1. Not for Profits (NFPs) The next solution - TAX Sean Urquhart, Partner Nexia Court – Sydney 16 November 2012

2. “Independent senator Nick Xenophon has vowed not to give up on his quest to call the controversial Church of Scientology to task over taxes” SBS World News Australia, Xenophon wont’ give up on Scientologists, 12 May 2010

3. Hot off the Press! 2 nd November 2012 – Not-For-Profit Sector Tax Concession Working Group Discussion Paper

4. Income Tax Exemption issues 1.What types of entities should qualify for an income tax exemption? 2.Should special conditions should be attached to eligibility? 3.Should the conditions be uniform or different for each entity type? 4.Should the ATO endorsement framework be extended to include NFP entities other than charities seeking tax exemption? 5.Should the income tax exemption for State, Territory and local government bodies be simplified and consolidated in the ITAA 1997? 6.Should the current threshold ($416) for income tax exemption for taxable NFP clubs, associations and societies be increased? Who should be eligible for exemption from income tax?

5. Refund of Franking Credits issues 1.Should other types of NFPs also be able to claim a refund of franking credits? 2.Should the ability of tax exempt charities and DGRs to receive refunds for franking credits be limited? Who should be eligible for refunds of franking credits?

6. DGR issues 1.Extend DGR status to all charities 1.Currently DGRs must be for public benefit 2.If extend to all charities, charities can provide private gain / benefit (relevant for providers of educational, child care & religious services) 3.Gonski review: fund should operate under DGR status and donors should be able to influence where funds are directed 2.Extend DGR status to most charities a.No DGR status for charities that provide a significant private benefit b.This approach would be inconsistent with the ACNC Bill 2012 where entity can be registered as a charity & have multiple sub-type registrations a.Entity registered as a charity with the following sub-types: 1.Advancement of education 2.Relief of poverty, sickness or needs of the aged 3.Establish endorsement conditions for scope of activities a.All charities can be endorsed as a DGR, but b.DGR may not use DGR funds for the advancement of religion, charitable child services and primary or secondary education Should DGR status be extended to all charities?

7. DGR issues 1.Tax deduction system 1.Currently in place 2.Favours people on a higher income as get greater marginal tax rate deduction 2.Tax offset mechanism a.In Canada: a.First $200 of donations offset at lowest marginal tax rate b.Donations in excess of $200 if offset at highest marginal tax rate b.Treasury Suggestion: a.34% for donations up to $1,000 b.38% for donations in excess of $1,000 3.Hybrid system a.Marginal tax deduction for donations to PAF b.Tax offset for donations to other DGRs What is the best mechanism to provide donors with a tax incentive?

8. FBT issues 1.Short-term reform options 1.Include meal entertainment & entertainment facility leasing benefits within relevant caps Currently no cap 2.Require employee declarations to avoid employees benefiting from various caps Currently employee can qualify for cap at each separate workplace (e.g. Doctors) 3.Align the FBT rebate rate (48%) with the FBT rate (46.5%) 4.Align the minor benefit exemption ($300) with the commercial sector 2.Long-terms reform option a.Phase out capped FBT concessions & replace with alternative Government support b.Phase out FBT concessions & replace with alternative tax-based support a.Refundable tax offsets payable to eligible entities b.Direct t tax offset c.Tax free allowances c.Limit concessions to benefits that are incidental to employment a.E.g. Car parks in the city What entities should be eligible for a FBT rebate / exemption?

9. GST issues 1.Adopt a principles-based approach to fundraising (input taxed) 1.Currently there is uncertainty what events the Commissioner will see as fundraising activities 2.Currently the concession is available for fetes, balls, gala shows, dinners, performances and events where all goods are sold for $20 or less outside the ordinary course of the NFP’s business 3.Proposal to adopt a principles-based test where NFPs can self-assess whether they qualify 2.Opt-in arrangement for GST treatment of non-commercial supplies (GST- free) a.Currently there is a compliance burden in determining whether the sale of certain items are GST-free b.E.g. Have to determine whether the total from the sale of the items are less than 75% of the cost incurred to organise the event c.Should NFPs be given the opportunity to treat all supplies as either taxable or input taxed (instead of going through all the compliance)? Compliance issues around fundraising & non-commercial supplies

