Not-for-Profit changes announced in 2011/12 Federal Budget

The 2011/12 Federal Budget heralded wide-sweeping changes to the Not for Profit (NFP) sector. In particular, the tax changes may be the most significant to the NFP sector since the introduction of GST.

1. The current state of play

   Before turning to these developments, it is helpful to briefly recall the current position of NFP entities under the tax law.

   Certain NFP entities can currently access tax concession including:

   income tax exemption; FBT exemption or rebate; GST concessions; refundable franking credits for charities and deductible gift recipients. The entities which are eligible to access these concessions are outlined in Div 50 (ITAA 1997). With the exception of charities, entities may self assess their eligibility for these concessions. Charities are required to apply to the Commissioner for endorsement (the meaning of 'charity' will be discussed further below).

   Certain NFP entities may also be deductible gift recipients (DGRs), though the categories of DGRs are different to those of exempt entities.

2. The 2011 Budget announcements

   The main budget announcements were:

   Establishment of the Australian Charities and Not-for-Profits-Commission (ACNC). Better targeting of not-for-profit concessions (e.g. removing the income tax exemptions, FBT exemptions/rebates and GST concessions for the unrelated commercial activities of a NFP). Introduction of a Statutory Definition of Charity. The establishment of the ACNC is welcomed as it should stream line the reporting and regulatory process for NFPs.

   However, the announcements to better target Not-for-Profit concessions and the introduction of a Statutory Definition of Charity pose significant risks and challenges for a number of NFPs. Therefore, it is very important for NFPs to be engaged in the legislative drafting process to ensure that the outcomes are fair and reasonable. As there has been no legislation released there is a lot of uncertainty at the moment regarding how "commercial activities" should be carried out in the NFP space going forward.

   This article will consider these announcements in further detail below.

   2.1 Australian Charities and Not-For-Profits Commission (ACNC)1

   The Government proposes to establish the Australian Charities and Not-For-Profits Commission (ACNC), a new independent statutory agency which will be responsible for determining the legal status of groups seeking charitable, public benevolent institution and other not-for profit benefits.

   It is proposed that the ACNC will be set up in Treasury from 1 July 2011 to ensure it is ready for operation by 1 July 2012. The Commissioner of the ACNC will be appointed by the Government and will report to Parliament through the Assistant Treasurer. The ACNC Commissioner will have sole responsibility for determining the status of charitable, PBI and other NFP groups for all Commonwealth purposes.

   As a result of the establishment of ACNC the Tax Office will continue to focus on administering tax concessions to the NFP sector but will no longer determine charitable status, which will come into effect from 1 July 2012.

   2.2 Targeting NFP concessions - Treasury's consultation paper

   On 27 May 2011 Treasury released a consultation paper on better targeting of NFP tax concessions. The paper is the first opportunity NFPs and tax practitioners have had to understand the detail of the Government's current thinking.

   Unfortunately there is little in the paper to please NFP entities, as it foreshadows a significantly increased compliance burden for NFPs that undertake commercial activities, and there is a potential tax burden. The paper is also disappointing for practitioners, as in many respects it seems to simply adopt the ATO's positions (e.g. on activities which are ancillary to or incidental to an entity's charitable purpose). This may suggest that the ATO is currently driving the reform agenda. It is hoped that going forward Treasury provides the sort of rigorous, independent policy analysis one would expect on such major reforms

   The consultation paper addresses four main issues:

   What commercial activities are simply ancillary or incidental (i.e. related) to a NFP's core altruistic purposes? It proposes that these activities will continue to be exempt from tax. What are small-scale or low-risk activities of a NFP? These will also continue to be tax exempt. How should the Government tax the unrelated commercial activities of a NFP? The paper proposes three possible options. What transitional measures should be adopted? We will address each of these issues in turn while providing some comment on each issue.

   2.2.1 Core activities and ancillary and...