Chapter 2Key issues
2.1Not-for-profit organisations play a key role in providing services throughout Australia. The introduction of self-assessed tax-exempt requirements will have wide-ranging effects on the administration of these predominantly volunteer-based groups. For some groups, the additional time required to administer the changes could be threatening to the long-term viability of the organisation. For others, the changes have come as a surprise and there are concerns over the Australian Taxation Office’s (ATO) suitability in implementing the changes.
2.2This chapter discusses and analyses some of the issues and concerns raised during the inquiry, including:
administrative burdens;
difficulties in navigating the reporting requirements;
lack of consultation;
potential for the introduction of gross income thresholds to apply to the returns; and
the suitability of the ATO as the body to be administering the returns.
2.3This chapter concludes with the committee’s views and recommendations.
Administrative burden
2.4Inquiry participants voiced their concern over the additional administrative burden imposed by the changes. The committee heard that the extra work involved in administering the changes depletes the already limited time of volunteers and deters people from getting involved in local organisations.
2.5The Australian Multicultural Action Network (AMAN) explained that completing the self-review return process is time-consuming and complex for smaller NFPs. The additional work necessary to gather and compile the information needed to complete and submit the returns ‘takes away time that could otherwise be spent on direct community engagement, program delivery, and advocacy efforts’.
2.6Mr Greg Peak agreed, noting that many of the affected groups are small, volunteer-run organisations that may lack the administrative capacity to handle the complexity of the self-review process. As a result, they may need to ‘seek external assistance from accountants or legal advisors, further diverting funds away from their core activities and social missions’.
2.7The administrative burden added by the changes is not limited to supplying the return itself. For many groups, applying for charity status has proven to be a significant hurdle. Landcare Victoria noted the various types of administrative work that time-poor volunteers needed to undertake as a result of the changes, including the correction of ABN details, amending or writing a suitable governing document, and setting up MyGovID details. Those who have successfully registered as charities have stated that it can take weeks for the ATO to confirm if it has endorsed their tax concessions, resulting in extra stress as they wait.
2.8Some groups have engaged outside legal advice at added expense to navigate the complicated process and ensure that their adopted rules are fit for purpose. The Community Council for Australia (CCA) worried that the increased administrative burden on NFPs and the flow on reliance on professional tax services is not a one-off cost, but an ongoing imposition.
2.9The additional administrative work particularly affects smaller organisations that are less equipped to handle it. Mr Peter Fitzpatrick AO, Chair and Director of various NFPs, told the committee that larger NFPs may be able to absorb the impact of the changes, but smaller organisations might struggle to survive, thereby reducing diversity in the sector.
2.10A number of small organisations highlighted for the committee the difficulties in attracting and retaining volunteers to run their operations. Changes such as these place further pressure on volunteers and risk making things more complicated, leading to groups disbanding and folding. Landcare Victoria outlined for the committee the consequences of the added administrative burden in some areas:
One network in the North Central region made up of 20 independent groups has reported four which are considering closing, and a Corangamite network of 12 groups will likely lose three of those as a result of these reporting changes. It is likely many of the 60+ environmental networks operating in Victoria are experiencing similar rates of closure amongst their 600+ member organisations.
2.11Agricultural Shows Australia (ASA) advised that the higher-level skill sets and knowledge required to navigate increasingly complex regulatory requirements is deterring people from getting involved with their local organisations. Volunteers are often stretched across multiple responsibilities and roles, and the ever-increasing documentation and compliance requirements cause stress and uncertainty. The skill sets now expected of volunteers are becoming more complex and cause potential volunteers to re-consider their involvement, particularly if there are financial or reputational penalties involved in making a mistake. This is particularly the case among younger volunteers, leaving an aging volunteer group to run their organisations with no institutional knowledge coming up behind them to continue operating.
2.12Mr Timothy Stokes, Co-Chair of the ATO’s Not-For-Profit Stewardship Group (NFPSG) that assisted in designing and refining the return, questioned the claims of administrative burden. Mr Stokes emphasised to the committee that the return has been designed to be user friendly and is no more onerous than the requirements placed on charitable organisations. According to Mr Stokes, the return ‘performs the important functions of both directing [self-assessing income tax exempt] entities to consider whether they are (and remain) eligible to self-assess as income tax exempt, as well as to provide for those entities to operate with an enhanced level of accountability’. Charities are required to provide a return to the ACNC each year declaring that they remain suitable to be endorsed as charities, and so this new requirement seeks to 'level the playing field' in respect of the accountability required of charities and non-charitable NFPs.
