Not-for-profit Tax Concessions

 

 

Submission to The Treasury

Better targeting of not-for-profit tax concessions

July 2011

Introduction

This submission briefly outlines key issues for Australia’s not-for-profit sector (NFPs) in response to The Treasury Consultation Paper of 27 May 2011 ‘Better targeting of not-for-profit tax concessions’.

This submission has been prepared with the members of the Community Council for Australia (see Attachment 1 listing of CCA members) as well as other key organisations in the not-for-profit sector, academics, lawyers, government officials, and key policy advisors.

It is important to note that this submission does not over-ride the policy positions outlined in the individual submissions from CCA members.  In endeavouring to provide concise and useful input in response to the Treasury Consultation Paper, this submission is divided into the following sub headings:

• Introduction
• About CCA
• Executive Summary and Recommendations
• The Broader Policy Context
• The Policy Intent of Proposed Changes
• Related or Unrelated Activity
• Establishing a Threshold
• Implementation and Timing of  Tax
• Conclusion

The CCA welcomes this opportunity to provide input into the development of this important policy and commends the Treasury for engaging in this consultation process.  CCA would be more than willing to engage in further discussion about any of the issues raised in this submission.

 

The Community Council for Australia

The Community Council for Australia is an independent, non-political member-based organisation dedicated to building flourishing communities primarily by enhancing the extraordinary work and effort undertaken within the not-for profit sector in Australia.  CCA seeks to change the way governments, communities and the not-for-profit sector relate to one another.  This includes establishing a regulatory environment that works for community organisations and not against them.

The mission of CCA is to lead by being an effective voice on common and shared issues affecting the contribution, performance and viability of not-for-profit organisations in Australia through:

• providing thought and action leadership
• influencing and shaping sector policy agendas
• informing, educating, and assisting organisations in the sector to deal with change and build sustainable futures
• working in partnership with the government, the business sector, and the broader Australian community.

 

Executive Summary and Recommendations

CCA believe it is appropriate to ensure that taxation concessions to charitable and not-for-profit organisations are properly targeted.  It should not be possible for commercial organisations to avoid legitimate taxation by posing as charitable organisations.  At the same time, it is important that not-for-profit organisations are encouraged to seek funding sources beyond government grants and service contracts, are able to engage in social enterprise and innovation, and seek income producing investments where appropriate.  CCA understand the goal of the proposed reforms is not to raise government revenue through additional taxation on not-for-profit organisations, but to act as a preventative measure closing off the possibility that large scale commercial operations can enjoy not-for-profit taxation concessions.  To this end, CCA make the following nine recommendations:

1. First do no harm.  Any new regulatory proposals must be tested against possible negative impact on the broad range of not-for-profit organisations currently doing the right thing and seeking to better serve their communities. 
    
2. Any new regulatory proposal must reflect the Government’s commitment to reducing red tape and compliance costs for not-for-profit organisations.
    
3. Proposed government reforms to the definition of charity and the establishment of a new regulator for the not-for-profit sector should be the first option in addressing issues where organisations inappropriately claim not-for-profit status. 
    
4. The definition of related activity of not-for-profit organisations must include:

   - any activity directed towards the altruistic purpose or objects of the organisation
   - activities engaged primarily for the benefit of the community being served, clients, patients, members, students, officers or employees of the not-for-profit organisation
   - the sale of merchandise that has been donated to the organisation(e.g. opportunity shop)
   - the distribution of items worth less than $25 as incentives for donating funds (stamps, pre-printed mailing labels, etc.)
   - legitimate fundraising activities or use of excess organisational capacity in which the majority of money raised after costs is returned to the not-for-profit organisation.
    

5. Where the surplus or net profit from unrelated commercial activities is returned to the not-for-profit to fulfil the altruistic purpose or objects of the organisation, the unrelated activity should be treated as related activity and relevant taxation concessions should apply.
    
6. A threshold of $2 million of total turnover for unrelated commercial activity by a not-for-profit organisation in any given year should be established for any proposed new regulation.  This will minimise concern, reduce compliance costs, and avoid creating new compliance barriers to everyday fundraising activities by not-for-profit organisations.  This threshold will also ensure appropriate scaling of compliance effort against likely benefit or return.
    
7. Application of the proposed new regulation must allow scope for responsible reinvestment of retained earnings, profits or surplus into unrelated commercial activities at critical times such as start-up social enterprises, medium term investment to address falling profitability, etc.
    
