APPENDIX 3
SENATE STANDING COMMITTEE ON ECONOMICS
INQUIRY INTO THE DISCLOSURE REGIMES FOR CHARITIES AND NOT-FOR-PROFIT ORGANISATIONS
BACKGROUND PAPER
Introduction
1. On
18 June 2008, the Senate referred to the Senate Standing Committee
on Economics, an inquiry into the disclosure regimes for charities and not‑for‑profit
organisations, for report by the last sitting day of November 2008.
Terms
of Reference
2. The
inquiry will examine:
-
the relevance and appropriateness
of current disclosure regimes for charities and all other not-for-profit
organisations;
-
models of regulation and legal
forms that would improve governance and management of charities and
not-for-profit organisations and cater for emerging social enterprises; and
-
other measures that can be taken
by government and the not‑for‑profit sector to assist the sector to
improve governance, standards, accountability and transparency in its use of
public and government funds.
3. In
referring this matter to the Economics Committee the Senate:
- noted the report by Choice[1]
on charities, which was published online in March 2008, that highlights the
wide variability and inconsistency in the way that charities disclose
information to the public; and
- acknowledged that the 27
recommendations from the inquiry into the definition of charities and related
organisations[2],
which reported in 2001, have not been implemented.
Important note to readers
4. As
demonstrated above, the terms of reference for this inquiry are reasonably
broad. This paper has been developed by the Committee's Secretariat to provide
a brief overview of some of the issues, in respect to governance and disclosure
regimes for the not-for-profit sector, which have been raised in the above
mentioned reports and in related literature. It is not intended to reflect
the views of the Committee on any of the issues raised, but rather to
provide guidance to individuals or organisations considering making a
submission to the inquiry on the types of questions and issues that the inquiry
is likely to grapple with.
5. It
is also important to note that it is not the intention of the Committee
to limit the inquiry to the issues and questions raised in this paper. The
Committee welcomes any submission that addresses the terms of reference for the
inquiry, regardless of whether or not it addresses the issues canvassed in this
background document.
The
not-for-profit sector in Australia
6. The
not-for-profit sector in Australia, which includes charities along with a range
of other entities, such as churches, sporting organisations, advocacy groups,
community organisations, co-operatives, trade unions, trade and professional
associations, chambers of commerce, welfare organisations and service
providers, is a significant sector of the Australian economy and makes a marked
contribution to civil society.
7. According
to the National Roundtable of Nonprofit Organisations[3],
there are as many as 700,000 not-for-profit organisations in Australia,
most of which are very small and dependent on the voluntary commitment of
members. Around 380,000 of these are incorporated in some form or another (ie.
they have a legal identity independent from their members). In 1999-2000 the
not-for-profit sector accounted for approximately 6.8% of Australians in employment
and contributed 3.3% of Australia’s GDP (4.7% when the value of volunteer labour is
included). In 2003, 86% of adults belonged to at least one not-for-profit
association, with 48% belonging to three or more.
8. Despite
the size of this sector, and its centrality to the well-being of society, its
contribution often goes unrecognised and it remains largely unregulated.
Current
regulatory regimes
9. There
is no single regulatory regime for not-for-profit organisations in Australia.
According to the Nonprofit Roundtable:
At present there are more than twenty different ways
to incorporate a nonprofit organisation. This variety is a product of both a
variety of specialist forms of incorporation (eg for trade unions, parent
associations), and the existence of a dual state/federal regime. There are
eight forms for incorporating as an association and six as a cooperative.
10. Some
(generally larger) not-for-profit organisations, because of their corporate
structure, come under the purview of the Australian Securities and Investments
Commission and, as such, are subject to the same reporting and auditing
requirements that apply to for-profit companies.[4]
Other not-for-profit organisations are incorporated associations or trusts.
Incorporated associations are governed by state and territory based legislation
which differs from one jurisdiction to another, ‘both in nature and
enforcement.’[5]
According to Murray, such associations ‘are lightly regulated with few
reporting requirements.’[6]
11. A
number of not-for-profit organisations may also have been established by
statute, for example the Cancer Council Victoria was established by the Cancer
Act 1958 (Vic). In these cases, the operation of the organisation,
including reporting requirements, is determined by the Act.
