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NFP Reform

NFP Reform . Paul Ingram, 6 June 2012. What is happening?. Unrelated Commercial Activities. Background. TR 2005/21

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NFP Reform

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  1. NFP Reform Paul Ingram, 6 June 2012

  2. What is happening?

  3. Unrelated Commercial Activities

  4. Background TR 2005/21 A purpose of carrying on a business or commercial enterprise as such is not charitable. This is the case even if the entity carrying on the enterprise is controlled by a charitable institution or its profits are ultimately applied for charitable purposes. However, a business or commercial enterprise that is merely incidental to the carrying out of a purpose that is otherwise charitable does not by itself prevent that purpose being charitable.’ (emphasis added)

  5. Background • Many tax advisers felt the ATO view was too narrow • View that commercial activities should be acceptable as long as the profits are used for charitable purposes • Crucial issue is not how moneys are raised, but how they are spent

  6. Background • Word Investments [2008] • Company limited by guarantee established by Wycliffe • Carried on purely commercial activities • Funeral business • General investment • All profits gifted to Wycliffe

  7. Background • High Court: Word is a charitable institution • Word endeavoured to make a profit, but only in aid of its charitable purposes. To point to the goal of profit and isolate it as the relevant purpose is to create a false dichotomy between characterisation of an institution as commercial and characterisation of it as charitable. • Activities were not intrinsically charitable, but charitable in character because they were carried out in furtherance of a charitable purpose.

  8. Government Takes Action • ‘Better Targeting of Not-for-profit Tax Concessions’ • Government will reform the use of tax concessions by businesses run by NFP entities • Rules deal with ‘Unrelated Commercial Activities’ (UCAs) • Start 1 July 2012

  9. Key Aspects • Income Tax • NFPs will pay income tax on profits from UCAs, but only where those profits are not directed back to their altruistic purpose (ie. accumulated) • DGR, FBT and GST concessions cannot be used to support UCAs • Structuring/accounting rules • Three different options being considered

  10. Definition of UCAs • Consultation Paper is quite vague • Reforms will not affect commercial activities which ‘directly further an NFP entity’s altruistic purpose, even where the activity is done in a commercial way’ • Such activities will be ‘related’ or ‘primary’ • But no clear definition

  11. Definition of UCAs • Perhaps three ‘easy’ categories • Activities that are intrinsically charitable, but carried out in a commercial way • NFP hospitals • Op shops • NFP child care centres • Businesses providing meaningful employment to the disadvantaged • Passive investment

  12. Definition of UCAs • Beyond that? • May need to demonstrate that the commercial activity is ‘incidental’ or ‘ancillary’ to the altruistic purpose • Best guide: examples in Appendix 3 • But distinction between ‘related’ and ‘unrelated’ remains unclear.

  13. Definition of UCAs • Eg. Schools • Some activities related • Tuck-shop, including sale of uniforms and text books • Using hall and volunteers to run Bingo two afternoons a week to raise money for the school • But what about more extensive public use of school facilities?

  14. Definition of UCAs • Small scale exception • Consultation Paper refers to ‘small scale and low-risk activities, such as lamington drive fundraisers, school fetes and leasing out of church halls’ • But how set the threshold?

  15. Structuring Rules • Option 1 • UCAs would have to be undertaken through a separate entity, which would be taxed equivalently to commercial entities • Will generally be able to negate income tax at the separate entity level • gift to parent (if a DGR) • dividends to parent (if DGR/charity) • trust distributions (other NFPs)

  16. Structuring Rules • Option 1 (cont.) • But there are other issues • Income tax at NFP level (if it accumulates) • No input tax concessions in separate entity (eg. FBT) • Costs of restructure • Legal/commercial difficulties with restructuring

  17. Structuring Rules • Option 2 • Essentially the same as option 1, except the separate entity would only pay tax on retained profit at year end • No PAYG instalments (cash flow advantage) • But unlikely to be adopted • Would require whole new corporate tax system

  18. Structuring Rules • Option 3 • NFP entities could continue to undertake their UCAs, but separate accounting would be required • Might save some restructure costs, but still some complexity • Accounting for profit from UCAs • FBT apportionments

  19. Transitional Relief • New rules start 1 July 2012, but will only initially apply to UCAs commenced after 7:30pm AEST on 10 May 2011 • Additional relief for UCAs intended/contracted? • But pre-10 May 2011 UCAs will be ‘phased in’ • Timing yet to be determined • ‘Same business test’ type rules in meantime

  20. What to do now? • Very difficult to provide practical advice, given uncertainty as to: • definition of ‘unrelated’ • which of the three structuring options will be adopted • scope (and duration) of transitional relief • We need to know before 1 July 2012!!!

  21. What to do now? • UCAs which are likely to qualify for transitional relief • Likely recommendation: do nothing! • Hang on to transitional relief as long as you can • State tax concessions (PRT, Land Tax) difficult in separate entity? • Defer/save restructuring costs

  22. What to do now? • Existing UCAs which are unlikely to qualify for transitional relief • Start making preparations for having to move them • But delay move until fate of three structuring options is clear • Little gained by moving early • But costs could be needlessly incurred

  23. What to do now? • Brand new UCAs • May be some benefit in establishing these in a separate entity from the outset • Save costs associated with moving them later • But consider federal/state tax costs

  24. What to do now? • Choice of entity (if you do move) • If NFP is a DGR • Company or Discretionary Trust both acceptable • If NFP is not a DGR • Company only viable if NFP qualifies for imputation refunds • Discretionary Trust may be better for cash flow anyway?

