Chapter 2 Analysis of the Bills

2.1                   The overwhelming evidence presented to the inquiry was that the charities and not-for-profits sector supports the establishment of the Commission, although there is potential for improving the legislation. This chapter presents some of the evidence in support of the Commission and the ways in which it will make it easier to work in the sector. Suggested improvements to the Bills then follow.

Support for the Commission and its benefits to the sector

Less red tape, the charities passport and lodge once-use often

2.2                   As ACOSS stated during the hearings, organisations claiming tax exempt status from the ATO will transfer this regulatory relationship to the Commission.[1] Looking beyond this change, many organisations in the sector have a regulatory relationship with other Commonwealth agencies. Treasury advised the committee that it is in the process of removing this duplication:

For some entities the reductions [in red tape] will happen immediately, particularly those entities that are regulated at the Commonwealth level. The consequential amendments that will accompany the ACNC draft will relinquish the responsibilities of ASIC and a number of other Commonwealth regulators in respect of charities where there is duplication. If we use a company limited by guarantee, for example, it will no longer be reporting to ASIC ... Its interaction will be only with the ACNC. Within that, the regulatory framework applying to it under the ACNC is less onerous than the current Corporations Act equivalent for that entity. So those entities will face an immediate reduction in their red tape and compliance costs.[2]

2.3                   Treasury is also working on a ‘charities passport’ and a lodge once-use often regulatory system. The idea is that organisations in the sector will only have to provide certain information to the Commonwealth once, and the Commission will be the point at which this occurs. The information provisions in the Bill are designed to allow the Commission to pass information on to other agencies for appropriate purposes. More generic information will be placed on the ACN Register, which will allow charities to prove their bona fides without effort.

2.4                   The Implementation Taskforce described how the reduction of duplication is progressing within government:

... Treasury and the task force are working on an absolutely comprehensive piece of work across the Commonwealth that would see the current reporting requirements of every charity put on the table with the relevant department and charity representatives, along with the requirements that would come through the ACNC's annual information statement, and reconciliation where there is duplication.[3]

2.5                   Currently, 33 Acts are under consideration for this purpose.[4] This represents a significant reduction in the compliance burden for organisations with a high exposure to the Commonwealth. Of course, many organisations in the sector are more exposed to State and Territory frameworks. The committee concurs with the Commissioner’s observation that addressing overlap with State and Territory requirements would represent a ‘radical reduction’ in red tape.[5]

2.6                   At the hearings, Treasury indicated that it has been negotiating with the States and Territories and that some jurisdictions plan to ‘turn off’ their associations legislation if they will be covered by the new Bills:

... discussions on incorporated associations are continuing with the states and territories. Some states have already indicated that they will be turning off the incorporated association acts to the extent that the ACNC is covering them, just as we are with the Corporations Act. In other states, those discussions are continuing.[6]

2.7                   Given the scale of the task of establishing an accurate database and untangling a web of regulatory requirements, it is only to be expected that red tape reforms will take time to bear fruit. The Community Council of Australia best summarised this:

If all we can do is establish that the Australian Charities and Not-for-profits Commission has a very accurate and reliable dataset of all the charities in Australia with some basic information about them, and that, when a charity applies for a grant or some kind of concession or is engaged with some level of government or regulation, they can just provide the link to the data that is on the ACNC website as the reference point for their core information—if we can get to that point, that will make a massive difference in the first instance ... I think that is at least a couple of years ... of work before that level of information and that level of reliability are established. But, once it is, the potential for it to benefit the sector is enormous. I do not think people quite realise how often charities have to demonstrate their bona fides, and the capacity to do that, by having the equivalent of a charities passport, has incredible appeal.[7]

Transferring the registration role from the ATO

2.8                   The committee received consistent evidence that the sector regards the ATO has a revenue raising agency, and that this is perceived as affecting its decisions on organisation’s charitable status, which has tax implications. Further, the ATO’s decisions are not always perceived as being consistent.[8]

2.9                   This has had led to a less than positive relationship generally between the ATO and the sector. ACOSS summarised the ATO’s situation as, ‘it was never intended (nor has it wanted) to be the sector’s regulator; and the relationship between the sector and the ATO is less than positive as a result.’[9]

2.10               The Community Council of Australia expanded on these issues, noting that many smaller organisations in the sector see the ATO as a very imposing organisation and are not able to deal with it effectively:

When you talk to these groups about why they have or have not applied, it is because it is an intimidating process. It requires a lawyer, or that is their perception. Engagement with the ATO is not something that Australians see as really desirable. Unless you have a good lawyer and get the right ATO person, it can be a quite involved and engaged process, and it favours larger organisations ... and it favours those organisations who can come and see people like you. There are so many smaller not-for-profits that should be able to claim charitable status that just find the process too difficult.