12. Not-for-profit
organisations who undertake fundraising activities are also subject to state
and territory fundraising legislation[7],
which may specify a variety of reporting and disclosure requirements. This adds
an additional level of complexity for organisations undertaking fundraising in
more than one jurisdiction.
Concerns
about the not-for-profit sector
13. A
number of concerns have been expressed about the way in which the
not-for-profit sector operates in Australia. These include:
-
a lack of transparency about the
way in which public or donated funds are spent; and
-
lack of accountability, despite
the fact that the not-for-profit sector is a major provider of services to the
public.
Lack
of transparency
14. A
survey conducted by Choice found that 81% of respondents did not know
what proportion of their charitable donation reached their favoured charity’s
beneficiaries, yet 94% considered it important to have access to that
information. The survey found wide variability and inconsistency in the way
that charities communicate key information to donors. In some cases, such
information was not publicly available at all, as some charities did not
publish their annual reports or financial accounts.[8]
15. The
Choice report, which also included a survey of charities, also found
that there was no uniform accounting or reporting standards for charities, so
even when charities did make available information about how donations were
distributed, this information did not necessarily allow a comparison to be made
across different entities, because different approaches and definitions may be
used. As one respondent put it:
Charities pluck numbers out of the air for their
fundraising costs. There’s no agreement about what constitutes administration
costs. Some will say it’s only the people in your fundraising department.
Others might include IT, HR, marketing departments... there’s no consistency.[9]
16. According
to Murray:
Currently many NFPs are not legally obliged to report
to donors, service recipients or to an independent auditing body. There is no
prospectus-type or financial report obligation to give a detailed breakdown to
donors of how their money is or was going to be used – how much will be used
for administration or marketing and how much will be given directly to the
cause that the donor wants to be supported. Some NFPs do provide this
information to maintain good relations with donors. However there is no legal
obligation to do so.[10]
17. This
assertion is supported by a survey of 448 charities undertaken by Givewell,
which found that only 54% of these charities publicly disclosed their
fundraising costs.[11]
18. It
is not only disclosure of fundraising dollars that is at issue. It is also
argued that it is in the public interest for not-for-profit organisations to be
more transparent and accountable, as they attract significant public funds
through tax concessions. While the extent of these tax concessions is unknown,
the Treasury estimates that, in 2006-07, total concessions, benefits and
incentives provided through the tax system to taxpayers and beneficiaries
amounted to approximately $50.12 billion.[12]
It is unclear what proportion of this $50.12 billion worth of concessions,
benefits, and incentives relate to charities or other not-for-profit
organisations, as the Statement does not provide a breakdown into these
categories.
19. According
to the Nonprofit Roundtable:
There are a great variety of concessions given by
different levels of government, each to a variety of nonprofit organisations.
It is impossible to find any set of principles underpinning the legislation
that designates these concessions. There are no clear links between the
concessions provided and public disclosure requirements. Not surprisingly, in
such an environment regulation is confusing, contradictory and often unfair.
20. Concerns
about current disclosure regimes by not-for-profits have resulted in calls for
not-for-profit organisations, particularly charities, to be subject to
standardised accounting and reporting requirements, thus ensuring that
stakeholders can make some assessment of their effectiveness and efficiency in
achieving their stated goals.[13]
21. It
has been argued that improved disclosure regimes may serve to increase
confidence in, and funding to, the sector. For example, in 1995 the Industry
Commission found that:
Accountability is an important operational issue for
all Community Social Welfare Organisations (CSWOs). Their supporters and the
general public expect, and are entitled to, information about the finances and
operations of CSWOs in return for their donations, voluntary activities and
taxation exemptions and concessions. Improved confidence that funds are being
used appropriately by CSWOs can potentially increase the overall fundraising
resources available to the sector.[14]
22. The
preliminary findings in February 2005 of Giving Australia also found
that:
businesses wanted non-profits to be more accountable
and transparent for funds received: there had been an erosion of trust... that
money given would be used for its stated purpose.[15]
23. Others
have argued, however, that changes to disclosure regimes, requiring all
not-for-profit organisations to be subject to standardised accounting and
reporting requirements, would seriously disadvantage small organisations, who
may not have the human resources and knowledge base to comply with such
requirements. In addition, a study by the Social Economy Executive Education
Network, while supportive of improved transparency and accountability in the
not-for-profit sector, notes that:
...transparency alone is not enough. The sector’s
stakeholders need to become more sophisticated in their understanding of the
sector to ensure that any increased transparency doesn’t result in negative
backlash. For example, there is no point encouraging organisations to disclose
their overhead costs or to argue for the need for their greater investment in
capacity if naïve funders will view this negatively and reduce their financial
support.[16]
Questions for consideration
-
Are current disclosure regimes for
not-for-profit organisation adequate?
