APPENDIX 3

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:

  1. the relevance and appropriateness of current disclosure regimes for charities and all other not-for-profit organisations;

  2. 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

  3. 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:

 

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:

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

  1. Are current disclosure regimes for not-for-profit organisation adequate?

  2. 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?

  3. 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)?

  4. 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?

  5. 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:

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:


Questions for consideration

i.         Does there need to be regulatory reform of the not-for-profit sector?

If not:

  • Why 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:

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:

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:

What should be the minimum features of any legal structure?

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