Navigating the self-review process
2.13The committee heard evidence on measures that have been taken to simplify the reporting process for small organisations. Clubs Australia submitted that it has ‘worked constructively with the ATO to develop and simplify the income tax-exempt self-assessment for clubs’ and that ‘based on feedback from industry bodies, the form has been reduced to six questions, which entities can complete in 15 minutes’.
2.14Ms Jennifer Moltisanti, Assistant Commissioner, ATO, advised that ‘in response to a recent question in an interview about scope to further simplify the return, I noted the return is basic in nature and takes a few minutes to complete… there’s not much more we can simplify’.
2.15Mr Stokes also reported that ‘there is significant support architecture the ATO has developed’ to assist NFPs. This includes both written guidance and in-person assistance from the ATO's dedicated NFP team. In response to questioning during Senate Estimates, Mr Jeremy Hirschhorn, Second Commissioner, Client Engagement Group, ATO, gave the following advice to organisations concerned about the reporting requirements:
[M]y first piece of advice would be not to panic—to be calm and to approach this calmly. The second piece of advice I would give is to go to our website and read the materials, because there are some very good guidance materials on our website. The third piece of advice that I would give is that, if a charity is still worried about meeting its obligations, you should not be a stranger. You should contact the tax office and talk through the situation, and we will, of course be understanding to those who honestly engage.
2.16The ATO advised that it had undertaken extensive consultation, engagement, and communication to raise awareness of the return, including user-testing and over 60 presentations at sector events and conferences. The ATO said that careful attention was taken to make the self-review return as simple and quick to submit as possible, with an average of five questions to complete. Returns in subsequent years will be simpler as NFPs will be able to check their pre-populated responses from the previous return before lodging.
2.17The Australian Charities and Not-for-profits Commission (ACNC) has developed a range of resources to support organisations applying for charity registration including online guides and webinars. It also provides one-on-one support for small organisations.
2.18Despite these assurances, the committee heard that there is, in fact, much confusion amongst NFPs about the new requirements. Mr David Crosbie, Chief Executive Officer, CCA, expressed frustration at what he feels is a dismissive approach towards the concerns voiced by NFPs:
When the government is imposing what is by any measure a very significant new imposition on not-for-profits, and requiring people to do a whole lot of documentation and extra work taking days of time—you can say it takes five minutes to complete the form, but that is not people's experience. You can say this isn't a significant administrative burden, but that is not people's experience. One of the things I find so frustrating is the dismissive approach of the ATO to people saying: 'It takes time. It is complex. It is hard to go through all these steps.' There's this sense of, 'No, it's not; the form only takes eight minutes.' Well, yes, it is. You've heard that, I've heard that and people don't want to have to do that. We are driving volunteers away from our community groups that are so vital.
2.19Landcare Victoria advised that its organisations across the state have exhibited ‘a high level of confusion and frustration’ in dealing with the ATO to navigate the reporting process. Landcare Victoria reports that members who have tried to respond to the changes have spent hours on hold with the ATO, received conflicting advice from ATO representatives, and expressed confusion over their charitable or non-charitable status. Confusion has also been exacerbated by a letter from the ATO instructing environmental groups to complete the self-review return when, in fact, this advice is only relevant to non-charitable NFPs. Volunteers have set up a MyGovID to complete the return, only to discover that their organisation is considered charitable and must instead register with the ACNC to be endorsed as income tax exempt.
2.20Other organisations also reported difficulties in navigating the categories of charities and inconsistencies in determining where they belonged. Mr Graham Stanley, President, Stonnington Scottish Country Dancers (SSCD), questioned why his and similar groups were determined to be outside the scope of the categories eligible for tax exemption when they were not dissimilar to other charities:
First, we were required to self-assess to determine what category we fell into. There are eight different categories, one of which was cultural. If you've had a look at our statement of purposes, you'll see that we are a cultural organisation, but we don't qualify as a cultural organisation. The only things that qualified in cultural were art, literature, music or musical purposes—and included in art are drama and ballet, as well as painting, architecture and sculpture. This is a very narrow definition that doesn't include us. It doesn't include Irish, Greek, Italian, Indian or any other form of dancing. It doesn't even include, for example, First Nations corrobborees. So the definition is far too narrow.
