Chapter 1 


Chapter 1 

Referral

1.1        This inquiry examined the Australian Charities and Not-for-profits Commission Bill 2012, the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012, and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions Bill 2012. The suite of three Bills was referred to the Community Affairs Committee on 23 August 2012 with a reporting date of 12 September 2012.  The Bills were also referred to the Parliamentary Joint Committee on Corporations and Financial Services Committee. 

1.2        Due to time constraints this committee has concentrated to a large extent on the Australian Charities and Not-for-profits Commission Bill 2012.  The committee notes that the Parliamentary Joint Committee on Corporations and Financial Services examined the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012 and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions Bill 2012 in greater detail in their report. The two committees cooperated in the preparation of background material on the legislation and in some administrative areas such as writing to potential submitters.  The report of the Parliamentary Joint Committee on Corporations and Financial Services is available at:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Community_Affairs/Completed_inquiries/2010-13/charitiescommission/report/index

1.3        The Community Affairs committee received submissions from 48 individuals and organisations. It held a public hearing on the bills in Canberra on 4 September 2012. The committee thanks the many individuals and organisations who assisted it, particularly in light of the tight time frames for the inquiry.

Conduct of the inquiry

1.4        The inquiry was advertised in The Australian, and through the internet. The committee invited submissions from the Commonwealth Government and interested organisations. The committee received submissions from 49 organisations (listed at Appendix 1).  

1.5        The committee held one public hearing as part of the inquiry.  The hearing was held in Canberra on 4 September 2012. A list of witnesses who appeared before the committee is set out in Appendix 2.

1.6        Submissions, additional information, the Hansard transcript of evidence and responses to questions on notice can be accessed through the committee's website at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Community_Affairs/Completed_inquiries/2010-13/charitiescommission/index

1.7        References in this report are to individual submissions as received by the committee, not to a bound volume.

1.8        The committee sincerely thanks all submitters and witnesses for their contribution and participation in the inquiry process.

Background

1.9        There have been at least seven reviews of the regulation and taxation of the not-for-profit (NFP) sector in Australia over the last 17 years. These include:

  • 1995 Industry Commission inquiry report Charitable organisations in Australia;
  • 2001 Committee for the Inquiry into the Definition of Charities and Related Organisations inquiry report Reported of the inquiry into the definition of charities are related organisations;
  • 2008 Senate Economics References Committee's Inquiry into the disclosure regimes for charities and not-for-profit organisations;
  • 2010 Review into Australia's future tax system;
  • 2010 Productivity Commission's inquiry report Contribution of the not-for-profit sector;
  • 2010 Senate Economics Legislation Committee's Inquiry into the Tax Laws Amendment (Public Benefit Test) Bill 2010 and
  • 2011 Senate Economics References Committee inquiry report Investing for good; the development of a capital market for the not-for-profit sector in Australia.

1.10      According to Treasury a consistent theme that has emerged from these reviews is that the regulation of the NFP sector would be significantly improved by establishing a national regulator and harmonising and simplifying regulatory and taxation arrangements.[1]   

House of Representatives Economics Committee inquiry into Exposure Draft

1.11      In July 2012, the House of Representatives Standing Committee on Economics was referred exposure drafts of the Australian Charities and Not-for-profit Commission Bill 2012 and the Australian Charities Not-for-profit Commission (Consequential and Transitional) Bill 2012 for inquiry and report by 14 August 2012. In reviewing the bills, the committee sought to 'investigate the adequacy of the bills in achieving policy objectives and, where possible, identify any unintended consequences'. The inquiry focused on three broad policy areas, namely, the capacity of the Australian Charities and Not-for-profits Commission to reduce red tape; the liability of directors, trustees and management committees for the conduct of not-for-profit entities; and procedural fairness.

1.12      The committee was largely supportive of the bills, concluding that '[t]he Bills should pass'. However, the committee determined that there was scope to refine the technical details of the Bills and the accompanying the Explanatory Memorandum.[2]

1.13      Treasury has advised that the government has adopted the recommendations of the House of Representatives Economics Committee. Table 1.1 is taken from Treasury's submission. It presents an overview the government's response to the recommendations in the House Economics report.