8. A minimum two year phase in period should apply to existing not-for-profit organisations engaged in unrelated commercial activities above the threshold.
    
9. A second process of consultation should be undertaken on the actual proposed changes prescribed in legislation or new regulatory requirements for not-for-profit organisations.

 

The Broader Policy Context

It is an unprecedented time of reform in the Australian not-for-profit sector.  The signing of the first National Compact between government and the Australian not-for-profit sector just over 12 months ago heralded a new approach by government to both acknowledge and support the role of not-for-profit organisations in Australia.  The establishment of an Office for the Not-for-profit Sector within the Department of Prime Minister and Cabinet, the establishment of the Not-for-profit Reform Council and the proposed establishment of the new Australian Charities and Not-for-profit Commission all represent significant positive changes in the relationship between government and the not-for-profit sector, and a commitment to necessary and overdue regulatory reform.

Recent reviews including the Productivity Commission Report into the Contribution of the Not-For-Profit Sector in 2010, Senate Inquiry into Disclosure Regimes for Charities and not-for-profit organisations 2008, and the review of Australia’s Future Tax System 2010, all made recommendations about the need for reform within the NFP sector and within government, most of which have been supported by governments, the not-for-profit sector and key stakeholders.

It is now acknowledged that promoting and supporting the not-for-profit sector is critical to building a more resilient and productive Australia.  The not-for-profit sector contributes $43 billion to the economy, employs nearly 900,000 Australians and involves over 4 million volunteers.  The Assistant Treasurer Bill Shorten described the sector as ‘punching well below its weight’ in terms of its contribution to the economy, to employment, to community life and the realisation of community values in Australia. 

The current Federal Government has committed to promoting social enterprise, reducing compliance costs for not-for-profit organisations, encouraging a diversification of financing options to build a more sustainable funding base, streamlining and refining the regulation of not-for-profits and charities, developing a clearer definition of charities, establishing less bureaucratic reporting requirements while building community transparency, and working to improve relationships between government and the not-for-profit sector (see Attachments 2 and 3). 

These important commitments are not acknowledged in The Treasury Consultation Paper, despite the fact that they represent a significant change in the way Government and not-for-profits have agreed to interact in the future.  Policy goals that are ignored or not enacted cease to be policy goals.  Government has announced their policy intentions and signed the National Compact in good faith.  Their commitment must be reflected in the practice of their Departments.  It is critical that any proposed new regulatory imposition on not-for-profit organisations is informed by this agreed broader policy context. 

At the very least, the broader commitment of government to strengthening the not-for-profit sector needs to be reflected by adopting the following two recommendations:

1. First do no harm.  Any new proposals must be tested against possible negative impact on the broad range of not-for-profit organisations currently doing the right thing and seeking to better serve their communities.
2. Any new regulatory proposal must reflect the government commitment to reducing red tape and compliance costs for not-for-profit organisations.

 

The Policy Intent of Proposed Changes

There appear to be two main principles informing the need for proposed new regulations:

• the need to prevent commercial organisations avoiding legitimate taxation by posing as charitable organisations
• the need to maintain a level of competitive neutrality in commercial markets even when not-for-profit organisations are part of the market.

CCA and the vast majority of not-for-profit organisations strongly agree with the first principle.  It is impossible to justify a fully commercial organisation being able to claim a range of taxation benefits by maintaining tenuous links with, or pretending to be a not-for-profit or charitable organisation.

It is important, however, to consider if this important policy goal might best be achieved through a clearer definition of charity and better regulation of the not-for-profit sector.  If organisations claiming to be not-for-profit and fulfilling altruistic purposes spend the vast majority of their time, effort and resources on running an unrelated commercial activity, how is it that they are able to maintain their not-for-profit status, even under existing legislation?  Trustees or the governance body of an organisation engaged in large scale unrelated commercial activities should be asked to demonstrate how their unrelated commercial activities relate to the organisation’s altruistic purpose. If little or no relationship can be established, the issue is not simply about access to taxation concessions, but about their status as a not-for-profit organisation. This should be a key feature of the new regulatory framework. 

While the not-for-profit sector does not support anyone who misuses an organisation’s not-for-profit status as a way to avoid legitimate taxation or mislead the community, there is extensive concern about any suggestion that the best way of addressing this issue is to bring into question the legitimacy of all existing taxation concessions for the activities of not-for-profit organisations. Forcing all not-for-profit organisations to review all their commercial activities will create massive uncertainty, increase the need for legal costs and other compliance activity, and impede the income generating activities of the not-for-profit sector.  This would be completely counter to the best interest of governments, the community and not-for-profit organisations. 

