Govt Revises Draft Bill on Tax Concessions for NFPs

The Federal Government has released a revised exposure draft on the special conditions for tax concessions for Not for Profit entities, including the controversial ‘in Australia’ condition.

“Restating the 'in Australia' special conditions provide that income tax exempt entities must operate and pursue objectives principally in Australia and for the broad benefit of the Australian community unless they are deductible gift recipients, which are subject to separate requirements, or are prescribed in the regulations as exempt,” said the Assistant Treasurer, David Bradbury.

The Government says the 'in Australia' special conditions provide additional measures to address possible abuse of Not for Profit entities for the purposes of money laundering and terrorist financing, and ensure the proper operation of NFP entities, their use of public donations and funds, and the protection of their assets.

The Government announced in the 2009-10 Budget that it would amend the 'in Australia' special conditions in Division 50 of the Income Tax Assessment Act 1997 to ensure that Government retains the ability to maintain appropriate oversight of organisations seeking to pass money to overseas charities and other entities.

The exposure draft also amends the 'in Australia' special conditions as they apply to deductible gift recipients, and standardises the term 'Not-for-Profit' throughout the tax laws.

The Assistant Treasurer says the redrafting follows a number of submissions from the Not for Profit sector. Taxation and legal experts working with Not for Profits had raised concerns on the original draft.

Bill d'Apice and Kylie Maxwell, from Makinson & d'Apice Lawyers, say the Exposure Draft in relation to ‘In Australia’ requirements is generally (but not entirely) responsive to the needs of the sector as expressed during the consultation process commenced last year.

“The winners include charitable organisations that receive donations from deductible gift recipients and many Church clients. The losers include entities that commit minor transgressions in the use of their income to achieve charitable purposes,” they said.

“The balance is probably right from the government's perspective but it is a little unrealistic from the perspective of Not For Profit organisations.”

Tax Director with Moore Stephens in Melbourne, Stephen O’Flynn, says the new exposure draft is a significant improvement from the prior exposure draft and the Government has attempted to address a number of major concerns.

In particular he says the latest exposure draft:

• expressly allows NFPs to transfer profits or assets between NFP entities with similar purposes as well as make payments for genuine compensation for services provide to, or reasonable expenses incurred on behalf of, the not for profit even if those NFPs are owners or members. The previous draft did not allow any of these payments to be made to members, even if the members were themselves NFP entities.
• only requires a tax exempt entity to comply with all substantive requirements in their governing rules. The previous draft required compliance with all the requirements in the governing rules. A tax exempt entity will not lose its tax exempt status for a minor or insignificant breach of its governing rules.
• requires tax exempt entities to operate principally in Australia and pursue their purposes principally in Australia.

O’Flynn says there are some exceptions including:

• grandfathering any entities currently prescribed in the regulations under section 50-50
• deductible gift recipients (as they have a stricter sole purpose test (that allows some activities that are incidental and minor), international affairs organisations and certain environmental organisations
• entities that are to be prescribed in regulations
• allowing certain funds received from government or non-deductible donations to be excluded from principally in Australia calculations

He says the Draft also clarifies that public educational institutions and public hospitals are not required to be Not for Profit entities to obtain tax exempt status (section 50-51(1)(b))

O’Flynn says that the main issues arising from the exposure draft legislation are:

• there is still a strict requirement for the use of income and assets solely for the purpose for which the tax exempt entity was established. There is no leeway for minor or insignificant breaches.
• Still some technical wording that could be improved in the draft to ensure, beyond doubt, that the policy intent to allow distributions to tax exempt parents without the loss of tax exempt status is achieved. The way the legislation is currently drafted will require all subsidiary entities to review their constitutions to ensure that their objectives are similar to their parents.
• Where a tax exempt entity gives money or property to another entity, that is not a tax exempt entity, the use of the money by the recipient is to be taken into account when the tax exempt entity determines whether they operate principally in Australia. This will place a greater burden on tax exempt entities to trace the use of funds that they provide to non-tax exempt entities, than is currently the case.
• anyone looking to establish a new entity to undertake / fund charitable activities overseas will not be able to obtain income tax exempt status unless their activities or the entities that they donate to are conducted principally in Australia unless they fall into one of the excluded categories mentioned above. Therefore, there will be some organisations that may consider applying to be named in the regulations to ensure a continuation of their tax exempt status.
• Most DGRs have a stricter ‘In Australia test’ that requires the DGR to be established in Australia, operate and pursue its purposes solely in Australia. The DGR will also have to look through any entity that it provides money to determine the final use of the money under of the sole purpose test.

Consultation on the revised exposure draft is open until Friday May 11, 2012. Copies of the exposure draft and explanatory material can be found here. 
 

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