Table 1.1 — changes to the ACNC Bills following House of Representatives Standing Committee on Economics inquiry

Section of the Bill or Explanatory Memorandum

Reference

Committee recom-mendation

Change

Objects

ACNC Bill — Paragraph 15‑5(1)(c)

1

A new object of the Act has been added to make clear the important role the ACNC will have in promoting the reduction of unnecessary regulatory obligations on the Australian not‑for‑profit sector.

Objects and Guide

ACNC Bill — Section 10-5

Explanatory Memorandum — Paragraphs: 1.85 to 1.99

2

The guide material has been altered so that it reflects that the Commissioner will support the transparency and accountability of the sector.

The explanatory materials have been added to, in order to better explain the operation of elements of the objects clause.

Registration provisions and Chapter four – enforcement powers

ACNC Bill — Sections 35-15, 100-10 and 100-15

7

Improvements have been made to ensure that registered entities have the opportunity to respond to compliance concerns, including extending the requirements to issue ‘show cause’ notices unless the ACNC Commissioner, considering a number of factors, believes that immediate enforcement action is necessary.

These changes ensure greater procedural fairness for registered entities, while also providing the Commissioner with the discretion to

revoke registration or suspend or remove a responsible entity without giving the entity a show cause notice in appropriate circumstances

Governance standards

Explanatory Memorandum — Paragraphs: 5.37 to 5.42

4

Material has been added to the explanatory materials to explain that sector‑developed codes of conduct for certain entities can be endorsed as part of the governance standards.

The Register

ACNC Bill — Subsection 40‑5(2)

8

A requirement has been introduced to provide that the ACNC Commissioner must not publish details of enforcement action on the Register for a period of at least 14 days, unless it is in the public interest to do so earlier. This provides time for a registered entity to respond before such information is made publicly available. Such information entered on the Register will be removed after five years, unless the public interest requires that it be retained.

The Register

ACNC Bill — section 40‑10(1)

5

A new regulatory power has been included in the Bill, to provide that the ACNC Commissioner must not include certain information on the Register in prescribed circumstances. This would allow regulations to be made to protect the privacy of private donors, such as those who maintain a private ancillary fund.

Obligations, liabilities and offences

ACNC Bill — Division 180

6

The provisions of the Bill governing obligations, liabilities and offences of incorporated and unincorporated entities have been redrafted to give effect to the Committee’s recommendations.

These have been revised to remove any criminal liability for directors of incorporated charities. They now also make clear that where there is a non-criminal contravention of the Bill, a director of an incorporated charity is only liable for any amount payable by the body corporate where this arises from a deliberate act or omission of the director involving dishonesty, gross negligence or recklessness.

Administrative penalties

Explanatory Memorandum — Paragraphs 13.137 to 13.162

9

Additional detail has also been added to the explanatory memorandum to clarify the Commissioner’s discretion regarding the issuing of administrative penalty notices.

Transitional reporting arrangements

Schedule 1, subitem 10 of the ACNC Consequential and Transitional Bill

3

Transitional reporting arrangements have been included to allow the Commissioner to treat a statement, report or other document provided to another Australian Government agency as meeting the financial reporting obligations of a particular registered entity under the ACNC Act. This arrangement will apply until the 2014-15 financial year and can be extended by regulation.

Statutory review

Schedule 1, subitem 16 of the Consequential and Transitional Bill

10

Consistent with the Committee’s recommendation the legislation will be reviewed after five years.

Source: Department of the Treasury, Submission 30, Appendix A, Summary Table – Changes to the ACNC Legislation, pp. 21–22.

Purpose of the Bills

1.14      The main ACNC Bill establishes a national regulator, and a national regulatory framework for the NFP sector. The ACNC Consequential and Transitional Bill contains consequential amendments to 34 Commonwealth Acts to support the operation of the ACNC. The Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 introduces a consistent definition of not-for-profit entities across Commonwealth legislation and reverses an effect of the High Court's decision in the Word Investments case by restating and standardising the special conditions for tax concession entities and for deductible gift recipients.  

