Chapter 3

Impact on the Charitable Sector

Introduction

3.1 The Explanatory Memorandum to the GST Bill states that at common law, charities are generally organisations that are established for the advancement of education; the relief of poverty; the advancement of religion; or other purposes beneficial to the community. These few words describe one of the most important groups of organisations in the Australian community. Not only do charities provide important community and welfare services but they also underpin the very social fabric of Australia and, indeed, our democratic way of life.

3.2 The Industry Commission in its 1995 report on charitable organisations stated:

These organisations have derived their mission and strength from the support of ordinary people. They have attempted to identify emerging and previously unrecognised social problems and marshal people's efforts to address them. In this sense, they have contributed significantly to community building and ultimately to nation building. Their efforts have had effects on every conceivable type of need, from foster care for children to personal care for older people, from homelessness to hunger overseas. [1]

Charities: providing the fabric of Australian life

Anglicare Australia stated:

The church and charitable sector makes a fundamentally important contribution to the development and maintenance of social capital which gives society coherence and makes democracy work. The active participation of citizens in organisations that serve the needs of people in the community and provide a means for the community to give voice to concerns is fundamental to the functioning of western style democracies. Government needs to understand this unique contribution and seek to enhance the role of church and community organisations rather than seek to fit them into the same mould as commercial for-profit organisations. The existence of the civil society is essential to the proper functioning of democracy in Australia.

Source: Submission No.624, p.9, Anglicare Australia.

The Adelaide Central Mission stated:

Non-profits exist for the benefit of the community. They provide ways in which Australians are able to `help their mates'; even when they don't personally know the mate. They are the very expression of the Australian `fair go' ethos. Non-profits have been part of the development of Australia since the earliest days of settlement helping to provide the warp and weft of the very fabric of our community. In tough times such as these it is Australians operating through non-profits who come to the fore through thousands of acts of volunteering and giving. Non-profits are a crucial part of building and maintaining human friendly communities.

Source: Submission No.866, p.4, Adelaide Central Mission.

3.3 The charitable sector is not small. [2] The Industry Commission estimated that in 1995 there were between 10,000 and 11,000 non-profit community welfare organisations in Australia which received some government funding, and an unknown number of others which rely solely on volunteers and donations from the public for their existence. In 1993-94 the community welfare sector's combined total annual expenditure was $4.8 billion and it employed over 100,000 paid staff. In addition the community contributes some 95 million hours of voluntary time each year to support the work of the sector. [3]

3.4 In 1995-96, non-profit organisations spent over $25 billion in operating expenditure, which was at least 6 per cent of Gross Domestic Product. The NSW Council of Social Service (NCOSS) stated that the non-profit sector is as large as the Victorian and NSW Governments combined and almost four times the size of Local Government in Australia. [4]

3.5 Non-profit community organisations vary across the spectrum: some are large with budgets well in excess of $100 million and hundreds of staff and volunteers across the country. Most are small, employing less than five staff and spending less than $100,000 annually.

3.6 These organisations provide the majority of community services in Australia. These include: children's services; health and aged care services; services for persons with disabilities; assistance for women escaping domestic violence; support for the aged to remain in their own home; support and training to help people find and retain work; financial counselling; and, emergency relief. Organisations such as Surf Life Saving, St John Ambulance and the Royal Life Saving Society provide assistance to all Australian communities. Australian Council of Social Service (ACOSS) stated `at least some of these services are used by all Australians at some point in their lives, but they are particularly important for low income people and others who experience some form of disadvantage'. [5]

3.7 Governments have long recognised the role of charitable and community organisations in promoting community welfare and delivering essential services that traditionally no other sector is willing to provide. In more recent times the for-profit sector has begun providing some of these services.

3.8 In order to support the role of charitable and community organisations Governments have exempted them from a range of taxes. Under the Government's proposed tax package these organisations would, many for the first time, be drawn into the tax system. This represents a significant shift in tax policy and reflects a major change in the tax treatment of these organisations.

3.9 The net effect of the Government's tax package would be to make many charitable and community organisations less competitive when compared with for-profit organisations in areas such as health and aged care. As a result, charitable and community organisations may be forced to play a much less significant role in these sectors.

3.10 We as a community need to decide whether we want charitable and community organisations to remain strong and integral partners in the delivery of human services. Unless the tax package is fundamentally revised the long-term end result of its introduction would be a drastic reduction in range and scope of services being provided by charitable and community organisations.

3.11 Without a strong charitable sector, government will be required to provide a greater range of services in those areas of need where profits are not possible – at higher cost and less efficiently. All Australians will be worse off if the charitable sector is diminished as a result of the proposed tax package.

The proposed tax package – summary of legislation

3.12 The basis of the Government's tax proposals in relation to charities, public benevolent institutions, community groups and religious organisations is that, in order to avoid unfair competition with business, the commercial activities of these bodies will be taxable. [6] This is a fundamental shift in government policy in relation to these organisations.

3.13 The non-commercial activities of these organisations will be GST-free. This includes the supply of goods and services for nominal consideration and includes supply of donated second-hand goods. A supply for nominal consideration is something that is sold for less than 50 per cent of the tax inclusive market value, or less than 50 per cent of the tax exclusive cost to the charity of providing the supply. [7] Organisations will be eligible for a credit of any GST paid on their inputs. However, sales of donated new goods or reprocessed second-hand goods will be subject to GST.

3.14 Under the proposed legislation, non-profit organisations with annual sales, including memberships, of more than $100,000 per year are required to register for GST. Such organisations will be required to charge GST on the commercial supply of goods and services, but they will be able to claim input tax credits for GST on inputs used to provide facilities for their members, unless these purchases relate to input taxed activities. Organisations that do not register will not be required to charge the GST on their sales. However, they will not be able to claim for any tax paid on purchases. These organisations may choose to register if they wish.

3.15 Where an organisation has branches, which are part of the same entity, the branches will also be subject to the GST provisions. For example, advice from the Office of the Assistant Treasurer to Scouts Australia (South Australian Branch) stated:

…the state branches of Scouts Australia which have a turnover in excess of $100,000, will be required to be registered. From your letter, it appears that the 160 Scout Groups that you refer to are part of the State Branch. These branches will have to charge GST on sales, but will benefit from cost reductions flowing from the claiming back of GST on inputs. [8]

3.16 Memberships of registered organisations will be taxable as the Government `regards membership fees as payments in return for services'. [9] Donations (which are not payments in return for services) will not be taxable.

Government Department confirms GST on gala dinners, lotteries and raffles

The Department of Family and Community Services (DFaCS) stated:

`To avoid unfair competition with other businesses, fundraising activities by all registered organisations, including gala dinners, lotteries and raffles…are payments for services and, as such will be subject to the GST'.

Source: Submission No.603, p.10, Department of Family and Community Services.

3.17 The operations of charities and PBIs will also be affected by changes to the rules regarding Fringe Benefits Tax. The principal change will be to limit, for each employee, `the value of fringe benefits eligible for concessional treatment to $17,000 of grossed-up taxable value per employee of such organisations (equivalent, in broad terms, to the grossed-up value of an average 6 cylinder car and some additional minor benefits). Any amount above this limit will be subject to the normal FBT treatment.' [10]

Impact of the tax changes on charitable organisations

3.18 All charitable organisations repeatedly raised concerns regarding the impact of the Government's tax proposals on the sector. Of most significance were concerns that the Government's proposals would undermine the very purpose of charitable organisations: the provision of services to the Australian people. It was argued that the changes will:

• threaten viability;
• introduce an artificial distinction between commercial and non-commercial activities;
• significantly reduce funds available for services through changes to Fringe Benefits Tax concession provisions;
• introduce significant compliance costs;
• cause cash flow problems;
• impact on fundraising activities and membership fees; and
• impact on volunteer workers. [11]

Commercial activities

3.19 As has already been stated, the Government's approach is based on the notion that commercial activities of charities are taxable `to avoid unfair competition with business'. [12] The Vos Committee considered the criteria for a `commercial' or `non-commercial' activity and noted that there were two ways to go: first, `things that are ultimately done in pursuit of a benevolent end thereby lack a commercial purpose, even if it results in a profit in a commercial or accounting sense'; and secondly, `the fact that goods are sold or services provided at a price, as businesses do, creates a commercial activity, notwithstanding that any profit is ultimately directed not to the proprietors of the business, but to charitable ends'. [13]

3.20 The Vos Committee noted that many submissions preferred the former approach: that activities of charities should be GST-free because the funds raised are returned to the community. However, Vos stated that the Government's policy `makes it clear that the ultimate purpose or end of an activity is not the determinant of the commercial/non-commercial distinction'. The Vos Committee concluded that `when goods and services supplied by charitable businesses are supplied at commercial rates and are competing against other businesses, then those goods and services should be subject to GST' and `where the services provided have no commercial equivalent, then it is appropriate for them to be GST-free'. [14]

3.21 Herein lies the major problem. Charities are not like every other organisation, they may use commercial means to raise funds, but those funds are used to provide community services.