-
What would be the potential
advantages and disadvantages for not-for-profit organisations of moving towards
a single national disclosure regime? How might any disadvantages be minimised?
-
Would a standardised disclosure
regime assist not-for-profit organisations who undertake fundraising
activities, and who operate nationally, to reduce their compliance costs if it
meant that they would only have to report on fundraising to a single entity
(rather than reporting to each state and territory)?
-
If there was to be a nationally
consistent disclosure regime, should it apply across all not-for-profit
organisations or should different regimes apply to different parts of the
sector? For example, should charities be treated differently than other
not-for-profit entities?
-
If different regimes were to apply
to different parts of the sector, how would this be determined and why? For
example, would it be based on classifications – ie., as a charity or deductible
gift recipient – or would different regimes apply to different organisations
based on their annual financial turnover or staffing levels (or some other
proxy for size and/or capacity)?
Lack
of accountability
24. Linked
to concerns expressed about lack of transparency of some not‑for‑profit
groups is a broader concern about poor accountability within the sector.
25. This
was a recurrent theme in the study conducted by the Social Economy Executive
Education Network into views on leadership and management in the ‘social
economy’[17]:
Innovative leaders in the focus groups and thought
leadership forums repeatedly expressed the view that there was increasing
accountability required of the sector. They spoke of the need for better
measures of impact. And participants from foundations commented on the need for
better processes for application and disbursement of funds that predicted greater
social impact. Recent discussions within the Social Economy speak about the
“rating of organisations and benchmarking within (and perhaps across) the
sector.[18]
26. They
argue for a ‘holistic’ approach to accountability that might include:
- Statements of an organization’s
mission, its purpose, its design (grant to earned income ratios) and
governance, alliances and partnership, codes of conduct and policies.
- Statements of internal
operations, employment and “discounted” wage structures, remuneration of
directors and managers, sustainability strategies, performance indicators,
program activities etc: and
- Statements about impact and the
effectiveness of projects and programs, public policy, reporting,
representation and advocacy, etc.
All these three areas contribute in a systematic way
to greater transparency in the sector.
Calls for regulatory reform
27. Concerns
about lack of transparency and accountability have led to calls for fundamental
reform of the regulation of the not-for-profit sector in Australia.
This has largely taken the form of calls for the establishment of a single
regulatory entity at the national level, such as those established in the United Kingdom[19] and New Zealand.[20]
28. For
example, the Inquiry into the Definition of Charities and Related
Organisations recommended that the Australian Government ‘seek the
agreement of all State and Territory Governments to establish an independent
administrative body for charities and related entities, and to the legislative
changes necessary for its establishment.’[21]
29. Similarly,
former Democrat Senator Andrew Murray has
proposed that consideration be given to establishing a simplified regulatory
framework to apply to both not-for-profit entities, including charities, and
small for-profit businesses, with the regime to be administered by a Registrar
of Incorporated Organisations.[22]
30. Calls
for changes to the regulatory regime applying to the not-for-profit sector are
also coming from within the sector itself. The Nonprofit Roundtable argues
that:
The precarious scaffold of regulation provided by a
mixture of common law, state, federal and local government laws is not a robust
framework of nonprofit organisation regulation that can easily accommodate
changes in our social and economic environment.