1.15      Specifically the ACNC Bill:

  • establishes the ACNC;
  • charges the ACNC with registering NFP entities and maintaining a register;
  • provides for the powers of the Commissioner in relation to the regulation of registered entities; and
  • sets out the obligations and duties of registered entities.[3]

1.16      The ACNC Bill has three objects. Its first is to maintain, protect and enhance public trust and confidence in the NFP sector. Its second object is to support and sustain a robust, vibrant, independent and innovative NFP sector. The third object specifies that the ACNC will promote the reduction of unnecessary regulatory obligations on the NFP sector.[4]

1.17      Initially, only tax endorsed charities would be regulated by the ACNC. However, the Bill would establish a regulatory framework that can be extended to all NFP entities in the future.[5] 

1.18             It is proposed that the ACNC will commence operations on 1 October 2012, and be responsible for determining charity status for all Australian Government purposes. The ACNC will maintain a charity register. As part of its status determinations, the ACNC will also determine whether a charity is a public benevolent institution or health promotion charity. All responsibility for the determination of charitable status, including reporting requirements, will be handed over to the ACNC from 1 October 2012. [6]

1.19      Registration with the ACNC will be a necessary precondition for access to Commonwealth tax concessions. The ATO will accept the ACNC's decision on whether an organisation is a charity. Existing charities endorsed by the ATO as income tax exempt will be automatically registered with the ACNC.[7]

The Australian Charities and Not-for-profits Commission

1.20      The Bill would establish the statutory office of the Commissioner of the ACNC.  A Commissioner of the ACNC will be appointed to oversee the functions of the ACNC. The Commissioner will be a fully independent statutory office holder, and will provide reports directly to Parliament via the Assistant Treasurer.[8] 

1.21      An ACNC Advisory Board of legal, accounting and NFP experts will be established which will advise the Commissioner in carrying out the functions of the ACNC. The Advisory Board will consist of between two and eight members, with one of these members being the Chair of the Advisory Board. [9]   

1.22      The members are expected to have a detailed knowledge of the NFP sector and how it operates and are there to provide the ACNC Commissioner with a pool of broad knowledge and experience in the NFP sector, law, accounting and taxation which the ACNC Commissioner can draw on to assist him or her to effectively fulfil the role of ACNC Commissioner.  However the board would not be a decision-making body and as such the ACNC Commissioner may have regard to the advice and recommendations of the board but will not be obliged to follow them.[10]

1.23      As well as being responsible for the regulation of the Not-for-profit sector the ACNC will also have a duty to provide assistance and support to the sector through the provision of educational material and other guidance. This includes assisting registered entities in complying with and understanding the legislation.[11]

The functions of the ACNC - registering NFP entities and maintaining a register

1.24      The Bills would provide the ACNC with the power to register NFP entities and to maintain the register.  Registration will be voluntary but an organisation will have to be registered in order to access certain tax concessions.[12] 

1.25      Chapter 2 of the bill establishes the parameters under which an entity may be registered with the ACNC. An entity may be registered if it:

  • is a not-for-profit entity;
  • is compliant with governance standards and external conduct standards;
  • has an Australian Business Number; and
  • has not been determined by Australian government agency that the entity has engaged in or supports terrorists or other criminal activities under Australian law.[13]

1.26      The Explanatory Memorandum (EM) provides the following explanation of not-for-profit entity:

A NFP entity is generally an entity that is not operating for the profit or gain of its individual members, whether these gains are direct or indirect. This applies both while by the entity is operating and when the entity winds up. [14]

1.27      In addition, the entity must satisfy the definition of 'charity', which will be defined to include seven subtypes:

  • an entity with a purpose that is the relief of poverty, sickness or the needs of the aged;
  • an entity with a purpose that is the advancement of education;
  • an entity with a purpose that is the advancement of religion;
  • an entity with another purpose that is beneficial to the community;
  • an institution whose principal activity is to promote the prevention or the control of diseases in human beings;
  • a public benevolent institution;
  • an entity with a charitable purpose described in section 4 of the Extension of Charitable Purpose Act 2004 (provision of childcare services).[15]

1.28      The EM to the bill notes that initially only charities may be registered, however, 'the bill establishes a regulatory framework that can be extended to all NFP entities in the future'.[16]

1.29      Decisions of a CMC Commissioner regarding registration and revocation of registration may be appealed to the Commissioner and, subsequently, to the Administrative Appeals Tribunal.[17]