10. Tax issues impacting the NFP Sector

11. Who will find this presentation useful? 1.Treasurer 2.Office bearer 3.Employee 4.Financial professionals 5.Auditors of charities Anyone involved in the administration of a NFP organisation

12. What will you learn from this presentation? 1.What are the NFP tax basics 2.What new developments are there 3.What must you do to keep yourself on track

13. Outline of presentation 1.Overview 2.Tax consequences 3.Types of NFP organisations & how they become exempt 4.“In Australia” requirement 5.Unrelated commercial activities 6.DGRs (e.g. Public Ancillary Funds) 7.Conclusion

14. Overview

15. The NFP sector: Bigger than Ben Hur? 600,000 entities $43 billion to economy (more than tourism, agriculture or communications) 900,000 employees 4.6 million volunteers Value of tax concessions estimated to be around $3.3 billion in 2011 and $4 billion in 2012

16. What makes NFPs special?  Various tax concessions can apply to NFPs A.Taxation concessions for entities receiving donations 1.Income tax exemption – Division 50 2.FBT exemption & rebate 3.GST exemption & rebate 4.Refund of franking credits B.Taxation benefits to taxpayers who donate to NFPs 1.Deductible Gift Recipient (DGR) status – Division 30 Tax deduction for donor who makes gift/contributions to a DGR DGRs can either be endorsed by the ATO or listed by name

17. Current position: ATO does it all ATO Principal regulator of NFP Sector Grant, withhold or revoke endorsement Income Tax Exempt Deductible Gift Recipient (DGR) Administrates tax concessions to ensure charities act in accordance with charitable purpose Bargwanna’s Case [2012] HCA 11 No annual gathering of information 1.Therefore difficult to monitor compliance (e.g. Whether NFP entity really pursues a charitable purpose) 2.However PAFs & PuAFs now have a requirement to file an information return

18. Bargwanna - ATO can deny tax concession status Charity must pursue its charitable purpose as set out in trust deed Action by taxpayers Maladministration of trust funds Mix of trust funds with personal funds Mr & Mrs B receives personal benefit Charitable Trust Mr B Mrs B Trustees of Trust Reaction by ATO ATO refuses endorsement of trust because: Fund was not applied for the purposes for which it was established Examples of non-fatal maladministration 1.Unauthorised investment by trustee 2.De minimis misapplication of trust funds Charity must apply charitable assets for charitable purposes

19. The Tax Reform story so far…  Problem Very complicated /complex to apply for tax concessions Hospitals entitled to income tax exemption, DGR status & FBT concession Universities entitle to income tax exemption & DGR status, but not FBT concession Definitions are not consistent/codified Compliance burden  Solution Uniform / Consistent approach Australia-wide 1.ACNC to determine eligibility for tax concessions & register new charities (not responsible for DGRs) 2.ATO to administer the process  Tedious process Gillard 2010 election commitment: Strengthening the NFP sector & May 2011 Budget 23 August 2012 - Australian Charities & NFP Commission Bill 2012 ACNC supposed to start 1 July 2012, then 1 October 2012 – Deferred 2 November 2012 – Discussion Paper: Fairer, simpler and more effective tax concessions for the NFP sector NFP Working Group final report due in March 2013  Where are we at this moment?

20. Some of the most important tax proposals Statutory definition of charity In progress Apply from 1 July 2013 “In Australia” conditions New definition of NFP In progress Apply from day of Royal Assent Unrelated Commercial Activities In progress Apply from 1 July 2012 Public Ancillary Funds 2011 Guidelines Finalised Apply from 1 January 2012

21. Case Study - Test your knowledge of NFPs Facts 1.A religious institution has as its main purpose to raise funds in Australia to donate to poor people in Africa 2.The institution also owns and operates a parking garage on a commercial basis Issues to consider 1.Is the institution a NFP organisation? 2.Is the institution a charity? 3.Is the institution exempt from tax? 4.Is the non-commercial activity exempt from tax? 5.Does the non-commercial activity affect the institution’s status? 6.Are profits from the non-commercial activity returned to the NFP? Issues will be discussed throughout presentation

