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Focus: Government abandons some not-for-profit sector tax reforms

3 February 2014

In brief: The Federal Government has announced that it will proceed with only one of the backlog of 'announced but unlegislated' reforms to the taxation of charities and other not-for-profit entities proposed by previous governments. Special Counsel Glenys Hodges (view CV) and Lawyer Scott Lang report on the fate of the reforms.

How does it affect you?

  • New legislation to restate and clarify the 'in Australia' special conditions for income tax exempt entities and deductible gift recipients (DGRs) is expected to be introduced during 2014.
  • The Federal Government will not proceed with proposed measures to 'better target' not-for-profit (NFP) tax concessions by restricting tax concessions to the altruistic activities of NFP entities, introduce a definition of 'not-for-profit' for the purposes of Commonwealth taxation legislation, provide for triennial review of DGR registers, and transfer the administration of the cultural gifts program. 

Taxation system reform consultation outcomes announced

On 14 December 2013, the Assistant Treasurer, Senator Arthur Sinodinos, announced the outcome of the Government's consultations over a backlog of 92 announced but unlegislated tax and superannuation measures, including proposed reforms of the NFP sector.1 The Government intends that the bulk of legislation for those reforms that are proceeding should be passed by Parliament during 2014.

Reform proceeding: restating the 'in Australia' requirements

A proposal to restate and clarify the 'in Australia' special conditions for income tax exempt entities and DGRs to ensure they operate principally in Australia was originally announced in the Rudd Government's 2009-2010 Budget and, as previously reported in our Focus: Not-for-Profit reform – new regulator and update on the agenda, the Tax Laws Amendment (Special Conditions for Not-for-Profit Concessions) Bill 2012 (Cth) was introduced to Federal Parliament by the Gillard Government and was reviewed by Parliamentary committees. It never went any further as concerns were raised by the committees and the Coalition and Greens recommended that the legislation not be passed.

The current and previous Federal Governments claim that reform is necessary due to the High Court's decision in the Word Investments case,2 where it was held that a charitable company satisfied the 'in Australia' requirement for income tax exempt status despite the fact that its only activities were to raise funds in Australia and transfer those funds to other charitable companies for distribution outside Australia.

The new legislation will take effect on the date of Royal Assent.

Reforms not proceeding

Better targeting of tax concessions

As previously reported, the Gillard Government released a consultation paper, Better Targeting of Not-for-profit Tax Concessions, in May 2011, which proposed to remove the income tax exemption, fringe benefits tax exemption or rebate, GST concessions and DGR status of NFP entities to the extent they engaged in commercial activities unrelated to their altruistic purposes and activities, and did not direct the profits from those commercial activities towards their altruistic purposes. The measure was to apply from 1 July 2011.

The Federal Government has announced that it will not be proceeding with legislation to implement this measure, but has indicated that it 'will explore simpler alternatives to address the risks to revenue'. There are no details on what these alternatives might be.

Definition of 'not-for-profit'

Currently there is no definition of the term 'not-for-profit' when used in Commonwealth legislation, despite the concept being used widely in taxation and charities legislation.3 As previously reported in our Focus: Not-for-Profit reform – new regulator and update on the agenda, the Tax Laws Amendment (Special Conditions for Not-for-Profit Concessions) Bill 2012 (Cth) proposed to introduce a consistent definition of a 'not-for-profit entity' across Commonwealth legislation. The proposed definition was subject to criticism by both the Coalition (then in opposition) and the Greens. The Federal Government will not proceed with legislation to introduce a definition.

Triennial review of DGR registers

In its 2009-2010 Budget, the Rudd Government announced that it would introduce triennial reviews of the organisations on, and the guidelines for, DGR registers, with the aim of assessing the scope for administrative and policy reform of DGRs. The Federal Government will not implement this proposal.

Transfer of cultural gifts program to ATO

The cultural gifts program allows taxpayers to claim an income tax deduction for the value of items of cultural significance donated to public art galleries, museums, libraries and archives. Early in 2013, the Gillard Government announced that the administration of the program would be transferred from the Ministry of Arts to the Australian Taxation Office in order to streamline processes and reduce red tape for donors. The Federal Government will not implement this proposal.

Footnotes
  1. Senator Arthur Sinodinos, 'Integrity restored to Australia's taxation system' (Media Release, No. 8, 14 December 2013).
  2. Word Investments Ltd v Commissioner of Taxation (2008) 236 CLR 204, 239.
  3. See, eg, Charities Act 2013 (Cth); Australian Charities and Not-for-profits Commission Act 2012 (Cth); Income Tax Assessment Act 1997 (Cth). 

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