2.21ASA noted that although the changes were flagged in advance, many volunteers underestimated the complexity of the changes until formal notice from the ATO was received. ASA and its state bodies have had to quickly learn the intricacies of the new requirements in order to advise its members of how to proceed. ASA says that ‘a one size-fits-all approach does not adequately address the specific needs of volunteer-run agricultural shows’. Without clear, structured guidance from federal authorities on ACNC registration standards, revising constitutions, and ensuring compliance with charitable purposes, many agricultural shows risk non-compliance. The lack of bespoke guidance exacerbates this challenge.
2.22The Australian Institute of Company Directors (AICD) agreed with this sentiment, noting that its members have observed that widespread confusion ‘can be attributed to incomplete and inconsistent communications and advice being provided to NFPs from the ATO and ACNC’. This incomplete and inconsistent communication includes the absence of coordinated and consistent advice, in particular around the requirement to register as a charity with the ACNC and be endorsed by the ATO. The absence of consistent advice from the ATO and ACNC has led to NFPs seeking additional legal advice and incurring extra costs that would have otherwise been directed towards the NFP’s core purpose.
2.23The committee received evidence suggesting that while the filling out of the short online form may be simple, the work to prepare for it is not. The Law Council of Australia (LCA) illustrated that it is often not a simple matter to determine whether a NFP is charitable or not. If it is not charitable, it then has to be determined which category it can self-assess as income tax exempt and set up the online access to the ATO. According to the LCA, there is little guidance from the ATO to assist in these aspects of completing the return.
2.24CCA provided an example of how the process is more complicated than simply filling out an online form:
The first problem is that the person completing the return must be the nominated responsible person on the Australian Business Register. Given that the Australian Business Register (ABR) has no active outreach to promote updating of their records, there is a very good chance that well before the organisation is able to complete the required return, they will have to step through a separate process to update the ABR. This is not always a straight forward process.
Assuming the ABR is appropriately updated, the nominated responsible person must then log in to access the return through the MyGov website. This second process, like the first, is often not straight forward. It is made more complex because the nominated person must obtain a level 2 security through their MyGov ID. Again, this is a barrier to completing the form, and can be time consuming finding and loading the appropriate documentation.
Finally, having jumped through two hoops already, the person completing the form needs to access the form and complete the required questions. For most organisations, this last step will be the easiest to complete, but for some, it isn’t always clear exactly how to classify their purpose and activities.
2.25The LCA also expressed frustration at the differing guidance provided on the ATO and the ACNC websites. The LCA provided three examples of the contradictory and complex advice that volunteers are expected to navigate:
(a)self-assessing community service organisation and a charity—the ATO’s guidance appears to describe charitable purposes (community welfare) but does not explain what would make the NFP not charitable.The ACNC stresses that the purposes of providing social interaction will make the entity not eligible as a charity, however the ATO also notes that social clubs are not eligible for self-assessing—neither guides the reader as to the characteristics that make the other listed community welfare groups charities or not.
(b)self-assessing cultural organisation and a charity—again neither website identifies the distinguishing feature that would bring an NFP within the ACNC or within the self-assessment regime.The examples on the ATO website again appear to meet the description of being registered as a charity.
(c)self-assessing educational organisations and a charity—if possible, this category is even more confusing as most of the examples listed as NFP self assessing types of educational organisations are in fact registered as charities e.g. universities, schools, colleges.
2.26The LCA has encouraged the ACNC to use its experience in processing a large number of applications from self-assessing NFPs to update its guidance to clarify what factors have prevented NFPs from being registered as charities.
2.27Given the difficulty in navigating the process, inquiry participants suggested that an extension to the reporting deadline would be beneficial to allow groups to learn what is involved and potentially finalise their charity status. Mr Trevor Beckingham, General Manager, Queensland Chamber of Agricultural Societies, illustrated the time pressures felt by organisations and how an extension of time to report would be beneficial:
Because most of the constitutions that our shows operate under—and I dare say this is for most not-for-profits—don't currently meet ACNC registration requirements, they would have to change their constitution. The difficulty there is they not only have to have the changes dealt with for them—and in most cases that would be professionally done—but then need to convince their members of the need to change the constitution. As most of them only have minimal general meetings, it would then be in the AGM, and, due to the time lag between AGMs, it's a protracted process that will take time to deal with. Therefore, being able to extend the deadline would enable shows to better, dare I say it, market the changes to their membership, because most of their membership is going to be resistant to constitutional change.