22. Basic Tax Consequences

23. A bird’s eye view of tax concessions & NFPs CharitiesPBIs & HPCs Public hospitals & ambulances DGRs Clubs & other NFP entities Income Tax Exemption If endorsed Refundable franking credits FBT exemption ($17,000 cap) FBT exemption ($30,000 cap) FBT rebate Charitable institutions only Some non-clubs only Other FBT concessions GST concessionsCharities only Deductible gifts * Treasury, Fairer, simpler and more effective tax concessions for the not-for-profit sector, November 2012  Refer to this table as we go through the presentation

24. Tax consequences – Income tax  Exempt from income tax & no need to lodge a tax return AEndorsed Charities & Income Tax Exempt Funds (ITEFs) 1.Do not need to pay income tax, CGT or lodge income tax returns, unless specifically asked to do so 2.Will need to regularly review whether it is still entitled to endorsement 3.Must notify the ATO if it ceases to be entitled to endorsement BSelf-Assessing other NFP organisations 1.Do not need to pay income tax, CGT or lodge income tax returns, unless specifically asked to do so 2.Do not need to get confirmation of the exemption from the ATO 3.Must carry out a yearly review to check if the organisation is still tax exempt * Taxable NFPs are generally treated as companies for income tax purposes (i.e. 30% tax) whether or not they are incorporated) Refund of franking credits $520 million in 2011

25. Tax consequences - GST Type of NFP entityGST Concession All NFPs Higher registration threshold of $150,000 (for other entities the threshold is $75,000) NFP school tuck shop at primary/secondary schoolMay treat sale of food as input taxed NFPs are members of a GST group Relaxed GST grouping rules as no longer necessary to satisfy the 90% ownership test GST religious group of income tax exempt charities Exclude all GST from transactions within the group Non-profit sub entity of income tax exempt NFPTreated as separate entity for GST purposes CharitiesMay account for GST on a cash basis  Specific GST concessions for NFPs  Voluntary donations to NFPs are not subject to GST

26. GST-Free Supplies & Charities Supply of what?When will it be GST-Free? Accommodation If the consideration for the supply is less than 75% of the GST inclusive market value of the supply Any other supply If the consideration for the supply is less than 50% of the GST inclusive market value of the supply Donated Second-hand goods If originally received as a gift or by way of a supply that was GST-free because of a previous application of the 2 nd hand goods GST-free rule Retirement Village Accommodation If a supply of accommodation or a service related to this supply If a supply of meals Raffle tickets, Bingo gamesProvided it does not contravene a state law  Some supplies by a charitable institution, trustee of a charitable fund, a DGR or a government school is GST-Free

27. Tax consequences - FBT Type of OrganisationFBT Concession PBI (other than hospitals)FBT exempt ($30k cap per employee) Health Promotion CharitiesFBT exempt ($30k cap per employee) Public & NFP hospitalsFBT exempt ($17k cap per employee) Public ambulance servicesFBT exempt ($17k cap per employee) Religious institutionsFBT exempt Charitable institutionsFBT rebate ($30k cap per employee, 48c/$) Certain other NFP organisationsFBT rebate ($30k cap per employee, 48c/$)  FBT concession depends on the type of organisation (Sections 57A & 65J of the FBTAA 1986) $2.5 billion tax cost Salary Sacrificing Uncapped meal entertainment & car parking expenses

28. Tax consequences – State Taxes Type of TaxFactors to consider Stamp Duty 1.Charitable status of transferee 2.Discretion whether transfer is exempt Land tax 1.Charitable status of the owner 2.Use of the property by the owner 3.Use of the property by the occupier  Different in each state & territory Questions to ask: 1.Which entity qualifies for the exemption? 2.Is registration required to be a charitable institution? 3.Are there any special requirements (e.g. Must use land for a charitable purpose)

29. Case Study: Recycled clothing & accommodation for the homeless Income Tax No income tax on profits from: 1.Nominal rents from housing 2.Receipts from providing meals 3.Receipts from selling recycled clothing PBI Operates recycled clothing store Provides temporary accommodation & food for the homeless FBT 1.Employees can receive up to $16,050 (a grossed- up amount of $30,000) in salary & wages without FBT 2.Saving to PBI of $7,400 per employee that can either be retained by PBI or provided to employee as higher pay GST 1.PBI can choose not to register if turnover less than $150,000 2.Sale of recycled clothing = GST-free (sale of donated 2 nd hand goods) 3.Charge for hostel accommodation = GST-free (less than 75% of GST-inclusive market value) 4.Charges for meal = GST-free (less than 50% of GST-inclusive market value) Fundraising (DGR) 1.PBI can apply to ATO for endorsement as a DGR (Welfare & rights category) 2.Donor can therefore receive a tax deduction for donations (up to 46.5%)