3.22 Charitable organisations argued that they are now under threat because of the Government's lack of recognition of the fundamental difference between non-profit organisations and for-profit organisations. Charitable organisations, unlike commercial organisations, do not provide a return for an individual or investors. Under the law, they are required to direct all their funding and any surpluses to their charitable activities. Commercial activities are not undertaken for profit-making but to enhance the capacity of the organisation to deliver essential services. [15]

3.23 Thus, while charities and commercial businesses may appear to have similar means of operation, they pursue very different ends. The Church & Charitable Private Hospitals Association argued that this `basic point has to be understood in order to see the logical fallacy of a tax or regulatory policy of so-called “competitive neutrality” between charitable hospitals and profit-making commercial private hospitals or clinics'. [16] ACOSS concluded `it is not in the public interest to tax these activities which return all profits to meeting social objectives'. [17]

3.24 Welfare organisations, including ACOSS and Mission Australia, also noted income is used to cross-subsidise services for those people who are unable to pay – this is very different from the operation of commercial organisations. [18] Anglicare Australia argued that under the Government's policy:

The cross subsidisation of services to the poor by a charity through applying its surplus from one area of activity to another area that needs additional resources is being equated with the profits reaped from a commercial activity for the private wealth of an individual. The values that make a gathering of individuals into a society and a community are lost in this narrow economic approach. [19]

3.25 It was also argued that charities provide essential services because of market failure. The commercial sector has not been able or willing to meet the needs to the community. [20] Uniting Community Services Australia stated:

To assume charitable activities primarily compete for market share is fallacious. Services provided by charities are generally those that do not generate a profit but address market failure and meeting of the needs of disadvantaged people. [21]

New tax on Australians helping Australians

The Church & Charitable Private Hospitals Association stated:

Unfortunately, Treasury seems to understand the profit motive and privatization but does not seem to understand mutuality, altruism or charity. It does not seem to understand that they are non-government institutions such as charities that exist to raise resources in order to meet the needs of the poor or the sick. To suggest that such organisations should be taxed in the same way as profit-making trading corporations is illogical.

Source: Submission No. 668, p.2, Church & Charitable Private Hospitals Associations.

3.26 Witnesses argued that charitable organisations had been forced to enter into business/fundraising activities because Government has cut back on funding. Community demand for services is far outstripping supply and is continuing to grow.

3.27 The Society of St Vincent de Paul noted that in the last two years its workload had increased 30 per cent while Government financial support had decreased 16 per cent. [22] One volunteer from Adelaide Day Centre for the Homeless stated:

At the day centre, the number of emergency food parcels requested has trebled in recent years and the number of people receiving assistance at the winter soup kitchen has increased by a corresponding figure. [23]

3.28 The only way organisations can meet the demand for services is to seek other avenues of fundraising – often of a more commercial nature. [24]

3.29 It was also argued that moves into the commercial area are linked to government policies of competitive tendering and contracting. [25] This sector has been required to become more `commercial' in order to qualify for government assistance. Now it will be penalised for it.

3.30 Wesley Mission also noted that many activities, which the Government believes are commercial activities, had been initiated by the Church and business has moved into that market:

Therefore, whilst you are saying we are moving more towards the business sector, in fact what has happened is that they have intruded into an area that we have had as our sole domain for many years. For example, the clothing recycling business was started by the churches. Hospitals and most of the welfare services that are provided in the community today were initiated by the church, way back in its history, and many other for-profit operators are now emerging. If that is true, surely the penalty should be on those who are intruding into an area that we are [in]. [26]

3.31 It was argued that the Government has failed to understand the fundamental difference between the end use of surpluses in the charitable sector and the business sector. In the past, this has been recognised by Government: charitable organisations have been exempted from paying income tax and other taxes. Charitable organisations questioned the reason for the Government's philosophical shift and pointed out the costs to the organisations themselves, and the adverse impact on the community of the proposed tax changes, would be high. [27]

3.32 A further matter raised with the Committee was problems with the definition of `nominal' consideration that is to be adopted in the tax package. Uniting Community Services Australian (UCSA) argued that:

The proposed definition of non-taxable activities of charitable organisations is predicated on the ill conceived notion that the difference between charitable and commercial enterprises is related to the price charged. [28]

3.33 Other witnesses pointed to practical problems. It was argued that determining the market price of a service will be a complex question, `as it is largely a subjective determination'. [29] Where there is no for-profit provider of the good or service the Committee was told that it was unclear how the market price would be determined. It was also argued that the uncertainty surrounding these issues is likely to lead to considerable compliance costs for organisations in obtaining rulings from the ATO. [30]

3.34 The Surf Life Savers stated:

This will require the Organisations to constantly monitor the market in terms of prices charged for goods and services and to ensure staff and volunteers are informed of this data across all products and services. We submit that these tasks will be unnecessarily burdensome and costly and will absorb significant financial resources that would otherwise be devoted to provision of the Organisation's core community services. [31]

3.35 Arthur Andersen submitted that this aspect of the package is:

particularly onerous as charities will be required to monitor their costs and pricing to ensure that any given supply is GST-free. Similarly, this effective pricing ceiling does little to ensure the financial viability of Australia's charitable community. The Vos Committee received numerous submissions in relation to the equity issues of imposing GST on supplies by charities to people in need and the financial impact on charities' ability to provide these services. The Government's response to the Committee's recommendation is not adequate. [32]

Financial implications for charitable organisations

3.36 Witnesses disputed that charitable organisations would benefit under the GST and identified significant negative outcomes on their operations. The major areas of concern were:

• impact on provision of services;
• increases in compliance costs;
• impact on volunteers; and
• expenditure implications for Government.

Provision of services

3.37 The Committee received many examples of the negative impact of the GST on the provision of services. A sample is provided to illustrate a range of impacts.

Sheltered Workshops

A Catholic sheltered workshop employs 53 people with varying degrees of mental and physical disability making garden trellis etc. These people would be unemployable in the open market.

As well as employment the workshop provides an essential part of their social life. Support staff help employees organise their holidays, weekend outings, medical appointments, liaise with their families, advocate for them with government departments, help them to organise their housing, provide friendship and relationship advice and so on.

Overheads for intensive supervision, extra time on production schedules and costs of general support are higher. Unlike a commercial operation, staff is not selected according to its capacity to perform given tasks, instead work is chosen carefully to meet the skills of the persons with disabilities.

The funds earned from the sale of the products cover only 87 per cent of the total cost of the program, the remaining 13 per cent must be found from other sources.

The GST reduce the capacity of this organisation to help its special workforce live with dignity and a reasonable degree on independence in the community.

Source: Submission No.929, p.14, Catholic Social Services.

In relation to sheltered workshops, ACROD also stated:

The output may be sold at market price but the labour is not engaged at arm's length: the labour is furnished by clients of the charity who are unable to secure employment in a regular commercial business…The Committee should also note that ACROD has had discussions with the Australian Chamber of Commerce and Industry (ACCI) several times in the last ten years about competition between our sector and business and the upshot has always been that it was not an issue.

Source: Submission No. 606, pp.17-8, ACROD

Cash Relief and Food Vouchers

The Society of St Vincent de Paul distributes in excess of $25 million in food and essential items each year, normally purchased at supermarkets. Of this $25 million, not less than $2.5 million is in bulk purchases for food parcels.

Over $6 million is distributed by a food voucher system at stores and supermarkets. With the imposition of the GST, the face value and the real value will be reduced. The Society estimated the loss to be well over $600,000 for vouchers and $2.5 million overall.

Source: Submission No.300, p.43, Society of St Vincent de Paul.

Loss of community support programs

The YWCA of Sydney estimated that the proposed GST will cost the organisation approximately $260,000 in its first year of implementation. This amounts to almost all of the $300,000 budgeted to subsidise their community support programs and services. This will effectively wipe out Sydney YWCA's ability to fund its own programs and continue the support given to Government funded programs.

Source: Submission No.610, p.10, YWCA of Australia.

Frankston Furniture Works

Trainees are provided with nine months of training in carpentry and life skills for long-term unemployed young people. Small quantities of wooden furniture are produced. All proceeds are used in the program. The furniture products are marketed as assisting the program and a substantial proportion of the customers buy the furniture for this reason. The added GST would also deter sales, especially if this causes customers to compare the product to a commercial equivalent.