The Australian Charities and Not-for-profits Register

1.30      The bill would authorise the creation of an Australian Charities and Not-for-profits Register maintained by the ACNC.[18] The register would be available for public access and would disclose details of the names, contact details, Australian Business Numbers, charity type, date of registration, and the governing rules of each registered entity. The register would also disclose the information statements provided by registered entities, with the exception of any information classified as not-for-publication, and financial reports and audit reviews provided to the ACNC. The register would also contain information potentially adverse to an entity, including warnings and directions issued by the Commissioner, enforceable undertakings, injunctions, and suspensions and removals from the register.[19] The bill would authorise subordinate legislation to restrict the kinds of information that may be included on the register.[20]

The powers of the Commissioner in relation to the regulation of registered entities

1.31      The Bill would provide the ACNC Commissioner with powers similar to other regulatory bodies such as the ATO and the Australian Securities and Investment Commission (ASIC). However the EM for the Bill emphasises that the ACNC Commissioner's primary function in terms of compliance with regulatory requirements in the Bill will be focussed on education and guidance to assist entities in meeting their obligations, rather than resorting to the enforcement powers outlined in the Bill.[21]

1.32      The specific education and advisory functions that the ACNC Commissioner will utilise are not set out in the Bill or the EM.

1.33       The EM lists the enforcement actions available to the ACNC Commissioner:

  • issue warning notices;
  • issue directions;
  • enter into enforceable undertakings;
  • apply to the courts for injunctions;
  • suspend or remove responsible entities; and
  • appoint acting responsible entities.[22]

1.34      The submission from the Treasury explained in further detail the powers available to the ACNC Commissioner:

  • gathering information, monitoring activities and inquiring about matters relating to general compliance with, or potential breaches, of the provisions of the new laws. An ACNC officer may enter premises for the purpose of monitoring, with the occupier’s consent or under a monitoring warrant;
  • giving a registered entity a warning notice or a direction if the Commissioner reasonably believes the entity has, or is more likely than not to, contravene the Act, governance standards, or external conduct standards;
  • accepting enforceable undertakings from registered entities to comply with the Act, governance standards or external conduct standards;
  • applying for injunctions to restrain registered entities from contravening the Act, or to compel compliance with the Act; and
  • suspending or removing a responsible entity of a registered entity (following a show cause notice), if the Commissioner reasonably believes that the registered entity has, or is more likely than not to, contravene the Act, governance or external conduct standards. The Commissioner may appoint acting responsible entities, subject to certain limitations, to enable the registered entity to continue to function.[23]

1.35      The Treasury submission also noted that the Bill provides an administrative penalty system in cases where misleading information has been provided or there has been a failure to provide information.[24]   

The obligations and duties of registered entities

1.36      The duties of a registered entity are largely not set out in the primary ACNC legislation.  The government announced in May 2012 that the governance standards and the detailed content requirements of financial reports would be set out in regulations, and that there would be a separate consultation process conducting for those regulations. 

1.37      However the ACNC Bill does establish a reporting framework that distinguishes organisations on the basis of their annual revenue.  The reporting requirements will correlate with the size of the organisation and be divided into three categories:

  • small entities – revenue of less than $250 000;
  • medium entities – revenue of between  $250 000 and $1 000 000; and
  • large entities – revenue of over $1 000 000.[25]

1.38      While the detail of what each entity will have to provide is not yet established the Treasury submission stated that:

Small entities will not have to provide financial reports. Medium entities will have to provide financial reports which can be reviewed rather than subject to a full audit. Large entities will have to provide audited financial reports.[26]

1.39      Unincorporated and incorporated organisations would also be treated differently under the Bill.   The obligations of unincorporated organisations would be based on the existing Tax Administration Act 1953, due to them not having a 'legal personality' and therefore unable to be sued or penalised.[27]

1.40      A body corporate does have a legal personality so would be treated differently.  According to the Treasury:

...the Bill sets out a more streamlined and targeted framework for attaching personal liability to directors of a body corporate. The directors of the body corporate are not personally liable for any offences contained in the Bill. In the case of a non-criminal contravention of the Bill, directors will only be personally liable for the liabilities of the body corporate in certain limited cases, for example, if there is a deliberate act involving dishonesty on their part.[28]

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