... There are examples of people who feel that, when the ATO engages with them, their capacity to actually engage in a real discussion about what is happening for their organisation is non-existent. It is an ATO ruling; that is it; you go to court, you accept it or you do not. As I said, if we tried to impose the ATO as the group that determined charitable status in the sector, I can only imagine that there would be a massive outcry, if there were not already.[10]

An educative regulator

2.11               In evidence, the Interim Commissioner outlined the proposed regulatory approach. In short, it involves taking an educative approach with charities, and then escalating the response, if warranted by an organisation’s conduct:

You would have noted, in looking at the statutes, that they are graduated and that there is opportunity for self-correction. What we have provided in the implementation report is a regulatory pyramid that details the approach that would be taken, which would begin with a very strong emphasis on education, guidance and advice. So there is a significant function for the ACNC, not just in developing material for the website and to be publicly available—some dedicated to charity, some to the public—but also with a phone advisory service and an email advisory service. If there is sustained noncompliance with the requirements, there are reminders and so on and you can move then to formal warnings. So you can have proactive intervention. If there appears to be wilful and serious noncompliance, particularly if there is concern about the conduct of that entity, then the commissioner does have powers to suspend.[11]

2.12               The committee regards this approach as well-balanced. The educative focus was also favourably received by many stakeholders in the inquiry.[12] The comments of the Consumers Health Forum of Australia were representative of much of the sector:

CHF recognises the need for the Bill to include wide-ranging enforcement powers for the ACNC Commissioner, to address the unscrupulous activities of a small minority of NFP organisations. We welcome, however, the emphasis on the ACNC’s educational activities in all the sections of the legislation dealing with compliance, as this clearly indicates that the intention of the ACNC is to work with registered entities and provide them with guidance to assist them to comply with and understand their obligations under the legislation.[13]

2.13               The committee believes that an educative, proportional approach will greatly assist the sector in achieving compliance efficiently and effectively and is encouraged by the depth of forethought that the Implementation Taskforce has displayed on this issue.

The Commission is off to a good start

2.14               The committee received evidence that the Implementation Taskforce, headed by Interim Commissioner Susan Pascoe, has been effective in establishing the Commission and communicating to the sector how it can be expected to operate.[14]

2.15               The Taskforce has been holding consultations and has published an Implementation Report, which comprehensively outlines the Commission’s regulatory approach, with an emphasis on proportionality, transparency, fairness, timeliness, and consistency.[15] The Smith Family appreciated the Implementation Report in that it communicated to the sector that the Commission will apply a measure of trust where warranted. The Smith Family stated, ‘It is pleasing that the directions spelt out in the Implementation Taskforce Report suggest that a trust-based approach is reasonably well founded.’[16]

2.16               Catholic Health Australia summarised the sector’s positive perceptions of the Interim Commissioner’s performance to date:

I also congratulate Commissioner Pascoe and thank the government for their good sense in appointing such a capable initial commissioner. Indeed—without seeking to embarrass her noting her presence in the room today—her appointment gives much confidence to people within the not-for-profit sector that the commission is off to a good start.[17]

‘Red tape’ in the objects of the Bills

Background

2.17               Reducing the burden of ‘red tape’ facing the not-for-profit sector is one of the explicit aims of the Bills and one of the most sought-after aspects  of reform in the charities sector. The Government has recognised the important role played by the sector in establishing an inclusive and productive Australia and has committed to deliver smarter regulation, reduce red tape, and improved transparency and accountability of the sector.[18]

Analysis

2.18               The committee acknowledges that the Government’s establishment of the Commission is part of its strategy to reduce red tape and notes that there is already a reference to the reduction of red tape in the objects of the main Bill.

2.19               The Treasury submission outlines how the new national regulatory system of the not-for-profit sector will deliver significant benefits to the sector, including ‘reducing red tape and duplication by streamlining process’. [19] Moreover, Treasury notes that the ‘establishment of a national regulatory framework, and a “one-stop shop” regulator, would in itself, reduce regulatory burden on the sector’:

... the objects clause currently requires the Commissioner to have regard to the ‘benefits gained from minimising procedural requirements and procedural duplication by cooperation between the Commissioner and other Australian government agencies; and effective administration of the laws that confer functions and powers on the Commissioner.’

In addition, a reference to red-tape reduction has been made in the Guide to the draft Bill, which provides that the ACNC Commissioner will ‘cooperate with other government agencies to oversee a simplified and streamlined regulatory framework for not-for-profit entities.’[20]

2.20               Nevertheless, submissions were consistent in requiring stronger and specific statement on reduction of red tape in the objects. The Uniting Church in Australia told the Committee:

We believe that red tape reduction should be the cornerstone of the bill and that it should empower the commission to take action to reduce the unnecessary duplicative and burdensome administrative reporting and compliance obligations on the sector. This would be in keeping with the government’s own stated aim that red tape reduction is the foundation stone of its not-for-profit reform agenda. It is important to note that we are asking for a reduction in unnecessary red tape and not a reduction in accountability or transparency. Therefore, we ask the committee to recommend amending the objects of the bill to include a clear obligation on the government and its agencies to reduce the unnecessary duplicative and burdensome administrative reporting and compliance obligations on not-for-profits.[21]

2.21               The Not-for-profit Sector Reform Council expressed concern that the ‘preamble and the objects do not reflect one of the original intentions of the Commission, which was to reduce red tape for the not-for-profit sector.’ The Council stated:

