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Focus: New national not-for-profit regulator proposed

28 July 2011

In brief: The Federal Department of Treasury has recommended the establishment of a national regulator to oversee all not-for-profit entities, which are currently subject to an array of complex regulatory burdens imposed by the overlap of federal, state and territory government legislation in this area. Partner Greg Bosmans (view CV), Lawyer Robert Merriam and Vacation Clerk Krista McMeeken report.

How does it affect you?

  • If adopted, the following key proposals will affect the regulation of not-for-profit (NFP) entities:
    • A single regulator will be established, responsible for regulating all NFPs under a tailored and principles-based framework addressing governance, accountability and transparency issues.
    • NFP entities will have the option of registering with the NFP regulator, but will need to do so if they wish to access government support.
    • Proportional reporting requirements will be applied to NFP entities, based on each entity's size, risk factors and level of assistance.
    • Broad organisational governance rules will be set for officers of NFP entities, based on minimum standards such as the duties of directors.
    • NFP entities will be required to pay a co-contribution to fund the national NFP regulator (with exemptions for small NFP entities).
    • A single portal will be established to provide information on NFP entities.

Background

In January 2011, the Federal Department of Treasury released a consultation paper1 regarding the proposed creation of a national regulator of the NFP sector. The Treasury has now released its final report2 , providing the Federal Government with 'a blueprint to implement a national NFP regulator'. The proposed reform responds to perceived inadequacies of the current NFP sector regulatory regime, which the consultation paper described as 'often inconsistent, overlapping and complex and ... in need of simplification'.

While concluding that a single national NFP regulator is the desirable long-term objective, the final report also sets out short-term options to improve the regulation of the NFP sector at the federal level.

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Current regulation

Regulation and education

The final report concludes that the current regulatory framework for NFP entities is complex, and the regulatory overlap between the federal, states and territories legislation results in a 'high regulatory burden but a poor level of regulatory oversight.' The particular legal form of an NFP entity (eg unincorporated association, charitable trust or company limited by guarantee) determines the form and level of regulation to which it is subject.

At present, there are more than 178 pieces of federal, state or territory legislation, involving 19 different agencies, that determine the charitable purpose or status of an NFP entity. Access to tax concessions, such as income tax exemptions, is decided at the Commonwealth level, making the Australian Taxation Office (the ATO) the default regulator at that level. At a state and territory level, access to concessions such as payroll tax, land tax and stamp duty must be endorsed by the relevant authority, and rates exemptions must be endorsed by the responsible local authority. Further, direct funding through grants can occur at all levels and is assessed by numerous government agencies. Like regulation, the provision of education to NFP entities regarding governance and compliance obligations is undertaken by different government and non-government bodies at the federal, state and territory levels.

Reporting

The final report finds that existing reporting arrangements are uncoordinated and complex, and impose a significant administrative burden on NFP entities, without necessarily providing adequate information to governments and the public. It argues that a national regulator could provide a single, central body to manage the collection of annual information reports from the NFP sector. This could simplify the reporting process and ease the regulatory burden on NFP entities by removing duplication. This regulatory burden could also be eased by imposing proportional reporting requirements on NFP entities, which would be based on the entity's size and risk factors and the level of assistance received.

Information portal

The final report observes that there is currently no single source of public information on the activities of NFP entities. A lack of accessible, reliable information reduces confidence in the sector and 'discourages appropriate levels of sector accountability and governance.' The final report supports the creation of a single public information portal that would:

  • inform the public about the accounts and activities of NFP entities in receipt of tax concessions; and
  • provide education and support materials (eg regarding governance requirements) to NFP entities.
Fundraising

The final report notes that fundraising regulation is inconsistent between states and territories, and, in some cases, non-existent. Given the increasing cross-border nature of fundraising, compliance with fundraising requirements can be difficult for NFP entities. The final report suggests that a national NFP regulator could administer consistent and simplified fundraising legislation.

'Charity'

The final report queries whether a statutory definition of 'charity' should be introduced to replace current reliance on the common law. It suggests a statutory definition would allow Parliament to more easily amend the definition of 'charity' and reduce uncertainty surrounding the classification of an NFP entity as charitable. The final report concludes that there is general support among stakeholders for a statutory definition to be imposed.

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Proposed national regulator

The NFP sector is currently regulated by numerous bodies at the federal, state, territory and local levels. The regulatory framework is complex, duplicative and burdensome. The final report suggests that a single national regulator, providing 'a central point for organisational governance, accreditation and reporting requirements', is required. The national regulator would be responsible for regulating all NFP entities, and would administer a regulatory framework that applies broadly across all NFP entities.

The national regulator might be established as a new, separate body or as a separate statutory office within the existing Australian Securities and Investments Commission or the ATO. The final report concludes that an NFP regulator established as a separate statutory office within the ATO is preferable, offering 'quick and cost effective establishment ... with a new organisational culture, while retaining the sector expertise of the ATO.' The Federal Government would need the support of the states to create a truly national regulator and this will likely take time. In the interim, and in the absence of state cooperation, the Federal Government could establish an NFP regulator to deliver reform at the federal level.

The proposed powers of the new regulator include:

  • asset protection where malfeasance is detected;
  • suspension powers where core duties are breached;
  • powers to register, investigate and deregister any NFP entity;
  • powers to issue warnings and penalties for non-compliance;
  • powers to undertake dispute resolution and appropriate enforcement powers, including general supervisory powers; and
  • the power to impose fines and civil penalties.

The regulator would determine the status of all NFP entities, including charities and Public Benevolent Institutions. This determination would initially be accepted by all federal agencies and, with the cooperation of the states, ultimately be accepted by every government agency. While registration would occur in a manner broadly consistent with the current system and voluntarily, registration would be needed to access government support.

The regulator will also be the central reporting coordinator responsible for recording and providing financial and other information about NFP entities. The regulator will harmonise reporting requirements at the federal, state, territory and local government levels and determine the final form of the financial report that NFP entities would be required to provide. Reporting requirements would be proportional to the size of the entity, the risk factors associated with the entity, and level of assistance provided to it.

The final report proposes the funding for the new NFP regulator could be:

  • entirely funded by the Federal Government; or
  • partly contributed to by regulated NFP entities,

in place of existing regulator fees. The final report concludes that co-contribution, in the form of a small flat fee (based on size and reviewed annually by the Federal Treasurer), would be both simple and effective. Small NFP entities might be exempted from this fee.

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Next steps

If the Federal Government adopts the final report's recommendations, then the regulation of the NFP sector in Australia will be significantly reformed. The creation of an effective, single, national regulator would require State cooperation and will take time. If and when this is achieved, the reform promises simplified regulation of NFP entities, and the avoidance of current regulatory duplication.

Footnotes
  1. The Treasury, Scoping study for a national not-for-profit regulator – Consultation Paper January 2011, available from the website of the Treasury.
  2. The Treasury, Scoping study for a national not-for-profit regulator – Final Report April 2011, available from the website of the Treasury.

For further information, please contact:

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