  25. In Australia (and other) Requirements

  26. Proposed Rules • Three separate aims • Standardise the special conditions for income tax exemption • Standardise the ‘in Australia’ requirement for DGRs • Insert a new definition of ‘not-for-profit entity’

  27. Income Tax Exemption • Most entities won’t be exempt unless: • Not-for-profit entity • Satisfy ‘in Australia’ requirements • Comply with all substantive requirements in governing rules • Use income and assets solely for the purpose for which established and operated

  28. Income Tax Exemption • Not-for-profit entity • No profit or gain to members, either while operating or on winding up • Governing rules/law prohibit distributions

  29. Income Tax Exemption • In Australia requirement • Div 50 already has rules which restrict overseas activities • But Word Investments suggests those rules are flawed • Word satisfied test, even though it merely passed money to Wycliffe Australia, which used all the money overseas

  30. Income Tax Exemption • In Australia requirement (cont.) • Under proposed rules, an entity must • Operate principally in Australia • Pursue its purposes principally in Australia • Wider focus than old expenditure test • Tracing rules

  31. DGR Status • In Australia Requirement • Slightly tougher • Operates solely in Australia • Pursues its purposes solely in Australia • Tracing rules • Some exceptions

  32. The ACNC

  33. The ACNC • New national regulator for the NFP sector • Proposed section 2-5(1): ‘The object of this Act is to promote public trust and confidence in NFP entities that provide a public benefit.’ • Will take over part of ATO role from 1 October 2012 • To eventually become ‘One-stop Shop’

  34. The ACNC • Key regulatory issues • Registration • Reporting • Governance • Fundraising

  35. Registration • Registration will be voluntary • But must register if want to access federal tax concessions and other federal government support • Transition • If endorsed as charity by ATO now, will be deemed to be registered with ACNC on 1 October 2012 • Reviewed upon adoption of new statutory definition on 1 July 2013

  36. Reporting • ‘Report-once, use-often’ reporting framework • Charity passport • Starts 1 July 2013 • But with first reports only beginning to fall due after 1 July 2014 • ‘Fixed form’ for annual information statement (financial and non-financial) • Aligned with SBR and SCOA ‘accounting taxonomies’

  37. Reporting (cont.) • Reporting requirements will be proportional

  38. Reporting (cont.) • Proposed Reporting Requirements

  39. Governance • One of the conditions for registration will be that the entity meets the governance requirements of the Act • But will only apply from 1 July 2013 • Should eventually replace existing legislative requirements (State and Federal)

  40. Governance (cont.) • Only a Consultation Paper at this stage • General approach 'To make it easier for the NFP sector, core governance principles-based rules that apply to all registered entities could be applied across the sector, with the level of regulation proportional to the size of the entity, its turnover, the risks it presents by virtue of its activities and the level of government support that an entity receives.'

  41. Governance (cont.) • Governance principles will be grouped into 5 areas: • duties and minimum standards of responsible individuals, including rules for proper organisational management and running of the entity • disclosure requirements and managing conflicts of interest • risk management procedures • the coverage of the minimum requirements of governing rules • relationships with members

  42. Governance (cont.) • Definition of ‘Responsible Individuals’ will be broad • Directors and officers, including persons who participate in making decisions, persons who have capacity to affect financial standing, and persons with whose wishes the responsible individuals are accustomed to act • Individual trustees • Directors and officers of corporate trustees

  43. Governance (cont.) • Responsible Individuals – Existing duties

  44. Governance (cont.) • New rules expected to at least pick up existing law • Query ‘Business Judgement Rule’? • Fiduciary type duty? • Suggestion in EM that Responsible Individuals will need to exercise the same degree of care, diligence and skill that a prudent individual would exercise in managing the affairs of others

  45. Governance (cont.) • ACNC’s enforcement powers will include the power to suspend or remove trustees and/or Responsible Individuals • Where ACNC satisfied that conducting affairs in a way that may cause harm to public trust and confidence

  46. Governance (cont.) • There will also be a range of offences • False or misleading statements • Late lodgement • Non-compliance with ACNC directions • Both administrative and criminal penalties • Responsible Individuals likely to be exposed

  47. Fundraising • Proposed fundraising rules will eventually replace most (but not all) existing State and Federal regulation • Consumer protection • Permitted calling hours • Unsolicited selling

  48. Fundraising (cont.) • Minimum information requirements • At time donations are solicited • Subsequent reporting • Regulation of third parties that raise funds on behalf of charities in return for a direct financial or other benefit

  49. Fundraising (cont.) • Possible exemptions • Government grants • Corporate donations • Donations from Ancillary Funds • Workplace appeals • Donations to religious organisations from own members • Lotteries and raffles (State law) • Fundraising below $50,000 annual threshold

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