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Tax concessions for not-for-profits

3 min read

The Productivity Commission’s (the Commission) recent report, Contribution of the Not–For–Profit Sector, addressed the efficiency and effectiveness of the sector as it increases its contribution to Australia’s economy.

Benefits of tax concessions

At a recent address to the Community Sector Industry Issues Forum, UnitingCare’s Director of Services and Sustainability Joe Zabar discussed tax concessions for the sector.

“Governments have recognised that market principles have not translated well in the sector and to address this [they] have utilised a range of economic levers to encourage the delivery of social services.

“These levers include funding to meet growing demand, and the provision of a range of tax concessions in the form of income tax relief, deductible gift recipient (DGR) status, and concessions from fringe benefit tax (FBT), payroll (state) and goods and service tax (GST).”

Zabar says the benefits of these concessions, particularly of FBT, are to lower the costs of labour.

“One of the key by-products of this concession is that it enables service providers to offer more services than would be the case if they had to meet the full costs of labour,” Zabar said.

The Commission outlined another major benefit of the FBT concession: it provides greater certainty than direct funding, which may be affected by deteriorations in the government’s fiscal position or changes in government preferences.

The importance of accountability

The Commission identified that there is a push for greater accountability by not-for-profits (NFPs) from the public and commercial sector.

Business and other major donors increasingly want evidence of the effectiveness of the activities, and prefer NFPs that can provide robust business cases for the investments they seek.

Zabar explained that tax concessions are sometimes seen by other sectors as promoting rent-seeking behaviour, breaching the competitive neutrality principle, inefficient and lacking in transparency and accountability.

Competitive neutrality

The Commission was specifically asked to look at various NFP tax concessions and their impact on competitive neutrality.

Competitive neutrality refers to the principle of equal treatment of competing organisations to promote a level playing field.

The Commission found that input tax concessions, notably FBT and payroll tax, do have the potential to affect competitive neutrality.

It emphasised, however, that such concessions are important to attract and retain staff, as most not-for-profits do not compete directly with for-profit businesses and, for the few that do, they tend to be delivering government services.

Recommendations for tax concessions

Aside from clarification of definitions and regulatory procedures, the Commission’s evaluation of tax concessions was to comment on their importance and to recommend their continued use and extension across the sector.

Analysing the Commission’s report, the Australian Council of Social Services (ACOSS) commented that the Commission did not put forward any more specific recommendations because of the parallel study into the Australian economy being conducted as part of the Henry Review.

The Henry Review

The Review of Australia’s Future Tax System (also known as the Henry Review) holds prospects for reform, that could have extensive implications for the third sector, particularly the potential reform of tax concessions.

The Commission stated that as it had no knowledge of the framework being considered by the Henry Review, it could not make recommendations about the taxation of the sector, beyond those in relation to competitive neutrality.

ACOSS reported that in the absence of the release of the Henry Review, the lack of direction or clarity from the Commonwealth Government about its priorities for tax reform had caused significant uncertainty and instability amongst its membership, especially in the face of persistent and unsubstantiated rumours.

The Government has said that the Henry Review will be released before the budget is announced in May, and most definitely before the next election. As to what changes will be implemented to tax concessions for the sector, it is largely a matter of ‘wait and see’.

The last word is best left to a sector representative. ACOSS recently said: “While the Government has sought to reassure ACOSS that it understands the importance of many of these concessions for the sector and would not make significant changes without consultation, this has not assuaged sector anxieties.”

Tax status and public support

The Commission’s report emphasised that the future of the sector essentially rests on its ability to engage with the community in building support for its purposes.

The Commission recommended enabling the public to provide greater support to a wider group of NFPs by extending DGR status to all charitable institutions and funds.

While the report acknowledged that tax concessions are generous in many respects, it did recognise that there are long standing issues to be resolved. One of the main issues identified is the statutory definition of a charity – an issue which has come to a head in the ongoing AidWatch case.

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