Chapter 2

2.1 Every major participant in the inquiry supported the introduction of policy reforms for the charities sector, and there was widespread and general support for the bills and the government's intentions for the sector. The Community Council for Australia stated:

CCA strongly supports the ACNC Bills on the basis that they provide for the establishment of an independent and responsive regulator for the charities and not-for-profit sector. CCA believes that over time the proposed ACNC will significantly reduce red tape, duplication and compliance costs. The ACNC is not an instant quick fix, but a long term structural change that will become increasingly important over time. It will deliver real benefits to not-for-profit organisations, governments, regulators and the broader community.[1]

2.2 Other groups also supported the package. Philanthropy Australia indicated that it:

supports the passing of the ACNC legislation... The millions of Australians who give their money, time and effort to supporting volunteer organisations in this country deserve a full-time, independent, solely focused organisation as regulator to foster best practice and growth in the sector. They also deserve a combined effort by all levels of government to reduce the burdens placed upon their good work.

Philanthropy Australia looks forward to working together with the ACNC into the future, for the benefit of the not-for-profit sector and the entire Australian community.[2]

2.3 The comments from The Smith Family were typical of those of many stakeholders:

Given the numerous inquiries into the not-for-profit sector over the last decade, the number of review processes regarding the establishment of the ACNC which have occurred over the last 12 months or more and the clear refinement of the legislation which has occurred as a result of those processes, The Smith Family believes it is now appropriate that the legislation to establish the ACNC proceed. The Smith Family would welcome the passing of this legislation and the establishment of the Commission.

In conclusion, following years of reviews and multiple recommendations, and in light of the less than ideal circumstances governing the sector, The Smith Family believes it is now time to move forward with the establishment of the ACNC. While the Bill is not perfect, it will enable the ACNC to begin to achieve what is now a long overdue reform. The approach and the work to date of the Implementation Taskforce provide some level of confidence in how the important early phases of the Commission will proceed. Ongoing engagement of the sector will be important to the evolution of the Commission and its long term success.[3]

2.4 There was also acknowledgement of an extensive process of discussion, debate and consultation associated with the reforms.

The ACNC Bills have been through an extensive and comprehensive process of consultation and review. They should now be passed so that we can begin to implement a long overdue reform - establishing an independent regulator for the Australian not-for-profit sector.[4]

2.5 The participation of Philanthropy Australia highlighted the exhaustive process of discussion:

Philanthropy Australia has been actively involved in the consultation and submission process to create the ACNC framework, including:

Submission on the Original Discussion paper
Participation in workshops
Submission on the first draft ACNC Legislation issued in December 2011
Submission on second Draft of legislation issued in June 2012
Submission to the House of Representatives Standing Economics Committee
Appearance before the House of Representatives Standing Economics Committee[5]

2.6 The committee is pleased to note the broad support, and the recognition that the consultations have led to concrete changes to the proposals; changes that have mostly acknowledged, and resolved, the concerns of most charities and not-for-profits involved in this process.

The structure and role of the Australian Charities and Not-for-profits Commission

2.7 As discussed in chapter one the Bill would establish the statutory office of the Commissioner of the Australian Charities and Not-for-profits Commission (ACNC). The Commissioner will be a fully independent statutory office holder, and will provide reports directly to Parliament via the Assistant Treasurer.[6] An ACNC Advisory Board will also be established under the Bill to 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. [7]

Views received on the structure

2.8 The committee did not receive a significant amount of evidence on the how the Commission will be structured under the Bill. However there were general comments in support of the establishment of the ACNC, and also that it is established under separate legislation than the regulatory framework it will administer. Chartered Secretaries Australia submitted that:

CSA strongly supports the establishment of the independent statutory office, the Australian Charities and Not-for-Profits Commission (ACNC).

We have also been a strong proponent of an approach to reform that separates the legislation establishing the ACNC from the regulations that will establish the duties, governance arrangements and operation of the entities which the ACNC will regulate. We commend the government for the implementation of this two-staged reform process3 and believe that the bill is an important step in ensuring that the regulatory reform will operate to remedy the current inconsistent, inefficient, fragmented and uncoordinated regulatory framework spread across many agencies and more than one level of government to which charities and other NFP organisations are subject.[8]

2.9 The Smith Family commented on the merit of how the ACNC will be set up and the benefits it will bring:

[W]e believe there is merit in:

separating the role of regulator and revenue collector [the ATO]

providing a one stop shop for NFPs for reporting, compliance and regulation, initially at the

Commonwealth level, and ideally over time, at the State/Territory level

supporting through an educational role, the development of what is a highly diverse sector, and

having a credible source of information on charities available for public use.[9]

2.10 However there were some concerns expressed around some of the detail governing how the ACNC will operate. The relationship between the Advisory Board and the Commissioner, and whether the independence of the ACNC was assured under the proposed structure was an issue raised with the committee.

2.11 Under the Bill the Advisory Board's function is to provide advice and make recommendations to the Commissioner 'at the request of the Commissioner'.[10] The Bill also emphasises that 'the Advisory Board cannot give any directions to the Commissioner'.[11] Dr Ogle from the Conservation Council of South Australia pointed to an apparent contradiction between Section 135-15 that states that the Advisory Board's function was to provide advice only 'on request' of the Commissioner, and section 110-20 which states that:

[T]he Commissioner may (but is not required to) have regard to the advice and recommendations given to her by the Advisory Board (whether or not the advice and recommendations were given in response to a request).[12]

The latter wording implies that advice could be given other than upon request.