The informing policy goal must be consistent with the government’s publicly stated policy intent and focus on preventing larger scale abuse of not-for-profit status, not questioning every economic activity of every not-for-profit organisation (see Attachment 4).

The question of competitive neutrality is similarly more about the definition of charity than taxation concessions.  If one organisation is engaged in commercial activity to build personal wealth and another organisation is engaged in commercial activity to benefit an altruistic purpose, these organisations are not equal and should not be treated as equal.  This is the basis of concessional arrangements for not-for-profit organisations and rightly so.  It is not a level playing field and should not be conceived of in this way.

Not-for-profit organisations rightly have the same responsibilities as other sectors to fulfil their legal, OHS, HR, and other statutory obligations. 

The fundamental point is that governments in Australia see a real benefit in the work of not-for-profit organisations and rightly provide taxation concessions to better enable them to fulfil their purpose.  These concessions should not be jeopardised by the need to better define and regulate which not-for-profit organisations are not acting to fulfil their altruistic purpose.  Consequently, CCA make the following recommendation in relation to the primary purpose of the proposed changes:

3.   Proposed government reforms to the definition of charity and the establishment of a new regulator for the not-for-profit sector should be the first option in addressing issues where organisations inappropriately claim not-for-profit status. 

 

Related or Unrelated Activity

If the government is committed to using changes in eligibility to taxation concessions as a way of addressing tax avoidance by a very small minority of commercial organisations operating as not-for-profit organisations, the notion of what is related commercial activity and what is unrelated commercial activity needs to be as clearly defined as possible to avoid confusion and uncertainty. It is also noted that there is limited information from Government available on the scale and type of avoidance activity. 

The first and most important criteria is that any commercial activities developed to support the altruistic purpose of the not-for-profit are clearly related to the purpose and should not bring into question eligibility for appropriate concessions.  The difficulty in fulfilling this primary criterion is that often organisations are involved in a broad range of activities to support their core mission. 

For example, there are drug treatment not-for-profit organisations in Australia that have reducing the harm from drug dependence as their primary purpose, but engage in activities including; training and employment, housing and accommodation, family reconciliation, child welfare, education, art, recreation, health care, running small farming enterprises, paid music performances, and other activities.  Another real world example is the provision of funding for diesel four wheel buses that take junior footballers from one remote community as part of a program to achieve higher indigenous retention in school.  The children can only play in the football competition if they have attended school.  This program has been effective.

If too narrow a definition of ‘related activity’ is applied, it would bring into question some of the most innovative and effective responses from not-for-profit organisation to many complex social issues.

An additional criterion should be whether the activities are for the benefit of the people who use the not-for-profit – the community the not-for-profit organisation serves.  If the indigenous junior football team goes to watch an AFL game and raises money for the travel costs by hosting a rock music concert, the activities are clearly still related to the primary purpose of indigenous school retention because they are about benefiting the students involved.

As part of raising funds, the indigenous football might auction a signed football from an AFL team, or under-take a large direct mail campaign, sending photos of the team and a team beanie to those who might sponsor their activities.  Again these commercial activities should not be seen as unrelated commercial activities or bring into question the not-for-profit status and taxation concessions this program has access to.

Uncertainty is a very real barrier for not-for-profit organisations engaging in any activity.  Most not-for-profit organisations are highly risk averse when it comes to commercial activities.  If not-for-profit organisations do not engage in these related commercial activities they will have less funding, provide less benefits to the community and require additional government funding.  While all definitions rely to some extent on interpretation, CCA strongly recommend that:

4.  The definition of related activity of not-for-profit organisations must include:
- any activity directed towards the altruistic purpose or objects of the organisation
- activities engaged primarily for the benefit of the community being served, clients, patients, members, students, officers or employees of the not-for-profit organisation
- the sale of merchandise that has been donated to the organisation (e.g. opportunity shop )
- the distribution of items worth less than $25 as incentives for donating funds (stamps, pre-printed mailing labels, etc.)
- legitimate fundraising activities or use of excess organisational capacity in which the majority of money raised after costs is returned to the not-for-profit organisation.

