Two new developments in the NFP world

August, 2011

A.    Final Report – Scoping Study for a National NFP Regulator

On Monday, 4 July 2011, the Treasury released the final Scoping Study for a national NFP regulator, which outlines the views put forward by stakeholders during the consultation about the design of the Australian Charities and Not-for-profits Commission (ACNPC). This final report concludes the Federal Government’s 2010 election commitment for a scoping study for a national ‘one-stop shop’ regulator. The Government had released a consultation paper on 21 January 2011 which sought stakeholder comment on the goals of national regulation, the scope of national regulation and the form and functions of a national regulator. One hundred and sixty one (161) submissions were received. The final Scoping Study makes forty four (44) recommendations on the direction of the reforms in an effort to strengthen the NFP sector.

The recommendations As mentioned, there are forty four (44) recommendations. These recommendations cover the scope of national regulation; registration; the definition of charity; education and compliance; fundraising; reporting; an information portal; governance, disclosure and compliance; the form of a national regulator; and the funding of that regulator.

Some of the more interesting recommendations are the following: Registration
(a) The NFP regulator should determine the NFP status of entities, including charities and public benevolent institutions. Initially, the regulator’s determination of the NFP status of an entity should be accepted by every Commonwealth agency. The regulator should initially focus on determining the status of charities (including public benevolent institutions), with this focus gradually growing to include all other NFP entities.
(b) Entities should apply to have their NFP status determined by the regulator on a voluntary basis. However, to obtain support which is provided by the Australian Government (and any state and territory governments) that agree – following conclusion of the COAG process – an NFP entity would need to be registered and regulated by the NFP regulator.

Implications for NFPs

The NFP sector in Australia is on the verge of undergoing much change and all NFPs need to keep abreast of those changes for numerous reasons, but most importantly to ensure that they are legally compliant at all times.
NFPs wishing to register (assuming that registration remains voluntary at least in the short term) with the proposed ACNPC next year may find themselves having to justify the endorsements that they currently enjoy.
If the ‘in Australia’ special conditions are changed as proposed, this will result in many NFPs suddenly discovering that they no longer comply with this requirement and, as a result, will no longer be income tax exempt or DGRs.

Governance, disclosure and compliance (f) Organisational governance rules should be proportional to the size of entities, risk factors and receipt of public and Government assistance. (g) Over the longer term, the regulator should be provided with powers regarding asset protection, the suspension and/or removal of responsible persons, registration and deregistration, the enforcement of governance rules, investigative processes, enforcement powers etc.

Form and funding of the national regulator (h) The Australian Government should seek agreement with the states and territories on a single national regulator through COAG. (i) The Government should consider whether or not to collect a supervisory co-contribution, as NFP entities are brought within the new regulatory framework, and once it is possble to replace existing fees.

It will be interesting to see how many of these recommendations are adopted by the new ACNPC once it is up and running as of 1 July 2012.

B.    Proposed Changes to “In Australia” Test

The Assistant Treasurer has released for public consultation an exposure draft of legislation that will restate the ‘in Australia’ conditions for tax concession entities by ensuring that:
(a) income tax exempt entities generally must be operated principally in Australia and for the broad benefit of the Australian community; and
(b) deductible gift recipients (DGRs) generally must be operated solely in Australia and for the broad benefit of the Australian community.

Reinstating the ‘in Australia’ special conditions will apparently provide support to the anti-avoidance measures in the tax law which limit income tax exempt entities spending money offshore and ensure that tax supported funds remain in Australia. Further, the ‘in Australia’ special conditions will supposedly provide additional measures to address possible abuse of NFP entities for the purposes of money laundering and terrorist financing, and ensure the proper operation of NFP entities, their use of public donations and funds, and the protection of their assets.

The consequences of the proposed changes These new special conditions are aimed to achieve standardisation across the different categories of income tax exempt entities. Standardisation is usually welcomed as it reduces complexity and confusion (and hopefully inequity). DGRs It is proposed that a new section 30-18 be inserted into the Income Tax Assessment Act 1997 which will apply to Item 1 DGRs. Item 1 DGRs will, if this legislation is adopted, have to:
(a) be established in Australia; and
(b) operate solely in Australia at all times; and
(c) pursue their purposes solely in Australia at all times.

The general exception is endorsed overseas aid funds. The exceptions to paragraphs (b) and (c) above will be if the Item 1 DGR has overseas activities which are:
(a) merely incidental to the Australian activities of the Item 1 DGR; or
(b) minor in extent and importance when considered with reference to the Australian activities of the Item 1 DGR.

Income tax exempt NFPs Income tax exempt NFPs (including charities) will, if the new legislation is adopted, be required to:
(a) operate principally in Australia; and
(b) pursue their purposes principally in Australia; and
(c) not donate money to any other entity, unless the other entity is an exempt entity (which is an entity which is income tax exempt in Australia).

The word “principally” is not defined in the proposed legislation. The ATO has, to date, interpreted this word to mean “mainly or chiefly”. Less than 50% is not principally. It is proposed that section 50-75 of the Income Tax Assessment Act 1997 be repealed. Section 50-75 is the section which currently allows NFPs – when assessing whether they comply with the ‘in Australia’ special conditions – to disregard distributions overseas of any amount received by the NFP as a gift (whether of money or other property) or by way of Government grant. Interested parties are invited to comment on this exposure draft bill. The deadline is Friday 12 August 2011.

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