Proposed changes to the ways charities conduct business will have significant impact
16 May 2011
The Federal budget announcement proposing changes to the not-for-profit sector in Australia will have a significant impact on the sector’s ability to do business, and ultimately, to help the growing number of Australians turning to charities in hard times.
Partner at McCullough Robertson, Heather Watson said the budget announcement regarding income tax exemptions and concessions will have an impact on charities’ and not-for-profits’ ability to deliver services.
'The Federal Government proposals may affect the tax position of an existing organisation because the definition of charity is changing, and income tax which has been exempt until now, may no longer be exempt,' Ms Watson.
'Tinkering with these fundamental aspects of not-for-profits (NFP), could affect their viability and management, and inevitably, their ability to conduct business, being service delivery and charitable works.'
The three broad areas the proposed changes would affect are:
- income tax concession eligibility
- the definition of ‘charity’ and ‘charitable object’, and
- reporting lines, mechanisms and requirements.
Income Tax Concessions
Currently a charitable organisation, (endorsed as such by the ATO), which operates in accordance with the charitable purposes in its governing document, and that applies its income to its charitable purposes, is income tax exempt.
The Government intends to introduce measures to ensure that tax concessions provided to charities or NFPs relate only to those activities which directly further its altruistic purposes.
Ms Watson said that under this measure, it is proposed that if an NFP receives profit from their unrelated commercial activities which is not directed back to their altruistic purpose (ie, the earnings they retain in their commercial undertaking) then that income will not be tax exempt.
'Further, they will not have access to the FBT exemptions or rebate, GST concessions, or deductible gift recipient support in relation to those activities,' she said.
The proposal is that 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.
It is proposed that these arrangements commence on 1 July 2011, to initially affect only new unrelated commercial activities that commence after 7:30 pm (AEST) on 10 May 2011. However, there will be transitional arrangements intended to phase out NFPs with existing unrelated commercial activities. The Government intends to consult on these arrangements.
Statutory definition of 'charity'
Ms Watson said that if a statutory definition of 'charity' were introduced as proposed, it would be applicable for all Commonwealth purposes, in particular, taxation.
The Tax Office has already withdrawn Taxation Ruling TR 2005/21 (FBT: charities) with effect from 11 May 2011 and released a Draft Ruling, Draft Taxation Ruling TR 2011/D2 , which sets out the Commissioner's views on the meaning of "charitable" and "funds established for public charitable purposes" for the ITAA 1997 and the FBTAA.
The Draft Ruling re-writes the previously issued Taxation Ruling TR 2005/21 in light of court decisions including: FCT v Word Investments Limited (2008) 70 ATR 225 and Aid/Watch Incorporated v FCT (2010) 77 ATR 195.
'This may affect whether existing NFP organisations retain their charitable status and remain entitled to endorsement,' she said.
'The tax office may also start an audit on core purpose, which may lead to the need to amend existing governing documents and address existing activities and practices to ensure compliance.'
This aspect of the reform is expected to take effect from 1 July 2013.
The Australian Charities and Not-for-profits Commission
Ms Watson said a new independent statutory agency, the Australian Charities and Not-for-profits Commission (ACNC), would be established if the current proposals go ahead.
'It will take over the role of assessing whether an organisation is a charity for the purposes of access to NFP benefits for all Government agencies,' she said.
'The Government has said they intend to implement a "report-once use-often" reporting framework for charities, and establish a public information portal.'
'All charitable and not-for-profit organisations should take full advantage of any education, information or support offered by government, but at the same time, should seek professional advice if they have any concerns or queries surrounding their financial and taxation affairs.'
'The proposed reforms will be implemented quite quickly and affect financial management and accounting from as early as the next financial year, so it’s important that CEOs and treasurer’s understand the implications as soon as possible.'
An implementation taskforce (headed by the expected Commissioner of the ACNC) will be established in Treasury from 1 July 2011 to ensure the ACNC is ready for operation by 1 July 2012. From 1 July 2011, the ACNC will determine charitable status and the Commissioner of Taxation will retain responsibility for administering tax concessions for the not-for-profit sector.
Source: Budget Paper No 2 [pp 36; 37; 322]; Assistant Treasurer Budget press release, 10 May 2011
For more information contact: Kristie Fankhauser on +61 7 3233 8876.