30. Case Study: Recycled clothing & accommodation for the homeless Income Tax No income tax on profits from activities Society / club to encourage a game, sport or art GST 1.Club / Society can choose not to register if turnover less than $150,000 2.Examples of GST-free supplies that club/society can make include: Basic food items Some education Child care Health services Some exports Fundraising (DGR) 1.Sporting clubs not eligible to be endorsed as DGRs 2.Artist Society can apply for listing as a DGR on Register of Cultural Organisations Sporting Club / Artist Society FBT Eligible to have FBT liabilities rebated by 48% on benefits up to a grossed-up value of $30,000 per employee

31. NFPs & Tax Exemptions

32. What is a NFP? Characteristics of a NFP 1.Entity that does not operate for the profit / gain of its individual members While it is operating; and When it winds up 2.Entity that does not provide any private benefit to a related party (e.g. Distributions to members/owners), other than reasonable 1.remuneration for services provided 2.reimbursement of related costs  What are typical clauses in a NFP’s governing documents?  Clauses that:  Prohibit the distribution of profit/gain to owners/members  Mandate that on winding up, assets can only be distributed to other NFPs  What is a NFP?

33. New proposed definition of NFP (from day of Royal Assent)  Developments so far  23 August 2012 - TLA (Special Conditions for NFP Concessions) Bill 2012  New legislation planned to be effective from day of Royal Assent  Main proposed change for NFPs who are in NFP groups  May gift surpluses & assets (distributions), provided  Purpose of NFP1 is similar to purpose of NFP2; and  Distribution is intended to help NFP2 achieve its purpose Current NFP 1 NFP 2 Distribution Proposed NFP 1 NFP 2 Distribution Owner/Member of NFP 2

34. How do NFPs obtain tax-exempt status? Endorsement Self-Assessment Charities ITEFs Other NFP organisations Next slides will discuss these different types of NFP entities

35. The 3 types of NFP organisations 1 Charities 3 Other NFP organisations Charitable Funds Charitable Institutions EndorsementSelf-Assessment PBIs HPCs 2 ITEFs Must carry out yearly review to check that organisation is still exempt 9 broad categories: 1.Health 2.Education 3.Employment 4.Community Service 5.Cultural 6.Scientific 7.Sporting 8.Religious 9.Resource Development HECS R

36. Charities PBIs HPCs Charitable Funds *Created by will or trust *Manage/hold trust property for a charitable purpose Charitable Institutions *Established solely to run/advance/promote a charitable purpose Public Benevolent Institutions *Dominant purpose to provide benevolent relief of poverty, sickness, disability etc. Health Promotion Charities *Dominant purpose to prevent/control diseases in humans

37. What is a charity?  What is a charity?  NFP Institution or fund established wholly and exclusively for a charitable purpose Charitable purpose = common law / case law meaning Must be for Public Benefit (i.e. Available for the public / section of the public) Pemsel “Heads” of CharityExamples 1.Relief of poverty, sickness or needs of the aged PBIs Hospitals & aged care homes Homeless hostels & soup kitchens 2.Advancement of educationSchools, colleges & universities 3.Advancement of religionChurches & synagogues 4.Other purposes beneficial to the community Grey area (not 50 shades) Libraries, Museums See Aid/Watch case Must be endorsed, can’t self-assess

38. Charities: Practical issues  The following are NOT charities 1.Body Corporate (carried on for profit of its members) 2.Sporting Oganisations (carried on for members’ common interests) 3.Government bodies (see Bayside case & PuAFs)  What are the benefits of being endorsed as a charity?  Can qualify for: 1.Income tax exemption (s50-5 of ITAA 1997) 2.FBT concessions (s123E of FBT Act 1986) 3.GST concessions (s176-1 of GST Act 1999)  What about entities with political purposes? (i.e. seek a change in law or government policy) Not a charity (Political objects doctrine) because: 1.Politics is not a charitable purpose 2.Political purpose is not for public benefit Political objects doctrine overturned by Aid/Watch case