Submission No.848, p.31, Brotherhood of St Laurence.

3.38 Other organisations indicated the cost of the proposed imposition of the GST on commercial activities. For example:

• Surf Life Saving estimated revenue loss to all member groups across Australia will be in the order of $3 million; [33]
• The Spastic Centre of NSW estimated direct costs associated with the GST on commercial activities were estimated to be in excess of $500,000 per annum and it would have no choice but to close business services operated by people with disabilities; [34]
• Wesley Central Mission estimated its income will be reduced on its printing business by $200,000. [35]

3.39 Organisations will have to decide whether: to pass on the added cost of the GST onto clients, who in many cases are unable to pay more; to absorb the costs of the GST; or lower costs to below 50 per cent of the commercial rate and thereby risk the organisation's long-term financial viability; or to cut the service completely. Charitable organisations will find it difficult to implement any of these options.

3.40 However, if organisations do have to cut services, it is clear that Government would have to step in and provide additional services or funding. This will have major expenditure implications for future federal budgets. [36]

Compliance Costs

3.41 The issue of compliance costs is a major concern. It was argued that these will exacerbate the difficulties of providing services to the community.

3.42 The Government stated that:

GST will remove the impact of indirect taxes on charities. Industry cost reductions will result in lower operating costs for these bodies. They will also benefit from the GST-free treatment of their non-commercial supplies of goods or services. All GST participants who are in a net refund position will be able to choose a monthly tax period and thereby get a refund at the beginning of the next month. [37]

3.43 Witnesses argued that there will be significant compliance costs for charitable organisations. It was pointed out that charitable organisations would not benefit from the removal of indirect taxes as they are, at the present time, largely exempt from indirect taxes. [38] For example, many are exempt from income tax, payroll tax, sales tax and fringe benefits tax.

3.44 Operating costs will also increase because organisations will need to establish new accounting systems. It was also argued that far from benefiting from the GST-free treatment of non-commercial supplies of goods and services, organisations will face complex accounting procedures where a mix of commercial and non-commercial activities are undertaken. The Church & Charitable Private Hospitals Association concluded:

We are not-for-profit institutions who do not pay taxes now and are being asked to pay taxes in the future. Our costs will go up, both in the payment of taxes and in the administrative cost in collecting those taxes. They will also go up in the fact that we have to collect the money before it is refunded. We will have to fund, up front, a lot of money. It is putting a penalty on not-for-profit hospitals. That is clear, unequivocal and a fact. [39]

3.45 It was argued that the administration of the GST for registered non-profit organisations would be more complex than for some for-profit businesses. Non-profit organisations will have to deal with a mix of activities and tax treatments: some activities will attract GST, some are GST-free and some are input taxed. [40] ACOSS noted that `this was the case in New Zealand, where “partially rated” organisations face compliance costs on average 10 % higher than business, due to the difficulty of separating out their activities into different categories'. [41]

3.46 Organisations indicated that the compliance costs under the tax changes would include:

• new accounting systems for recording GST payments and input tax credits;
• upgrading present computing systems;
• revenue collection systems needed to identify GST amounts invoiced;
• payment systems needed to identify and record GST amounts paid;
• establishing what supply of goods and services are GST-free and which are liable for GST;
• establishing procedures to assess 50 per cent rule applying to non-commercial goods and services;
• increased budgets to cover the cost differential between purchase prices of goods which will increase following the GST relative to their present cost with WST exemption;
• identification and payment of FBT liabilities;
• increased wage costs due to new FBT requirements;
• training of accounting staff;
• potential need to employ additional staff to deal with extra tasks associated with compliance;
• increased costs for equipment and motor vehicle insurance since premiums are based on replacement cost (which will arise given effect of the price differential between WST and GST); and
• fund the amount of GST input taxes paid until reimbursed. [42]

3.47 The Government acknowledged that there will be costs with the new tax regime. DFaCS stated:

It is expected that organisations will have administrative costs associated with registering, and in some cases have to lodge tax returns for the first time. To assist in the transition, the Prime Minister has stated that charities will also be able to access a $500 million fund set up to assist in the implementation of the tax reform. [43]

Those organisations not registered do not have access to the $500 million assistance package for small business. [44]

3.48 Concern was expressed that the Government had not made it clear how the $500 million will be distributed. Further, it was considered that the compliance costs for non-profit organisations would far exceed that which the Government had estimated. Organisations pointed out that, unlike for-profit organisations, they currently do not have to deal with many taxes and will have to introduce new systems because of the tax changes. For profit organisations also have professional accounting personnel, while many charitable organisations rely on volunteers. Compliance costs for training will be high, especially for organisations reliant on volunteer workers.

3.49 The Australian Catholic Social Welfare Commission noted that the Government, in its impact statement, had estimated that the gross compliance costs of the GST at $1,195 per firm. It stated that `this figure is contested as a gross underestimate of the true costs to those organisations with no existing WST collection system. The compliance costs figures have been based on businesses with recurrent costs'. [45] Arthur Andersen, for the Australian Catholic Health Care Association (ACHCA), calculated that the total transition and compliance costs for the Catholic health and aged care sector will be approximately $29 million. ACHACA noted that it is difficult to present highly accurate estimates of compliance costs but the costs are `higher than we would expect for a fully commercial operation of a similar size'. [46]

3.50 Other organisations also indicated that compliance costs would be high. Catholic Social Services stated that its agencies estimated compliance costs to range between $6,000 and $80,000 per agency depending on the size and complexity of the organisation. [47] St Vincent de Paul estimated its compliance at $2-$4 million. [48] The Council for Homeless Persons Australia estimated that SAAP services would require $6 million for one off establishment and transitional costs. [49]

3.51 Many organisations were concerned that they relied on volunteers, including Honorary Treasurers, with only a small number of paid staff. It was argued that many volunteers will be poorly equipped to handle the requirements of the proposed tax system and extensive training would be required. [50] The Queensland Country Women's Association, for example, indicated that its volunteers ranged in age from 13 years to 80 plus and that members were still using the same methods of handling paper work handed down from 76 years ago. [51]

3.52 Surf Life Saving stated:

Coping with this burden will present major problems for the Organisations. In most cases, the volunteers on which we rely do not have the necessary level of skill and expertise to carry out the compliance tasks adequately. They want to deliver first aid and safety services to those in need in the field, not do accounting tasks in the “back room”. It will take a major effort in training volunteers on the intricacies of the GST, and will involve high upfront costs in implementing appropriate accounting systems. [52]

3.53 Evidence from charitable organisations argued that cash flow problems will be exacerbated by the introduction of the tax proposals. Many told the Committee that they ran on very tight budgets. While input tax credits will be claimable, the time lag between reimbursement and the initial outlay will impose on many organisations a serious cash flow situation. Organisations will have to find the financial resources to carry those costs. Funds may have to be diverted from welfare activities. [53]

3.54 The Motor Neurone Disease Association of Victoria estimated, with the GST and a recovery period of three-monthly claims and a four week turn around, the organisation will require an additional up-front $15,683 for recurrent expenditure on an expenditure budget of $475,255. [54]

3.55 Accountants also believed the compliance costs would be substantial. Arthur Andersen concurred with the evidence to the Committee from charitable organisations and stated that most GST taxpayers `will be saddled with a substantial compliance burden but will contribute no net GST revenue'. [55] The Committee considers that charitable organisations face high compliance costs.

3.56 Another accountant went so far as to state `this is all going to mean a lot more accountants being able to take early retirement on the Gold Coast'. [56]

3.57 Unregistered organisations (ie those with annual sales of less than $100,000) will be GST-free. However, they will be unable to claim input tax credits. Thus, they must bear the costs of the tax inputs, while at the same time they lose their traditional input tax exemptions. This is bound to result in price increases or loss of services. Organisations may, of course, choose to register and so recover the input tax. However, in doing so they will take on added costs of compliance and have to add the GST to the costs of commercial goods and services. Either of these options has cost implications for small organisations.

Volunteers

3.58 The importance of volunteers to the well-being and viability of organisations and the well-being and character of the Australian community was emphasised by many witnesses. Most non-profit organisations in Australia rely on work performed without pay by their members or supporters. There may be professional staff to carry out administrative and planning functions, but there is usually volunteer help as well.

3.59 The types of organisations to which volunteers contribute range across the board as do the services that volunteers deliver: in the child care sector volunteer boards of management run community-based child care centres; meals on wheels associations rely on volunteer drivers to deliver meals to the house bound; in the Scout and Guide movement volunteers act as group leaders; at Lifeline volunteers enable the telephone counselling service to be available 24 hours a day for those in need.