2.12 The Green Institute also commented on the restrictions on how the Board can provide advice to the Commissioner and suggested that these may amended:

The ACNC Advisory Board should have the power to provide advice and make recommendations on its own initiative, not only when requested by the Commissioner.[13]

2.13 The Treasury confirmed in evidence to the committee that advice is only provided to the Commissioner on request, however they did also commit to providing further information which would possibly explain any inconsistency in the Bill.[14]

2.14 Another area that was explored by submitters was whether the ACNC should be established as an independent statutory agency in much the same way as other regulatory bodies such as the Australian Tax Office (ATO) and the Australian Securities and Investment Commission (ASIC).

2.15 Mr Joe Zabar from Uniting Care said that with the benefit of hindsight that is something his organisation the sector would have preferred:

The one thing I would say is that, if we had our time again, the sequencing of a lot of the reforms that the government has undertaken would have probably been done differently. I think the issue of the independence of the ACNC by way of a statutory body might have been the preferred option but that horse has now bolted.[15]

2.16 Again the Green Institute commented in their submission that independence of the ACNC for all matters including setting policy that may impact on the sector:

The ACNC Commissioner’s role is the ‘general administration’ of the Act. Policy remains the domain of the Treasurer through the ATO. Furthermore, the ACNC Advisory Board can only provide advice at the request of the Commissioner. The concern is that the ATO’s focus on regulation and revenue‐protection will overwhelm the ACNC’s aim of supporting and sustaining the sector.[16]

2.17 They proposed that independence could be enhanced if the ACNC Commissioner was:

...given specific responsibility for upholding the objects of the Act and advising the Minister on its implementation, not merely for ‘general administration’.[17]

2.18 YouthCare submitted their concerns that the ACNC would not be sufficiently independent from the ATO because they would be employing ATO staff:

[F]rom a layman's perspective it may be difficult to have confidence that experts from the ATO will be able to maintain an entirely independent perspective in their work with the ACNC.[18]

2.19 The Independent Schools Council of Australia was also concerned about the relationship between the ACNC and the ATO. They submitted that the ACNC should have no authority to require information that enable taxation compliance as this is contrary to 'the stated aims of increasing transparency to public':

The ACNC should not act on behalf of the ATO and the annual information statement should be framed to give quality public information and not be framed to attempt to "catch out" any supposed Taxation non-compliance.[19]

2.20 The Department of the Treasury responded that there were significant cost savings inherent in the decision to establish the ACNC as an independent statutory office and that the independence of the office was ensured through the legislation and administrative arrangements:

[T]here are significant cost savings from providing the ACNC with back-office support from the ATO. There are some examples of how that support is provided, including HR systems and finding of accommodation and premises. So having a relatively small agency having systems being provided by the ATO in this instance has quite significant cost savings. In relation to independence, there is a lot that can be said about ensuring that, even though back-office support is provided by the ATO, there is a lot of independence that is provided not only through the legislation but also through the administrative arrangements as to how the ACNC interacts with the ATO in the provision of those services[20].

2.21 The Interim Commissioner, Ms Susan Pascoe provided an expanded response on the issue in the Joint Parliamentary Committee on Corporations and Financial Services' hearing:

I note that a number of the submissions are still wary that the enterprise will not be fully independent. Perhaps I can make reference to some of the less formal arrangements—that is, the administrative arrangements, that would sit alongside the legislative elements that people can see in the bill.

The decision the government took was that the ACNC would take its back office services from the Australian Taxation Office, with the intention being to achieve the economies of scale and the efficiencies that you can get from such an arrangement and, indeed, we have seen them. For example, we have accommodation that was organised by the Australian Taxation Office. We would have needed considerable expertise to organise that accommodation, and I doubt we could have leveraged the kind of leasing arrangement that the ATO can, given the size of the workforce that it needs to accommodate. We use their payroll system, we use their IT backup service and so on—there is a legion of services that we are taking. But we are taking them under a memorandum of understanding with the Tax Commissioner. As evidence of the commitment of the Tax Commissioner to allowing us to operate independently, he has given a full delegation to me, even as an interim commissioner, to both recruit and direct the staff of the ACNC... So I think that, when you look at those elements of independence, staffing and budgets are critical elements. Further to that, we will table an annual report to parliament through the minister, so that does give us a further element of independence. Finally, we operate with our own appropriation through the budgets already committed through to 2014, and that does give us a level of independence in determining our own affairs.[21]

The powers of the Australian Charities and Not-for-profits Commission

2.22 As discussed in chapter one the Bill provides the ACNC Commissioner with powers similar to other regulatory bodies such as the ATO and the Australian Securities and Investment Commission (ASIC). 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]

Views on the powers of the ACNC

2.23 The committee heard evidence that the legislation will provide an appropriate framework to deliver on the objects in the Bill. Uniting Care Australia framed their appearance before the committee by saying that:

Our assessment is that the proposed legislation creates a sound oversight framework for the ACNC to regulate the sector but that, with some minor adjustments, it can be improved...

