The Commonwealth Government has announced funding for changes relating to charities and not-for-profits: the establishment of the Australian Charities and Not-for-profits Commission, refinement of not-for-profit tax concessions and a statutory definition of ‘charity’.

The Government will also undertake further reviews of aspects of the regulation of the NFP sector, including reviews of the company limited by guarantee entity, NFP fundraising, and the governance obligations appropriate for NFP entities.

The Australian Charities and Not-for-profits Commission

The Government will establish a new statutory agency, the Australian Charities and Not-for-profits Commission (ACNC), by 1 July 2012.

From 1 July 2012, the ACNC will initially be responsible for determining charitable, public benevolent institution, and other NFP status for all Commonwealth purposes; providing education and support to the sector; implementing a ‘report-once use-often’ general reporting framework for charities; and establishing a public information portal by 1 July 2013.

The Commissioner of Taxation will retain responsibility for administering tax concessions for the NFP sector.

The Commonwealth will continue negotiations with the states and territories on national regulation for the charitable sector.

The Government will set up an Implementation Taskforce from 1 July 2011. It will be responsible for ensuring the ACNC is ready for operation by 1 July 2012, and will also consult with the public, the NFP sector and government agencies on a new general reporting framework and public information portal.

Reform of tax concessions by businesses run by NFP entities

The Government will reform the tax concessions provided to not-for-profit (NFP) entities so that the NFP income tax concessions will only apply to profits generated by unrelated commercial activities that are directed back to a NFP entity to carry out its altruistic work. This means NFP entities will pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose (that is, the earnings they retain in their commercial undertaking).

The new arrangements will commence on 1 July 2011 and will initially affect only new unrelated commercial activities that commence after 10 May 2011.

NFP entities, in respect of their unrelated commercial activities, will also not have access to the fringe benefits tax exemptions or rebate, goods and services tax concessions, or deductible gift recipient support in relation to those activities.

Commercial activities that further a NFP entity’s altruistic purposes, and small-scale and low-risk unrelated commercial activities, will not be affected by the reforms. Examples of this type of related commercial activity include not-for-profit hospitals, op-shops that sell second-hand household items and clothing at discounted prices to those in charitable need, NFP child care centres, and businesses whose purpose is to provide meaningful employment to disabled persons.

The reforms will not affect NFP entities carrying on small-scale and low-risk activities, such as lamington drive fundraisers, school fetes and leasing out of church halls.

NFP entities with existing unrelated commercial activities will initially be able to continue to use their tax concessions to support these activities. The Government will consult on transitional arrangements for these existing activities, with the intention of phasing these out over time.

NFP entities that have entered into a government service delivery contract as at 7.30pm (AEST) on 10 May 2011 will be allowed to use their tax concessions in support of that contract. The 50,000 National Rental Affordability Scheme allocations will be unaffected by the tax changes.

These reforms will not affect the principle of mutuality and the tax treatment of clubs.

A statutory definition of ‘charity’

The Government will also introduce a statutory definition of ‘charity’ applicable across all Commonwealth agencies from 1 July 2013.

The definition will be used for all Commonwealth laws, and will be based on the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations, taking account of the findings of recent judicial decisions, such as Aid/Watch Incorporated v Commissioner of Taxation which extended the definition of charity to include further types of advocacy-based organisations.

The ACNC will develop new guidance for the sector, implement system changes, and re-assess the charitable status of entities on the basis of the new statutory definition.

The Government will also consult with the states and territories with the intention of developing and introducing a definition of ‘charity’ that can be adopted by all jurisdictions.

More information: Budget Paper No 2, pp 36-37, and 322.