5.  Where the surplus or net profit from unrelated commercial activities is returned to the not-for-profit to fulfil the altruistic purpose or objects of the organisation, the unrelated activity should be treated as related activity and relevant taxation concessions should apply.

 

Establishing a Threshold
 
If questions are to be asked about all the commercial activities of all not-for-profit organisations there is a very real danger that thousands of not-for-profit organisations will choose to avoid putting their organisations at risk, even though they are usually only contemplating small scale investment in commercial activities that will benefit their community into the future.

Experience overseas clearly indicates that a very small proportion of larger not-for-profit organisations engage in significant commercial activities and this small minority contribute the vast majority of unrelated business income taxes collected by governments.

This highlights the issue of scale of collection and compliance costs compared to revenue or savings in potentially avoided taxation.  As with most taxation measures, there is a point at which the costs of complying with and enforcing new regulations are higher than any potential benefits.

If the policy goal is to only target significant commercial activities, a threshold must be established to provide certainty to smaller not-for-profit organisations.

The Australian Taxation Office currently provides small business concessions to commercial organisations with a gross turnover of less than $2 million per year (Attachment 5).

In reviewing actual returns under not-for-profit Unrelated Business Income Tax in the United States, it emerges that less than 1.5% of organisations submitting a UBIT return declare a total unrelated business income of in excess of $2 million, yet this tiny minority of large organisations making a UBIT return pay 65% of the over $600 million UBIT collected each year in the United States (Attachment 6).

Establishing a threshold is critical to ensuring only those organisations with significant unrelated commercial activities are given reason to seek legal and taxation advice before engaging in income producing activities.  To not have a threshold would mean every single not-for-profit organisation in Australia would have to think about how compliance with a new requirement to justify any income producing activities might apply to their fundraising activity, their small investment or their new social enterprise.

Placing this kind of compliance burden across the whole not-for-profit sector is indefensible even if there are examples of inappropriate use of taxation concessions in unrelated commercial activities.  It is totally inconsistent with broader government policy reforms for the not-for-profit sector and inconsistent with the stated intent of this proposed new regulation.

A threshold is critical if the not-for-profit sector is to support the proposed new regulation.  A $2 million threshold is consistent with the ATO position on what a small business is.  A $2 million threshold will allow the government to target larger unrelated commercial activities that are more likely to pose a real risk to competitive neutrality.  A $2 million threshold meets the scalability test of cost versus benefit in terms of likely savings on taxation avoidance while requiring limited enforcement and compliance costs for the vast majority of not-for-profit organisations that have very limited commercial activities.  For these reasons the CCA makes the following recommendation: 

6.  A threshold of $2 million of total turnover for unrelated commercial activity by a not-for-profit organisation in any given year should be established for any proposed new regulation.  This will minimise concern, reduce compliance costs, and avoid creating new compliance barriers to everyday fundraising activities by not-for-profit organisations.  This threshold will also ensure appropriate scaling of compliance effort against likely benefit or return.

 

Implementation and Timing of Tax

In addressing the government commitment to strengthen the not-for-profit sector and the fundamental need of the sector to have some certainty in forward planning potential income producing activities, it is important to clarify and establish new regulatory requirements as soon as possible.

At the same time, the broader regulatory reforms currently being developed for the not-for profit sector have already created a level of concern and uncertainty and there is a need to ensure appropriate consultation on any proposed new regulations.

Ideally the government will make very clear the principles and guidelines they are likely to adopt on the new regulations within the next three months.  This does not mean finalising the actual regulation, but it does mean confirming the principles such as a threshold and the definition of related activity.

Alongside this statement of principles a second process of consultation should be initiated to ensure the actual proposed new regulatory requirements do not cause significant problems or issues for legitimate not-for-profit organisations seeking to diversify their income base and provide better services to their communities.

It is assumed that the Board of Taxation will review any new regulations once they have been in place for a period of time to ensure they are meeting the policy intent.

In relation to transition arrangements, it is not unreasonable to consider a phase-in period for unrelated commercial activities above the threshold currently being undertaken by not-for-profit organisations.  Given the proposed new requirements are likely to apply to only a very limited number of not-for-profit organisations, it is suggested that the government should allow at least a two year phase in period during which organisations might have an opportunity to either restructure their practices or enter into dialogue with relevant government authorities.   

