Exclusive: “Unfinished business” for not for profit tax system

One of the authors of a landmark 2013 report on taxation of the not for profit sector has called the recommendations “unfinished business” and says the sector has stalled without the correct support.

In 2013, the Not-for-profit Sector Tax Concession Working Group published its final report into the tax system for Australian not for profits, but many of its 23 recommendations, which would have removed the red tape restricting the sector’s growth and productivity, were never actioned.

Now one of the authors of the report, Anne Robinson, exclusively tells Pro Bono News the time is right for the report to be revisited, labelling it “unfinished business”.

Assistant Minister for Competition, Charities and Treasury Andrew Leigh, speaking to Pro Bono News as he prepared to board a flight for Perth for meetings, refused to commit to revisiting the report and its recommendations, saying instead that Labor’s “main focus is on doubling philanthropy by 2030”, a key election pledge.

He added that if the government is successful in achieving this aim, the size of the tax concessions associated with deductible gift recipients would also double in what would be “a significant budgetary impost”.

He also said he believed the main focus for the government should be on the recommendations that extend workplace and high-net-worth giving, and the creation of a blueprint to “set the path” for the sector towards 2030.

The sector is currently participating in a series of roundtable discussions with Leigh, following years under a Coalition government widely perceived as hostile towards not for profit organisations.

Pro Bono News understands many of the report’s recommendations will be raised in those discussions; Leigh said he was open to “fresh ideas”.

Where are we now?

The working group that authored the report had been set up to “examine the… range of tax concessions provided to the NFP sector in terms of their fairness, simplicity and effectiveness”. It conducted consultations with the sector and received more than 225 submissions on a discussion paper circulated before the report’s release.

The report was explosive in nature, making a number of recommendations that would reshape the working environment for not for profits, and lift their productivity as well.

Pro Bono News spoke exclusively to Anne Robinson, a partner at Prolegis Lawyers and a member of the working group.

Robinson recalled a sense of “enthusiasm and moving forward” at the time of the report’s creation, which occurred around the same time as the creation of the Australian Charities and Not-for-profits Commission.

It was also a time of engagement with Treasury, which was showing an interest in the not for profit sector, but not long after its release, the report was “parked”, Robinson said.

She attributed this to hung parliaments, the change in government and the ensuing “war on charities”, with the report and its reforms being put in the “bottom drawer”.

Robinson was careful to add that there were “champions” amongst the previous government who still supported the sector – but nevertheless, she said it was hard to deny that the Liberal government didn’t “have the same kind of commitment to the not for profit sector”.

“We didn’t talk openly about it at the time, but it was a very frustrating period,” she recalled.

“We’ve had a period of nine years there where it’s been quite tough. A whole lot of the red tape reduction was bypassed. Our sector was stalled.”

Reform back on the agenda

Robinson said she believes the sector is feeling more optimistic about the chances that the report’s recommendations would be reconsidered under the Albanese government.

This could have the benefit of increasing the productivity of charities and not for profits, making it easier for them to operate and compete with the business world.

“I’d say the big ticket item would be to continue the process of red tape reduction in the charity sector,” she explained.

“It’s much needed. We need red tape reduction. And that’s why I’m really very pleased that the report… has come back into the sunlight.”

While she believes that many of the recommendations within the report remain important today, she said there are other reforms which the sector had been advocating openly for and which needed to be urgently addressed to help the charity and philanthropic sectors grow.

One of those is the simplification of the deductible gift recipient (DGR) set up.

One of the solutions proposed in the working group’s report was to extend DGR status to all categories of charity except those that solely advance religion or education.

Given the changing philanthropic environment and the growth in “big philanthropy”, Robinson said the reform process would now need to go beyond just what was recommended in the report to simplify giving categories and make it easier for wealthier philanthropists to donate to where they wanted.

The report recommended the removal of the $2 threshold for tax-deductible donations. With Leigh exploring ways to double giving by 2030, Robinson said she was unsure whether removing this threshold would result in a behavioural difference in donors.

“Most people who give small donations are not actually looking for tax deductions, so I think the $2 thing is… more of an administrative decision,” she said. 

“[It used to be] a much bigger threshold and that was a social statement that you have to be a rich person before you get acknowledged as being a philanthropist. That’s fallen away.

“I don’t think that that change would have any impact on an increase in philanthropy.”

Rather, Robinson said making it easier for major philanthropists to donate could transform giving in Australia. 

Another area that could be considered is around the community impact of giving, Robinson said.

Noting that churches and religious groups do much of the philanthropic and social work in the community, she said it was important to create a “simpler system” to facilitate their work.

