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2011 Budget announcements: a taxing time for NFPs

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Wayne Swan’s announcements will result in significant impacts on the operations of not-for-profits (NFPs) within the country, hopefully in many cases for the better. However, in any change to regulation there are always winners and losers, so those responsible for managing and governing NFPs need to be alert to the changes to minimise any impacts upon their activities.

There were three major announcements made in the Budget which will affect many NFPs.

1. Australian Charities and Not-For-Profits Commission

The Government has taken steps to establish a new statutory authority to be known as the Australian Charities and Not-For-Profits Commission (ACNC). The ACNC will be operative from 1 July 2012 and the Government has established an Implementation Task Force which started work on 1 July 2011 to ensure that the ACNC is ready for operation by 1 July 2012. Robert Fitzgerald AM is Chair of this advisory board.

The ACNC will initially be responsible for determining charitable, public benevolent institution and other NFP status for all Commonwealth purposes. Back office support will be provided by the Australian Taxation Office to assist ACNC in carrying out this role.

The ACNC will also be responsible for implementing a “report-once”, “use-often” general reporting framework for NFPs which, if successful, is likely to provide significant benefits to those in the sector who are required to report to a number of different government agencies.

2. Statutory definition of “charity”

In 1601, the Statute of Elizabeth was passed in the United Kingdom during the reign of Elizabeth I and its preamble established the basis for legally determining what a “charity” is. Believe it or not, this definition is still applied in Australia as it has developed over 400 years through interpretative judgments handed down in English and Australian courts.

The Government is determined to introduce a statutory definition of the concept of “charity” to be applicable across all Commonwealth agencies from 1 July 2013.

The Howard Government looked to implement a statutory definition of “charity” in 2001 and there was considerable controversy around that definition. No doubt the next attempt to define it will be similarly controversial.

3. New tax arrangements

The Budget announcement which is likely to have the largest impact on the activity of NFPs is the introduction from 1 July 2011 of income tax upon NFPs in respect of surpluses from their “unrelated commercial activities” which are not applied towards their altruistic purposes.

This new tax came into effect on 1 July 2011 in respect of “new” unrelated commercial activities; that is, those activities which commenced after 7:30 pm on 10 May 2011.

Notwithstanding the fact that this tax is now in place in respect of certain activities, the details of it are still unknown and this has created a great deal of uncertainty in the NFP sector.

The Assistant Treasurer, the Hon. Bill Shorten, issued a consultation paper seeking the sector’s views on how to “better target Not-For-Profit tax concessions”. This is a euphemism for taxing NFPs unrelated commercial activities.

As at the date of finalisation of this article, the Government has not determined how such a tax will be imposed and what other changes may be necessary to allow the “better targeting of NFP tax concessions”.

Possibilities canvassed in the consultation paper include:

  • Requiring NFPs to establish different entity structures so that their unrelated commercial activities can be identified. The options included setting up a separate entity to be taxed equivalently to other commercial entities in Australia, setting up a separate entity where only profits retained in that entity at the end of the year would be taxed or allowing NFPs to undertake unrelated activities within the existing NFP structure.
  • No matter which of these options is adopted by the Government it will require NFPs who are undertaking unrelated commercial activities to either change their structure or their internal accounting processes.
  • The Government states that it will not prevent NFPs from carrying on unrelated commercial activities but wants to ensure that any surpluses generated from those activities are applied towards the NFP’s altruistic purposes – otherwise the tax man will come knocking at the door.
  • Whilst these changes are only impacting new unrelated commercial activities after the Budget date at present, the Government has indicated that it will phase in these requirements in respect of all unrelated commercial activities of NFPs irrespective of when they were commenced.
  • The reforms will not affect the passive investment activities of NFPs.
  • Some usual business activities can be a trigger to actually convert an existing unrelated commercial activity into a “new” unrelated commercial activity, thereby attracting income tax. Some examples given include:
    • changes in the goods and services provided;
    • an increase in the goods or services provided;
    • a change in the market for goods and services;
    • a change in the mix of customers;
    • a change in the method of selling;
    • the addition of a new location;
    • changes in trade names, trademarks, etc;
    • changes in the number of employees;
    • taking over another entity or amalgamating with another entity.

The Government is looking at similar tax arrangements in place in the UK, Canada and the US to guide it in refining the proposed tax system.

As always, the devil will be in the detail as far as tax law is concerned but it is clear that the activities of many NFPs will need to be restructured to ensure that NFPs do not pay unnecessary income tax. Future developments in this area will be reported on our Charities and Not-For-Profits Resources Centre at www.makdap.com.au/charity_home.cfm

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