One of the critical issues in relation to the implementation of new requirements is the capacity of not-for-profit organisations to make appropriate investments in income producing activities and social enterprises.  The reality is that good governance and responsible management both require not-for-profit organisations to ensure there is appropriate reinvestment into their income producing activities.  Forcing organisations to redirect all surplus income or profits from income producing activities into the altruistic purpose of the not-for-profit may actually compromise the viability of the income producing activities.

Social enterprise is only just emerging in Australia, but is likely to be an important area of investment in altruistic purpose for not-for-profit organisations.  It also has the potential to leverage existing not-for-profit assets and attract new forms of capital into supporting and benefiting the Australian community.

For these reasons the CCA recommends the following:  

7.  Application of the proposed new regulation must allow scope for responsible reinvestment of retained earnings, profits or surplus into unrelated commercial activities at critical times such as start-up social enterprises, medium term investment to address falling profitability, etc.

8.  A minimum two year phase in period should apply to existing not-for-profit organisations engaged in unrelated commercial activities above the threshold.

9.  A second process of consultation should be undertaken on the actual proposed changes in legislation or regulatory requirement for not-for-profit organisations.

 

Conclusion

CCA supports the government policy goal of preventing commercial organisations utilising not-for-profit status to avoid payment of taxation. 

CCA does not support adopting an approach that assumes a policy position in which no concessions apply to the income producing activities of not-for-profit organisations unless the not-for-profit organisations satisfies strict related activity criteria (as applies in some countries).

CCA is concerned about the potential for unintended and negative consequences for the vast majority of not-for-profit organisations that can occur with the uncertainty of new regulations and the imposition of new compliance costs.  Such an outcome is not justified by the need to prevent a very small minority of organisations seeking to avoid their taxation obligations through use of not-for-profit status.  The only real winners in this approach are legal services and other consultancy firms who can use the uncertainty to increase their own income.  Unfortunately there have already been a number of instances where some firms have told their not-for-profit clients that they will need legal advice before engaging in any income producing activities.

The proposed new definition of charitable organisations and the soon to be established Australian Charities and Not-for-profit Commission provide an appropriate opportunity to ensure not-for-profit organisations are actively engaged in fulfilling their altruistic purpose.

There is a very real danger that good government policy intent supported by the not-for-profit sector might be derailed by poor policy implementation leading to massive compliance costs for both the sector and government with minimal return to government.  This kind of negative outcome will not only reduce the income producing activities of not-for-profit organisations, but also reduce the capacity of communities to respond to their own social, environmental or economic challenges.  It is very difficult to put a price on the costs to our communities in stifling innovation and responsiveness through burdensome compliance.  The one thing we do know is that we will all pay a price if the proposed regulation fails to clearly and broadly define unrelated commercial activities and establish a fair threshold

If the recommendations in this submission are adopted, the proposed new regulations will have minimal negative impact on the not-for-profit sector, the government will maintain its commitment to positive reform for the not-for-profit sector, and the policy goal of preventing misuse of not-for-profit status to avoid taxation will be addressed.

 

Attachment 1

List of Members of the Community Council for Australia

As at 15 March 2011

1. Aboriginal Employment Strategy Ltd. – Danny Lester
2. Alcohol and other Drugs Council of Australia – David Templeman
3. Alcohol Tobacco and Other Drugs Association ACT – Carrie Fowlie
4. Associations Forum Pty. Ltd – John Peacock
5. Australian Indigenous Leadership Centre – Rachelle Towart
6. Australian Institute of Superannuation Trustees – Fiona Reynolds
7. Australian Major Performing Arts Group – Susan Donnelly (Director)
8. Connecting Up Australia – Doug Jacquier
9. Good Beginnings Australia – Jayne Meyer Tucker (Director)
10. HammondCare – Stephen Judd (Director)
11. Hillsong Church – George Aghajanian
12. Illawara Retirement Trust – Nieves Murray
13. Lifeline Australia – Dr Maggie Jamieson
14. Maroba Lodge Ltd. – Viv Allanson
15. Mental Health Council of Australia – Frank Quinlan
16. Mission Australia – Toby Hall (Director)
17. Musica Viva Australia – Mary Jo Capps (Director)
18. Opportunity International Australia – Rob Dunn
19. Philanthropy Australia – Deborah Seifert
20. RSPCA Australia – Heather Neil (Director)
21. Social Ventures Australia – Michael Traill
22. Surf Life Saving Australia – Brett Williamson (Director)
23. The ANZCA Foundation – Ian Higgins
24. The Benevolent Society – Richard Spencer (Retiring Director)
25. The Big Issue – Steven Persson (Director)
26. The Centre for Social Impact – Peter Shergold
27. The Smith Family – Lisa O’Brien (Director)
28. The Ted Noffs Foundation – Wesley Noffs
29. Volunteering Australia Inc. – Cary Pedicini
30. Wesley Mission – Keith Garner (Director)
31. WorkVentures Ltd. – Arsenio Alegre
32. World Vision Australia – Tim Costello (Chair)
33. YMCA Australia – Katherine Pengilly