39. What is a charity? – Aid / Watch [2010] HCA 42 (Income Tax, GST, FBT) A political purpose can be a charitable purpose (TR 2011/4) Aid/Watch Oversees the efficient use of aid money by: 1.Monitoring to see where aid is delivered; 2.Publishing research about where aid is delivered 3.Campaigning for changes in the way aid is delivered Australian AidForeign Aid $ $ Question Can political activities be charitable? High Court Aid/Watch is charity under 4 th head (other purposes beneficial to the community) because: Generated debate about the efficiency of aid for the relief of poverty (1 st Pemsel head) Contributed to public welfare (i.e. not just to simply change a law) Practical implications 1.Charity can be established to generate lawful debate in areas of poverty, religion & education (first 3 Pemsel heads) 2.But no charity if entity is: 1.participating in Government 2.established contrary to public policy

40. What is a charity? – Central Bayside (Payroll Tax) Association of Doctors (180 GPs) Commonwealth Government Grants for purpose of improving health outcomes Funds used for range of purposes: 1.Improving patient outcomes 2.Collaborative projects with pharmacists 3.Implementing decision support software Government body can’t be a charity Central Bayside Question Is Central Bayside a charitable body & exempt from payroll tax? Argument of State Commissioner Not a charitable body because of its close relationship with the Government & only furthering the purposes of Government High Court Charitable body because: a.Not under the control of the Government; b.Both Government and Central Bayside pursued the charitable purpose of improving health outcomes

41. Word Investments Wycliffe Bible Translators Set up Sole activities: 1.Accepts funds from the public for investment; and 2.Conducts commercial funeral business What is a charity? – Word Investments (IncomeTax) Directs excess profits back to support evangelical work Income Tax exempt charity that translates Bible into other languages Objects of NFP must be charitable Will discuss commercial activities later High Court All the objects in the articles of association, when read as a whole, state a charitable purpose (i.e. the advancement of religion)

42. What if an entity is both a charity & a NFP of one of the 9 categories? Tiebreaker  Entity must be endorsed as a charity (i.e. can’t self-assess) NFP Charity NFP of one of the 9 categories Endorse Self-Assess

43. Proposed New Definition of Charity (from 1 July 2013)  Problem with definition of charity Since definition of charity depends on case law, there is uncertainty what a charity is Government wants to introduce a statutory definition of charity Howard Government initiated this in 2000, but abandoned it in 2004  New Developments  May 2011 Budget announcement  28 October 2011 – “A definition of Charity” consultation paper  Exposure Draft expected in 2012  New legislation planned to be effective from 1 July 2013  Main ideas from the consultation paper  Uniformity in application of tax concessions for whole of Australia  Public benefit requirement?  Charity regulator to decide who is a charity?  Are government bodies excluded from being a charity? (see PuAF discussion)

44. Income Tax Exempt Funds (ITEFs) ITEFs Non-charitable fund Established solely for the purposes of making distributions to DGRs

45. What is an ITEF?  Non-charitable funds established solely for the purpose of providing money, property or benefits to DGRs or for the establishment of DGRs  Can be established by will or instrument of trust Must be endorsed, can’t self-assess ITEF DGR Can be either a charity or a non-charity that is income-tax exempt Must not be a Private or Public Ancillary Fund * Non-charitable fund

46. Other NFPs that can self-assess 3 Other NFP organisations Must carry out yearly review to check that organisation is still exempt 9 broad categories: 1.Health 2.Education 3.Employment 4.Community Service 5.Cultural 6.Scientific 7.Sporting 8.Religious 9.Resource Development HECS R

47. The 9 types of organisations that can self-assess HECS R Health Employment Community Service Scientific Religious Educational Cultural Sporting Resource Development H E C S R Not political Not lobbying Art, Literature Music, Musical purposes Public Institution Fare Work Trade Union Public & non-profit Hospital Private Health Insurer Church Institution Association Research Fund Animal racing Game or sport Agricultural, Fishing Industrial, Manufacturing Tourism, IT

48. Other NFP Organisations that can self-assess  There are 9 types of organisations that can self-assess  Common characteristics of these 9 types: 1.Not for profit organisation 2.Established for a specific purpose 3.Not a charity 4.Pass one of 3 tests: 1.Physical presence in Australia test (see “in Australia” discussion) 2.DGR test (see DGR discussion) 3.Prescribed by law test (generally an overseas entity that is exempt from tax overseas & prescribed by name in the income tax regulations) No endorsement necessary