While she doesn’t believe that donations to these organisations should be tax deductible, Robinson said the good work they do should be acknowledged and reflected in their tax arrangements.

To do this, she said a DGR aggregator could provide a solution by reducing the “clunky” legal options around providing donations to them. The same format could be extended to schools, which Robinson said are “often community hubs”.

Another reform she’d like to see is for greater scrutiny of not for profits by the regulator, to stop the “rorting” that occurs through self-assessments.

“I’ve always been a great advocate for having the Charities Commission so that there’s transparency of reporting,” Robinson said.

As an example, Robinson said some sporting clubs that were no longer involved in sport were still self-assessing as income tax-exempt in a clear contravention of the rules.

“They should be accountable to the ACNC, in my view. The intrusion into the sporting club world of pokies, gambling and the potential for money laundering I think is a social disgrace,” she added.

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See more: New income tax reporting requirements for NFPs to start in 2023

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Simplifying the tax requirements for not for profits could also increase their productivity, Robinson added, by removing the burden of onerous red tape and admin.

Calling out the fringe benefits tax

In an interesting twist, when the working group report was handed down, one area in which the government of the day made a move was the fringe benefits tax (FBT).

The report made a number of recommendations in this area, including to replace the FBT concessions to not for profits that related to salary packaging arrangements with an alternative support payment.

The report also recommended removing the uncapped concessions on meal entertainment and entertainment facility fringe benefits.

The report’s recommendations in this area were costed, with the government advised on how much it could save if it acted on FBT, with the money to be reinvested in issues relevant to the sector.

But while the savings were implemented, the revenue was not passed on, Robinson said, in a “disappointing” move.

She said that in an environment of low unemployment, capped FBT-exempt benefits could encourage more staff to come on board and increase the competitiveness of charities.

“[Charities] can’t afford to pay big salaries, but when they can provide FBT exempt benefits up to a reasonable amount, that’s much more attractive. That’s a really good way of, I think, government policy supporting those social goods because we want people, and that will enable them to keep people in the workforce for longer,” she explained.

“Unfinished business”

Robinson said the working group’s report should “absolutely” be revisited.

The report’s final recommendation was around “ongoing examination” of tax issues related to not for profits, and Robinson said she felt that “two-way engagement” would be needed to fulfil this, with the sector working with the ACNC and tax office to identify issues and make suggestions for improvements.

She’s also keen to see new faces and fresh eyes review the group’s work in the context of the new sector environment, to grow the next generation of not for profit talent and ensure the sector moves forward.

“I think it’s a very important project. I think it’s unfinished business,” she said of the report.

“I think there’s a lot of work to be done.”

What were the key recommendations?

The report made 23 recommendations spanning income tax, deductible gift recipients (DGR), fringe benefits tax, GST, mutuality, clubs and societies, and how to consolidate the benefits of the reforms.

The recommendations, as noted in the report, were:

• Recommendation 1:  Review existing categories of entities for income tax exempt status
• Recommendation 2:  Raise and simplify the tax threshold for taxable NFP entities 
• Recommendation 3:  Extend the ATO endorsement framework to all NFPs accessing tax concessions
• Recommendation 4: Rewrite the income tax exemption provisions for State and Territory government bodies
• Recommendation 5: Extend the income tax exemption for mixed charitable/DGR funds
• Recommendation 6:  Extend DGR status
• Recommendation 7:  Simplify the property donation rules
• Recommendation 8:  Remove the public fund requirements
• Recommendation 9: Remove the minimum gift deduction threshold
• Recommendation 10:  Explore mechanisms to promote giving
• Recommendation 11: Modernise the anti-avoidance rules for gifts
• Recommendation 12:  Replace the NFP FBT concessions (only in relation to salary packaging arrangements) with an alternative support payment to eligible NFPs
• Recommendation 13:  Include uncapped meal entertainment and entertainment facility leasing benefits in existing caps
• Recommendation 14:  Remove eligibility for multiple caps 
• Recommendation 15:  Align FBT rebate rate with the FBT tax rate
• Recommendation 16:  Align the minor benefits exemption with the commercial sector
• Recommendation 17:  Transitional payment to eligible NFP employers 
• Recommendation 18:  Improve ATO guidance on GST and fundraising
• Recommendation 19:  Review interaction of GST and NRAS
• Recommendation 20:  Normal income tax rules should apply to all member and non-member receipts of mutual organisations  
• Recommendation 21:  All gaming, catering, entertainment and hospitality receipts of mutual organisations be subject to normal income tax rules
• Recommendation 22:  Returning reform savings to the NFP sector 
• Recommendation 23:  Forum for ongoing examination of NFP tax anomalies and minor policy and technical issues