Don’t Change Refundable Franking Credits - NFP Submission

National peak donor organisation, Philanthropy Australia has told a Federal Government inquiry into Australia’s financial system that it strongly opposes any changes to current system of refundable franking credits.

However, Philanthropy Australia’s submission to the Financial System Inquiry, which is chaired by former Commonwealth Bank CEO David Murray, recommends a greater focus on growing the number of ‘contract ready’ social enterprises which can attract impact investment.

Dividend Imputation

Philanthropy Australia’s submission says it has some concern the Inquiry’s Interim Report comments regarding dividend imputation, given the role played by refundable franking credits as a source of income for philanthropic trusts and other charities.

The submission said that the Interim Report only considers the effects of dividend imputation in a narrow manner which focuses on how it may or may not impact on other forms of finance.

“It therefore omits to consider the broader role of financial markets, and the broader significance of dividend imputation,” the submission said.

“Philanthropic trusts and other charities, are able to reclaim the value of the franking credits from the Australian Taxation Office. This policy was introduced by the Howard Government in 2000.11 This change recognised the fact that although technically income tax exempt, philanthropic trusts and charities were indirectly paying tax on their income through the corporate taxation system.

“Therefore, in the case of philanthropic trusts and other charities, the debate around dividend imputation arrangements does not involve questions about double taxation, rather it involves questions about whether these entities are entitled to be fully income tax exempt rather than just partially.

“Since their introduction, refundable franking credits have become a major source of income for philanthropic trusts and other charities.

“In 2012-13 there were 4,815 philanthropic trusts and other charities in Australia which claimed franking credits as a result of their Australian company investments. In the same year, over $580 million in refundable franking credits were returned to philanthropic trusts and other charities to fund grants and programs.

“Any adverse changes to dividend imputation arrangements for philanthropic trusts and other charities would therefore impact upon the ability of these organisations to support charitable causes in our community, and therefore would ultimately be harmful to the community.

“Philanthropy Australia would therefore strongly oppose any such changes,” the submission said.

Capacity Building for Social Enterprises

The submission also recommended options for better supporting capacity building of social enterprises be examined further, with the objective of growing the number of ‘contract ready’ social enterprises which can attract impact investment.

Philanthropy Australia submission said that one of the challenges for growing impact investment in Australia is not necessarily the supply of willing investors or risk capital, but the lack of appropriate investment opportunities.

“Whilst there may be existing or potential social enterprises in which investments could be made, these opportunities may not be ‘contract ready’ and without appropriate support, they may struggle to become contract ready.

“This is essentially a question of capacity building, and there may be a role for Government to assist social enterprises to become ‘contract ready’, and thereby attract impact investment.

“The United Kingdom’s £10 million ‘Investment and Contract Readiness Fund’ enables social ventures to access new forms of investment and compete for public service contracts.

“Grants between £50,000 and £150,000 are available on a rolling basis to social ventures who will go on to raise at least £500,000 investment, or who want to bid for contracts over £1 million.

The submission said consideration could be given to the establishment of such a fund in Australia, including an examination of Government and non-Government sources of funding.

Alternatively, the option of providing additional funding for existing entities which provide some support for capacity building could be considered.

The Financial Services Inquiry has been charged with examining how the financial system could be positioned to best meet Australia's evolving needs and support Australia's economic growth.

The Inquiry released an Interim Report on 15 July. The Interim Report included a section on impact investment and social impact bonds, which can be accessed here. There is also a discussion of dividend imputation, which can be accessed here.

“Government could provide guidance to superannuation and philanthropic trustees by explaining how superannuation trustees can facilitate impact investment within the existing regulatory framework,” the interim report said.

“There may also be benefits in exploring options to better use the underlying assets of private and public ancillary funds. To enable private ancillary funds to better reflect their sophistication, it may be possible for such funds to be considered sophisticated or professional investors if the founder of the fund meets either of these thresholds.

“Finally, moves to simplify and streamline disclosure requirements could reduce the regulatory burden associated with social impact bonds.”

Impact investment allows investors to align their financial objectives with their personal values by investing in opportunities that offer both social and financial returns. Unlike socially responsible investment, impact investors actively seek social or environmental objectives.

According to the inquiry, more impact investment activity in could trigger a marked change in the way governments deal with social or environmental problems by supporting entrepreneurs to find new solutions and could shift governments’ approaches to dealing with these problems from paying for service delivery to paying for outcomes at the best price.

The final submission by Philanthropy Australia is available here.

The Inquiry's Final Report is due to be provided to the Australian Government by November 2014.

More than 50 leading philanthropists, trendsetters and visionaries from Australia and overseas have joined delegates from the philanthropic, advisory and Not for Profit sectors to discuss and debate global trends in philanthropy, impact investing, digital civil society and innovation at the two-day Philanthropy Australia’s 2014 National Conference in Melbourne this week.