49. “In Australia” test

50. “In Australia” test (from day after Royal Assent)  Why is this test necessary?  To prevent charitable trusts & NFP organisations to shift untaxed funds overseas  Why does the Government want to restate this test?  Word Investments  Charity operates principally in Australia if it paid funds to institutions in Australia and the institutions ultimately expended those funds outside Australia  Government not happy with this  Australian charity is only supposed to pass funds to an overseas charity that is a DGR  However, charitable funds may only pass funds to charities based in Australia  Developments so far  23 August 2012 – TLA (Special Conditions for NFP Concessions) Bill 2012  New legislation planned to be effective from day of Royal Assent

51. Word Investments Wycliffe Bible Translators Set up Sole activities: 1.Accepts funds from the public for investment; and 2.Conducts commercial funeral business Word itself does not carry out charitable works, but distributes profits from unrelated business activities to charitable institutions Directs excess profits back to support evangelical work Income Tax exempt charity that translates Bible into other languages Irrelevant where ultimate beneficiaries are Did Word conduct its activities principally in Australia? Word Investments “In Australia” requirement High Court: YES Irrelevant where beneficiary entities (i.e. the entities to whom Wycliffe distributed the Bibles to) are located because: Word operated & conducted all it’s activities in Australia Word did not have a physical presence anywhere else

52. “In Australia” test – What are the proposed changes? Stricter “In Australia” test for DGRs (solely) CurrentProposed No uniform “In Australia” conditions (i.e. different meaning for different entities) Standardised “in Australia” condition to be applied consistently to different entities Incur expenditure & pursue its objectives principally in Australia Operates & pursues its purposes principally in Australia  No income tax exemption unless entity operates principally in Australia

53. “In Australia” test – Proposed change Direct / Indirect advancement of purpose Direct advancement of charitable purpose Indirect advancement of charitable purpose NFP Entity Must operate principally in Australia NFP Entity Must operate principally in Australia Non-Income tax exempt entity Conducts charitable activities directly Gives money or property to other entity to conduct charitable activities Where does this entity operate principally?

54. Unrelated Commercial Activities

55. “There may appear to be a vast difference selling lamingtons at a church fete and selling funeral services, but where the object of raising the funds is the same, [there is] no reason to draw a legal distinction between the two” The Commissioner of Taxation v Word Investments Ltd [2006] FCA 1414 at [60]

56. Word Investments Wycliffe Bible Translators Set up Sole activities: 1.Accepts funds from the public for investment; and 2.Conducts commercial funeral business Word itself does not carry out charitable works, but distributes profits from unrelated business activities to charitable institutions Directs excess profits back to support evangelical work Income Tax exempt charity that translates Bible into other languages NFP carries out commercial activities Can Word be a charitable institution even though it carries out commercial activities that are more than incidental? High Court: YES Word has charitable purpose of advancing religion even though it carried on an investment & funeral business Word endeavoured to make a profit, but only in aid of its charitable purpose Word carried out its business activities – not as an end in itself - but to further its charitable purposes Word Investments [2008] HCA 55 Unrelated commercial activities

57. Currently no law VS May 2011 Henry Review May 2011 Budget Recommends that commercial activities of NFPs should also be exempt from tax Restrict the use of tax concessions by businesses run by charities May 2011 Consultation Paper Expected Bill before 29 November (speculation): To apply from 1 July 2012 (for activities commencing after 10 May 2011)  Why the focus on unrelated commercial activities?  To encourage NFPs to focus solely on their altruistic purposes (and not get side-tracked by commercial dealings)  To ensure a level playing field between NFPs

58. Which activities may not be tax exempt? Unrelated Commercial activities of endorsed charities may no longer be exempt 10 May 2011 Activities that are caught: 1.New, unrelated commercial activities commencing after 10 May 2011; 2.Earnings that charity make from its commercial undertaking is not directed towards the charity’s altruistic purpose; 3.Activities are not small-scale or low-risk unrelated commercial activities; AND 4.Activities are not passive investment activities New Activity not Exempt 1.In respect of only these activities, charities will lose their income tax, CGT, FBT and GST exemption/concession as well as DGR support 2. However, the charities’ tax concession endorsement & DGR endorsement will be unaffected Exempt  What are the consequences of these unrelated commercial activities?