The focus of the current draft does not provide any detail on how the reporting burden for registered organisations would be reduced. As an example, the bill could include the fact that organisations registered with the ACNC and in receipt of a Commonwealth grant would not be required to submit financial acquittals for the Commonwealth grant if, as an organisation, they submitted audited financial statements to the ACNC.[22]

2.22               Likewise, ACOSS was concerned that ‘provisions such as those at 15-10 that refer to benefits from minimising procedural requirements and duplication, or cooperation between the Commission and other government agencies, do not provide adequate assurance that the sector will benefit from this reform’. The submission stated:

The Government’s not-for-profit reforms were announced in the context of the commitment to reduce red tape; a commitment predicated on enhancing productivity and efficiency and, most importantly for charities, effectiveness for clients. Throughout the evolution of this reform, the sector has been assured of principles such as ‘light touch regulation’; and of the commitment to reduce duplication of reporting requirements and enhance the value of the reporting that is undertaken in terms of information for and about the sector. Yet these principles are not evident in the ACNC Bill. It is important that the legislation includes an explicit objective of reducing red tape.[23]

Conclusion

2.23               The Committee acknowledges the wishes of the not-for-profit sector that the reduction of ‘red tape’ should be made an explicit object of the Bill and agrees this should occur.

 

Recommendation 1
2.24	That the objects of the Australian Charities and Not-for-profits Commission Bill 2012 explicitly include the reduction of red tape.

 

‘Public trust and confidence’

Background

2.25               One of the objects of the Bill is to ‘to maintain, protect and enhance public trust and confidence in the Australian not-for-profit sector’.[24] Amongst other things, in performing his or her functions and exercising his or her powers, the Commissioner must ‘have regard to the maintenance, protection and enhancement of public trust and confidence in the not-for-profit sector’.[25] Moreover, in deciding whether to revoke the registration of an entity the Commissioner must take account of a range of matters, including ‘the extent (if any) to which the registered entity is conducting its affairs in a way that may cause harm to, or jeopardise, the public trust and confidence in the not-for-profit sector mentioned in subclause 15-5(1) (Objects of this Act)’.[26]

2.26               The way in which the legislation and explanatory materials portray the level of public trust and confidence in the sector was of great importance to stakeholders. For example, ACOSS stated, ‘One area where there has been marked improvement in the drafting of the legislation is in recognising that the sector currently holds public trust and confidence.’[27]

Analysis

2.27               Evidence presented to the Committee raised concerns about the application of ‘public trust and confidence’ in determining the revocation of registration under the provisions of the Bill. In its submission, Catholic Social Services Australia highlighted the legal ambiguity of the terminology:

Under section 35-10(2)(e) of the Exposure Draft, the Commissioner can revoke the registration of a charity if that charity is conducting its affairs in a way that may cause harm to, or jeopardise, the public trust and confidence in the NFP sector. Given the inherent subjectivity on this matter, we recommend enhanced clarity about the definition to be used for decisions by the Commissioner which may be based on this terminology.[28]

2.28               Catholic Health Australia made a similar point:

At present the bill gives no definition of what that new legal principle might mean. I come to this inquiry not knowing what the application of the principle might mean for the governance of our organisations. What I can point to at the moment is section 180 of the Corporations Act that tells directors of not-for-profit organisations that they have to exercise their governance with care and diligence. I can turn to section 181 that tells directors that they have to act in good faith and in the best interests of the company. Those principles evolved out of years and decades of development of case law. Case law built up that was then enacted by the parliament to give us certainty as to how governance is to be exercised.[29]

2.29               Catholic Health Australia was concerned that the meaning of ‘public trust and confidence’ would have to await ‘first prosecution’, when ‘it is then tested in the courts at great expense’. It suggested that ‘ideally that would be defined in the legislation before it proceeds, and I think that is entirely possible’.[30]

2.30               In its submission, the Housing Industry Association argued that ‘Public trust and confidence’ was often not relevant to organisations in the not-for-profit sector, as they did not rely on public donations or public money.[31]

2.31               On the other hand, the Not-for-Profit Sector Reform Council saw value in the Commission having the oversight of the sector in the interests of public trust and confidence and that it was an important outcome for the sector:

It would only take one or two to diminish that trust and confidence. I think that we do not know—the mishmash of regulation and those that have oversight of the sector is so complex and so chaotic that if you had a situation where there was a fundamental failure then the whole sector would have the taint of the scandal because the sector, and particularly those charities that rely on public donation and public support, may find themselves in a situation where there is a decrease in the amount of donations or public support for their charities. By having the ACNC there and having a central regulator, you would have that oversight body that would be able to act effectively…[32]

2.32               In the same vein, ACOSS recommended that clause 10-5, the guide to the Act, be redrafted so that it refers to improving the accountability of the sector, rather than supporting it. Their suggested drafting was:

The Commissioner of the ACNC will provide information to help the public understand the work of the not-for-profit sector and to support the transparency and accountability of the sector.[33]

Conclusion

2.33               The charities and not for profit sector has managed itself well and has not had to endure the kind of scandals that have been seen elsewhere in the world which have been the catalyst for regulation. The Committee acknowledges that the sector has sought to be proactive in encouraging a regulatory framework that might help prevent such an event from occurring in the future.