And that:

[T]he act sets out the need for the ACNC to maintain, protect and enhance public trust and confidence in the sector, and we believe that this proposed legislation provides the ACNC with sufficient oversight powers to deliver on this.[23]

2.24 Others, including World Vision Australia, the Baptist Union of Australia and Anglicare, expressed concern that some of the regulatory powers of the Commissioner are too severe. World Vision Australia stated in their submission that:

...the tone and structure of the enforcement powers continue to suggest a heavy-handed approach weighted against the interests of registered entities and responsible entities. Further efforts should be made to ensure that the powers are better targeted, fairer, not used to inappropriately interfere with an organisation's legitimate operations and do not impose undue costs on an entity in taking action against the ACNC.[24]

2.25 Australian Baptist Ministries commented along similar lines:

Australian Baptist Ministries believe that the regulatory powers contained in the current Bill are too excessive. They are much broader in scope than those of the Australian Tax Office (the current regulator) and in our view are far too excessive for a body (the ACNC) that is supposed to be focussed on education and of the promotion of the Charitable and No-for-profit sector. [25]

2.26 Anglicare Sydney were also concerned that there was no justification for the increase in powers compared to the previous regulatory regime administered by the ATO:

[T]he wide spectrum of enforcement powers conferred upon the ACNC Commissioner and its officers under the Bill, are acknowledged in the Explanatory Memorandum accompanying the Bill as representing an expansion of powers over those exercised by the current default regulator, the ATO. Yet it is unclear to ANGLICARE Sydney what current situations in the sector justify the need for this degree of expansion, particularly in the light of Treasury’s previously stated assumption that “charities operate for charitable purposes, and overwhelmingly most aim to comply with their regulatory requirements.”[26]

2.27 The power to revoke registration was a particular area that attracted comments from a number of submitters. The Independent Schools Council of Australia voiced concern that the Commissioner can make a judgement to revoke the registration of an entity based on the probability that the entity is 'more likely than not' to contravene the Act. Given the seriousness of revocation of registration and the financial and administrative consequences the Council is of the view that this 'provides the Commissioner with the predictive power to determine the intent of mind of an entity', and is therefore an unacceptable basis for such as substantial power.[27]

2.28 The Bill also does not define 'more likely than not'. However, the bill would require the Commissioner to take account the nature, significance and persistence of any contravention of the bill was passed or governance standards or external conduct standards.[28] The Explanatory Memorandum (EM) argues that there is a high threshold to satisfy the registration criteria could be revoked on the grounds of non-compliance with the statutory of governance requirements:

This ground only covers the situation where there is a substantial or significant likelihood of a contravention or non-compliance and would not extend to a situation where there was only a small chance of the contravention or non-compliance occurring.

In determining whether an entity is more likely than not to contravene a provision of this law or is more likely than not to comply with governance standard or external conduct standard, the ACNC Commissioner must have sufficient, reliable and accurate evidence which clearly indicates that there will be a contravention.

A mere suspicion, rumour or possibility of a likely contravention or likely non-compliance is insufficient with a ACNC Commissioner to take action.

In addition, a 'reasonably believes' test needs to be satisfied which ensures that the ACNC Commissioner will only revoke registration likely contraventions were a reasonable individual, provided with a set of information available to a CMC Commissioner, would conclude that it is more likely than not that a registered entity will contravene a provision of the Bill.[29]

2.29 World Vision Australia considered that revocation on the grounds that the entity had not adhered to governance standards or had given false or misleading information would be a disproportionate reaction:

The giving of false and misleading information in an application for registration should not be a standalone ground, as this allows the Commissioner to revoke registration in circumstances where the entity otherwise remains fully entitled to be registered and where the “offence” may be the result of oversight or mistake...

We also note that no other registration regime has such onerous outcomes as de-registration for failure to comply with governance standards. WVA cannot see a rationale for such an outcome, especially in the NFP sector where it is well-accepted that non-compliance is usually a matter of ignorance or under resourcing.[30]

2.30 Conversely the Financial Services Council were of the view that revocation was an appropriate sanction on the grounds set out in the Bill:

We agree that the ACNC should be able to revoke the registration of a Registered Entity for the reasons outlined in the Bill. Revocation is a suitable penalty to impose upon a Registered Entity that was either not entitled to registration, has contravened the ACNC Act, has provided false or misleading information or has requested revocation of registration.[31]

2.31 World Vision Australia also suggested that the appeals process for cases where revocation was applied as a penalty should be strengthened:

Revocation should not take effect until all avenues of appeal or review which an entity wishes and is able to take have been exhausted, unless there is a clear and demonstrated public interest in the decision taking effect earlier. It cannot be assumed that the Commissioner will always make a correct decision. [32]

2.32 The Department of the Treasury responded to World Vision's concerns that the enforcement powers of the ACNC Commissioner are too severe at the committee's hearing:

My initial response is that World Vision Australia is a company limited by guarantee as a structure. The enforcement mechanisms as reflected in the ACNC bill are already similar to those that World Vision is subject to being a company limited by guarantee. So from a World Vision Australia perspective and that of all other companies limited by guarantee that are charities, of which there are a very large number, this regime is not substantially different... What we can add is that when we developed the regulatory powers for the ACNC we had reference to the existing regulatory powers of ASIC, the tax office and other Commonwealth regulators that these entities are already subject to. But the way we have now implemented it in the ACNC bill they now afford significantly new procedural fairness grounds that they are not already subject to with the existing regulators. [33]

2.33 The clarification of the liability of directors was broadly welcomed.[34] However the Financial Services Council did have reservations about whether the ACNC Commissioner would have the authority to remove trustees from the boards of public (PuAF) or private (PAF) ancillary funds:

