The lack of systematic reform of Australia's Deductible Gift Recipient framework is a particular problem and continues to let many of our charities down, writes Krystian Seibert, Policy & Research Manager with Philanthropy Australia.
In June, the Full Federal Court handed down its decision in ‘Commissioner of Taxation v Hunger Project Australia’. The Court rejected the Commissioner’s interpretation of what constitutes direct relief for purposes of being a Public Benevolent Institution (PBI), finding that the Hunger Project Australia was a PBI even though it was predominantly engaged in fundraising.
The Commissioner has decided not to appeal the decision further, so we’ll have to wait and see whether there’s a legislative response.
As pointed out by Professor Myles McGregor-Lowndes, the decision has big implications for many charities who have previously been denied PBI status, and therefore denied access to certain Fringe Benefits Tax exemptions and Deductible Gift Recipient (DGR) status.
The decision reminded me of how charity and related aspects of taxation law in Australia have evolved in a very ad hoc manner. Of course it’s not the only area of law that’s evolved like this, but it certainly does stand out.
The lack of systematic reform of our DGR framework is a particular problem and continues to let many of our charities down.
The taxation framework for philanthropy can be seen as having two sides – the supply-side are the ways donors can give, for example through individual donations, through workplace giving or using structures like Private Ancillary Funds. We have a pretty good supply-side framework in Australia, although there’s always room for improvement.
The demand-side on the other hand, is how charities access such philanthropic support. For most charities, having DGR status is critical to accessing philanthropic funds especially from the growing number of Private Ancillary Funds, Public Ancillary Funds or through workplace giving.
Australia has around 60,000 charities. And based on 2011-12 data, there are only 28,000 entities with DGR status. Not all these are charities, but overwhelmingly they are. This means that more than half of Australia’s charities can’t accept tax deductible donations or a grant from a Private or Public Ancillary Fund!
These include community foundations, which are ineligible for DGR status in their own right. They can operate a Public Ancillary Fund, but this can only be used to accept donations and distribute grants. This limits their potential impact, particularly in rural and regional areas where there are fewer charities for them to provide grants to.
Neighbourhood houses are in a similar situation. Some are eligible for DGR status, but many miss out.
Last year, their peak body the Australian Neighbourhood Houses and Centres Association was given a ‘DGR specific listing’ for a fund which can be used to channel donations to neighbourhood houses. It’s certainly an improvement on the previous situation but again it’s an ad hoc response to a broader problem, and is therefore hardly an ideal solution.
A DGR specific listing requires a legislative amendment, and is pretty much a charity’s only option if they fall through the cracks. But it’s very hard to get and often requires years of lobbying.
The types of charities mentioned above are just two examples of organisations that currently miss out on DGR status, but there are many more such examples.
This just goes to show why the policy settings on the demand side of philanthropy are badly in need of change.
We need to reform the DGR framework by broadening access to DGR status. We also need to simplify the framework.
Fortunately, work has already been done to show us how this can be achieved.
The former Not-for-profit Sector Tax Concession Working Group had its final report made public in February. Building on the previous recommendation of the Productivity Commission in its 2010 report ‘Contribution of the Not-for-Profit Sector’, the Working Group recommended that DGR status should be extended to all registered charities.
This would move Australia closer to the situation in jurisdictions such as the United States, Canada and the United Kingdom.
The Working Group recommended limits on the activities DGR funds can be used for. For example, charities whose purposes are the advancement of religion, or education through child care or primary and secondary education, would only be able to apply DGR funds towards activities falling within other charitable purposes.
This would have the effect of limiting the cost of the reform, which would otherwise be prohibitive.
The Working Group’s recommendation was estimated to cost $120 million per year. Of course, that is no small amount especially in a tight fiscal environment. But the Working Group also looked at potential offsetting savings within the existing set of other Not for Profit tax concessions.
Such a change would broaden access to DGR status to about 42,000 charities, an increase of about 14,000.
The change would also simplify the DGR framework. Currently, if a charity is engaged in activities covered by more than one DGR category, it may need multiple DGR endorsements or have to restrict its activities. That’s red tape charities could do without.
On the supply-side of philanthropy, reforms in the early 2000s to introduce what are now known as Private Ancillary Funds and pre-tax workplace giving arrangements were game changers. What we now need is a game changer on the demand-side, and reforming our DGR framework is that game changer.
This opinion piece originally appeared on Pro Bono Australia, Thursday 17 July.
Jul. 20, 2014
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