Tax Review Targets Not for Profit Sector

The Federal Government’s new discussion paper on tax reform specifically targets the Not for Profit sector asking if the current tax arrangements are appropriate – raising issues around the ongoing availability of Fringe Benefits Tax concessions and other foregone tax revenue.

Federal Treasurer, Joe Hockey’s tax discussion White Paper, entitled Re:think, Better tax, Better Australia, includes a separate section on the Not for Profit sector which points out that while existing tax concessions help increase the level of activity in the NFP sector, the value of revenue forgone from the concessions is significant and growing steadily.

“NFP tax concessions result in significant revenue forgone,” the discussion paper says.

“The two largest groups of tax concessions involve exemptions from paying fringe benefits tax (FBT) for public benevolent institutions (PBIs), health promotion charities (HPCs), public hospitals, non-profit hospitals, and public ambulance services; and income tax deductions for making gifts to DGRs. The amount of revenue forgone from these concessions has been increasing, particularly the FBT exemptions.

“By 2017-18, the PBI concession is estimated to result in revenue forgone of nearly $1.6 billion, from almost $1 billion in 2010-11. In comparison, the deduction for gifts to DGRs has remained relatively stable, increasing from nearly $900 million in 2010-11 to almost $1.2 billion in 2017-18.

“However, the actual revenue forgone from NFP concessions cannot be quantified because many organisations are not required to submit tax returns. This means that the actual revenue forgone is likely to be higher than is currently reported.

“Given the size and reach of the NFP sector, some tax concessions may result in distortions that affect the broader allocation of resources in the economy, particularly where they operate in competition with for-profit providers. These distortions arise when the prices that NFPs pay for their inputs (such as labour) are altered by the presence of concessions in the tax legislation.”

The discussion paper says that while recognising the wider benefits of NFP activity (particularly where an NFP provides services that for-profit private sector organisations do not), these tax concessions arguably help to both improve societal outcomes and ensure that the overall level of activity in the NFP sector is closer to optimal.

“Notwithstanding this, it is important to assess their effectiveness to ensure that the concessions continue to meet their intended policy objectives, do not result in unintended consequences (such as high compliance costs or an uncompetitive advantage) and deliver the greatest possible community benefit. This is particularly important considering the revenue forgone as a result of these tax concessions,” it says.

The Paper also points to the range of NFP entities that are exempt from paying tax on fringe benefits. The concession is provided to employees with a monetary limit per employee of either $17,000 or $30,000 depending on the NFP.

“By utilising salary sacrificing arrangements, the cost of labour to these NFPs is reduced. This lower cost could be used by the NFP to offer employees a higher salary, providing them with an advantage in hiring and retaining staff,” the paper says.

“This concession effectively provides a wage subsidy to those employed by eligible NFP organisations, which must be paid for by all other taxpayers. This concessional treatment is particularly problematic where the NFP competes with for-profit providers, in particular in the hospital sector. These concessions allow employees of eligible entities to spend from pre-tax income, thereby reducing income tax payable. There is evidence that some employers and employees have tax-sharing arrangements to share this benefit.

“While there are capping thresholds on the fringe benefits tax concession, meal entertainment and entertainment facility leasing benefits are excluded from the caps and are unlimited. Benefits received by eligible NFP employees exempt from tax and not limited by a cap include payments for holidays, weddings and family celebrations.

“Expenditure on this concession in terms of revenue forgone was estimated to be around $430 million in 2013-14, and is estimated to rise to around $545 million in 2017-18.”

Another issue the paper says results from FBT being levied on individual employers with caps assessed per employee. This allows employees with more than one employer to receive benefits with multiple caps.

As well, the discussion paper points to the range of NFP organisations that are eligible for income tax exempt status, such as employee or employer associations and clubs established to encourage animal racing, sport, art, literature or music.

“Although an income tax exemption does not pose as many concerns regarding competitive advantage and any retained earnings must ultimately be used to further their purposes, there appears to be no clear rationale underlying this exemption,” it says.

“Some NFP organisations, including around half of all registered charities, are eligible for deductible gift recipient (DGR) status. This entitles donors to claim a tax deduction for any eligible gifts they make to such organisations.

“Organisations that seek DGR status generally apply to the ATO for endorsement as a DGR. However, in the areas of foreign aid, environment, culture and harm prevention, organisations must apply to the relevant department and seek the approval of the Minister as well as the Treasurer. In exceptional cases, organisations are specifically listed in the tax legislation.

“While DGR status is highly valued, the process for applying for it can be time consuming. In addition, organisations that operate across a range of DGR categories may not be eligible to be endorsed under a single category. This may require them to restructure, seek specific listing by name in the Income Tax Assessment Act 1997, or forgo DGR status altogether. There are also different requirements for DGR status across the different general categories, which creates further complexity.”

The discussion paper is calling on submissions that address the following questions:

• Are the current tax arrangements for the NFP sector appropriate? Why or why not?

• To what extent do the tax arrangements for the NFP sector raise particular concerns about competitive advantage compared to the tax arrangements for for-profit organisations?

• What, if any, administrative arrangements could be simplified that would result in similar outcomes, but with reduced compliance costs?

• What, if any, changes could be made to the current tax arrangements for the NFP sector that would enable the sector to deliver benefits to the Australian community more efficiently or effectively?

Submissions and suggestions on the discussion paper can be made at the website bettertax.gov.au until 1 June 2015.