Fitzgerald began by raising the Commission’s concern that one of the biggest issues facing the third sector was the failure of not-for-profits to be able to access capital.
Fitzgerald said the Commission “will look at the establishments of Commonwealth and states to try to ascertain the level of capital constraint”. It will then look at options to change the environment. He went on to float two potential outcomes.
The first is to establish new forms to allow equity. Citing the example of UK community interest companies that allow a private sector investor to put equity into a not-for-profit organisation and return a cap return on investment.
Fitzgerald explained that they are essentially hybrid companies with the cap set by the government, but have an equity component with a return on investment available to investors.
The second possibility could be to establish capital funds by the Federal Government that allows matching by philanthropy and business. “That is, for every dollar the philanthropy or business puts in, the government will put in a dollar.”
Australia’s taxation system
The Commission was asked to look into a number of issues regarding Australia’s taxation system. Fitzgerald identified a number of points that the Commission considered relevant as input for the Henry Review.
Fitzgerald began by focusing on $4 billion of tax concessions granted each year. “We were asked in this inquiry to answer a couple of questions,” Fitzgerald continued. “The first one will seem extraordinarily strange.
“If you get rid of tax returns and you get rid of deductibility for gifts given to charitable DGR organisations – does that matter?”
Before answering his own question, he outlined some theoretical scenarios using the Red Cross as an example.
“For example, you can introduce a new system of tax credits, that is, if I give a dollar to the Red Cross, I will receive not a figure of my marginal tax rate but at a set figure of say 30 cents in the dollar. Or a more radical proposal is I give my dollar to the Red Cross and I get nothing back but the Red Cross gets the 30 cents in the dollar. And the question is if you do the latter will the level of donations decrease?
“We’ve come to the view that the tax treatment does matter. Therefore, you would have to be extremely courageous to do the second one. Because our view would be there would be a drop in the level of donations given.”
In another point on taxation, the Commission also recommended that, subject to costing, DGR status should be expanded to all charities.
“However, a couple of cautions: there are two areas of concern to the government, one is religious institutions and the other is educational institutions.”
Finally, the Commission was asked specifically to look at competitive neutrality in relation to the sector.
“Competitive neutrality is only an issue where the not-for-profit organisation is in direct competition with the for-profit. Our view was that income tax exemptions do not pose a significant problem. The problem comes in relation to the FBT [Fringe Benefit Tax] exemption, which currently accounts for just on a billion dollars per year of benefit to the not-for-profit sector, and the public hospitals, and payroll taxes.
“So the question is, does it create a disadvantage to for-profit operators that compete directly with those agencies? Our view was that FBT exemptions and parallel tax exemptions are in fact distortive tax.”
Fitzgerald also identified the social innovation of Australian society as another critical point raised by the Report.
“Social innovation has started to re-emerge as a very important issue,” says Fitzgerald.
“The sector claims it is, by nature, innovative. My own view is that the sector was definitely innovative, but ceased to be as innovative in more recent times.”
He identified a number of reasons for this, including the way contracting with the government took place. “Governments decide what will be delivered, how it will be delivered, who will deliver it at what price – it’s hardly an innovative generative system”.
The suggestions put forward in the draft report to increase the level of social innovation in the sector include opening up co-operative research centres to deal with social innovation issues, and the development of social innovation funds, which could be on a contributory “dollar for dollar” basis.
Government funded services
Fitzgerald said that the way the third sector deals with the government in terms of funded services was flagged by the sector as an area of great concern.
“The Commonwealth and many of the state governments are very attracted to client directed funding. It is my expectation that government at all levels will move strongly toward client directed funding.
“Client directed funding in the community service sector, for example, will not work unless there is a guarantee of access and quality. And how is that achieved is going to be very critical.
“We’ve also mentioned a collaborative model [in the Report], which we think has increasing merit. This is a newer model where you have your intractable problems that require long term collaboration between the provider and the government.”
It requires trust, genuine evaluation and an ability to terminate the contracts, and to find a new provider over time. “But a collaborative mould much better suits many of the intractable problems in human services.”
Fitzgerald went on to discuss the issue of full cost recovery. He said it was important for the government to be clear about what they are going to fund and to what they will contribute.
“This is a perverse thing,” he explained. “In the Australian marketplace nobody contracts with the private sector on a cost minus basis. You just don’t do it.
“If the market is in fact dominated by not-for-profits, it is likely that the government will only fund at cost minuses. That is, there will be an automatic assumption that the sector, in fact, will have delivered the service at less than full cost which they will cross subsidise from other sources of income.
“We think that is completely inappropriate.
“Where the government would have to provide the service in the absence of a not-for-profit organisation, then that service should be fully funded. If the government chooses, however, to fund only on a contributory basis, it should state the level of the contribution that it’s prepared to make, so it makes a choice.”
Fitzgerald finished his discussion of government funding with a comment about risk management.
“It is absolutely critical that we improve the risk management framework that exists. Our assessment is the government no longer understands the nature of risk, does not understand how to manage it, does not understand how to apportion or fund it.”
While Fitzgerald acknowledged this may be a sweeping statement, he believes it is supportable. He identified the increased levels of compliance in relation to risk antithetical to good risk management. He suggested increasing the length of the contacts, identifying the one year duration, which many of the contracts are made at, extraordinarily short and antithetical to the development of a strong service provision.
Finally, Fitzgerald said the Commission believes establishing an office for sector engagement within the Prime Minister’s portfolio would help drive regulatory reform.
“It would also help drive and encourage what we believe is much necessary government funded service engagement reform. We also believe it could provide high level leadership for sector and business engagement.”
On the National Compact between government and the not-for-profit sector, Fitzgerald said “Our report is not a comment about what should be in that compact, that’s up to the sector and the government, but one of the things that’s been learnt from the compacts from around the world is that there needs to be a robust implementation and evaluation strategy.”