2.28The committee heard evidence that the new requirements create inequities and disparities in how similar groups are treated. The ways in which the ATO has identified potentially affected groups – for example, by targeting groups that hold an ABN – means that some small organisations have been included while other similar groups have not. SSCD told the committee that they had obtained an ABN simply for the purpose of hiring a town hall for an event and applying for a council grant to purchase audio equipment. It appears that this has resulted in them now needing to fulfill the new reporting requirement, creating a disparity between them and other similar, non-ABN holding groups. SSCD submits that whether or not a NFP community group holds an ABN should not impact on its compliance requirements.
2.29Paynesville Landcare Coastcare Group (PLCG) further reiterated this disparity, saying that there is ‘zero logic for allowing a wide range of clubs and associations to self-identify as NFPs, but small Landcare groups like ours, acting solely on public land for public benefit, are denied that same right’. To them, it is unfair that they are having to clear further administrative burdens as a group acting in the public benefit while local sporting clubs and other groups do not.
2.30Mr Will Day, Deputy Commissioner, Small Business, ATO, confirmed that approximately 11 000 NFP entities had lodged a self-review return by the public hearing date, out of an estimated cohort of 155 000. This equates to seven per cent of all NFP entities. In answers to questions taken on notice, the ATO confirmed that, while it had not set a target for lodgement of returns by NFP entities, its target for ordinary tax returns lodged in the 2023-24 financial year was 83 per cent. Mr Day noted that around 200 returns were being received daily by the ATO, adding this was expected to increase as the revised 31 March 2025 deadline approaches.
2.31Regardless, Mr Day noted that the ATO was ‘proud’ of its efforts to date in terms of the delivery of the policy.
2.32In answers to questions taken on notice regarding the extent to which Treasury and the responsible Minister/s had been updated on progress of the policy, the ATO confirmed meetings of the NFP Stewardship Group, of which Treasury is a standing member, in July and December 2022; March, July and November 2023; and March and July 2024. After a request from the office of the Shadow Assistant Minister for Competition, Charities and Treasury, the ATO also provided a verbal update to his staff on 14 March 2024, followed by written material including ATO key messages, frequently asked questions, and fact sheet documents.
Proportionality and potential thresholds
2.33The Queensland Law Society (QLS) submitted that the regulation is ‘not proportionate to the mischief’ and agreed that imposing the measure will place ‘undue compliance costs’ on NFPs. QLS argued that the majority of the targeted NFPs are small organisations with minimal employees and volunteer committee management. Given the number of small organisations affected by the changes, QLS suggested that imposing this requirement on all NFPs is not proportionate given that a large percentage of the organisations are micro or small, they do not represent a risk to taxation revenue, and they are not involved in significant tax avoidance. Ms Wendy Devine, Manager, Legal Policy, QLS, noted that the ATO had advised the committee during the 2022-23 budget estimates ‘that there were no cases of sham self-assessing income tax exempt entities in that year’.
2.34The LCA also expressed its concern over the lack of proportionality of the measure given the large number of micro-organisations subject to the new requirement and no identified tax abusive behaviour. Ms Alice Macdougall, Deputy Chair, Charities and Not-for-profits Committee, LCA, told the committee that the LCA ‘absolutely supports tax integrity, but this must be done with reasonable, proportional and responsible regulation that does not impose unnecessary burdens and red tape, particularly on small volunteer community groups’.
2.35The LCA criticised the lack of incremental implementation for NFPs above a defined threshold of revenue, given the complexities in identifying whether or not the NFP is a charity. The LCA noted that there had been no assessment of the benefit to government or risk to the public, in the context of the burden on NFPs, and there was a lack of any explanation as to why small NFPs are being subject to this new requirement. The 2021-22 Budget papers note that the ‘measure is estimated to have an unquantifiable impact on the underlying cash balance over the forward estimates period’.