3.60 The size of the contribution of volunteers to the Australian community was estimated at $18.1 billion in 1992. [57] The Scouts indicated that in South Australia alone, its adult volunteers contributed over $9 million in `volunteer-hours' in 1998. [58]

3.61 The need to maintain the volunteer base is thus of primary importance to many community welfare organisations. However, it was noted that it is increasingly difficult to do so. The Scouts stated:

We are struggling desperately to get leaders. Just getting volunteers in Australia at the moment is a nightmare – it really is. We work constantly to try to recruit adults to work as leaders. Where we have good adult leaders, we have full groups. The problem is getting adult leaders. [59]

3.62 Studies of volunteering in Australia support the view that there has been a steady decline over the last 15 years in the number of people in the community willing to undertake volunteer work. In 1994-95, less than one in five Australians aged 15 or more did any volunteer work. The majority of volunteer hours was contributed by a small number of people: almost 60 per cent of the hours were contributed by only 2.5 per cent of the population. This was an average of more than 300 hours over the year. [60]

3.63 Witnesses argued that the introduction of the GST would exacerbate the decline in the number of people volunteering. First, there would be added costs through rises in memberships and subscriptions as these are to be made taxable under the proposed changes. Surf Life Saving stated `in the extreme, the GST on our membership fee could be viewed as a 10 per cent tax on members' commitment to volunteer their time to save lives'. [61] Secondly, many organisations use volunteer treasurers. The fear is that the extra burdens placed on these members of organisations as a result of the GST will discourage people from remaining members or joining in the first place. The Scouts stated:

But the real concern is that groups would just fold up because volunteers would just not be able or willing to do it [undertake GST compliance]. [62]

Proposed limit on Fringe Benefits Tax (FBT) concessions

3.64 Currently religious institutions, PBIs and public hospitals that are PBIs are exempt from FBT. Not-for-profit organisations may be eligible to receive a rebate on the FBT they pay. Under the proposed changes, the FBT concessions will be capped at $17,000 of grossed-up taxable value per employee. Any amount above this limit will be subject to the normal FBT treatment and taxed at 48.5 per cent. Fringe benefits concessions for religious practitioners will not be affected by the proposed limit on the exemption.

3.65 The Government indicated that it had sought to change the FBT rules because of rorting of the system. Many witnesses disputed that the community welfare sector was responsible for rorting. ACROD also pointed to a letter from the Treasurer which stated:

The government is mindful that the majority of eligible employers do not abuse FBT concessions. Nonetheless, the fact that they are open-ended means that there is scope for the concessions to be exploited. [63]

3.66 There is clearly a need to limit the current FBT concessions. Further regulation is required to ensure transparency in the use of the concessions and provide guidance on the appropriate use of salary packaging.

3.67 Organisations also pointed out that, following the 1995 Industry Commission report on charitable organisations, consensus had been reached in the sector that FBT exempt salary benefits be capped at 30 per cent of gross salary. [64] Rather than rorting the system, community welfare organisations had used the FBT arrangements to stretch their staff budgets as far as possible to ensure the highest level of services could be maintained.

3.68 Organisations argued that their use of the FBT system had been encouraged by the Government. For example, the Spastic Centre of NSW indicated that it had taken part in a meeting in 1997 which was attended by the Prime Minister and `it was clearly the understanding at this meeting…that organisations like ours should optimise benefits of exemptions to maximise services for people with disabilities'. [65]

3.69 The Government has provided no information or modelling on the potential impact of the proposed FBT concession changes on the charitable and community sectors and the services they provide, DFaCS indicating that it had not done any specific research on the impact of the FBT changes. [66] There was a general lack of information on the assistance these sectors received through their indirect tax concessions and the effect of changing those arrangements.

3.70 The Industry Commission report, in considering the removal of tax concessions to charities, states:

The above disadvantages of input tax exemptions and concessions suggest that they may not be a good way of providing assistance to the sector. Given the major benefits which CSWOs as a whole currently derive from input tax exemptions, however, the Commission considers that any proposal to remove these benefits should include alternative ways of providing the same aggregate level of government assistance to the sector. [67]

3.71 The Government has identified savings of $240-$260 million arising from the proposed limits on FBT exemptions. On the basis of tax expenditure data, the charitable and community sectors could lose over $100 million a year as a result of the changes to the FBT concessions. This represents the value of the services that would be lost as a result of the FBT limit if no additional funding is provided to the sectors.

3.72 The tax package contains no compensation to the charitable and community sectors for the proposed changes to the existing FBT concessions. The Government appears to be viewing the changes as a revenue raising measure without any concern for the consequences of cutting Commonwealth assistance to the sectors that provide community services to the disadvantaged in society.

3.73 Organisations argued that the use of salary packaging was important because the benefits accrued to the organisation and therefore:

• enabled organisations to maximise the use of existing limited funds; and
• enabled the charitable and community sector to compete with the for profit sector to recruit and retain competent and dedicated staff. [68]

3.74 After the changes, organisations would have to consider a number of options:

• curtail services provided, with some organisations being forced to forsake the supply of `less profitable' services in pursuit of those with a greater return;
• increase charges to offset the additional costs associated with compliance with the tax package measures;
• downgrade the quality or numbers of staff; or
• seek additional funding from the Government. [69]

3.75 In many cases the organisations would be forced to cut essential services. The Spastic Centre of NSW indicated that, as a result of the proposed FBT concession limits, it would:

• cease to provide services to 370 school age children in NSW; and
• close a children's respite service which currently supports 40 families per annum; and
• reduce the early intervention services by one third. This translates to 240 families unable to access our services at any one time; and
• cease services for the current 200 isolated and disadvantaged families in the rural communities. [70]

3.76 Other organisations also indicated that cutbacks in service would result from the changes to FBT arrangements including:

• Wesley Central Mission: likely cutbacks to Kids Under Kanvas, an integrated camping program for children with and without disabilities, and Do Care, a support program for isolated older people; [71] and
• Therapy Focus: cut in therapy services to school age children in Perth, approximately five therapist positions to go. [72]

3.77 The extra costs varied across organisations. The WA Deaf Society estimated its costs at $29,000 while one Anglicare aged care agency estimated its costs at $440,769 or 11.49 full-time jobs or 14.33 nursing home and aged care beds. Mission Australia estimated that there would be a $1.35 million impact on its operations. [73] Deafness Forum Australia indicated that for its organisation it would probably be looking at a cut of one in three. [74] ACHCA indicated that the FBT changes would result in a 15 per cent increase in wages costs. [75]

3.78 It was argued that if services were curtailed, the costs to Government would increase as people may be forced to turn to Government agencies to supply the goods and services that had previously been available through community organisations. This outcome was particularly highlighted by non-profit organisations in the health care sector. United Healthcare Network noted that it provided health services that were not usually provided by the for-profit sector. Thus, any decline in provision of services would force people into the public health care system at a greater cost to Government. [76]

3.79 Organisations were conscious of the need to retain qualified and competent staff. It was noted that many employees utilising the FBT arrangements are not highly paid compared with similar occupations in the public and private sectors. Salaries offered by community and welfare organisations, even taking into account the FBT arrangements, are generally low. The FBT arrangements had gone some way to ensuring that experienced and competent staff were retained by FBT exempt organisations. It was noted that the need for organisations to be able to attract and keep competent staff has in the past been recognised by Governments through the policy of providing them with an exemption from FBT. It was also argued that organisations were finding it necessary to employ more experienced staff as Government sought to devolve more and more responsibility for self-reliance to the not-for-profit sector. [77]

3.80 The National Aboriginal Community Controlled Health Organisation (NACCHO) highlighted the problems of attracting doctors and people to remote health services and the importance of concessional FBT arrangements:

Considering that even with those packages some of our services in remote areas cannot attract doctors and people to them now, we believe that there will be an impact again even with just trying to retain staff. We have had dealings with our doctors and, with the so-called rural incentive programs that are put around and floated around, this will now take the edge off all these so-called doctor programs that are supposed to be benefiting our mob out there. [78]

3.81 Organisations also indicated that additional compliance costs as a result of the FBT changes would also be incurred:

• costs of redrafting employment contracts;
• updating systems to cope with the extra disclosure requirements;
• cashing out benefits to avoid the extra administrative burden; and
• training costs. [79]

3.82 In relation to the continued exemptions for religious practitioners, the Smith Family stated:

That there is a distinction drawn between fringe benefits paid to religious practitioners and those workers elsewhere in the sector is inconsistent and inexplicable - is it appropriate for the matter to be determined by whether the nature of the service is spiritual or material? Indeed many within the sector may have difficulty in distinguishing the exempt and taxable components of benefits where religious practitioners adopt multiple roles in service delivery. [80]