It is not appropriate that the ACNC be given the power to make a determination as to whether a director of a public listed or private company has breached his/her duty to the company. It is also not appropriate for the ACNC to make a determination as to whether a trustee of a charitable fund that is not a PAF or PuAF is in breach of trust. Like with other federal regulators, such as ASIC or the ACCC, the ACNC should be required to make application to the relevant court if it seeks an equitable remedy against a director of a licensed trustee company or a public trustee of a charitable fund that is not a PAF or PuAF.[35]

The obligations and duties of registered entities

The reduction of red tape

2.34 One of the objects of the Bill is 'to promote the reduction of unnecessary regulatory obligations on the Australian not-for-profit sector.'[36] This object has been often referred to as a commitment to reduce what is colloquially known as 'red tape', describing the administrative obligations placed on entities. The inclusion of the new object has been broadly welcomed by submitters to the inquiry.

2.35 As discussed in chapter one the ACNC Bill would 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 will determine their reporting obligations.

2.36 While the new object was generally welcomed there were some submitters expressed reservations that the inclusion offered no assurances that the intent would be delivered. ACOSS stated in their submission that it:

...welcomes and strongly supports the inclusion of a new Object in the Bill following the House of Representatives Economics Committee report, identifying the reduction of red tape as a central objective.[37]

2.37 Uniting Care were also supportive of the intent of the amendment but were concerned that the ACNC would not be able to deliver red tape reduction beyond its own activities and relations with the sector:

[W]e are concerned that there are limitations to the ACNC’s capacity to deliver any tangible red-tape reduction measures outside of its own activities. The majority of the proposed red-tape reduction benefits of a single national NFP regulator are predicated on State/Territory Government cooperation or agreement which is yet to be secured from other Commonwealth agencies and regulators.[38]

2.38 Similarly, while Mission Australia were 'pleased to support the recent changes'[39] to include the new object, they were disappointed to not to see any concrete proposal to achieve this aim:

We support the notion of the ACNC as a one-stop regulatory stop and support the notion of a Charity Passport that will see us provide our financial and governance information once, to be used often. Yet it is disappointing to see no evidence of how this is being achieved. Our overriding concern is that rather than reducing red tape and compliance burden, the ACNC will add another layer of compliance and that nothing will be taken away.[40]

2.39 The Conservation Council of South Australia also expressed concern that there were no obligations explicitly set out in the Bill to support the Object:

It is good to have that objective but, when that was added as an objective, there was almost nothing changed in the act... There is little or nothing in the act that would be a positive obligation to support not-for-profit's through community education. We have had conversations with the ACNC or the task force and are pleased with some of those directions. But there is nothing in the act to reflect that and that creates a disjunct between the conversations we are having with the ACNC staff and what is in the legislation.[41]

2.40 The Moore Stephens accountancy network welcomed the 'report-once, use-often' concept but added that a specific function to reduce the regulatory burden should be added to the Commissioner's 'Assistance Functions' in section 110-10 of the Bill:

In recognising the importance of the achievement of this ‘report-once, use-often’ framework we recommend its specific inclusion in the functions of the Commissioner as an additional element in Section 110-10 of the Bill. We also suggest that these functions as defined within the Bill include a responsibility for ‘developing, enhancing and maintaining’ this ‘report-once, use-often’ framework.[42]

2.41 The transitional arrangements to allow the ACNC Commissioner to accept reports from other agencies and levels of government until the ACNC develops its own 'report-once use-often' framework is in place was also welcomed. This capacity was introduced as a result of a recommendation from the House of Representatives Economics Committee report.[43] Chartered Secretaries Australia were confident that this interim arrangement would:

...ensure minimal duplication of reporting, while the ACNC works with other regulators and cooperates with other government agencies to promote the reduction of unnecessary regulatory obligations on the NFP sector.[44]

2.42 A number of submitters wanted this transitional arrangement to be extended beyond the end of the current financial year 2014–15. The Independent Schools Council of Australia suggested that the period should be extended to coincide with the review of the legislation that is scheduled to take place after five years.[45] The Australian Catholic Bishops Conference and Catholic Health both recommended that the Commissioner be 'required' to accept reports,[46] while World Vision wanted to see the arrangements to be extended to include reports that are not required by law.[47]

2.43 There was discussion about whether the reduction of red tape could be explicitly cited in the Bill. The argument put forward by Primrose Solutions was that if the term was used it would then have to be defined and would then illustrate exactly what the ACNC Commissioner could and could not do in terms of regulatory obligations on the sector. Dr Primrose emphasised the importance of having the intention clearly set out:

We think there is no option but to use the term 'red tape' in the bill. I recognise the reluctance of the drafters to accept that but it is possible. If you put it in the definitions, it is possible to define it. Not-for-profit leaders will be looking for something like that and they will be looking for something that instructs the commissioner to take a very high priority and to achieve—not just set up a working group and maybe have a go at it. So we suggest that it is important to very clear and very explicit in dealing with that key requirement of the not-for-profit sector... What we are after is something that hits the high spots of saying, 'Yes, the government is concerned about the things that really concern you.' [48]

2.44 The committee understands that when the sector talks about the reduction of red tape they are often concerned about the duplication of reporting obligations rather than objecting to reasonable reporting requirement that ensure the proper and transparent operation of the entity. Dr Boyd-Cain from ACOSS affirmed this in evidence at the committee's hearing:

