1. NFP Reform – An Update Paul Ingram, Partner, Minter Ellison 14 November 2012

2. What is happening? Proposed MeasureProgress to dateProposed start date Unrelated commercial activitiesConsultation Paper1 July 2012? In Australia and other special conditions Bill in HOR First income year starting after date of assent Establishment of the ACNC: - General - Non-financial reporting - Financial reporting - Governance rules Bill passed, awaiting Assent Consultation Paper Assent 1 July 2013 1 July 2014 1 July 2013 Statutory definition of charityConsultation Paper1 July 2013 NFP Sector Tax Concession Working Group Discussion Paper?

3. Unrelated Commercial Activities

4. ‘Better Targeting of Not-for-profit Tax Concessions’ Government to reform the use of tax concessions by businesses run by NFP entities Will cover ‘Unrelated Commercial Activities’ (UCAs) Started 1 July 2012??? Transitional relief for pre-10 May 2011 UCAs No legislation as yet

5. Key Aspects NFPs will pay income tax on profits from UCAs but only where those profits are not directed back to their altruistic purpose (ie. accumulated) DGR, FBT and GST concessions cannot be used to support UCAs

6. What are ‘Unrelated Commercial Activities’? Consultation Paper is quite vague Reforms will not affect commercial activities which ‘directly further an NFP entity’s altruistic purpose, even where the activity is done in a commercial way’ Such activities will be ‘related’ (and ok) But no clear definition

7. Definition of UCAs Perhaps three ‘easy’ categories Activities that are intrinsically charitable, but carried out in a commercial way NFP hospitals, op shops and child care centres Businesses providing meaningful employment to the disadvantaged Passive investment Beyond that? Is activity ‘incidental’ or ‘ancillary’ to the altruistic purpose?

8. Likely Issues for Schools? Some activities clearly related Tuck-shop, inc. sale of uniforms and text books Using hall and volunteers to run Bingo two afternoons a week to raise money for the school But what about: More extensive public use of school facilities? Property development?

9. UCAs: Impact on State Taxes? Payroll Tax exemptions Already attempt to tax wages paid to workers not engaged exclusively in work of a kind ordinarily preformed in connection with the conduct of school/the charitable purpose May be toughened?

10. UCAs: Impact on State Taxes (cont.) Land Tax exemptions Currently broad Used solely or mainly (educational institutions) Wholly or mainly (charitable purpose) Reform?

11. In Australia (and other special conditions)

12. Proposed Rules Three separate aims Standardise the ‘in Australia’ and other special conditions for income tax exemption Standardise the ‘in Australia’ requirement for DGRs Insert a new definition of ‘not-for-profit entity’

13. Definition of ‘Not-for-profit entity’ Main requirements: Not carried on for profit or gain of its owners or members, neither while operating nor upon winding up Governing rules must prohibit distributions to members Unless to NFP entity with a similar purpose Unless compensation for services, expenses

14. Definition of ‘Not-for-profit entity’ (cont.) Most constitutions will need minor amendments But Bill not yet passed Once it is passed, will have at least 12 months to amend rules

15. The ACNC

16. New national regulator for the NFP sector Three key objects Public trust and confidence in NFP sector A robust, vibrant, independent and innovative NFP sector Reduce red tape Will take over part of ATO role

17. The ACNC Key regulatory issues Registration Reporting Governance

18. Registration If endorsed as charity by ATO now, will be deemed to be registered with ACNC Reviewed upon adoption of new statutory definition on 1 July 2013 Building and Scholarship Funds? External funds will be separately registered Internal funds will not be

19. Reporting Reporting requirements will be proportional SmallRevenue less than $250,000 MediumNot small Revenue less than $1,000,000 LargeNot small Not medium

20. Reporting (cont.) Reporting Requirements Lodge Annual Information Statement Lodge Annual Financial Report Financials Reviewed Financials Audited SmallYesNo MediumYes No, unless choose to do so, or directed to do so LargeYes NoYes

21. Reporting (cont.) Substituted Accounting periods Commissioner will have power to approve But approval deemed to be given where: Charity automatically registered on commencement of ACNC; and Charity notifies Commissioner within 6 months ACNC will send material out

22. Reporting (cont.) Start dates First Reporting YearFirst Report Due By GeneralSAPsGeneralSAPs Non-financial2012/13201331 Dec 201330 June 2014 Financial2013/14201431 Dec 201430 June 2015

23. Reporting (cont.) Amendments made by HOR Commissioner must treat reports under the Schools Assistance Act 2008 as satisfying financial reporting requirements of ACNC Act Applies until at least 2014/15 (or 2015 for SAPs), and perhaps longer ACNC/DEEWR working group

24. Governance One of the conditions for registration will be that the entity meets the governance requirements of the Act But will only apply from 1 July 2013 Two categories: Governance standards External conduct standards

25. Governance (cont.) Governance standards likely to cover aspects such as: duties and minimum standards of responsible individuals, including rules for proper organisational management and running of the entity disclosure requirements and managing conflicts of interest risk management procedures the coverage of the minimum requirements of governing rules relationships with members

26. Governance (cont.) External conduct standards Will ensure that funds sent outside Australia Reach legitimate beneficiaries Are used for legitimate purposes Not contributing to terrorist/criminal activities

27. Governance (cont.) No detail as yet To be prescribed in regulations in due course Mandatory consultation beforehand Additional Parliamentary scrutiny as well Cannot include ‘gag clauses’

28. Statutory Definition of Charity

29. Proposed Statutory Definition Will apply from 1 July 2013 Will be based on draft Charities Bill 2003 That Bill was intended to merely ‘replicate’ the Common Law, but probably went a bit further Will Gillard Government want to go further again?

