Final Report: Detailed Analysis
B3. Tax concessions for not-for-profit organisations
Consistent with the recommendations of previous inquiries, a national charities commission should be established to monitor, regulate and provide advice to all not-for-profit (NFP) organisations (including private ancillary funds). The charities commission should be tasked with streamlining the NFP tax concessions (including the application process for gift deductibility), and modernising and codifying the definition of a charity.
Categories of NFP organisations that currently receive income tax or GST concessions should retain these concessions. NFP organisations should be permitted to apply their income tax concessions to their commercial activities.
NFP FBT concessions should be reconfigured.
- The capped concessions should be phased out over ten years. In the transition period, the value of the caps would gradually be reduced. Reportable fringe benefits for affected employees (that is, those benefits that are readily valued and attributed) would be exempt from tax up to the relevant cap, and taxed at the employee's marginal tax rate above the cap. The market value of these benefits would be taken into account for transfer payment purposes. Non-reportable fringe benefits would be taxable for NFP employers.
- The FBT concessions should be replaced with direct government funding, to be administered by relevant Commonwealth portfolio agencies or the charities commission. All NFP organisations eligible for tax concessions should be able to apply to the relevant body for funding for specific projects or for assistance with the costs of recruiting specialist staff.
Simple and efficient tax arrangements should be established for clubs with large trading activities in the fields of gaming, catering, entertainment and hospitality. One option is to apply a concessional rate of tax to total net income from these activities above a high threshold. For clubs below the threshold, no tax would be applied to income from these activities.
Over the past two decades, the NFP sector has been the focus of a large number of reviews, which have consistently recommended the establishment of an independent national charities commission to address the complexity of the tax and regulatory arrangements for the NFP sector.15
The Review supports this recommendation. A national charities commission should be established to monitor, regulate and provide advice to all NFP organisations (including prescribed private funds). The commission should be tasked with streamlining the NFP tax concessions, and modernising and codifying the definition of a charity.
In addition to reducing complexity and compliance costs for NFP organisations, the commission would facilitate the collection of comprehensive data on the sector. The data collected could be used to target government support for the sector better, and would help individual donors make more informed choices about their giving.
NFP organisations should have scope to conduct commercial activities freely. This approach would reduce costs associated with education, assistance, advice, disputes and litigation on the ATO's interpretation of a 'charitable purpose',16 and would reflect the principles of the High Court of Australia's Word Investments decision.
The FBT concessions should be removed and replaced with a more neutral form of assistance.
However, in recognition of their importance in helping NFP organisations to deliver their services, these concessions should be phased out over 10 years to provide recipient NFP organisations with sufficient time to adjust the prices they charge for their services, and to renegotiate employment contracts and funding models.
During the transition period, the value of the capped concessions would gradually be reduced. Reportable fringe benefits for affected employees (that is, those benefits that are readily valued and attributed) would be exempt up to the relevant cap, and taxed at the employee's marginal rate above the cap. The value of all reportable fringe benefits should be taken into account for transfer purposes (see Section A1).
As with other employers, non-reportable fringe benefits should be taxable for NFP employers at the top marginal tax rate.
The benefits to NFP organisations of FBT concessions should be replaced with direct government funding. All NFP organisations eligible for tax concessions should be eligible to apply for funding for specific projects, or to assist with the costs of recruiting specialist staff. This would significantly simplify the number of classes of NFP organisation described in Table B3.1, and would facilitate the charities commission's task of codifying the definition of a charity. Where possible (particularly in relation to health), subsidies should shift to the relevant Australian government portfolio agency. For activities where there is no relevant agency, subsidies should shift to the charities commission.
The process for applying for funding, and the principles that would underpin decisions, should be subject to extensive consultation with the sector.
Simple, efficient and concessional tax arrangements should be established for clubs with large trading activities in the fields of gaming, catering, entertainment and hospitality. One option is to apply a concessional rate of tax to total net income from these activities above a high threshold. For clubs below the threshold, no tax would be applied to income from these activities.
The threshold should be supported with appropriate integrity mechanisms to prevent affected clubs from splitting their operations into smaller clubs to circumvent the threshold.
This approach would be simple for clubs to understand and apply, and would assist in better targeting the application of the mutuality principle.
Appropriate transitional arrangements should be designed in consultation with the NFP sector.
15 Reviews include the 1995 Industry Commission study on charitable organisations in Australia; the 2001 Senate Committee inquiry into the definition of charities and related organisations; the 2008 Senate Committee inquiry into disclosure regimes for charities and NFP organisations; and the 2009 Productivity Commission study on the contribution of the NFP sector.
16 For example, the distinction between a related an unrelated commercial activity could be contentious — the Seventh Day Adventist Church has publicly argued that the tenet of vegetarianism advocated by their religion is advanced through the sale of vegetarian products by their Sanitarium business.
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