I think it is important to be clear about the difference between a legitimate and a well-structured regulatory framework and overly burdensome regulatory responsibilities... We are not at all wanting to undermine the legitimate regulatory framework that ought to apply to this sector in the same way that we expect the business community to be held to an acceptable level of regulation.[49]

2.45 UnitingCare recommended that combining acquittals and audited financial statements is a specific area where red tape could be tangibly reduced. They suggested that:

...an additional clause be inserted in section 60-25, or elsewhere as appropriate, to the effect of: 'Where a registered entity is required to provide an annual financial statement to the ACNC, that entity will no longer be required to provide a financial audited statement for any individual grant or grants provided by an Australian government agency unless that agency has reason to suspect fraud in relation to the use of that grant money.'[50]

2.46 Their reasoning was that:

...the requirement for providing an annual audited financial statement to the ACNC, together with the Auditor-General's recently introduced powers to conduct performance audits on recipients of Commonwealth grants, removes the need for government agencies to require audited financial statements as part of their acquittal process.[51]

2.47 However it was widely accepted that this was a long term objective that would require significant liaison between different agencies and levels of government. ACOSS pointed out that the information required for acquittal is not always the same information that should be required by the ACNC:

We do not yet have a model where we can have the acquittal process slide straight into the regulatory process so that it is a single line of report. I am not saying it cannot be done; I am just saying I do not have the model to propose how that could work... In so far as the ACNC has a role there are all sorts of questions about how government agencies will use the information that the ACNC collects, but there is information included in acquittals to funders that is not regulatory in its nature and that is not included in the work that the ACNC has been doing on what it will expect organisations to report on. [52]

2.48 The Office for the Not-for-profit Sector were also cautious about combining the two types of report, but did outline reforms that were being carried out within government that was actively looking at situations where it may be possible:

There are some very high risk and very complex situations where a particular agency might require more detail than what we want to be the standard detail given to the ACNC. But what we are doing in the Office for the Not-for-Profit Sector is making sure that, if agencies are going to make that request, we have tested it, that it is reasonable and that agencies are doing everything they can to reduce the compliance costs.[53]

Registration

2.49 The Bill would require entities to apply, in the, as yet undeveloped 'approved form', to the Commissioner of the ACNC for registration.[54] The Commissioner would have 60 days in which to consider the application, an additional 28 days if requesting further information.[55] The Bill does not expressly provide applicants with the right to withdraw the application. However, if the Commissioner has not considered the application within the allowable timeframe, the entity may provide the commission with written notice that they wish the application to be treated as having been refused.[56] The EM explains that this is intended to ensure 'that entities have recourse if decision is not made in a set time and can have the decision reviewed where appropriate'.[57]

2.50 Where an application meets the statutory criteria, the Commissioner would be required to register the entity.[58] However, the commission has discretion to revoke registration where the Commissioner reasonably believes that the entity:

was not entitled to registration when registered;
provided false or misleading information;
has or is more likely than not to contravene a provision of the bill when passed;
has or is more likely than not to contravene a governance standard or an external conduct standards;
the entity has a trustee in bankruptcy liquidator;
has requested the revocation.[59]

2.51 The Salvation Army raised a concern that the entitlement to be registered was restricted to entities that are 'not operating for the profit or gain of its individual members': [60]

[T]he Salvation Army are concerned with the drafting of the not-for-profit entity definition and its potential interpretation. As stated in our submission, it is of concern that the definition will preclude members from obtaining genuine charitable services and outcomes from the organisation in which they support. A prime example of this problem relates to persons with disabilities who might serve on the board of a disability organisation and/or are members of the disability association. Once this definition is enacted, they will be precluded from receiving genuine charitable services from that supporting organisation.[61]

2.52 However the Department of the Treasury explained that the definition is based on the current definition within the Income Tax Act 1986, which is then referred to in the Income Tax Assessment Act 1997 which is in turn being amended with a new definition:

'A company that is not carried on for the purposes of profit or gain to its individual members and is, by the terms of the company's constituent document, prohibited from making any distribution, whether in money, property or otherwise, to its members or to a friendly society dispensary.'[62]

2.53 The effect of this definition is that:

As long as it is not provided to them in their capacity as a member but in their capacity as a welfare recipient of the church, that is fine within the existing law and fine within the new law... We also have put in place that, where you receive genuine compensation for services provided or for reasonable expenses incurred on behalf of one entity to another, a distribution to a member, if they happen to be the same person, is also not a breach of the not-for-profit clause.[63]

Implementation timeline

2.54 As previously noted, the government intends to commence operation of the ACNC on 1 October 2012, with financial reporting standards to take effect from 1 July 2013, and the first financial reports being lodged with the ACNC on 1 July 2014.[64]

2.55 The committee heard from a number of organisations who strongly supported implementation of the legislation in accordance with the intended timeframe. Philanthropy Australia commented:

We are fully aware there is still further work to be done, particularly in terms of finalising the governance and reporting regimes, and as always implementation will determine the ultimate success or failure of such game changing legislation. However, Philanthropy Australia is firmly of the view that now is the time to start.[65]

2.56 The Australian Council of Social Services agreed:

We strongly support the ACNC opening on 1 October. We acknowledge there is still significant work to be done, not least in relation to the governance standards, but we see that work as best undertaken once the ACNC is fully enabled. We do not support recommendations for further delay.[66]