 

Attachment 2

National Compact Extract: signed by sector organisations and Government 17/3/10

Shared principles of the National Compact

The Australian Government and the Third Sector will work together according to these principles to achieve their shared vision:

• We believe a strong independent Sector is vital for a fair, inclusive society. We acknowledge and value the immense contribution the Sector and its volunteers make to Australian life.
• We aspire to a relationship between the Government and the Sector based on mutual respect and trust.
• We agree that authentic consultation, constructive advocacy and genuine collaboration between the Sector and the Government will lead to better policies, programs and services for our communities.
• We believe the great diversity within Australia’s Third Sector is a significant strength, enabling it to understand and respond to the needs and aspirations of the nation’s varied communities, in collaboration with those communities.
• We commit to enduring engagement with marginalised and disadvantaged Australians, in particular, Aboriginal and Torres Strait Islander people and their communities.
• We recognise the value of our multicultural society and we will plan, design and deliver culturally responsive services.
• We share a desire to improve life in Australia through cultural, social, humanitarian, environmental and economic activity. To achieve this, we need to plan, learn and improve together, building on existing strengths and making thoughtful decisions using sound evidence.
• We share a drive to respond to the needs and aspirations of communities through effective, pragmatic use of available resources.
• We recognise concerted effort is needed to develop an innovative, appropriately resourced and sustainable Sector. 
• We acknowledge the need to develop measurable outcomes and invest in accountability mechanisms to demonstrate the effectiveness of our joint endeavours.

Priorities for action

Implementing the Compact principles will require coordinated engagement across Government and collaboration with the Sector to develop action plans.  These plans will detail how the Compact’s eight priorities for action, outlined below, will be met.

1. Document and promote the value and contribution of the Sector.
2. Protect the Sector’s right to advocacy irrespective of any funding relationship that might exist.
3. Recognise Sector diversity in consultation processes and Sector development initiatives.
4. Improve information sharing including greater access to publicly funded research and data.
5. Reduce red tape and streamline reporting.
6. Simplify and improve consistency of financial arrangements including across state and federal jurisdictions.
7. Act to improve paid and unpaid workforce issues.
8. Improve funding and procurement processes

Reference: www.nationalcompact.gov.au/resources/national-compact/

Attachment 3

Statement of government support for PC recommendations (extract from the Communiqué from the second meeting of the Not-For-Profit Sector Reform Council, 18 May 2011)

With regards to the Productivity Commission research report, Contributions of the Not for Profit Sector, the Minister advised that the Commonwealth Government has accepted ‘in-principle’ all but one of the recommendations relating to the Commonwealth. The one recommendation not supported was recommendation 9.5 pertaining to program related social innovation funds. While encouraging greater innovation is critical, the Government believes this should be pursued in other ways.

Reference:

www.notforprofit.gov.au/node/140

 

Attachment 4

Statement from Assistant Treasurer Bill Shorten on the purpose of new regulations (extract from Speech given to National Press Club, Canberra, ‘Passing Round the Hat for Change: This Labor Government and the Not-for-Profit Sector’, 27 May 2011)

Unrelated business income

But regulation is only part of the picture. The sector also needs a sustainable funding base.

Funding for the sector via forgone tax revenue is a significant outlay for Government. Indeed, quantifiable tax expenditures in 2010-11 are estimated to be $3.3 billion, but this does not include unquantifiable expenditures including forgone income tax which is estimated to be at least $1 billion per year but could be significantly more.

Like any significant government outlay, taxpayers should expect the fiscal ruler to be run over things from time to time.

As I'm sure you are all aware, the High Court held in Commissioner of Taxation v Word Investments Ltd (2008) that charities are able to use tax concessions intended to support altruistic activities for unrelated commercial activities.

As part of the reform package announced in the Budget, and in response to the Word Investments case, the Government announced that it would reform the tax concessions provided to not-for-profits that carry on unrelated commercial activities.

