Publications / Nonprofit
In the 2011 Budget announcement the Australian Government proposes some significant changes to the operation of the not-for-profit sector in Australia. There are three broad areas of change which will impact on:
- whether an existing NFP is entitled to the same income tax concessions as it currently enjoys whether an existing NFP will still fall within the definition of ‘charity’
- what are charitable objects for a new NFP
- the tax concessions available to a new NFP, and
- which organisation a NFP will have to report and how.
There are currently income tax exemptions and concessions in place for charitable organisations. The proposals may affect the tax position of an existing organisation in one of two ways:
- the changing definition of ‘charity’, and
- income which might previously have been exempt from taxation may no longer be.
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. 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 (i.e. the earnings they retain in their commercial undertaking) then:
- that income will not be tax exempt, and
- they will not have access to the FBT exemptions or rebate, GST concessions, or deductible gift recipient support in relation to those activities.
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.
Proposed date of effect
It is proposed that the arrangements will commence on 1 July 2011 and will initially affect only new unrelated commercial activities that commence after 7.30pm (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’
The Government intends to introduce a statutory definition of ‘charity’ which will be applicable for all Commonwealth purposes.
The ATO has already withdrawn Taxation Ruling TR 2005/21 (FBT: charities) with effect from 11 May 2011 and released a Draft Ruling, Draft Taxation Ruling TR 2011/D2, which sets out the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. The ATO may start an audit on core purpose. It 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
The Government will establish a new independent statutory agency, the Australian Charities and Not-for-Profits Commission (ACNC).
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. The Government intends to implement a ‘report-once use-often’ reporting framework for charities, provide education and support to the sector on technical matters, and establish a public information portal.
An implementation taskforce (headed by the expected Commissioner of the ACNC) will also be set up 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.
Reports say the measure is expected to result in additional tax revenue of $41 million over four years as a result of increased compliance activity to ensure that NFP tax concessions are used only as intended.
Proposed date of effect
Transition 1 July 2011 and in place by 1 July 2012.
Source: Budget Paper No 2 [pp 36; 37; 322]; Assistant Treasurer Budget press release, 10 May 2011
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Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.