2.36The CCA claimed that the policy has evolved beyond its original purpose and now imposes a major burden on the NFP sector without addressing its original aims. The measure, according to the CCA, was framed around the risk of lost government revenue from large NFPs. The CCA reports that there are over 140000 NFPs with an active ABN. Of these, less than 20 per cent register for GST, less than 10 per cent pay payroll tax, and 80 per cent do not use professional tax services. The vast majority turnover less than $50 000. Given that so many are small organisations, and no evidence has been produced to indicate a pattern of tax avoidance amongst these organisations, the amount of tax avoided would be minimal.
2.37Ms Macdougall agreed that the policy has strayed from its original intent. In referencing Recommendation 24 of the Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislation Review (ACNC Review), MsMacdougall noted that it was deliberately phrased to limit the proposal to larger organisations:
The recommendation was clearly phrased to say, 'There may be a risk in this larger group that is self-assessing, so let's ask them to put in a return and make sure that there is tax integrity in relation to that,' and that's reasonable in terms of a larger organisation. But then, when you go into the smaller organisations, the balance as to the risk—the proportionality of the regulation—is completely lost, and, as we can see, has caused quite a lot of disruption. As far as I know, no particular reasons have been given in relation to this.
2.38To address these issues, QLS recommended that a gross income threshold for filing a NFP self-review return be set to reduce the burden on smaller NFPs. Such a measure could be staged incrementally over a set number of years and would be a ‘more proportionate response to the tax risk’. The QLS supports the recommendation of the ACNC Review to amend the ACNC Act so that NFPs with annual revenue of $5 million or more must be registered under the ACNC Act to be exempt from income tax. This approach is preferable to the current proposal because it is proportionate to the tax risk of these organisations, utilises the bespoke skills and knowledge of the ACNC to deal with NFPs and their volunteer governance arrangements, facilitates the collation and distribution of statistics about significant NFPs, and increases transparency and accountability of large NFP organisations.
2.39The issue of thresholds was noted by the ATO in its 2018 submission to the ACNC Review. In its submission, the ATO indicated that a threshold of $1million would be appropriate:
The current regulation of non-charity NFPs, particularly those entities with a large turnover, seems out of sync with charities in terms of their level of accountability and transparency. We do not seek to place a regulatory burden on small NFPs or build unnecessary bureaucracy. However, ACNC regulation could readily extend to those NFPs that wish to access tax concessions that have a turnover that warrants a higher level of transparency. Adopting the existing ACNC categories for medium and large charities the first stage could require currently self-assessing NFPs with a turnover of $1M per annum to register with the ACNC and complete an annual information statement … In stage two that ACNC regulation could be extended to those NFPs with a turnover of $250,000 to $1M per annum.
2.40The CCA agreed with the threshold approach, recommending that an appropriate threshold be introduced that is commensurate with the risk posed and that justifies the resources and effort required to pursue any possible tax avoidance.
Role of the ATO in administering NFPs
2.41While acknowledging the need for accountability, small organisations noted that the changes add little to existing processes. AMAN told the committee that the self-review return requires the organisation to confirm information that it has already provided through other reporting mechanisms, including financial audits and submissions to the ACNC. This has been the case for over a decade.
2.42The CCA argued that the ACNC ‘has the skills, expertise, the appropriate portals and data management, and is clearly the appropriate vehicle to collect annual returns from NFPs’. This is in contrast to the ATO, who CCA suggested is being tasked with a requirement that ‘is so distant from its core business that it presents real challenges’:
[T]he ATO used to be the regulator for charities in this country. There was no ACNC. It was a mess. It was an absolute mess. If you worked in a small charity and wanted to claim a tax deduction or even to hire the community hall, to prove that you were a charity you had to show letters from the ATO stating your status. There was no annual return, and the capacity of the ATO to investigate complaints was incredibly limited. It's very rare that a sector like the charities sector would ever argue to create a regulator for itself, but, if you've been regulated by the ATO, it becomes a very desirable outcome.
2.43The ACNC was established, in part, to positively engage with a diverse NFP sector and conduct its operations with a knowledge of the unique environment these groups operate under. The CCA submits that it makes no sense for the ATO to be the organisation seeking to collect self-assessed information from small NFPs when the ACNC has specialist capacity in this area.
