Is the Tax Regime for Charities and Not-For-Profit Entities “Fit for Purpose”?

Australia provides tax concessions to an extremely broad range of entities beyond the notion of ‘charity’. This includes agricultural entities, professional sport bodies, public universities, schools, clubs and societies (that rely on the mutuality principle) and specific listing of entities. Many of the specific concessions were introduced decades ago, and there is no mechanism to check if the concessions are still justified.

In a recent Australian Tax Forum article, I consider some examples where the concessions are available to entities that either do not need or, alternatively it could be argued, do not deserve taxpayer-funded support. I argue that the introduction of these concessions was not the result of application of tax policy principles, and that the piecemeal approach to amending the legislation, means we not only have a system that is not fit for purpose, but one that could be described as “a dog’s breakfast”.

This was confirmed by the Organisation for Economic Co-operation and Development’s (OECD’s) 2020 report on taxation and philanthropy: the regime in Australia was one of the most complex and the most difficult to justify by reference to underlying tax principles, especially efficiency.

Tax concessions for charities and not-for-profits

The Commonwealth tax regime, that includes income tax exemption for charities and other not-for-profits (NFPs), and gift deductibility for a narrower group of entities, is just over 100 years old with the enactment of the first Income Tax Assessment Act (ITAA) in 1915. But its antecedents can be found in earlier legislation imported from Britain. For example, the Income Tax Act 1895 (Vic) included an exemption for non-profit entities and subsequently public charitable institutions.

The system has been added to in fits and starts over time, often at the whim of a politician, and certainly not as the result of carefully considered tax policy. The generally accepted rationale for providing these concessions is that the government is providing support for ‘worthy’ causes, some of which might relieve the government of its own fiscal responsibilities.

There has been discussion from time-to-time about how this support might be given more directly, or in the case of gift relief, more equitably, but ultimately such significant changes have been eschewed.

There have been a number of reviews that have touched on the appropriateness of the concessions. But surprisingly only one review dedicated to examining the tax measures applying to the NFP sector: the Non-for-Profit Tax Concessions Working Group (2013).

Unfortunately, the recommendations of that review were not fully considered when there was a change of government in 2013.

Here I detail a number of examples where either the circumstances of different entities, or the rationales for providing support have changed.

Agricultural entities

Agricultural trading companiesare typically run by and for the benefit of growers and, in some cases, having revenues in excess of $100 million per annum. A specific income tax exemption was inserted into the legislation in 1922, but following a 2010 case a decision was made to recognise such entities as ‘charities’. Designation as a charity allows the entity to claim an additional concession, namely refunds of franking credits, which would not be available under the specific exemption.

Moreover, these entities exist for the benefit of their members. As such, they should not be eligible for concessions designed to apply where there are public, rather than private, benefits

Sport bodies

Another anomalous category of specific income tax exemption is for bodies that encourage sport. This is likely to apply to community sporting bodies, but the concession is also claimed by professional sporting bodies such as the Australian Football League (AFL), the National Rugby League (NRL) and Cricket Australia.

The concession was introduced in the 1950s – just in time for the Olympic Games in Melbourne, at a time when these types of bodies only had revenue from gate receipts. These entities now have very large revenues from commercial operations, including broadcasting rights and gambling.

Although these types of entities are not regarded as ‘charities’, they are nevertheless eligible for a rebate from fringe benefits tax (FBT). This means that already highly-paid executives and sportspersons can be given significant benefits at approximately half the rate of FBT compared with other businesses.

Public universities

Public universities have a prized position in relation to tax – perhaps reflecting the special role of funding by the Commonwealth government. They are income tax exempt and have deductible gift recipient (DGR) status (unlike primary and secondary schools), although they are not entitled to any FBT concessions (on the basis that they are ‘government bodies’).

Universities are also entitled to be registered as charities and as such comprise some of the largest charities on the Australian Charities and Not-for-profits Commission (ACNC) register.

One matter worth noting is that they receive different tax treatment to public hospitals which are not eligible to become charities. Public hospitals by contrast rely on specific exemptions for income tax exemption and DGR status.

Public universities (and public hospitals) now operate very substantial businesses and a question could be raised about whether concessions introduced 100 years ago are still appropriate.

Primary and secondary schools

Although primary and secondary schools are not eligible for the same concessions as universities, they can operate ‘school building funds’ (SBFs) and scholarship funds that receive tax deductible gifts and contributions. These concessions were introduced in the 1950s when the Commonwealth did not have constitutional power to provide funding to schools.

At the same time, there was a deduction for payment of private school fees although this was eventually abolished in the 1980s.

SBFs are the second most numerous category of DGR and the entities that operate them are overwhelmingly private schools. The generous concession continues to apply despite the fact that the Commonwealth government does now provide funding to private schools, and the fact that the facilities that are built using these tax-supported gifts are often extremely luxurious.

Clubs and societies

The common law principle of mutuality means that many clubs and societies do not pay tax on receipts from members, including from the use of electronic gaming machines (pokies). Moreover, many entities are creative with the concept of membership allowing attendees to become ‘temporary members’.

The Productivity Commission in 2010 drew attention to the very large revenue streams that were not being taxed, both under the specific exemption for clubs and societies that ‘encourage sport’ and the principle of mutuality.

Specific listing

In the journal article, I also consider the practice of granting specific listing of entities entitled to DGR status. There are now more than 200 such entities.

The process for obtaining listing is opaque and can take a couple of years – and essentially, inclusion is at the discretion of the Treasurer of the day. Perhaps the main concern about this process is that it is the opposite of a principled approach.

In light of these examples, it is hoped that the current Labor government will reconsider the recommendations of the Not-For-Profit Sector Tax Concessions Working Group to ensure that the tax regime for charities and NFPs is fit for purpose, namely meeting its original objectives, and is appropriate for the 21^st century.