Australia Reforms Not-For-Profit Tax Concessions

by Mary Swire, Tax-News.com, Hong Kong

12 May 2011

The Australian government has announced a range of Budget measures to make it easier for the not-for-profit (NFP) sector to deliver assistance to Australia's most vulnerable people.

Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, said that: "The NFP sector provides vital services to many of our most disadvantaged and vulnerable citizens, but the ability of the sector to undertake this work has been impaired by complex regulatory arrangements and unnecessary red tape for far too long".

The measures include reforming the use of tax concessions by businesses run by NFP entities. "The government strongly supports the provision of welfare, education, sports, arts, worship, culture and community services provided by NFPs through access to significant tax concessions," Shorten said.

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. They will not be able to use input tax concessions, such as fringe benefit tax and GST concessions, for their unrelated commercial activities.

The reforms will not, however, affect the use of tax concessions to further a NFP entity's altruistic purpose, even where the charitable operation is conducted commercially. Examples of this type of related commercial activity include not-for-profit hospitals, shops that sell second-hand household items and clothing at discounted prices to those in charitable need, NFP child care centres, and businesses whose purpose is to provide meaningful employment to disabled persons.

The Commissioner of Taxation will retain responsibility for administering tax concessions for the NFP sector. This seeks to address sector concerns regarding a perceived conflict of interest between determining charitable status and the role of administering tax concessions. Starting immediately, the Australian Taxation Office will begin to structurally separate its role of determining charitable status from its role of administering tax concessions.

The government will consult to determine the most appropriate model for implementing these reforms. Possible models include those adopted by Canada, the United States, the United Kingdom, Ireland and South Africa.

The government will also commence discussions with the states and territories with the aim of ensuring a coordinated approach to resolving these issues is adopted. Further, any change to the GST base will also require the unanimous support of the state and territory governments.

These new arrangements will commence on July 1, 2011 and will initially affect only new unrelated commercial activities that commenced after 7.30pm Australian Eastern Standard Time (AEST) on May 10, 2011.

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 them out over time.

NFP entities that have entered into a government service delivery contract as at 7.30pm (AEST) on May 10, 2011 will be allowed to use their tax concessions in support of that contract.

"This package of reforms marks a significant step forward in the future of Australia's NFP sector," Shorten said.

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