Committee View
2.44The committee recognises that NFPs play an important role in our communities. Many of these organisations provide essential services to their area, often filling gaps in service provision and taking the initiative to address needs that they have observed in their respective communities.
2.45The committee also recognises the good work done by the ATO and the ACNC in addressing the need for transparency and accountability in the NFP sector.
2.46The Committee observes that there is a significant discrepancy between the overwhelmingly positive view of the roll-out presented by the ATO and both the negative experiences of many stakeholders and the number of returns that have been received. This falls significantly below the targets the ATO sets itself for returns generally. Noting evidence that the number of returns received from not-for-profit entities is expected to rise as the deadline nears, at the current rate of 200 a day, the number received by 31 March will only be approximately 41,000. On this basis, the implementation cannot reasonably be described as being successful.
2.47Changes to the self-review process have caused undue stress and confusion among small NFP organisations. Such groups are typically run by volunteer administrations, in their own time, and in many cases do not have the expertise or resources required to navigate complex bureaucratic processes. The administrative burden created by the changes has put a strain on office holders, and risks deterring others from volunteering their own time to assist. Simplifying the reporting process would aid in easing the concerns of administrators and make volunteering a more attractive proposition.
2.48The committee considers that much of the confusion around the new requirements could have been prevented through greater consultation and clearer advice. The committee commends the ATO for holding advisory sessions with affected stakeholders. However, it is not enough to listen – concerns must also be acted on. The evidence received by the committee suggests that, despite the best intentions of the ATO and ACNC, further work is necessary to bring smaller groups along with the changes. The committee notes that an extension of time to submit a self-review return has been granted to 31 March 2025. A further extension may be warranted to allow small NFPs to prepare.
2.49The committee has heard widespread support for the intent of the proposed changes to increase accountability and transparency in NFPs. All participants, including NFPs themselves, want to maintain a vibrant NFP community while ensuring that they are held to the standards expected of them by their communities. However, the committee believes that the new requirements are no longer consistent with the original intent of the policy and are disproportionate to the risk posed by the vast majority of these organisations. Many of the affected groups are small organisations with little annual turnover and no obvious examples of tax avoidance.
2.50For small groups like these, the cost of compliance with the new returns is greater than the community benefit gained from the information provided. The committee believes that there is no need for groups such as these to be subject to such requirements. Nonetheless, the committee recognises the value in having larger organisations with annual turnover in the millions of dollars to be accountable for the money they bring in. For this reason, the committee believes that thresholds above which an NFP would become required to complete the return, while excluding the groups below that threshold, should be introduced.
2.51The Committee notes that Treasury and the relevant Minister, Dr Andrew Leigh, have had ample opportunity to observe progress of the implementation of the policy and its many associated challenges, including in a briefing provided to Dr Leigh’s office in March 2024. Despite this, the Government has failed to take the sort of decisive action required to improve the experience of stakeholders in a meaningful way.
2.52The committee recommends that the Australian Government introduce thresholds that exempt smaller, low-risk not-for-profit entities from completing the self-review assessment, capturing only those with a turnover above a certain amount.
2.53The committee recommends that the Australian Taxation Office extend the deadline for the return of the not-for-profit self-review assessment beyond 31 March 2025.
2.54The committee recommends that the Australian Government explores the appropriateness and/or practicality of the Australian Charities and Not-for-profits Commission managing the self-review assessment regime in place of the Australian Taxation Office.
2.55The committee recommends that the Australian Taxation Office and Australian Charities and Not-for-profits Commission work to harmonise their guidance on tax obligations for not-for-profit entities, and that the Australian Charities and Not-for-profits Commission updates its online information on factors affecting the registration of not-for-profit entities as charities.
2.56The committee recommends that the Australian Taxation Office undertakes enhanced and results-focused consultation with the not-for-profit sector, aimed at genuinely resolving challenges and uncertainties being experienced in the self-review assessment process – including extending the hours of the telephone helpline to better suit volunteers, Australian Tax Office staff bringing laptops to town hall meetings to address registration issues in real time, and updating and sharing on the Australian Taxation Office website the information packs for treasurers of not-for-profit entities that were previously available.
Senator Andrew Bragg Chair Liberal Senator for New South Wales
| Senator Dean Smith Member Liberal Senator for Western Australia |