59. Would new rules apply to this scenario?  Change to existing unrelated commercial activity just before 10 May 2011  Does this cause the activity to become a new activity (and hence the new rules apply)? 10 May 2011 Existing Commercial ActivityNew Commercial Activity? Slight Change in Activity Should charities restructure their businesses? If so, by when?

60. Which activities may remain tax exempt?  Related vs Unrelated commercial activities  Related = part of NFP’s altruistic purpose Activities that will still be tax exempt 1.Non-commercial activities (e.g. Hobby farming) 2.Related commercial activities (see next slide for examples) 3.Unrelated commercial activities where profits are directed back to the charity to carry on its altruistic work 4.Small-scale/Low-risk unrelated commercial activities (e.g. lamington drive fundraisers, school fetes, leasing out church halls) 5.Passive investment activities 6.Unrelated commercial activities that existed at 10 May 2011 7.Activities from a Government service delivery contract entered into after 10 May 2011 Practical issues with these type of activities will be discussed next

61. Practical issues & unrelated commercial activities Commercial Activities  When is an activity commercial?  Is carrying on a business (income tax) or enterprise (GST) a commercial activity?  Will the provision of administrative services by one charity to another charity in a group be a commercial activity? Related Commercial Activities  When is an activity a related commercial activity? Examples of Related Commercial Activities 1.NFP hospitals & child care centres 2.Op shops that sell 2 nd hand household items & clothing to disadvantaged members of the public at discounted prices 3.Charities whose purpose is to provide employment to disabled persons 4.Churches operating a bookshop and selling religious items (integrated business-like activities) 5.Trade school selling furniture made by its trainees (profitable use of charity’s by-products) 6.Fees charged by old age homes (after factoring in government grants & running costs) 7.Adopting commercial methods for charitable operations 8.Holding passive investments to raise funds for charitable purposes

62. Practical issues & unrelated commercial activities Passive investment activities  What are passive investment activities?  Property development?  Leasing out rental properties?  Actively managing a share portfolio? Directing profits back to charities for their altruistic work  What if charities first invest the profits from the commercial activities and then direct them back for altruistic purposes?  How long can the time lag be?  Consultation paper – Must be directed back by end of the income year  Any tracing problems? Costs of these measures  More compliance & admin work for charities 1.Examine their activities 2.Do apportionment Tax portion of unrelated activities Do not tax portion of altruistic activities

63. How do unrelated business activities affect the tax concessions? GST  Is the registration threshold still $150,000? (or reduced to $75,000) FBT  Does restriction depend on whether employee is principally/predominantly involved in unrelated commercial activities or will this be pro-rated?  Potentially PBI will no longer be able to provide exempt fringe benefits to employees who carry out unrelated commercial activities DGR issues DGR $100 donation Unrelated Commercial Activities Charitable Activities Conducts Questions to ask 1.How much of donation can donor deduct? Pro rata? Depends for what donation was used for? 2.How will donor know what donation was used for?

64. Questions to ask – Unrelated business activities QuestionsIssues to consider 1.Does your NFP meet the definition of charitable? Common law / legal meaning of charitable Charitable purpose Public benefit 2.Are your NFP’s business activities related to its charitable purposes? 1.Business activities that: give effect to the charitable purpose directly carry out the charitable purpose are simply incidental or ancillary to the charitable purpose 2.Activities that are intrinsically charitable but are carried out in a commercial way 3.What are the consequences if these business activities are found to be unrelated to your NFP’s charitable purposes? Business activities taxable? Loss of different exemptions? 4.How can these issues be fixed?Restructure commercial activities in separate entity  What questions can you ask to determine if there is a problem?

65. Action Plan – Unrelated business activities  Pro-active steps NFPs can take to prepare for the change Take the following actionWhy? 1.Review constituent documents Constituent documents must: reflect the charitable / altruistic purposes contain clauses consistent with NFP status & tax concessional status 2.Review extent & purpose of commercial activities Earnings from commercial activities must be applied to: altruistic purposes; or purposes that are incidental to altruistic purposes 3.Review business plans & contracts for delivery of services To preserve tax concessions, NFP may have to restructure their operations (e.g. Put commercial activities in a special purpose vehicle) Take out Audit insurance?