2.34               An increase in public trust and confidence strengthens the sector, with all the flow on benefits of growth in jobs and services in a very large sector of the economy as well as improved outcomes for the people and outcomes they support. Given the important and often essential nature of much of the work of the sector, the impact of a loss of public trust and confidence on the ability to raise funds would flow through, not just to the organisations, the people they employ and services they purchase, but to some very vulnerable people who rely on their services.

2.35               Given the nature and significance of the sector covered by the Bill, the Committee believes that including in the objects of the Bill, ‘to maintain, protect and enhance public trust and confidence in the Australian not-for-profit sector’ is appropriate.

2.36               However, the Committee recognises that there is some uncertainty in the sector about how the term ‘public trust and confidence’ will be interpreted and would support the inclusion of further explanation in the Explanatory Memorandum.

2.37               The Committee also supports ACOSS's request to enhance the educative and enabling role of the Commission in improving the accountability of the sector and supports the redrafting of the guide to reflect that.

Recommendation 2
2.38	That the Explanatory Memorandum include material on the meaning of ‘public trust and confidence’ and the way that it might be interpreted. That the guide to the Act reflect the educative and enabling role of the Commission in supporting transparency and accountability in the sector.

Reporting framework

Background

2.39               The reporting framework for registered entities proposed under the Bills will be set out in detail in regulations. The framework is due to commence on 1 July 2013, with extensive public consultation to take place in the meantime. The extended start date is intended to give more time for charities to move to the new regulatory framework and for the Commission to provide guidance to help with the transition. The first financial reports are due to be lodged by 31 December 2014, or later if a substituted accounting period applies.[34]

2.40               As part of the reporting framework, all registered entities will be required to provide an annual information statement. The first annual information statement will be in respect of the 2012-13 financial year, and will need to be lodged with the Commission by 31 December 2013, unless a substituted accounting period applies. Only medium and large entities will be required to provide annual financial reports to the Commission. Large entities will be required to have their financial reports audited, while medium entities can choose to either have a review or an audit.[35]

2.41               Under the Bill, the Commissioner may approve a substituted accounting period, in lieu of a financial year ending 30 June, for a registered entity. Entities that notify the Commissioner, within six months of the commencement date, that they currently report under an Australian law for a period other than a financial year ending 30 June, will be taken to have been approved by the Commissioner (on an ongoing basis) to lodge their financial report for that other period. That is, existing substituted accounting periods will be grandfathered for such entities provided they notify the Commissioner. The Commissioner’s approval to adopt the alternate accounting period will not be required in these cases. Registered entities which report using a substituted accounting period will still report annually. Instead of 31 December, these entities will be required to provide their financial reports to the Commissioner six months after the last day of their accounting period. The Commissioner has the power to impose any conditions that are necessary for this transition.[36]

Analysis

2.42               The reporting framework of the Bill is designed to address the disparate and overlapping reporting requirements that NFP entities are already subjected to under various regulatory regimes.[37] The delayed start to the reporting framework is designed to, ‘give charities more time to transition to the new regulatory framework’, and enables ‘the ACNC to work with the sector to provide guidance and information to facilitate the transition to the new regime’.[38]

2.43               Nonetheless, there is widespread concern within the sector that the reporting regime for the Commission will duplicate existing reporting processes and add another layer of reporting to the sector. In its submission, Chartered Secretaries Australia (CSA) stated:

The draft legislation does not address the question of how the proposed regime will co-exist with existing parallel legislation …

A key policy objective for the NFP regulatory reform is the creation of a one-stop shop regulator for the sector, and reduced compliance and red tape. Unfortunately, until the question is addressed of how the proposed regime will co-exist with parallel existing legislation, this admirable objective cannot be realised. CSA understands that there are parallel processes occurring to address some of these areas. However, lack of definitive timelines and recommendations leaves the sector uncertain and concerned.[39]

2.44               CSA noted that ‘many charities, which were created under state-based incorporated associations legislation, will now be faced with a parallel Commonwealth regulatory and reporting framework’. While welcoming the 12-month extension to reporting obligations contained within the Bill, CSA believed that ‘until such time as reporting for the sector is streamlined between Commonwealth and state governments, charities in the first instance (and possibly the entire sector in the future) are likely to be burdened with duplication of reporting’.[40]

2.45               CSA recommended that:

…in the same vein as the ‘basic religious charity’ exemption contained in the exposure drafts, consideration should be given to providing the Commissioner with the power/discretion to extend these exemptions to other types of organisations (for example, schools) where extensive reporting and compliance is already in existence and unlikely to be changed or amended as a result of the ACNC legislation, in order to ensure there is no duplication of reporting.[41]

2.46               In evidence before the committee, Catholic Health Australia highlighted the existing regulatory burden facing the health care sector:

