Clements Dunne & Bell Melbourne

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Non Profit (NFP) Sector Reforms

6 August 2012

The 2011-12 Federal Budget slated some significant reforms for the NFP sector including the creation of a new regulatory body, a statutory definition of a “charity” and changes to the taxation of “unrelated commercial activities” of NFP organisations.

A brief summary of the status of the reforms follows.

Not-for-profit Regulator

The Australian Charities and Not-for-profits Commission (ACNC) will be an independent statutory body that will be charged with the responsibility of regulating the NFP sector.

Draft legislation for the establishment of the ACNC was released on 9 December 2011 with the intention of introducing the legislation in the Autumn sittings of Parliament. It was originally envisaged that the ACNC would commence operations on 1 July 2012.

A deferral in the start date of the ACNC to 1 October 2012 was announced by press release dated 17 May 2012.  It was also announced that there would be a two stage approach to the introduction of the regulatory framework.

The first stage will be the establishment of the ACNC as regulator of tax endorsed charities from 1 October 2012.

The governance standards and financial reporting framework will then be introduced with effect from 1 July 2013.

The ACNC will initially regulate tax endorsed charities only. Other NFP organisations may come under the regulation of the ACNC at a later time.

On 5 July 2012 the draft ACNC legislation was referred to the House of Representatives Standing Committee on Economics for an enquiry. As part of the enquiry, the Committee has invited submissions to be made by 20 July 2012 and has run Public Hearings on the 26th and 27th of July 2012.

It is now intended that the legislation will be introduced to Parliament later this year.

Susan Pascoe, AM who is Head of the ACNC Implementation Taskforce, has been named as the inaugural Commissioner of the ACNC (subject to the approval of the Governor-General).

Definition of Charity

The Government has announced that it will introduce a statutory definition of Charity that will have application across all Commonwealth laws from 1 July 2013.

The definition of Charity is a very important development as amongst other things, it will impact upon a NFP organisation’s ability to access tax concessions.

Under the current law, the meaning of Charity is derived from over 400 years of common law and is at times ambiguous. The Government intends to introduce a statutory definition of Charity in the hope that this will provide greater clarity and certainty.

On 28 October 2011 the Government released a consultation paper on the definition of Charity and received over 200 submissions by the closing date of 9 December 2011.

At the time of writing, there has been no draft legislation released despite the proposed commencement date of 1 July 2013.

Meanwhile, the ATO wrote to endorsed tax concession charities in March and April 2012 advising them to review their charity endorsement status (based on existing law) in the lead up to the handover over of regulatory responsibility to the ACNC on 1 October 2012.  Essentially, the ATO wants NFPs to self review in order to ensure that eligibility requirements continue to be satisfied.

Changes to the Taxation of Commercial Operations of NFPs

In the 2011-12 Federal Budget the Government announced an intention to “better target” tax concessions for NFP organisations.

In essence, the Government is looking at how to tax profits from “unrelated commercial activities” that are not directed back to a NFP's altruistic purpose(s).

We refer you to our previous newsletter for further information on this budget announcement.

http://www.cdb.com.au/News/federal-budget-changes-to-the-not-for-profit-tax-concessions.html
 
A consultation paper was issued on 27 May 2011 and closed for comments in July.  There has since been a number of consultation forums and Treasury continues to develop implementation options.

On 30 March 2012 the Government announced a deferral of the start date from 1 July 2011 to 1 July 2012 in order to facilitate additional consultation.

The extended start date will apply to new unrelated commercial activities commenced after 7.30pm (AEST) on 10 May 2011.  Existing unrelated commercial activities will continue to be covered by the transitional arrangements announced in the 2011-12 Federal Budget.

At the time of writing, draft legislation is yet to be introduced and considerable uncertainty remains.  Accordingly, the ATO has issued details of an “administrative treatment” that will be applied.

http://www.ato.gov.au/taxprofessionals/content.aspx?doc=/content/00283251.htm&pc=001/005/054&mnu=51998&mfp=001&st=&cy=

We urge affected NFPs to review their position and to assess their ATO administrative treatment options.

Further, we recommend that systems be put in place that will allow unrelated commercial activities to be clearly identified, evaluated and managed.

“In Australia” Special Condition for Tax Concessions

An exposure draft of legislation was issued for consultation in July 2011 and closed for comment in August.

