Not for Profit Reform – Federal Government to move to shut the “Word Investments” gate and tax charities on unrelated business income

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Business for charity – the current law

Word Investments was a decision of the High Court in December 2008, confirming that Tax Concession Charity endorsement (and so exemption from income tax and some limited FBT and GST concessions) was available for an organisation engaged in commercial enterprise provided that it existed to fund charitable purposes. (Our Legal Resource Centre has a detailed case note on the Word Investments decision).

This for example allowed Word’s funeral business which existed to fund the charitable activities of another organisation to be considered charitable. Sanitarium is another high profile example.

What the inquiries and experts have repeatedly said

Recent detailed analysis from the Productivity Commission enquiry into the contribution of the Not for Profit Sector and the head of Treasury in The Henry Tax Review resulted in recommendations that this long standing freedom of charities to engage in commercial enterprise to fund altruistic purposes (whether their own or those of other charities), should continue to be allowed.

The proposed change

The Federal Budget last night (10 May 2011) announced:

“Not‑for‑profit sector reforms – better targeting of not‑for‑profit tax concessions

Revenue ($m)

2010‑11

2011‑12

2012‑13

2013‑14

2014‑15

Australian Taxation Office

The Government will reform the tax concessions provided to not‑for‑profit (NFP) entities to ensure they are targeted only at those activities that directly further a NFP’s altruistic purposes. The new arrangements will commence on 1 July 2011 and will initially affect only new unrelated commercial activities that commence after 10 May 2011.

Under this measure, the NFP income tax concessions will only apply to profits generated by unrelated commercial activities that are directed back to a NFP entity to carry out its altruistic work. This means NFP entities will pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose (that is, the earnings they retain in their commercial undertaking).

NFP entities, in respect of their unrelated commercial activities, will also not have access to the fringe benefits tax exemptions or rebate, goods and services tax concessions, or deductible gift recipient support in relation to those activities.

Commercial activities that further a NFP entity’s altruistic purposes, and small‑scale and low‑risk unrelated commercial activities, will not be affected by the reforms.

NFP entities with existing unrelated commercial activities will initially be able to continue to use their tax concessions to support these activities. The Government will consult on transitional arrangements for these existing activities, with the intention of phasing these out over time.

NFP entities that have entered into a government service delivery contract as at 10 May 2011 will be allowed to use their tax concessions in support of that contract. Likewise, the 50,000 National Rental Affordability Scheme allocations will be unaffected by the tax changes.”

Source: http://www.finance.gov.au/publications/commonwealth-budget/2011-12/2011-12/content/bp2/html/bp2_revenue-07.htm

The big picture problem with this proposed reform = reduction in resources for the benefit of the community

It is interesting to note that no revenue uplift is budgeted for in this measure.

What this measure will do is essentially put the brakes on creative income producing endeavours of charitable purpose ventures, who through hard work and often many volunteer hours are building capital, capacity and income for charitable purposes (which by definition must be purposes for the common good).

The message in substance to charities is, “don’t think creatively and work hard to help yourself and better your situation and advance the purposes you exist for – by running a profitable business – rather continue to rely on donor dollar or government hand outs when we choose to give them to you.”

Now the proponents will say, “no we’re not saying that, all we are saying is that if you do engage in business enterprise, you should be taxed of the profit you make like anybody else.” But this misses the point – these bodies exist for charitable purposes (not the gain of individuals), which by definition must be for the common good. If they cease to exist for that purpose our current legal framework allows them to be stripped of their charitable status.

What this move will do is limit the productive capacity of our free enterprise society to contribute to the common good and so ultimately reduce the resources or “size of the purse” available to advance the common good of all of us. The result will be increased demands on Federal Budgets going forward.

Additionally there will be huge amounts of resource applied to drafting the legislative changes (at a Government level) and huge amounts or resource spent by charities both internally and with external specialist lawyers and accountants seeking to understand how the changes will affect them.

Let your local MP know what you think

It should not be assumed that this change will certainly take place. We encourage you to let your views be known to your local member of parliament. Feel free to quote from this brief paper.

Independent views

These views are the views of the partners of Corney & Lind Lawyers a law firm that specialises in advising the Not for Profit sector on a daily basis and is contributed to the public debate at our cost and not at the behest of any client or group of clients.

This article was written by Graham Corney, Andrew Lind and Alistair Macpherson (11 May 2011).