of NFP tax concessions. The paper is the first opportunity NFPs and tax practitioners have had to understand the detail of the Government’s current thinking.

Unfortunately there is little in the paper to please NFP entities, as it foreshadows a significantly increased compliance burden for NFPs that undertake commercial activities, and there is a potential tax burden. The paper is also disappointing for practitioners, as in many respects it seems to simply adopt the ATO’s positions (for example, on activities which are ancillary to or incidental to an entity’s charitable purpose). This may suggest that the ATO is currently driving the reform agenda. It is hoped in going forward that Treasury provides the sought of rigorous, independent policy analysis one would expect on such major reforms

The consultation paper addresses four main issues:

• What commercial activities are simply ancillary or incidental (i.e. related) to a NFP’s core altruistic purposes? It proposes that these activities will continue to be exempt from tax.
  
  
• What are small-scale or low-risk activities of a NFP? These will also continue to be tax exempt.
  
  
• How should the government tax the unrelated commercial activities of a NFP? The paper proposes three possible options.
  
  
• What transitional measures should be adopted?

Introduction of a statutory definition of charity
Following on from the Scoping Study for a not-for-profit regulator – Consultation Paper - January 2011. The Treasurer announced in the 2011/2012 Federal Budget that the Government will introduce a new statutory definition of charity applicable across all Commonwealth agencies from 1 July 2013.  In addition the Government will consult with the States and Territories with the aim of introducing a definition (of charity) that could be adopted by all jurisdictions.

There are a number of tax concessions utilised by charities at the Federal, State and Territory levels. A streamlined definition across the States would be advantageous for the NFP sector.

Conclusion
Good legislative design should be assessed against the goals of the legislation. The Assistant Treasurer has stated that the proposed reforms have been introduced to:

• (i) ensure that valuable government assistance is directed to support NFPs’ altruistic purposes, whilst delivering a level playing field between small, large and NFP businesses; and
  
  
• (ii) to protect community assets from unnecessary commercial risks.

Unfortunately, I cannot see how the proposed imposition of income tax on commercial activities can achieve these objectives. Charging tax on unrelated commercial activities may reduce the funds available to be used for altruistic purposes. It does not create a level playing field. In addition, the current Australian tax regimea llows franking credits to be refunded to charities and deductible gift recipients. Therefore, any efforts to tax these entities would only result in additional red-tape without any permanent tax gain to the Government.

Whilst the removal of the FBT rebate and GST concessions may assist in delivering a level playing field it will make NFPs less viable and may lead to increased costs for government as the Government may be required to support service delivery that is currently provided by the NFP sector efficiently.

With regard to point ii) there may be some advantages in NFPs setting up separate entities to protect their assets from commercial risks and this is what a number of organisations currently do. Fortunately, the decision in Word Investments has made this a viable option for NFPs, as the previous ATO view was forcing NFPs to carry out commercial activities in the same entity as the entity carrying out their altruistic purposes. Other than mandatorily requiring commercial activities to be carried on outside the entity carrying on the altruistic activities, any changes to the system will not enhance asset protection any further than is available under the current rules.

Whilst the common law definition of charity may not be 100% clear and there has been confusion at the fringes (particularly in relation to the Commissioner’s views over the last decade) there would also be confusion at the fringes of a statutory definition. The advantage of a common law definition is that it is fluid and can be adapted to the current thinking of the courts. However, a statutory definition is more likely to be set at a current point in time and will require constant updating to adapt to the conditions and public sentiment that prevail at the time.

It is not clear what the Government is trying to achieve by introducing a statutory definition of charity. Whilst it is clear that the Commissioner has lost a number of NFP tax cases in recent years, is there a problem with this? In my view it has merely settled some of the uncertainty surrounding the charity definition. A statutory definition can only make some entities that are currently considered to be charities worse off. The question is which charities does the Government have in its sights.

Moore Stephens has obtained tax exempt charity concession status for a number of subsidiary entities since the Word Investment Case and has considerable experience dealing with NFPs.


Contact

Stephen O'Flynn
T  +61 3 8635 1986
soflynn@moorestephens.com.au

www.moorestephens.com.au