3.83 ACROD also noted the continued concession for religious practitioners and stated `whilst ACROD supports this concession by Government we strongly maintain that services to people who have profound and severe disabilities should be regarded as no less worthy than religious services'. [81]

3.84 Many organisations appearing before the Committee, recommended that the proposals relating to FBT be amended and that salary packaging be limited to a maximum of 30 per cent of total remuneration. Any benefits provided in excess of the 30 per cent threshold be taxed at the ordinary rate. It was argued that this would provide a more meaningful and appropriate cap and still ensure that organisations can manage their costs and attract suitably qualified staff. [82]

Impact on fundraising

3.85 Community welfare organisations rely to a great extent on fundraising as a source of revenue. Fundraising takes a variety of forms including street, mail and telephone appeals, special events including gala dinners, auctions, fun runs, fairs, bingo nights, cake stalls and sausage sizzles. Charitable fundraising was estimated to be about $8 billion a year. [83]

3.86 Under the Government's tax proposals, `to avoid unfair competition with other businesses, fundraising activities by all registered organisations, including gala dinners, lotteries and raffles, as well as memberships to those organisations are payments for services and, as such, will be subject to the GST'. [84]

3.87 It was argued that the application to GST to fundraising will diminish the amount of money going to organisations. Organisations will have to cut services. This will result in increases in demand for government services. ACROD concluded that `rather than improving the efficiency of social arrangements for meeting community needs, this sort of tax [on fundraising] on charities is a prime example of tax distortion against the efficient meeting of social needs'. [85]

3.88 Many community welfare organisations also challenged the basis on which the Government has proposed to tax fundraising activities. They argued that in fundraising, the community welfare organisations are not offering the same `good' or `service' as the for-profit sector. For example, the Australian Council for Overseas Aid argued that fundraising activities cannot be compared to commercial gambling products. It noted that `for a start, no gambler would ever weigh up the odds of a wager on a charity raffle compared to a flutter at the races. People buy tickets in a charity raffle mainly to support that charity since the chance of a win is invariably poorer than from a commercial gambling product.' [86]

3.89 The Surf Life Saving Association noted that fundraising is often, in practice, `seen as more in the nature of a donation by the person buying the ticket. In many cases, the prime motivation by the person in buying the ticket is to provide funds to the charity rather than to enter into any real expectation of winning the prize.' [87]

3.90 The Spastic Centre of NSW expressed concern that the public will be less inclined to buy raffle tickets etc because not all their donations will be directed to community services and because the public does not believe that governments should benefit from philanthropic efforts. [88]

3.91 Other problems raised included the additional compliance costs and potential for greater impositions on volunteers who give their time to charities.

3.92 The following discussion focuses on the various types of fundraising undertaken by organisations and the potential impact of the GST on registered organisations.

Donations

3.93 Donations are not payments in return for goods and services and therefore are GST-free. However, it was argued that because of the significant reductions in personal income tax rates, the value of tax deductibility will also decline. As a result, revenue received from this source will decline. [89]

Sponsorships

3.94 The Vos Committee noted that sponsorships will be taxable as they are payments for services, ie advertising or some other benefit. However, most sponsorship arrangements will take place between registered entities and therefore will have no net impact. In the event of a business sponsoring a charity, the charity will need to remit GST on the amount of the sponsorship. But the business will be eligible for input tax credits. DFaCS stated that `this makes the situation effectively cost neutral for sponsors, so there should not be a reduction in sponsorships of events carried out by the charitable organisations'. [90]

3.95 The Vos Committee did not consider that it would be appropriate for sponsorships in the charity sector to be GST-free. Vos considered that this would provide an incentive for business to direct its advertising through charitable entities. [91] The Committee notes that currently charities have a tax advantage and excessive use of advertising through charitable organisations does not occur.

3.96 Organisations considered that, although the GST on sponsorships is cost neutral, there will be a detrimental impact as the initial payment of the tax will carry with it a disincentive for the sponsor. [92] Moreover, sponsorships from a person or a family trust will be taxable. The person or trust will have to give 10 per cent more or the sponsorship will be worth 10 per cent less. The person or trust will not be able to claim an input tax credit.

3.97 ACROD stated:

The Treasurer is defending the goods and services tax on sponsorships by saying that, because a sponsorship will typically take place between two registered entities, the impact of the GST will net out, so the net financial position of the sponsor will not be affected. Again, this ignores the disincentive factor of a sponsor initially having to give $1,100 instead of $1,000 and via the mechanism of an invoice which was not required previously. It also fails to address the question of individuals as donors with individuals not being registered entities. [93]

3.98 Further, it appears that as sponsorships from financial institutions are input taxed, they will not be able to obtain a GST credit. Either the sponsor will have to include extra for the GST or the organisation will lose 10 per cent of the amount. [94]

3.99 Sponsorship is very important for many organisations. For example, Lifeline Australia noted that its major sponsor is Telstra. It indicated that without that sponsorship, Lifeline would not be able to maintain its 24 hour counselling service from anywhere in Australia for the cost of a local call. `We would not be able to sustain our National phone number and presence and the cost of long distance calls and timed local calls presently met from sponsorship monies will have to be paid by the caller. The quality of service provided by Lifeline today will rapidly fall to unacceptable levels'. [95]

3.100 The YWCA of Canberra also argued that attracting sponsorship from the private sector for community and welfare activities is extremely difficult. This has been particularly the case with the Olympics taking a large proportion of private sponsorship. [96]

Memberships

3.101 The Government has determined that membership fees are payments in return for services and are thus taxable. The Committee heard a number of arguments in favour of memberships being GST-free. Surf Life Saving stated that `in the extreme, the GST on our membership fee could be viewed as a 10% tax on members' commitment to volunteer their time to save lives'. [97] A number of arguments in favour of membership being GST-free were put to the Committee.

3.102 First, it was argued that memberships are not simply a fee for service. Although members may receive some services such as a newsletter or voting rights, the value of these services do not necessarily bear a direct relationship to the payment. Further, `for many people it is a way of making a financial contribution to an organisation and expressing support for the issues on which the organisation is working'. [98] The Scouts and Guides also noted that its group leader members only receive indirect services and these services are all concerned with their voluntary work in delivering the youth program.

Tax on 6 year olds membership fees

In relation to scouts themselves:

This would seem to us to be the first time in Australia's history that a tax system applied to a six–year–old because he or she received services from a scout or guide leader. Can the government seriously argue that we should place a 10 per cent tax on a six–year–old's membership fee, because not to do so would create an exemption precedent?

Source: Submission No.746, p.6, Scouts and Guides Australia.

3.103 Diabetes Australia noted that while memberships will be taxable:

…we understand that a person buying shares for personal profit would not pay GST. People join DA because they and others like them need help not because they expect a full return on capital invested. It seem iniquitous that persons subscribing for a membership in a charity with no thought of reward should be subject to GST while those investing for personal gain are not. [99]

3.104 Secondly, concern was expressed that some members would be unable to afford any increase in membership costs and membership numbers will decline. As a result organisations will be unable to continue to provide services. The War Widows Guild submitted that there would be difficulties in raising the cost of its subscriptions and its journal, by the 10 per cent required, to $22 per year. Many Guild members have difficulty in finding the current charge of $20 per year. It was feared that membership numbers will fall if charges are increased. As a result, the Guild's ability to provide the services that currently meet many members' needs will be reduced. This will occur at a time when demand for assistance was increasing as members age.

3.105 The Scouts also expressed concern that their membership will fall because of the GST. Already many scouts from low socio-economic groups are finding it difficult to maintain membership. It was also argued `that given the increasing negative distractions and influences that are present to the youth of our nation, the Australian community needs organisations such as the Guides and Scouts to be active and thriving as we enter the new millennium'. [100]

3.106 The Scouts also indicated that revenue problems already exist in some States and assets have been sold to subsidise costs. Any further decline in membership will exacerbate an already difficult situation. In was stated that `in South Australia, and in the smaller states, the Guide operation may be forced to close down due to lack of funds'. [101]

3.107 Thirdly, funds raised through memberships provide the means to assist a particular sector of the community and reduces demand for more expensive government funded services. For example, the War Widows Guild told the Committee that it not only assists its members to remain in their own homes thereby decreasing demand on aged care facilities, but also provides advice about entitlements. The Department of Veterans' Affairs directs war widows to contact the Guild for advice on entitlements. If the Guild did not perform this role, the Department may need to employ more staff to assist the approximately 100,000 war widows in Australia. [102]

3.108 Fourthly, membership of a particular organisation may provide a service that is not provided by a commercial entity. The YWCA noted that membership of its organisation provides women with a `voice' to government – something no commercial organisation does and something that may not be defined as a service in commercial terms.