The exposure draft dealt with the matter of re-stating the “in Australia” condition for tax concession entities to ensure that Income tax exempt NFP organisations and Deductible Gift Recipients (DGRs) must generally be operated principally in Australia for the broad benefit of the Australian community.

A number of issues were raised in the consultation process with the Government acknowledging that the exposure draft had some issues.  

A revised exposure draft of the legislation was subsequently released on 17 April 2012 with submissions having closed on 11 May 2012.

Legislation is expected to be introduced to Parliament later in 2012.

Tax Ruling TR 2011/4 Income Tax & Fringe Benefits Tax: Charities

Whilst the Government is pursuing its reform agenda, the current law continues to apply.  The ATO finalised draft tax ruling TR 2011/D2 as TR 2011/4 in October 2011.

This ruling replaces TR 2005/21 and reflects recent developments such as the Word Investments and Aid / Watch cases.

The ruling deals with the meaning of Charity when seeking to apply the Income Tax and Fringe Benefits Tax exemptions available to NFP's under the current regime.

A copy of TR 2011/4 can be found at:

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20114/NAT/ATO/00001

The Word Investments decision has seen an increased focus on “commercial activities”. In particular, the Government and the ATO want to clearly see profits from commercial activities being applied towards the charitable objects of the organisation. Consequently, NFP's that have accumulated profits may come under increased scrutiny.
 
We also refer you to the “Self Governance Checklist” released by the ATO to assist NFP's organisations to review their tax concession status.

As noted above, the ATO is encouraging NFPs to review their status in the lead up to the handover of regulatory responsibility to the ACNC on 1 October 2012.

http://www.ato.gov.au/nonprofit/content.aspx?menuid=0&doc=/content/00292727.htm&page=6&H6

Fundraising Reform

A consultation paper entitled “Charitable fundraising regulation reform” was released in February 2012 with the closing date for submissions of 5 April 2012.

The objective of the reform is to achieve a nationally consistent approach to the laws that govern fundraising that will be overseen by the ACNC.

Consultation continues and the timing of the release of exposure draft legislation remains unknown.

A copy of the consultation paper is available here:

http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Charitable-Fundraising-Regulation-Reform

Victorian Payroll Tax Changes

Section 48 of the Payroll Tax Act 2007 provides an exemption for wages paid by religious institutions, public benevolent institutions and non-profit organisations.

Section 48 has been amended with effect from 1 July 2012 so that only the wages paid to persons engaged exclusively in work of a religious, charitable, benevolent, philanthropic or patriotic nature are exempt from Payroll Tax.

Wages paid to persons engaged in “unrelated commercial activities” will not be eligible for the Payroll Tax exemption even where the proceeds from those activities are applied to further the charitable purposes of the NFP organisation.

This amendment will require NFPs to immediately review their Payroll Tax arrangements to ensure that the exemption is being correctly accessed.

Please refer to the following Payroll Tax Bulletin for further details.

http://www.sro.vic.gov.au/sro/SROnav.nsf/childdocs/-98E8944DC5A0C753CA2575D100047764-696A6B5AE91CEBBDCA2575D10004A84D-54B0342B013B8501CA257A2A0017BCC4/$file/Publication-PTX-02-12.pdf

 

We understand that these changes are reflected in other Australian States and Territories.  As such, arrangements outside of Victoria should also be reviewed.  

Please contact us if you require specific advice regarding the Victorian changes or the rules applicable in other jurisdictions.

Working Groups

In February 2012 the membership and terms of reference for a Not-for-profit Sector Tax Concession Working Group were announced.

The purpose of the Group is to examine the current range of tax concessions and whether there are fairer, simpler and more effective ways to deliver support to the NFP sector.

Also, in April 2012 the Council of Australian Governments (COAG) has agreed to the terms of reference, work plan and initial milestones for a new Not-for-profit Reform Working Group.

The purpose of the Group is to develop and recommend options for reform of the NFP sector and to assist the Federal Government with its reform agenda.

A focus of the group will be streamlining and consolidating regulations to reduce red tape and compliance costs and to enhance transparency and accountability.

Disclaimer

This document contains limited information regarding certain NFP sector reforms.  It is general in nature and should not be relied upon as a substitute to specific advice.  

We recommend that NFP organisations seek specific advice regarding the reforms affecting the NFP sector and the specific implications of same.



 

 


 

 


 


 

 

 

 

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