2.57 Community Councils of Australia expressed the same view:

The ACNC Bills have been through an extensive and comprehensive process of consultation and review. They should now be passed so that we can begin to implement a long overdue reform - establishing an independent regulator for the Australian not-for-profit sector.[67]

2.58 However some submitters expressed concern about the implementation timeline. Some were worried whether organisations would be able to prepare for the financial reporting requirements in time. Others thought it undesirable that the legislation would be in place before the regulations had been finalised that would set out the governance standards to be required under the new regulatory regime. The Institute of Chartered Accountants was typical of submissions expressing these concerns:

[I]n its current form we do not believe the draft legislation is ready to be passed through the Parliament. Two fundamental pieces of the NFP reform are not yet available for review or consultation – the governance requirements and the reporting framework. We consider that these requirements are integral to the reform process and should be made available before the legislation is passed by Parliament. These areas do have the potential to increase the burden on many charities, so it is important that they are clarified up-front and time given so their impact can be assessed appropriately.

We accept that as a consequence of this recommendation the start date of the regulator may need to be delayed. We consider a short delay (perhaps two to three months) acceptable.[68]

2.59 Some organisations suggested a delay to allow further development of regulations. Not for Profit Accounting Specialists said:

Our preference would be to have draft regulations as well as the legislation written and available for review before either is passed to ensure that together, the legislation and regulations give the full picture and all bases are covered prior to introduction of the legislation. It will be more difficult to make changes once the legislation has been approved.[69]

2.60 The Australian Institute of Company Directors thought the entire process should be delayed while aspects of the Consequential and Transitional Bill were consulted upon:

We are of the view that the Bill should not be passed until adequate time has been provided for the consequential amendments to be properly considered by stakeholders, and the Government and other parties have had an opportunity to obtain considered feedback.[70]

2.61 They were also one of the groups that thought the governance standards should be in the bill rather than in regulation:

We feel strongly, to the extent core governance, reporting and external conduct standards are to be mandated, that they should be included in the legislation rather than in regulations so that their introduction occurs through a process of parliamentary discussion, debate and voting.[71]

2.62 CPA Australia had a particular concern about the consequences of the timeframe for the preparation of accounts:

CPA Australia remains concerned that with the regulations incomplete, some charities may find it difficult to determine what if any new practices they will need to implement to enable them to lodge the financial report with the ACNC for the year ended 30 June 2014 and which must include comparative information for the year ended 30 June 2013. Importantly, the start date of the comparative year information was 1 July 2012. Without the complete regulations, we suggest the Senate Community Affairs Legislation Committee recommend a further delay by 12 months to the commencement date of that part of the legislation to require charitable entities to lodge their financial report with the ACNC.[72]

2.63 However, other professional associations had a different view. Chartered Secretaries Australia considered that:

[W]hile we believe that it would have been useful for the draft regulations to be released concurrently with the bill, we accept that the bill provides for sufficient flexibility for the development of the governance and external conduct standards and reporting framework to be developed in consultation with the sector without imposing onerous compliance obligations on the sector.[73]

2.64 Anglicare Diocese of Sydney, while also being concerned about implementation, and supporting the need for staged introduction of governance arrangements, did not propose delayed implementation as the answer.[74]

2.65 The committee noted that, while concerns were raised by a number of professional bodies, most peak associations were not concerned, and strongly advocated implementation on the current timeline. The peak body Charities Council for Australia expressed scepticism about whether the financial reporting requirements were likely to be that difficult for organisations to meet. It concluded:

[T]he process that the Australian Charities and Not-for-Profits Commission Taskforce has been through, in consulting with groups about what kind of information they currently have and could provide, would alleviate most people's concerns about the level of onerousness or the level of work required in satisfying the reporting requirements.[75]

2.66 The committee pursued the issues with government representatives, including the Australian Charities and Not-for-profits Commission Implementation Taskforce. They explained elements of the reforms that are designed to ensure there will not be difficulties resulting from the timeline. These include transitional arrangements and the clear intention on the part of the Australian Charities and Not-for-profits Commission Implementation Taskforce that the financial reporting requirements not be onerous, particularly for smaller organisations.

2.67 Government representatives indicated that the transitional arrangements would assist in ensuring smooth transition to the new reporting requirements, as well as facilitating red tape reduction:

Mr Jacobs: ...For three years, the transitional reporting arrangements would be 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 within the proposed ACNC Act. That allows reduction of red tape whilst the reporting arrangements are being sorted and whilst the discussions with the states and territories are progressing.

DEPUTY CHAIR: That gets around the issue that was raised this morning around delaying the start date of reporting.

Mr Jacobs: Yes, so it is a key point.[76]

2.68 The government also made clear that there was no intention of requiring comparative financial reporting data at the outset:

Ms Ram: The regulations, as Mr Jacobs said, will set out the detail of what is required in the financial report and what specific accounting standards need to be adhered to. The source of comparative year reporting is in the accounting standard. So it is something that we will look at in developing the regulations in terms of turning off the comparative year reporting, because, if we did not, that would in effect bring the financial reporting forward by one year, which was not the government's intention.

DEPUTY CHAIR: Is it something that will be dealt with within the regulation?

Ms Ram: Yes.

