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Navigating the Productivity Commission’s legal recommendations

3 min read

The Productivity Commission issued significant legal recommendations to the Federal Government in its final report on Contribution of the Not-For-Profit Sector (the report).

What were these recommendations and how likely are they to be adopted?

Diversity in the sector

Australia has a diverse third sector, which makes for a minefield of legal regulations. Both large not-for-profits (NFPs) and smaller state-based organisations face an unnecessarily complex, confusing and costly regulatory environment.

Furthermore, the majority of NFP organisations are unincorporated and so fall outside the regulatory system which currently exists for incorporated NFPs only.

Of those NFPs that are incorporated, many that are small in size and operate entirely within one state or territory face compliance costs that are often not commensurate with their size or scope.

Recognising this, the report acknowledges that much remains to be done in improving the quality of regulation in the sector.

A single legal entity

A single and clear set of regulatory requirements – be that in relation to registration, tax endorsement or fundraising – would minimise compliance costs faced by NFPs. The challenge, however, is to create a regulatory system that is straightforward while also proportionate to the risks posed for different kinds of NFPs.

A single national legal form would potentially be attractive for new entities, however the administration and transition costs of such a form would be significant for other existing entities. In light of this, the report found that the current variety of legal forms offers scope for best fit in the sector.

Acknowledging that the shortcomings of existing legal forms need to be addressed, the report recommended that the Australian Government could better regulate legal issues for NFPs through two measures.

Firstly, the Corporations Act should be amended to establish a separate chapter relating to NFPs which are limited by guarantee. This chapter should:

  • Embody the principals of proportionality in relation to reporting, fees and charges
  • Provide clear rules on the disposal of assets in the event of the NFP being dissolved or restructured, in addition to the proposed prohibition on the payment of dividends.

The Government should also pursue harmonisation of state-and-territory based incorporated associations legislation. This harmonisation should focus on:

  • Aligning NFPs’ public, corporate and financial reporting requirements
  • Rules for the distribution of assets in the case of dissolution or restructure of a NFP
  • Allowing NFPs to migrate from one legal form to another, and to move to the Commonwealth jurisdiction without onerous transaction costs.

National fundraising legislation

General opinion in the sector favours the introduction of a national fundraising legislation and a national regulator. However, state and territory governments are reluctant to cede power to the Commonwealth, without knowing what form such national legislation might take.

To increase confidence in the transferral of their jurisdictional powers, the report recommended that states and territories develop harmonised national fundraising legislation through the adoption of a ‘model act’.

A National Regulator for NFPS

The report advocated for a measured and gradual approach to the introduction of a Regulator, which would improve certainty, reduce the cost of adjustment and establish important building blocks.

It also recommended that the Australian Government should establish a ‘one stop shop’ for Commonwealth regulation by consolidating various regulatory functions into a new National Registrar for Community and Charitable Purpose Organisations.

The registrar would offer the advantage of a single regulator for registration and tax endorsements, the submission of corporate and financial information and the registration of national and/or cross jurisdictional fundraising activities. It would also offer appropriate guidance in relation to governance matters and handle complaints in respect to its functions.

A lawyers’ perspective

Makinson & d’Apice conclude that the report offers recommendations that are both attractive and frightening.

However, it cautions that the implementation of any of these recommendations in any form would be a long and drawn out process, involving jumping over of many more hurdles and requiring years to implement.

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