At the moment, a hospital, if it is established under the Corporations Act, needs to report to ASIC; it also needs to report to its state government; and it perhaps has to report to the Private Health Insurance Industry Council. An aged-care organisation needs to report to Accreditation and Standards in the Department of Health and Ageing. We think the opportunity to reduce those reporting obligations is immense, but we do not yet have the confidence that the know-how to do all of that is actually in place.[42]

2.47               A similar burden was placed upon the independent schools sector, with various reporting requirements to different sections of government at federal and state level.[43]

2.48               Catholic Health Australia argued that the purpose of the reforms was to remove duplication of reporting, and asked, ‘If it cannot guarantee that at the time of its passage, why support the legislation in its current form?’[44]

2.49               One solution to the problem of duplication offered by Chartered Secretaries Australia was for ‘transitional arrangements whereby any charity or not-for-profit currently reporting under state legislation or under the Corporations Act is exempt from reporting under Commonwealth legislation’. This was to be done in conjunction with the referral of powers.[45]

2.50               In its submission, the Victorian Government  suggested that ‘reporting requirements be streamlined to specifically enable audits and reviews prepared under Victorian legislation to be accepted for the purposes of the ACNC, thus reducing duplication caused by the Commonwealth legislation’.[46]

2.51               In response to these concerns, the Implementation Taskforce noted the work being done to ensure that a more streamlined system would be in place before reporting commenced. It stated:

Quite a body of work is being scoped at the moment where the ACNC and Treasury will work with individual Commonwealth departments to lay out what the current reporting requirements are, what the ACNC requirements will be both through the annual information statement and, for the medium and larger charities, the financial reporting and then seek to rationalise and indeed reduce what is required. Preliminary discussions on the scoping for that are underway. That has been enabled by the minister on 17 May, giving the additional 12 months for this work to get underway.[47]

2.52               Looking specifically at reporting requirements through MySchool, she noted the potential compatibility of reporting requirements with the Commission and the potential options for eliminating duplication with only minor adjustments:

If you look at the current requirements of non-government schools to report through the MySchool website and the requirements that the ACNC will have through both the annual information statement and the financial reports, they are really quite close. That is a piece of work that the task force members undertook in the development. They looked at certain types of charities, particularly large groups of charities, to see what the impact might be. There would not be a significant adjustment to reconcile the two. I think the key issue is: what is the primary point of entry for the reporting? Do you maintain the MySchool website with possibly some minor adjustments, and does the ACNC then take the data through the MySchool website, or not? In terms of making sure that you maintain the minimum adjustment to the administrative requirements, that would be the question.[48]

Conclusion

2.53               The committee supports the decision of the Government to delay the implementation of the reporting framework under the Bill, and to subject it to further consultation. However, the committee acknowledges that there are some concerns from the sector about reporting duplication. While these problems may ultimately be resolved through negotiation between different Commonwealth agencies and between the Commonwealth and the States and Territories, the committee feels that in the transitional period a flexible approach to reporting arrangements is in order.

2.54               The Committee has some concerns about the complexity involved in transitioning such a diverse community to a single reporting framework. Sector includes aged care, organisations that work with disabled children, and foreign aid organisations. All have substantial reporting requirements. Also, the sector has incorporated associations across all State jurisdictions, cooperatives, etc. It may be an advantage for the Commissioner to be able to ‘shelve’ some sectors while prioritising others, or accept reports via the department for health and take the information they need from them, or retain Myschool as the principal place for schools to report and take from there.

2.55               The Committee recommends that the Bill be amended to specifically state that the Commissioner has the discretion to accept financial reports and the required material for its purposes from other Government Departments. This capacity should be time limited and reviewed as the lodge-once use-often process is developed. The discretion provides both the Commissioner and the sector with additional flexibility during the transition phase – to concentrate on various sectors before others, - to work with various parts of the sector to get the reporting framework right, and to minimise duplication.

2.56               Having made this recommendation, the Committee considers that it would be a negative unintended consequence if State bodies became the source for reports during the transition phase, as it is the reporting to several State bodies across state borders that contributes a large part of the duplication. The committee anticipates though that State Governments will continue their work with the NFP reform process and work in good faith to reduce duplication.

Recommendation 3
2.57	That the Commissioner have discretion to accept reports or material prepared for other agencies and levels of government as reports for the purpose of the reporting framework under the Bills. This arrangement should be time limited and be reviewed as the lodge-once use-often process is developed.

Governance standards

Background

2.58               One of the key conduct requirements for entities under the Bills will be to comply with governance standards, which under clause 45-10, may be specified in the regulations. Under clause 35-10 of the main Bill, non-compliance makes an organisation eligible to have its registration revoked, although the Commissioner must also take a range of other factors into account.