Mr Jacobs: We clearly understand the issue that if, in saying that the reporting obligations should start from 1 July 2013, you asked for comparative information then in effect you have brought that forward by 12 months, and the consultation process and development of those regulations can easily solve that issue.[77]

Committee view

2.69 The committee recognises the significant number of inquiries and discussions that have taken place around this issue for many years. It also notes the confidence expressed by those in the sector regarding the work of the Implementation Taskforce and its first commissioner, Ms Susan Pascoe. The comments of the CEO of Catholic Health Australia were typical:

I am satisfied on two fronts that the legislation does establish a sufficiently independent body. That is the nature as to why legislation is underpinning it. I think the government is also to be commended on the appointment of Susan Pascoe as the initial commissioner. The appointment of the commissioner has given great satisfaction to those of us within the not-for-profit community. The decision of Susan Pascoe's appointment is a good one and gives us some confidence that through the selection of commissioner we are likely to see those discretionary powers utilised productively and effectively.[78]

2.70 The committee concludes that there should be no delays to implementation, and is confident that the new ACNC will work with charities to ensure the new framework is a step forward for the not-for-profit sector.

Thresholds

2.71 The bill would establish a three-tier scheme of reporting.[79] Small organisations would be required to provide an information statement; medium-sized entities would be required to provide annual financial reports that had been reviewed; large entities would have to provide annual financial reports that were audited.[80] The commencement points for the medium and large thresholds are revenue of $250 000 and $1 million respectively.[81]

2.72 Moore Stephens Australia's representative, Mr Joe Shannon, commented that his organisation believed the thresholds to be too low:

From day one, we have had the view that those levels are very low to set the types of onerous obligations that are proposed in the act. Our numbers suggest about 45 per cent of the sector will be above the $250,000 threshold. We think that is a lot of the sector to be dragged into this level of onerous requirement that exists in the reporting aspects of this act. We know specifically that under the tax laws there is a threshold of $2 million for large and small organisations. We strongly encourage consideration of $2 million as a more relevant size rather than the $1 million that is in the act. We do acknowledge that the $1 million is the same as the company limited by guarantees but we still think it is a very small number to set these requirements at and we really encourage consideration of that level already in the tax act to be considered small or large from a business point of view.[82]

The Institute of Chartered Accountants in Australia agreed.[83]

2.73 The Conservation Council of South Australia drew attention to examples of existing guidelines or laws under which the thresholds are higher than those proposed in the Bill. It recommended:

that the size thresholds in s205-25 of the bill be increased to better reflect the reality of organisational scale and to bring them into line with community and commercial understandings. We would suggest that a small organisation be one with revenue below $500,000 p.a. (which is the threshold for a prescribed association in the South Australian Associations Incorporation Act). The threshold for a large organisation should be at least $5m p.a.[84]

2.74 Mr David Crosbie from the Community Council for Australia indicated that their organisation had previously expressed reservations about the thresholds. However, he also pointed out that the information requirements being planned were not onerous, and that it would generally be in an organisation's interests to have that information available. The issue is not simply a compliance issue: it is about ensuring good governance through providing effective guidance to charities about what information they should be keeping and monitoring:

In our original submission we argued for higher thresholds around what a small organisation was. I think it is 250,000 at the moment, and we argued that perhaps that should be a bit bigger. Also, having seen the outline of the kind of information being requested by the ACNC, having looked at their implementation report and having had further discussions with them about templates for reporting and at what they intend including, I would think it would be very difficult for people to argue that that is a significant amount of additional work. I do not know where people get that from; I do not know what they are basing that on. The kind of reporting I have seen is more like a minimum dataset. It is more like fundamental information that a not-for-profit should have if it does not have it.

Senator BOYCE: The submissions I have seen have been suggesting that perhaps $1 million is too low for a large organisation and that perhaps it should be set at $2 million. Within that you could have a couple of grants and go over—

Mr Crosbie: Yes. I think the thresholds genuinely were low. For me, a small organisation is under $1 million. When we talk about small businesses, for instance, we talk about $5 million as the cut-off point.

Senator BOYCE: Well, some definitions do!

Mr Crosbie: Yes. And we have argued that there is a case for doing that in the not-for-profit sector. But I also think this ends up being about what you ask those organisations to do. At the end of the day, regardless of whether you are small, medium or large, the question is: what is your compliance cost here, or what reports do you have to provide? ...I sometimes listen to the big end of town come in here and talk about massive reporting requirements, and I wonder whether they have actually read the implementation report and seen what has been suggested. I cannot think of a single large organisation that could not put their fingers on the kind of information being asked for in less than 10 minutes—and if it took them longer than 10 minutes I would be wondering how that organisation was being run, frankly.[85]

2.75 The committee asked the government to explain the proposed threshold levels. Mr Martin Jacobs of Treasury indicated that '[t]hose thresholds have come from the requirements for companies limited by guarantee. They are also thresholds which are used by some other jurisdictions.'[86] Treasury reviewed the thresholds for reporting requirements of unlisted companies and incorporated associations, and summarised these in its submission to the House Economics Committee.[87] While the matrix of regulations across the various jurisdictions is complex, several jurisdictions set the threshold for small organisations at $250 000 (including the Commonwealth, New South Wales and Victoria), some set it at a lower level (Australian Capital Territory, Queensland) and one sets it higher (South Australia). In other jurisdictions, the legislation is not directly comparable.