A clear policy intent underpins this measure.

It is designed to protect the integrity of the sector by ensuring that valuable tax concessions are utilised to further the altruistic aims of the sector, rather than being used to provide an uncompetitive advantage to a purely commercial activity.

We understand that many not‑for‑profits face challenges in raising funds to maintain their services.

As our record shows, this Government has actively encouraged not-for-profits to be innovative and to diversify and to grow their revenue streams.

However, we do consider that Government support by way of taxpayer concessions to not-for-profits is best utilised in furtherance of the altruistic purposes of the not-for-profit entity. That is the very reason for the existence of the concessions.

It is what taxpayers expect.

Accordingly, as of 7.30pm on Budget night, not-for-profits will be required to pay income tax on those profits from new unrelated business activities that are not directed back to their altruistic purpose – that is, the earnings they retain in their commercial undertaking.

This is not a revenue raising measure – you won't see a single dollar gained in the forward estimates as a result of this reform.

But the Government has acted based on the strong advice of the Treasury and ATO that the loophole created by Word Investments posed a significant risk of exploitation and presents a risk to revenue for all levels of Government.

Importantly, it is not the Government's intention for these reforms to affect the use of tax concessions that support a charity's related commercial activities.

That means the sort of innovative commercial activities established by some of the people in this room – the likes of GoodStart or some of the social enterprises – will continue to receive the benefit of charitable tax concessions.

We think that the local op shops providing discounted goods to the disadvantaged, not-for-profit child care centres, or even not-for-profit hospitals should notbe prevented from accessing these concessions to undertake their vital activities, even when they are being operated on a commercial basis. This sort of innovation is, and should be, encouraged.

We also recognise that low risk and small scale commercial activities should be carved out. Therefore running a local lamington drive, school fete or leasing out a school hall, will not put at risk an entities status. The Government realises that these activities are a natural part of the local community life.

There are also no Budget night shocks for those not-for-profits with existing unrelated commercial activities. Tax concessions will initially be available to support these activities. And we will talk to the sector about transitional arrangements.

There are also exemptions for not-for-profit entities that have entered into a government service delivery contract as at 10 May 2011 or participate in the National Rental Affordability Scheme.

But these reforms will raise a number of legitimate questions about the application of these measures to the diverse and innovative activities that the sector engages in. Sometimes the line between what is 'related' or 'unrelated' may be blurred. Some organisations may structure their activities in a certain way that might not automatically gel with these reforms. And we understand that it may hard to determine what constitutes a 'low risk' activity.

I am mindful of the law of unintended consequences, and I am determined to get this right. We want to provide certainty to the sector – we shall consult.

So today I am pleased to release a discussion paper on this issue, seeking input from the sector about these reforms and how best to implement this change. I am keen to hear from each of you on how these changes will affect existing unrelated commercial activities that are being undertaken or planned, and how best to transition entities that are undertaking unrelated commercial activities over time.

Reference:

www.dpm.gov.au/DisplayDocs.aspx?doc=speeches/2011/019.htm&pageID=005&min=brs&Year=&DocType=1

 

 

Attachment 5

ATO Eligibility for Small Business Concession

Guide to small business entity concessions

Eligibility

You generally qualify for the small business entity concessions if your business is a 'small business entity' for the year in question. However, some of the concessions have additional conditions which you will also need to meet.

You are a small business if you carry on a business and your business turnover (aggregated turnover) is less than $2 million.

Your turnover includes all income earned in the ordinary course of business for the income year. Turnover refers to your gross income or proceeds, rather than your net profit. It doesn't include any goods and services tax (GST) amounts you have charged on your sales.

Your aggregated turnover is the sum of your turnover for an income year and the annual turnover of any entity you are connected with or that is an affiliate of yours at any time during that income year.

There are aggregation rules that determine whether you need to include the turnover of another entity in your aggregated turnover.

You satisfy the turnover test for the current year if your aggregated turnover:

• was less than $2 million in the previous income year, or
• is estimated to be less than $2 million for the current year (provided that your aggregated turnover was less than $2 million for one of the two previous income years), or
• is actually less than $2 million at the end of the current year.

Reference: http://www.ato.gov.au/businesses/content.aspx?doc=/content/00231250.htm&page=2&H2

 Attachment 6

 UBIT Tax Returns US 2007 (see attached file)