Tax on membership runs counter to the Government's own policies

The YWCA also added that membership numbers, as a reflection of the representative nature of an organisation, is now a clear criteria for the Government in considering funding under most grant programs. However, the Government's proposals would directly work against expanding the representative nature of organisations.

Source: Submission No.610, p.11, YWCA of Canberra.

Gambling Activities

3.109 Lottery and gambling activities will be included in the tax base. The GST will be applied to the operator's margin of these activities, not the prizes paid out. Thus the tax will apply to the `difference between total “ticket sales” or “bets taken” by the operator of the gambling or lottery activity and the value of the prizes or winnings paid out'. [103]

3.110 Under the proposed arrangements, registered charitable organisations will have to pay 10 per cent GST on the gross margin. GST paid out on inputs will be claimed back. The organisation will either have to accept the smaller return or put up the cost of the tickets to maintain the overall level of profitability of the raffle. [104]

Surf club raffles

A Surf Club runs a fundraising raffle and offers as a prize a food hamper to the value of $100. It has to purchase the food hamper at the full retail price (exclusive of GST) of $100. It proposes to sell 1,000 tickets at $1 each in order to derive total takings of $1,000. Under the present system the takings will be $900, under the GST $809.10.

No GST

Ticket sales $1,000
Less purchase of hamper*$100
Less GST of margin (1/11th)
Surplus $ 900

Under a GST

Ticket sales $1,000
Less purchase of hamper*$100
Less GST of margin (1/11th) $ 90.90
Surplus $ 809.10

*Input tax credits claimable.

The clubs revenue is 10 per cent less under the GST. To recoup the shortfall the Club must either increase the price of the tickets or sell more. Both alternatives have drawbacks. With the first the Club must ask for a greater `donation' from the purchaser. With the second there is a burden on Club members to sell more tickets. If it can't do this, its surplus is reduced.

Source: Submission No.452, pp.21-2, Royal Life Saving Society, Surf Life Saving, St John Ambulance.

Other fund raising activities

3.111 Many organisations conduct other fundraising activities such as fetes and fairs. As a result of the changes, the sale of goods and entertainment at fetes and fairs will attract the GST unless the goods and services are sold at prices less than 50 per cent of an equivalent good or service sold by a commercial organisation. Donated second-hand goods at white elephant stalls, charity garage sales etc will be GST-free. [105]

3.112 Registered organisations will be able to claim back input tax credits on the inputs to such events, for example the hire of marquees etc. However, for many organisations the administrative burden and compliance costs may make it impractical for the organisation to do so. In many cases volunteers run these types of events. The use of volunteers will make it more difficult for organisations to ensure that all input tax credits are collected to offset the tax on items attracting the GST. [106]

3.113 Many organisations also sell Christmas cards, pot plants, pens etc. These will be taxable if sold at more than 50 per cent of the commercial rate. Organisations could decide to drop the price below 50 per cent of the commercial rate and wear the lost income. This decision would depend on the size of the contribution these goods make to fundraising. Organisation could decide to keep the price up, but then face possible falls in demand and compliance costs of claiming back input tax credits.

3.114 Problems with fundraising activities such as cake stalls etc were raised. Fundraising Australia suggested that if the ingredients were donated and cakes etc produced, GST would be payable because they were transformed. Organisations also questioned how the commercial rate would be measured and raised the difficulty of comparing a homemade product with a store bought product. Other organisations suggested that often the prices of cakes etc were inflated with the purchasers seeing the price as a donation to the organisation. [107]

New tax on sausage sizzles

The Scouts stated:

[The concern is] about imposing the legal obligation on [scouts] to be a tax collector every time they go out and run a sausage sizzle. Initially, we thought, `Well, we are a charitable organisation, and each little group, because they are only a little volunteer group, will not be covered'. This letter [from the office of the Assistant Treasurer] we received last week says specifically that, yes, they will be GST included because they are part of both national scout and national guide organisations. Suddenly, every sausage sizzle, every car wash will be affected – and leaders are not going to be prepared. You will not get people to volunteer to be the treasurer.

Source: Committee Hansard, 24.2.99, p.970, Scouts Australia.

New tax on fundraising dinners for charities

ACROD stated:

The Treasurer also defends the goods and services tax on fundraising activities by pointing out that where the activity results in a supply of goods or services at less than 50 per cent of market value it will be GST free. This totally ignores the common situation where fundraising activities are quite deliberately supplied at way above the market value of supply with the difference essentially being a donation. For example, if you pay $100 for a fundraising dinner, you do so happily knowing you will get a $25 meal and the rest goes to the organisation as support. The crux of the matter is that the transaction based concept of the goods and services tax is just not relevant to many aspects of the voluntary sector. This fundamental point has to be recognised and taken account of.

Source: Committee Hansard, 4.2.99, p.303, ACROD.

Opportunity Shops

3.115 The Vos Committee considered fund raising activities through the sale of donated goods through Opportunity Shops. It agreed that these were not truly commercial ventures as the prices are set because the stock has been donated and the goods are being disposed of well below any commercial price. It recommended that the sales of these goods be GST-free.

3.116 The Vos Committee considered the reprocessing of unwanted clothing and clothing not suitable for sale into industrial rags. It stated that most of these products are sold to other businesses rather than direct to final consumers and `therefore these sales have a much more significant commercial flavour, and so the Committee considers such sales should be subject to GST'. [108]

3.117 St Vincent de Paul noted that GST-free second hand goods are not the only items sold at opportunity shops. The stores also sell cards, piety goods and books and these will be taxable. The Society noted that its stores are staffed by volunteers who will need to be trained to undertake the new administrative requirements. They volunteered to assist the poor and the needy – not to undertake accounting tasks. [109]

3.118 Those organisations that reprocess donated goods argued that imposing the GST on this activity may adversely affect the ability of organisations to operate with a surplus. The Smith Family noted:

The recycling of donated goods into a number of end products, some of which will attract GST under the draft legislation, has also been the traditional domain of the charitable sector in Australia for decades, and logically this is an activity which should be fostered by maintaining existing concessions rather than inhibited by increased prices to end users, given that the profits must, under the charters of The Smith Family and similar organisations, be directed to their charitable objectives. [110]

3.119 Lifeline indicated that its Brisbane centre estimated that the GST on its rag business to be $51,000 a year and `that is $51,000 they will not have to put into services for out clients'. [111]

Government grants

3.120 Many community welfare organisations receive funding through government grants. Under the proposed tax changes, general grants will be GST-free. However, grants which are made in respect of specific outcomes or services are subject to a GST. Where the recipient is a registered entity, the transaction will be one between two registered entities and so will have no net GST implications ie the registered organisation will claim a input tax credit. [112]

3.121 Welfare organisations noted that an increasing number of general grants are now payments by government for specific services and these will be effected by the changes. Organisations will have to bear added compliance costs, money will be transferred between the government and organisations and back to the government again. There will be no benefit to GST revenue but there will be administration costs for the organisation. [113]

3.122 The YWCA of Canberra also argued that the GST situation in relation to grants or contact funding created `an extremely odd situation'. That, in fact, the Government was penalising those organisations which were not so heavily reliant on government grants and had developed alternative income streams. The YWCA suggested that these organisations will be disadvantaged compared to those organisations which rely heavily on grants. [114]

Capital equipment

3.123 Concerns were raised about the impact of the GST on the sale and lease of capital equipment and assets. The most frequently sold and leased assets are motor vehicles.

3.124 At the present time charitable organisations do not pay sales tax on motor vehicles. They are usually disposed of every 2 years or 40,000 kilometres, which ever comes first. Diabetes Australia stated that `the practical effect of this is that the tax relief gained matches the depreciation on the vehicle. The cost of a new vehicle ex-sales tax and the market value of the trade-in are about equal and turnover is made at zero net cost' to the organisation. [115] Any excess is used by the organisation to fund its activities. [116]

3.125 Under the proposed tax system, registered charities must charge GST whenever they dispose of capital equipment including motor vehicles. It was argued that depreciation will be greater than the tax relief and will result in increased outgoings on overheads and consequent reduced funds for organisations. [117]

3.126 The Council of DSC Funded Agencies also noted that `changeover costs of vehicles is estimated to increase by $2,000 to $3,000 per vehicle'. This has `already filtered into the market for vehicles as lease payments have risen considerably (as much as 200%) as finance companies factor in the reduced residual values on vehicles'. The resale value of a vehicle in two or three years is expected to diminish and finance and leasing companies need to recoup losses and are already changing their financing arrangements as a result. [118]

Treatment of charities in the UK and Canada

3.127 In Canada, certain activities are exempt from GST, regardless of who provides them. They include:

• long-term residential care;
• child care services provided primarily for children 14 years of age and younger; and
• personal care services for children, underprivileged individuals, or individuals with disabilities, when provided by a person operating an establishment for these individuals, in either institutional or non-institutional settings.