66. DGR entities 27,783 endorsed DGRs 200 specifically listed DGRs Fewer than half of all endorsed charities are endorsed as DGRs ATO, Taxation Statistics, 2009-2010

67. What is a DGR?  DGRs are entities that donors can make income tax deductible gifts and contributions to  Cost to Government of $910 million in 2012 How can you become a DGR?  You must either: 1.Be listed by name in the Income Tax Law as a DGR (e.g. Amnesty International Australia & Landcare Australia) 2.Endorsed if meet the requirements of a general DGR category 1.Health promotion charities 2.School building funds 3.Public benevolent institutions 4.Overseas aid funds 5.Registered cultural & environmental organisations 6.Public libraries, museums & art galleries Types of endorsement  As a whole (e.g. Public hospitals & public universities)  the whole of the donation is deductible  For the operation of a fund, authority or institution (e.g. School building fund)  only the relevant part of the donation is deductible 50 general categories 4 types of DGR registers 200 in October 2010 27,783 in October 2010

68. DGR “In Australia” test (from day of Royal Assent)  Developments so far  23 August 2012 – TLA (Special Conditions for NFP Concessions) Bill 2012  New legislation planned to be effective from day after Royal Assent  Stricter threshold than for Income Tax Exempt Entities  Must operate solely & pursue their objectives solely in Australia (e.g. Have beneficiaries in Australia)  When may DGR’s activities be outside Australia?  International affairs DGRs (e.g. Overseas Aid Funds)  Incidental overseas activities  Overseas activities minor in extent & importance compared to domestic activities For DGRs – Stricter Test More lenient “In Australia” test for Income Tax Exempt Entities (Principally)

69. DGR “In Australia” test – Proposed change Direct / Indirect advancement of purpose Direct advancement of charitable purpose Indirect advancement of charitable purpose DGR Must operate solely in Australia DGR Must operate solely in Australia Non DGR Conducts charitable activities directly Gives money or property to other entity to conduct charitable activities Where does this entity operate?

70. Public Ancillary Funds (PuAFs) - Introduction  What can PuAFs be used for?  To raise funds for charities with DGR status  How do PuAFs do this?  PuAFs raise funds and then distributes them to “doing” DGRs to do charitable activities  PuAFs also has DGR status  But risk of money-laundering?  Regulations to prevent money-laundering  What minimum amount must PuAFs distribute each year?  PuAFs’ financial statements must be audited annually  PuAFs must value their assets (excluding land) annually  PuAFs must then distribute a minimum of 4% of the market value of the fund’s net assets over the following 12 months

71. Regulatory Framework for PuAFs  Trust deeds of PuAfs must comply with requirements  Check trust deeds  Non-compliance = risk of losing DGR status PuAF Trust Deed must comply with: Guidelines & Income Tax Act TR 95/27 Guidelines (9 December 2011) Applies from 1 January 2012 Very similar to PAF guidelines What must be in trust deed? 1.PuAFs may only distribute to certain DGRs (i.e. “doing” DGRs) 2.Prohibition on indemnification of trustee for losses suffered because of dishonesty What must be in trust deed? 1.Receipts must be issued in name of the fund 2.The ATO is to be notified of any changes to the trust deed If trust deed does not comply, have to amend trust deed See PuAF model trust deed handout (30 April 2012)

72. Public Ancillary Funds (PuAFs) – Practical Issues 1.Charitable NFP entities cannot qualify for charitable status if they are controlled by the Government PuAF Donations DGR status Get tax deduction Government Entity May only donate to other charity Entity for whom funds are raised Controlled by Government so receipts not tax-free 2.PuAFs can’t receive donations from PAFs or other PuAFs PuAF Donations DGR status PuAF 3.Upon winding up, a PAF may not transfer their net assets to a PuAF PuAF Transfer of assets DGR status PAF

73. Fundraising issues

74. Fundraising for charities through a PuAF or through commercial activities? PuAF Through a PuAF Donations DGR status Get tax deduction “Doing” DGRs Minimum of 4% distributions Because of compulsory 4% distribution, risk that PuAFs cannot build up their capital Through proposed unrelated commercial activities “Doing” DGRs Because of proposed unrelated commercial activities test, charities can’t accumulate funds in their operating entities Entity for whom funds are raised Operating Entities Make profit from unrelated commercial activities Profit taxable unless exception applies (e.g. Passive investment activity) All profits taxed here

75. Questions?

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