2.59               One issue that arose in relation to these requirements was uncertainty. According to evidence, some parts of the sector are currently unsure about what will be expected of them when the legislation becomes operational. Chartered Secretaries Australia argued that they should be principles-based and adaptable to an organisation’s needs:

On a different note, it is difficult for us to make precise comment on the governance standards as these have not yet been released for public consultation. Nevertheless, we hope they are principles based and flexible. We would like to draw your attention to the ASX Corporate Governance Council's principles and recommendations which have become what we think are the default guidelines on governance, but they are adaptable as they operate on an if not, why not basis, and we do hope that the same proposal is adopted with the not-for-profit sector.[49]

2.60               Finally, Catholic Health Australia argued that the governance standards should be legislated into the Bills, rather than left to delegated legislation:

In relation to the uncertainty around governance standards, we have said that the bill should be amended to ensure that, at a future date, governance standards are enacted as law, not as regulation. Creating a power to have governance standards enacted under regulation makes it too easy for future governments to change those governance standards. At present, if the Corporations Act needs to be amended, it has to go through the process of parliamentary re-enactment. A regulation creates more opportunity for that to be changed.[50]

Analysis

2.61               Treasury responded to most of these points during the hearing. Treasury confirmed that governance standards would be principles based and be flexible to take into account the wide range of organisations in the sector:

In effect, the governance requirements will be subject to a detailed consultation process. The government has announced that it will undertake consultation in developing those governance requirements, but they would be principles based and have regard to different circumstances of particular charities, given the diverse nature of the sector.[51]

2.62               Further, Treasury reported that the Government has set back the start date for governance standards to July 2013, which will provide enough time for thorough consultations:

The government is already providing further time for the development of the reporting and governance obligations, in that they will not start until 1 July 2013, and first reports for financial statements will not be until the end of that reporting year. In effect, there are six months from the end of the reporting year before they have to be lodged with the ACNC.

The process that the government is proposing to develop those regulations is to take them through a detailed consultation process, so in effect the regulations would be released as an exposure draft, consultation meetings would be set up, and submissions would be sought on the detail of those regulations. We would also work with the states and territories in the development of those regulations… So in that aspect the government is already looking to have the ACNC start from 1 October this year but in effect delay certain aspects of the ACNC operating requirements for a further period of time to allow this further consultation and development to occur.[52]

2.63               In relation to whether the governance standards should be in the Bills, the committee is satisfied that the planned consultation process will be extensive and sufficient, particularly given the extended time frame for compliance.

2.64               However, the committee appreciates the diversity of the sector and the need to match governance standards to the nature and size of vastly different organisations. Governance standards for aged care and for organisations working with children will be of necessity quite different to those suitable for a local parks committee, or a local congregation with a building fund.

2.65               It is also likely that the negotiations required between the Commission and State, Territory and Commonwealth Governments will be more complex in areas like aged care and disability services where the consequences of poor governance are great. The committee acknowledges that some sectors have, or are working on, standards that apply across their membership. The Australian Council for International Development is one example.

Conclusion

2.66               The committee therefore seeks to increase the options of both the Commissioner and the sector in developing governance standards by recommending that the Minister can annex, by regulation, a limited number of existing governance standards to the Bill and that the Commissioner could allow organisations to adopt one of those standards as their own. That would allow discrete sets of organisations, like independent schools, local places of worship, or foreign aid organisations, to develop their own set of governance standards to meet the specific requirements of their circumstances, whether those circumstances require more complex standards, or extremely simple ones.

2.67               There would still need to be a default set of governance standards and a small set of over-arching principles for all registered entities that might relate to issues such as charitable objects and ‘fit and proper persons.’

2.68               The committee notes that there are many potential ways open to the Minister, the Commissioner and the sector in working their way through this issue to the most effective and efficient solution. The committee presents this recommendation as an option for their consideration.

Recommendation 4
2.69	That the Government consider incorporating existing or sector-developed governance standards into the Bill through regulation, in addition to a default set of governance standards.

Reporting thresholds

Background

2.70               Clause 205-25 of the Bill provides for a tiered system of registration based on revenue thresholds. This has been done in order to minimise the compliance burden placed on registered entities. Reporting requirements under the Bill are proportional to the size of registered entities, based on a revenue threshold. There are three tiers:

n  a small registered entity is an entity with annual revenue of less than $250,000;

n  a medium registered entity is an entity with annual revenue of less than $1 million that is not a small registered entity; and

n  a large registered entity is an entity with annual revenue of $1 million or more.

2.71               Revenue is calculated in accordance with the relevant accounting standards issued by the Australian Accounting Standards Board.[53]

Analysis

2.72               During the inquiry, the Committee received evidence that the proposed thresholds were too low. In its submission, the Anglican Church Diocese of Sydney expressed concern that ‘the revenue thresholds used to determine whether a registered entity is small, medium or large remain unhelpfully low’. The submission noted that:

The thresholds currently proposed are based on those used by States and Territories under incorporated associations legislation and also under the Corporations Act for companies limited by guarantee. We understand it is convenient for these thresholds to be retained, particularly to ensure that that there is minimum impediment for State and Territory agencies agreeing to report to the ACNC as a one-stop shop. However, beyond convenience, there is no obvious basis why these thresholds should be adopted for the whole sector and, in our view, good reason to doubt their suitability as thresholds for the whole sector under the ACNC Bill.[54]

2.73               The submission argued that ‘if one of the objects of the ACNC Bill should be to simplify and streamline the regulatory arrangements for the not-for-profit sector, we submit that raising the thresholds for the purposes of defining small, medium and large registered charities would be appropriate’. The submission suggested doubling the level of the thresholds.[55]