30. Proposed Statutory Definition (cont.) Traditional four heads may be expanded Potentially controversial issues ‘Exclusively charitable purpose’ vs ‘dominant’ Focus on purpose or activities? No presumption of public benefit

31. Proposed Statutory Definition (cont.) Removal of presumption of public benefit How significant is it? Presumption actually of limited scope at Common Law anyway? Independent schools in UK have largely overcome

32. Proposed Statutory Definition (cont.) Independent Schools Case (UK) Key question was whether class of persons who can afford fees is sufficient to constitute a section of the public Total exclusion of the poor is certainly not acceptable – there must be some access beyond fee-paying students But Charities Commission guidelines held to be too restrictive

33. Proposed Statutory Definition (cont.) Independent Schools Case (UK) 'Although it is necessary that there must be more than a de minimis or token benefit for the poor, once that low threshold is reached, what the trustees decide to do in the running of the school is a matter for them, subject to acting within the range within which trustees can properly act. That is something entirely different from imposing on the trustees the view of anyone else about what is "reasonable".'

34. Proposed Statutory Definition (cont.) Independent Schools Case (UK) Commissioner has accepted decision and withdrawn relevant guidelines New guidelines to be issued in late 2012/early 2013

35. Proposed Statutory Definition (cont.) Will Australian independent schools face the same issues? Consultation Paper on statutory definition does refer to the UK debate (at 86): ‘While some issues may not arise in Australia because of differing school systems, it is nonetheless expected that guidance similar to that issued by the Charities Commission…will be provided in Australia but modified where necessary to suit Australian conditions and laws.’

36. NFP Sector Tax Concession Working Group

37. Formed in response to the Tax Forum Discussion Paper now released ‘The purpose of the paper is to stimulate discussion, debate and feedback…It is not a position paper and the options canvassed are not recommendations.’

38. Income Tax Exemption Reviewing current categories of exemption No specific mention of schools Other possible reforms: Extending public benefit test beyond charities Extending ATO endorsement beyond charities

39. Refunds of Imputation Credits Expanding range of entities that qualify But capping the amount that can be claimed

40. Deductible Gift Recipients Making all charities DGRs But perhaps not those for advancement of religion, charitable child care services, primary and secondary education Significant private benefits? Gonski idea of Govt controlled philanthropic fund

41. Deductible Gift Recipients (cont.) Incentivising donors, reducing compliance Tax offsets rather than deductions Testamentary and workplace giving Increasing threshold from $2 to $25 Eliminating public fund requirements

42. Fringe Benefits Tax Clearly the big issue for the Government! Inconsistency of treatment Competitive neutrality Use of concessions outside of policy intent Meal entertainment Entertainment facility leasing Compliance burden

43. Fringe Benefits Tax (cont.) Short-term reform options Including meal entertainment and entertainment facility leasing benefits within the FBT caps Preventing use of multiple FBT caps Reducing 48% rebate rate Extending minor benefit exemption to tax exempts

44. Fringe Benefits Tax (cont.) Long-term reform options Phasing out exemptions and rebates and replacing them with: Government grants Refundable tax offsets for employers Tax offsets or tax free allowances for employees Limiting FBT concessions to benefits that are incidental to employment Staff carparks In-house meals Incidental use of cars

45. GST Reforming the fundraising concession Simplifying rules re supplies for nominal consideration

46. Other Developments

47. Red Tape Reduction ACNC intended to become ‘one-stop shop’ ACNC Act contains express object re red tape ACNC will have to report on it annually Commonwealth Grant Guidelines to be amended COAG NFP Reform Working Group SA has already announced ‘harmonisation’ amendments Reporting Charitable collections

48. Building Funds Draft Ruling TR 2011/D5 Issued on 5 December 2011 Rejects the ‘more than 50% school use’ rule of thumb Non-school use must be ‘minor’ or ‘occasional’ Still not finalised Not expected until February 2013

49. Personal Liability for Corporate Fault Reform COAG project Ensure criminal liability only imposed on directors where fair and reasonable to do so Commonwealth has reviewed its laws Bill before Parliament SA Govt has passed one Bill Another one to come?

50. Some Concluding Remarks ACNC registration information (SAPs) Keep an eye on future developments Unrelated Commercial Activities Governance rules Building Funds Update Constitution in due course