Committee view

2.76 The committee notes that the proposed thresholds are based on those currently applying to some of the organisations that will operate under the ACNC's reporting framework, and that only in South Australia does the change appear to represent the lowering of an existing threshold. It further notes that under the proposed thresholds, around four out of every five charities would fall in the 'small' category, with the lightest reporting requirements.[88] The thresholds are set on revenue, and so would not be affected by capital held by charities. The committee expects that the government and the ACNC will monitor closely the effects of the thresholds on the reporting burden of charities, and the balance that this strikes with transparency and confidence in the sector. The committee notes that the thresholds can be varied by regulation if required.[89]

Independence

2.77 Charities are keen to ensure the preservation of their independence and freedom to pursue their stated objectives. There was praise for inclusion in the Bill's objects clause of the goal 'to support and sustain a robust, vibrant, independent and innovative Australian not-for-profit sector'. Some inquiry participants were particularly concerned to ensure that the new regime would protect that independence. Anglicare CEO Grant Millard said:

we would like to see a provision that sets a role for the commissioner in the enforcement of the independence of the sector with a view to the maintenance of the advocacy rights of not-for-profits so that the sector may continue to speak out without fear or favour in the interests of the marginalised and socially excluded, without the fear of government retribution through contractual gag clauses or targeted funding withdrawals.[90]

2.78 There was a particular concern about the relationship between government and charities in their roles as service providers. ACOSS and UnitingCare noted:

Preserving the independence of NFP entities can be challenging where, typically, a Government monopsony exists. The Government monopsony in social service delivery limits the capacity of NFP entities to conduct genuine contract negotiations with the Government. This has led to both an increase in the reporting and administrative obligations placed on NFP entities as well as terms and conditions which have limited the capacity of entities to undertake advocacy (commonly referred to as a “gag” clauses).[91]

2.79 ACOSS and the Conservation Council of South Australia both recommended that the legislation include, in relation to governance standards, a statement that the standards must 'not prevent or constrain not-for-profit organisations from carrying out advocacy functions in pursuit of their purpose'.[92]

2.80 UnitingCare proposed that the section of the Bill that includes core concepts be amended to add a reference to what independence means:

Insert 205-45 Independence of the NFP Sector

Independence of the sector means that NFP entities are autonomous entities subject to the direction and control of their Boards or Governance body(ies). The independence of an NFP entity, particularly in relation to advocacy cannot be set aside, limited or controlled by condition of direct or indirect Government funding.[93]

2.81 Although independence was strongly defended by many stakeholders, it was not clear whether this could be addressed in legislation in a way that would have concrete effects, since the ACNC will not be in the business of reviewing contracts. Mr David Crosbie from Community Council for Australia reflected on this dilemma:

[T]his is a very difficult issue in many ways, because no-one in the not-for-profit sector wants to see gag clauses introduced. I notice the first object of the ACNC Bill is to promote the independence of the sector: 'One of the objects of the Australian Charities and Not-for-profits Commission is to promote the independence of the sector.' Independence is written in—and many of us worked around those objects to make sure that independence was included. So I see the ACNC as being about promoting the independence of the sector, and respecting and engaging with the sector as independent entities.

I am not sure that you can put in clauses as to the regulator's role that will address issues that arise from individual contracts. It may be positive to reinforce the notion that the independence of the sector needs to be respected... I am not sure that having a clause in the ACNC establishment legislation is going to prevent those kinds of contractual arrangements creating limitations on what a not-for-profit can or cannot do.[94]

2.82 The Salvation Army responded to the committee's queries in this area. Its proposal reflects the difficulty in trying to give legislative effect to the objective of independence:

On reflection of how practically the NFP sector can be protected from gag clauses in the future, The Salvation Army recommends that consideration is given to amending the Consequential ACNC Bill to include an amendment to the Financial Management and Accountability Act 1997 to at least limit Federal Government funding contracts from including such gag type clauses.[95]

2.83 Ms Lavarch, Chair of the Not-for-Profit Sector Reform Council, described constraints on independence, such as gag clauses, as 'outrageous', but nevertheless thought it was not the place of the ACNC to deal with them:

In terms of whether it is the place of the Australian Charities and Not-for Profit Commission or the commissioner to step in to ensure the independence of those organisations registered, I think it would be an overreach of the role of the regulator. I believe that there should be other mechanisms—they [gag clauses] should not be there in the first place. But I do not believe it is the role of the ACNC to be the advocate, on behalf of the organisations, to a government that seeks to insert unconscionable clauses in their contracts or funding arrangements.[96]

2.84 Ms Lavarch also referred to research which suggested there may be other mechanisms available to address gag clauses in contracts:

The observation was made from research undertaken at the Australian Centre for Philanthropy and Nonprofit Studies at QUT that, if you looked at the clauses in the government contracts and then looked at the restrictions under the Australian consumer law as to what can and cannot be included in a consumer contract, then the government contracts would be in breach of their own consumer laws.[97]

Committee view

2.85 The committee believes the fostering of an independent not-for-profit sector is essential, and supports this as an object of the Bill. Gag clauses are an objectionable feature of contracts with not-for-profit entities. They are particularly inappropriate in those contexts where a monopsony exists: where the government offering the contract is the only purchaser of services. The committee believes such clauses should not be introduced.

2.86 The committee does not conclude that there is an effective and appropriate way in the not-for-profit reforms can be a vehicle for legislative change to prevent clauses in contracts that might restrict the independence of charities. Governments should however commit not to use such clauses.

Recommendation 1

2.87 The committee recommends that the bills be passed.

Senator Claire Moore

Chair

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