2.74               The Independent Schools Council of Australia also protested against the probable impact of the threshold on the independent schools sector—most schools would qualify as large entities with the consequent reporting burden that applied to that tier:

The vast majority of our schools will be at the high end—that is, revenue will be above $1 million—and $1 million is not much for a school, although some 150 schools might be less than $1 million. Our schools receive very little donation dollars, so if you are regulating organisations that receive gifts from the general public, then schools should be put aside. We do receive government funding and of course that is public money and we acknowledge that. There are several strings attached to receiving that money and the reporting and compliance requirement for receiving that money is extensive. So we already have that covered off. There is very little in the way of public money.[56]

2.75               In its submission, the Australian Major Performing Arts Group (AMPAG) recommended leaving the thresholds at the proposed level but setting them out ‘in an attached schedule rather than enshrined in the legislation, to allow for increases in CPI etc’. AMPAG also urged ‘the ACNC to inform government of the appropriateness of thresholds over time’.[57]

2.76               In evidence before the committee, Treasury explained the rationale behind the proposed thresholds, and in particular the precedents upon which they are based:

Smaller registered entities make up 78 per cent of the entire population, and they do not actually have any financial reporting requirements. So, between small, medium and large, the break-up is that 78 per cent are small, 11 per cent are medium and 11 per cent are large. In fact, you might see those as being at the higher end of the scale rather than at the low end of the scale. That said, those thresholds were set in a government review in 2010, established for companies limited by guarantee, after a thorough consultation process. We have had discussions with the states and territories, and their current regulatory regimes, which set thresholds at a lower rate, are all moving to align themselves with the company limited by guarantee levels that we have also adopted as part of the ACNC Bill draft.[58]

2.77               Furthermore, in its submission, Treasury noted that the ‘legislation includes a regulation making power which allows for the thresholds to be changed over time’.[59]

Conclusion

2.78               The committee accepts the rationale outlined by Treasury that, while the thresholds may seem high, 78 per cent of registered entities would be classified as small entities. Further, the thresholds match those set for companies limited by guarantee after extensive consultation in 2010. All State and Territory governments are moving their lower thresholds up to match those for companies limited by guarantee, which have now been adopted as part of the Bill.

2.79               The consistency around the thresholds for companies limited by guarantee, entities registered under State and Territory laws, and those to be registered by the proposed Commission, provide a suitable framework for further negotiations on the reduction of red tape. Changing the thresholds for the Commission alone may create areas of duplication and increased compliance for some organisations that are close to the thresholds. Therefore, the committee supports the thresholds as outlined in the Bills.

2.80               However, the committee notes that the thresholds can be amended by regulation and brings the concerns of the sector to the attention of the Minister and the Commission for consideration at the appropriate time. The committee has also recommended that the Bills include a five year review and the reconsideration of the thresholds may be included in that process.

Privacy and reporting requirements

2.81               One issue raised during the inquiry concerned how much financial information about entities would be disclosed on the Register.[60] The Association of Independent Schools of New South Wales expressed concern that sensitive information such as principals’ salaries might be published on the Internet:

My other comment is on the financial reporting. We are also told that there is a possibility of reporting on the public portal things such as CEOs' principal salaries and the bottom lines of many of our schools. If you have seen what some of the media try to do with league tables and My School information, you will know the delight they will have if they receive this sort of information on a public portal.[61]

2.82               In relation to what will be published on the Register, the committee notes that clause 40-5 of the main Bill, which lists the relevant items, only includes basic information. Some other matters can be included under the regulations, but these will be subject to the disallowance process in the Parliament. Further, clause 40-10 allows the Commissioner to remove certain types of information from the Register. This includes material that is commercially sensitive, or has the potential to cause detriment to an entity or to an individual. Therefore, the committee concludes that, not only is there no evidence to suggest that information such as staff salaries will be placed on the Register, but that the Commissioner will have a legislative avenue for not publishing it as well.

Anonymity of private ancillary funds

Background

2.83               Private ancillary funds (PAFs) provide a tax-effective mechanism for individuals to pursue philanthropy in that they receive a tax deduction on monies placed in a PAF, provided at least five per cent of the corpus is distributed annually. PAFs do not receive donations from third parties. Rather, they are location in which individuals can place their own funds for distribution over time.

2.84               PAFs are subject to a high degree of regulatory oversight, which they accept as the price for their favourable tax treatment. In addition, a large amount of aggregate data is published about them through the Queensland University of Technology. In 2009-10, PAFs distributed $197 million to the charitable sector.[62]

2.85               Clause 40-5 in the main Bill describes the information to be placed on the Register. This includes basic entity information, information statements, financial reports, some enforcement history, if any, and data specified in the regulations. Clause 40-10(1) describes what can be removed from the Register, including material that is commercially sensitive, offensive, inaccurate or misleading, or that specified in the regulations.

2.86               Clause 40-10(2) is a general override provision. It states that the Commissioner may include information, or decline to remove it, if the public interest outweighs the criteria in clause 40-10(1), including the regulations.