3.128 Other goods and services are exempt when charities provide them:

• most services;
• sales of used and donated goods;
• short-term residential accommodation (less than one month of occupancy);
• meals on wheels programs; and
• total admission to fundraising events.

3.129 In Canada, most goods and services sold by charities, or provided for a fundraising activity, are exempt unless they are sold regularly throughout the year. For example, Christmas cards, raffle tickets and bingo nights are exempt. Subscriptions to a charity's magazine are taxable. Grants, subsidies and personal corporate donations are not subject to GST. Sponsorships are exempt depending on the nature and extent of the promotional benefits given to the sponsor. Memberships are exempt in certain circumstances. [119]

3.130 In the United Kingdom, charities benefit from some 200 million pounds sterling per year in relief from VAT through a variety of zero rates and exemptions. [120]

3.131 Donations, legacies or other voluntary contributions do not attract VAT. One-off fund raising activities are VAT exempt, including fetes, balls, gala shows, dinner dances etc. Memberships are exempt in certain circumstances. Sponsorships are exempt depending on the extent of the benefit received by the sponsor. [121]

3.132 In March 1999 the report of a review of charity taxation conducted by HM Treasury was published. The review contained proposals to simplify the tax system for charities and ways to encourage more people to give to charity through changes to the tax system.

Conclusions

3.133 Charitable organisations perform an invaluable role in Australian society. They form part of the social capital and social fabric of this country and have contributed to community life in every conceivable way. Many of these organisations aim to help the disadvantaged within society: the frail; the aged; the unemployed; the disabled; the bereaved and the sick. Others provide leadership for the youth of Australia, for example, the Scouts, Guides, YWCA, YMCA and Surf Life Saving. Many others provide essential community services such as child care and provide children with safe havens through outside school hours care programs and community drop-in centres. They provide safety nets for people in need. And as researchers indicate, they provide `a rich “civic culture”' that is a prerequisite for a strong democratic political system and for continuing economic prosperity'. [122]

3.134 The Committee considers that the Government's tax proposals will undermine the position of these organisations within our society. The Committee does not consider that it is appropriate to regard normal fundraising or membership activities as `commercial' activities. Indeed, the end use of the surplus funds is, the Committee believes, a fundamental difference between the for-profit and the not-for-profit sectors.

3.135 Under the Government's tax package charitable and community organisations would, many for the first time, be drawn into the tax system. This represents a significant shift in tax policy and reflects a major change in the tax treatment of these organisations. The result of this shift will be to make many charitable and community organisations less competitive in areas such as health and aged care, reducing the role of these organisations in these sectors.

3.136 We as a community need to decide whether we want charitable and community organisations to remain strong and integral partners in the delivery of human services.

3.137 The impact of the proposed changes to the FBT concession limits will be disastrous for charitable and community organisations and the disadvantaged groups that receive assistance from those organisations. On the basis of the Government's projections for the savings generated by these changes, the charitable and community sector may lose over $100 million a year as a result of the FBT changes. This is the value of the community services that will be lost, unless further assistance is provided to those sectors.

3.138 Many organisations began using the FBT concessions following prompting from governments which have either frozen or even reduced direct funding grants. The use of the FBT concessions has allowed charitable and community organisations to stretch their salary budgets further, in the face of increasing demand for their services.

3.139 The Government provided no information or modelling on the potential impact of the proposed FBT changes on the charitable and community sectors or the groups who receive services from these sectors. The Committee found a general lack of information on the level of assistance currently being provided to these sectors through indirect tax concessions.

3.140 The tax package contains no compensation for charitable and community organisations for the additional costs they will face as a result of the FBT change. Without some form of compensation many organisations will have no choice but to cut essential services to the disadvantaged when the proposed FBT limits are introduced.

3.141 The impact of the GST on charitable organisations will not be small. Charitable organisations will have to charge GST on what the Government considers to be `commercial' activities. For example, the Surf Life Saving Association has estimated that it will suffer an annual revenue loss in the order of $3 million. Many charitable organisations have ventured into more commercial areas of activity in order to increase fundraising for the provision of essential services. This has often been the case where government grants and other funding has not been adequate to meet the demand for services.

3.142 For charitable organisations, the proposed tax package will also result in significant compliance costs; loss of revenue because of the imposition of a GST on fundraising activities; loss of revenue because of a GST on memberships; and, for smaller organisations an increase in overall tax burden in as much as those organisations which do not register will be input taxed. Volunteer workers will have to be trained to undertake tax compliance tasks. This will be a further burden and may discourage people from assisting charitable organisations in the future. Many charitable organisations believed the Government's proposed $500 million assistance package will be inadequate.

3.143 The loss of funds as a result of the proposed tax package will impact on the ability of charitable organisations to provide services to the community. Those Australians who receive assistance from charitable organisations will suffer if services are cut. Charitable organisations will be forced to play a much less significant role in the delivery of human services. This will diminish the influence of a sector which contributes so much to the fabric of Australian life.

3.144 The Committee notes that the treatment of exemptions from the activities of charities proposed by the Government is considerably less generous than that in Canada and the United Kingdom, where Governments have been moving to reduce the tax impost on charities, particularly in the treatment of fundraising, sponsorships and membership fees.

Footnotes

[1] Industry Commission, Charitable Organisations in Australia, AGPS, Melbourne, 1995, p.1.

[2] In this report, the Committee uses the term `charitable organisation' in referring to the wide range of charitable, welfare, community organisations, Public Benevolent Institutions and non-profit organisations which provide community and welfare services including health services.

[3] Industry Commission, 1995, pp.1, 25.

[4] Submission No.640, pp.2-3 (NCOSS).

[5] Submission No. 68B, p.10 (ACOSS).

[6] Tax Reform: not a new tax, a new tax system, p.95.

[7] Departments of Treasury, Health and Aged Care, Family and Community Services, Community Sector Briefing Kit, pp.5, 6.

[8] Submission No.746, Additional Information, Letter from the Office of the Assistant Treasurer to Scouts Australia, dated 17.2.99.

[9] Vos Report, p.23.

[10] Tax Reform: not a new tax, a new tax system, p. 50.

[11] See for example Submission No 68B, p.11 (ACOSS), Submission No.606, p.15 (ACROD), Submission No.624, p.10 (Anglicare), Submission No.738, p.1 (Port Adelaide Central Mission), Submission No.765, p.1 (Lutheran Community Care), Submission No.922, p.3 (SACOSS), Submission No.1028, p.3 (Spastic Centre of NSW).

[12] Tax Reform: not a new tax, a new tax system, p.95.

[13] Vos Report, pp.67-8.

[14] Vos Report, p.68.

[15] Submission No.68B, p.11 (ACOSS), Submission No.935, p.8 (UCSA).

[16] Submission No.668, p.2 (Church & Charitable Private Hospitals Associations).

[17] Submission No.68B, p.11 (ACOSS).

[18] Submission No.68B, p.11 (ACOSS), Submission No.681, p.2 (Mission Australia), see also Submission No. 611, p.11, (YWCA of Australia), Submission No.640, p.3 (NCOSS).

[19] Submission No.624, p.9 (Anglicare Australia).

[20] See for example, Submission No.364, p.12 (Aged Care Australia).

[21] Submission No.935, p.8 (UCSA).

[22] Submission No.300, p.41 (Society of St Vincent de Paul).

[23] Committee Hansard, 24.2.99, p.940.

[24] Submission No.929, p.11 (Catholic Social Services).

[25] Submission No.935, p.8 (UCSA). Submission No.1028, p.5 (The Spastic Centre of NSW).

[26] Committee Hansard, 10.2.99, p.617 (Wesley Mission).

[27] See for example, Submission No.68B, pp.10-11 (ACOSS), Submission No.300, p.41 (St Vincent de Paul), Submission No.606, p.5 (ACROD), Submission No.866, p.6 (Adelaide Central Mission).

[28] Submission No.935, p.9 (UCSA).

[29] Submission No.68B, p.12 (ACOSS).

[30] Submission No.992, p.5 (Tax Reform and Community Sector Alliance), Submission No.364, p.16 (Aged Care Australia).

[31] Submission No.452, p.12 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance).

[32] Submission No.927, p.9 (Arthur Andersen).

[33] Submission No.452, p.9 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance).

[34] Submission No.1028, p.6 (The Spastic Centre of NSW).