A fundamental review is necessary, as the complexity
and rigidity of Australia’s current nonprofit laws place a costly compliance
burden while failing to adequately protect funders and donors and other
stakeholders such as volunteers and beneficiaries. The evidence suggests that
the current scaffold constrains small nonprofit organisations while failing to
take account of the complexity, but also the professionalism and national focus
of many large nonprofit enterprises. The imposition of unnecessary costs
inhibits the formation of nonprofit organisations and increases costs to the
community, governments and consumers.
The regulatory framework must enable the nonprofit
sector to grow and adjust to rapid change. For example, nonprofit regulation
needs to be able to adapt to such developments as electronic commerce, social
entrepreneurship, funding innovations and an aging population.
31. However,
as was noted in the discussion about the need for increased transparency, not
all in the not-for-profit sector are supportive of regulatory reform, with some
arguing that small organisations would be hampered by any additional regulatory
or administrative burden.[23]
32. While
there have been consistent calls for a National regulator, there is some question
about where such a regulator might be located. Possibilities that have been
canvassed include:
- within the Australian Tax Office,
although Murray argues that it ‘is a good administrative principle that the tax
collector should not be burdened with non-tax regulation... there is a great deal
of merit in having a separate independent entity which regulates the NFP sector
which is unrelated to the ATO or the sector itself’[24];
- as a separately resourced division
of the Australian Securities and Investment Commission (ASIC), which already
has a role to play in regulating not-for-profit organisations that are
companies limited by guarantee. This would lead to economies of scale but
concerns have been expressed that ASIC is not particularly user friendly to the
not-for-profit sector[25];
and
- a stand alone regulatory body,
which would be independent of government.
Questions for consideration
i.
Does there need to be regulatory
reform of the not-for-profit sector?
If not:
- Are
there alternative (non regulatory) measures that might be taken by
government and the not-for-profit sector to address some of the concerns
raised by groups such as Choice about the governance, standards,
accountability and transparency of not-for-profit organisations who use public
and/or government funds?
- Who
should be responsible for progressing and/or funding these measures?
- How
might the uptake of any such measures be monitored?
If so:
- What should be the objectives of
reform?
- Are their minimum requirements
that must be met in order for a national regulatory system to be worthwhile?
- Should regulatory reform apply to
the whole not-for-profit sector, or only to segments of the sector? For
example, to charities; to bodies receiving public funds, whether through grants
or tax concessions; to bodies with a financial turnover about a specified
threshold etc?
- Where should the impetus for
reform come from? Who should drive reform?
- What sort of consultation should
be conducted on the nature of any regulatory reform? How could input be
facilitated from across the broad range of organisations who comprise the
not-for-profit sector?
- Are their particular models of
regulation and/or legislative forms that would be useful, in the Australian
context, in improving governance and management of charities and not-for-profit
organisations and in catering for emerging social enterprises? What are the
perceived advantages and/or disadvantages of these models?
ii.
Should there be a single national
regulator for the not-for-profit sector?
If not,
- Why
not? What would be the disadvantages in having a single national
regulator?
If so:
- Should a national regulator be
responsible for the entire not-for-profit sector or only the charitable sector?
- Should the regulator be
independent of government?
- Where would the regulator be best
located? For example, as a stand alone agency or located within an existing
institution, such as the Australian Securities and Investment Commission.
-
Should a national regulator be
responsible for making decisions about charitable status?
-
How should any national regulator
be funded? For example, by the federal government, by federal, state and
territory governments, on a cost recovery basis?
iii.
Should there be a single,
specialist, legal structure for the not-for-profit sector?
If not,
- Why
not? What would be the disadvantages in having a single, specialist, legal
structure for the not-for-profit sector?
If so, would
this be best achieved through:
- A national legislation scheme,
whereby current national and state and territory laws relating to the
not-for-profit sector are harmonised into uniform law?; or
- The referral of powers from the
states and territories to the Commonwealth, allowing for incorporation of
current laws relating to the regulation of the not-for-profit sector, for
example, incorporations Acts and fundraising Acts, into Commonwealth
legislation?
What
should be the minimum features of any legal structure?
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