[35] Submission No.896, p.5 (Wesley Central Mission).

[36] Submission No.344, p.4 (Deafness Forum of Australia), Submission No.784, p.5 (Council for Homeless People Australia), Submission No.1028, p.6 (The Spastic Centre of NSW).

[37] Regulation Impact Statement for the Introduction of a Goods and Services Tax, p.4.

[38] Submission No.611, p.11 (YWCA of Australia), Submission No.615, p.2 (Youth & Family Services Logan City), Submission No.848, p.32 (Brotherhood of St Laurence).

[39] Committee Hansard, 11.2.99, p.727 (Church & Charitable Private Hospitals Association).

[40] Submission No.848, p.32 (Brotherhood of St Laurence).

[41] Submission No.68B, p.13 (ACOSS).

[42] Submission No.1034, pp.26-7 (Australian Catholic Social Welfare Commission), Submission No.866, p.9 (Adelaide Central Mission), Submission No.1053, p.2 (Baptist Community Services).

[43] Submission No.603, p.10 (DFaCS).

[44] Committee Hansard, p.111 (DFaCS).

[45] Submission No.1034, p.26 (Australian Catholic Social Welfare Commission).

[46] Submission No.683A, p.2; Attachment p.30 (ACHCA).

[47] Submission No.929, p.19 (Catholic Social Services).

[48] Submission No.300, p.43 (St Vincent de Paul).

[49] Submission No.783, p.14 (Council for Homeless Persons Australia).

[50] Submission No.642, p.7 (Lifeline Australia), Submission No.1305, p.2 (Volunteering SA)

[51] Submission No.1371, p.3 (Queensland Country Women's Association).

[52] Submission No.452, p.11 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance Australia).

[53] See for example, Submission No.610. p.12 (YWCA of Canberra), Submission No.906, p.2 (Association of Major Community Organisations of SA), Submission No.922, p.3 (SACOSS), Submission No.925, p.4 (Council of DSC Funded Agencies).

[54] Submission No.772, p.3 (Palliative Care Victoria).

[55] Submission No.927, p.1 (Arthur Andersen).

[56] The Canberra Times, 22.3.99, p.21.

[57] Senate, Hansard, 19.9.95, p.952.

[58] Submission No.746, p.2 (Scouts Australia and Guides Australia).

[59] Committee Hansard, 24.2.99, p.969.

[60] AGPS, 1999 Year Book Australia, p.540.

[61] Submission No. 452, p.13 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance Australia).

[62] Committee Hansard, 24.2.99, p.974.

[63] Committee Hansard, pp.303-04.

[64] Submission No.364, p.16 (Aged Care Australia), Submission No. 935, p.10 (UCSA), Submission 1034, p.27 (Australian Catholic Social Welfare Commission),

[65] Submission No.1028, p.4 (Spastic Centre of NSW), Submission No.925, p.2 (Council of DSC Funded Agencies).

[66] Committee Hansard, p.111.

[67] Charitable Organisations in Australia, Industry Commission Report No. 45, p.296.

[68] Submission No.663, p.9 (United Healthcare Network), Submission No.681, p.2 (Mission Australia), Submission No.655, p.7 (The Smith Family), Submission No.896, p.5 (Wesley Central Mission Melbourne), Submission No.1028, p.4 (Spastic Centre of NSW), Submission No.681, p.2 (Mission Australia), Submission No.848, p.31 (Brotherhood of St Laurence), Submission No.925, p.1 (Council of DSC Funded Agencies), Submission No.1077, p.1 (Care Flight).

[69] Submission No.663, p.10 (United Healthcare Network).

[70] Submission No.1028, p.5 (The Spastic Centre of NSW).

[71] Submission No.896, p.5 (Wesley Central Mission Melbourne),

[72] Submission No. 992, p.13 (Tax Reform and Community Sector Alliance).

[73] Submission No.624, pp.11-12 (Anglicare), Submission No.681, p.3 (Mission Australia).

[74] Committee Hansard, 3.2.99, p.159 (Deafness Australia).

[75] Committee Hansard, 3.2.99, p.269 (ACHCA).

[76] Submission No.663, p.10 (United Healthcare Network).

[77] Submission No.452, p.24 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance Australia), Submission No.671, p.2 (Catholic Care), Submission No.925, p.2 (Council of DSC Funded Agencies), Submission No.1034, p.27 (Australian Catholic Social Welfare Commission).

[78] Committee Hansard, 3.2.99, p.178 (NACCHO).

[79] See for example, Submission No.663, p.7 (United Healthcare Network).

[80] Submission No.655, p.8 (The Smith Family).

[81] Submission No.606, p.10 (ACROD).

[82] Submission No.606, p.9 (ACROD), Submission No.663, p.3 (United Healthcare Network), Submission No.992, p.11 (Tax Reform and Community Sector Alliance), Submission No.1034, p.27 (Australian Catholic Social Welfare Commission).

[83] Senate Select Committee on the New Tax System, Committee Hansard, 3.3.99, p.1528 (Fundraising Australia).

[84] Submission No.602, p.10 (DFaCS).

[85] Submission No.606, p.21 (ACROD). See also Submission No.300, p.45 (St Vincent de Paul), Submission No.720, p.1 (Council of People with MS Australia), Submission No.1009, p.2 (Centacare Townsville), Submission No.1014, p.2 (Isolated Children's Parents' Association), Submission No.1079, p.2 (Community Development Organisation).

[86] Submission No.621, p.2, (Australian Council for Overseas Aid).

[87] Submission No.452, p.21 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance Australia).

[88] Submission No.1028, p.7 (Spastic Centre of NSW). See also Submission No.674, p.6 (Royal Institute of Deaf & Blind Children) Submission No.992, p.8 (Tax Reform & Community Sector Alliance).

[89] Submission No.364, p.13 (Aged Care Australia).

[90] Submission No.603, p.10 (DFaCS).

[91] Vos Report, p.74.

[92] Submission No.606, p.22 (ACROD), Submission No.655, p.8 (The Smith Family).

[93] Committee Hansard, 4.2.99, p.303 (ACROD).

[94] Select Committee on the New Tax System, Committee Hansard, 3.3.99, p.1534 (Fundraising Australia).

[95] Submission No.642, p.4 (Lifeline Australia).

[96] Submission No.610, p.9 (YWCA of Canberra).

[97] Submission No.452, p.13 (Royal Life Saving Society, Surf Life Saving Australia, St John Ambulance Australia).

[98] Submission No.68B, p.13 (ACOSS).

[99] Submission No.634, p.5 (Diabetes Australia).

[100] Submission No.746, p.2 (Scouts Australia and Guides Australia).

[101] Submission No.746, pp.3,6 (Scouts and Guilds Australia).

[102] Submission No.190, p.9 (War Widows' Guild of Australia, NSW Ltd).

[103] Tax Reform: not a new tax, a new tax system, p.98.

[104] See for example, Submission No.404, p.2 (Riding for the Disabled Association of Qld), Submission No.608, p.2 (Epilepsy Association of NSW).

[105] Submission No.800 p.10 (Fundraising Institute Australia, Third Sector Management).

[106] Submission No.800, p.11 (Fundraising Institute Australia, Third Sector Management).

[107] Select Committee on the New Tax System, Committee Hansard, p.1531 (Fundraising Institute Australia, Third Sector Management), Submission No.674, p.9 (Royal Institute for Deaf & Blind Children), Submission No.848, p.30 (Brotherhood of St Laurence).

[108] Vos Report, p.71.

[109] Submission No.300, p.44 (St Vincent de Paul Society).

[110] Submission No.655, p.6 (The Smith Family).

[111] Committee Hansard, 10.2.99, p.606 (Lifeline).

[112] Briefing Kit, p.5, Vos Report, p.73.

[113] Submission No.68B, p.12 (ACOSS), Submission 992, p.8 (Tax Reform and Community Sector Alliance), Submission No.1079, p.1 (Community Development Organisation).

[114] Submission No.610, p.143 (YWCA of Canberra).

[115] Submission No.643, p.6 (Diabetes Australia).

[116] Submission No.606, p.23 (ACROD).

[117] Submission No.643, p.6 (Diabetes Australia).

[118] Submission No.925, p.8 (Council of DSC Funded Agencies), Committee Hansard, 25.2.99, p.1039. See also Submission No.199, p.2 (Emerald Club for Hope and Outreach).

[119] Revenue Canada, GST/HST Information for Charities, July 1998.

[120] HM Treasury, Review of Charity Taxation¸ 9.3.99, p.21.

[121] Customs and Excise Notice 701/1/95.

[122] R. Pultman, quoted in AGPS, 1999 Year Book Australia, p.541.