2.87               PAFs are charitable organisations and will be subject to the Bills. The committee received a number of submissions from philanthropists expressing concern that donor identities could be disclosed under the legislation.[63] At the hearing, Philanthropy Australia argued that publishing individual data on PAFs would, for many of them, be contrary to the nature of their activities:

… for some people, giving is a very private activity. They do not seek acknowledgement for it. In fact, some of them think that acknowledgement is almost counterintuitive to the generosity of giving, whether that is from religious or personal reasons. And there are some individuals, for instance, who work as volunteers in not-for-profit organisations and support those organisations through their family philanthropy, and they do not want to be recognised within that volunteering role as being the person that is also funding the organisation, because they just believe that that would be totally inappropriate as far as their personal values are concerned.[64]

2.88               Publishing individual data about PAFs would have two potential negative effects. For example, there could be an increase in unsolicited approaches from groups seeking money. There could also be a reduction of money in PAFs, or at least lower growth, as individuals who highly valued their privacy would reduce their engagement with philanthropy.[65]

2.89               The Community Council of Australia supported philanthropists’ request for anonymity at the individual level.[66]

Analysis

2.90               At the hearing, the committee questioned Treasury about the Government’s intentions in relation to PAFs. Treasury confirmed that the regulations were likely to accommodate their concerns:

During consultations, a number of those consulted raised with us concerns, particularly in the private ancillary fund space, particularly around the privacy of individual donors, and this is the group that we have in mind when the government goes about developing those regulations.[67]

2.91               Philanthropy Australia acknowledged and appreciated this intention, but also argued that the public interest provisions in sub-clause 40-10(2) raised too much uncertainty for its membership. It also commented that the public interest would already be reflected in the regulations, which would be promulgated by the Government and subject to Parliamentary scrutiny:

The current draft has provision for the minister to issue regulations and … it is indicated that these regulations could, for instance, be used to protect private information. That is seen as something that could happen rather than something that will happen. We are happy with that intention. The one specific clause is, I think, clause 40-10(2) which gives the commissioner the ability to override any regulation if they think it is in the public interest. To our minds, if the minister issues a regulation, the public interest has been taken into account at that point and, therefore, we would have thought, a regulation from the Governor-General should not be overridden by the commissioner.[68]

Conclusion

2.92               The committee appreciates the contribution of PAFs to the sector and also notes the large degree of regulatory oversight and aggregate reporting to which they are subject. The committee also understands that, for many private donors, anonymity goes to the very nature of philanthropy.

2.93               PAFs by nature do not accept donations from the public or from other parties. While the committee can see the benefits to the community of being able to see the scale and range of PAFs, the committee can see no public benefit in publishing the names of private donors where they seek to keep their philanthropy private. Therefore, the committee recommends that the Government investigate ways to strengthen protection in the Bill for these private donors. In making this recommendation, the committee makes no comment on whether other non-identifying information about PAFs may be published.

Recommendation 5
2.94	The Government investigate ways to strengthen protection in the Bills for private donors who wish to keep their philanthropy private.

Likelihood of conduct sufficient grounds for enforcement action

2.95               In parts of the main Bill, such as clause 35-10(1)(c) in relation to revoking registration, the Commissioner may take enforcement action if they reasonably believe that something is likely to occur. Examples are a contravention of the legislation or non-compliance with a governance standard, or an external conduct standard.

2.96               The ‘likelihood standard’ represents a greater than 50 per cent chance of something occurring. In the inquiry, stakeholders argued that the likelihood standard was too low for the Commissioner to take enforcement action and that a greater probability of something occurring should be required.[69] In evidence, ACOSS argued for a ‘reasonable belief’ test:

I think the commission that is almost here will have a culture of early intervention and of creating good relationships with the entities involved. There is plenty of scope for early intervention through practice directions, but the ability to warn, direct and fine should be confined to reasonable belief that there has been noncompliance.[70]

2.97               The committee notes that varying degrees of probability are required in different areas of the general law. For example, in civil matters a 50 per cent test is sufficient. In criminal matters, ‘beyond reasonable doubt,’ which is well above a 50 per cent probability, is often applied.

2.98               The key point here for the committee is that the Commissioner must take into account a range of matters before taking enforcement action. In clause 35-10(2) of the main Bill, for example, the Commissioner takes into account the ‘nature, significance and persistence’ of misconduct. The committee’s expectation is that, for the more serious types of misconduct, the Commissioner is more likely to act when they conclude that something is likely to happen. Conversely, if there is a 50 per cent chance of less serious misconduct occurring, the committee expects that the Commissioner would be less likely to intervene.

2.99               In other words, the Bills allow the Commissioner to respond in a proportional manner to varying circumstances. Therefore, the committee does not see value in restricting the Commissioner by applying a reasonable belief test, rather than a likelihood test.

Directors’ liability

Background

2.100           Division 180 of the Bill deals with obligations, liabilities and offences under the Act, and provides that:

If an entity (the primary entity) is subject to an obligation or liability, or commits an offence, certain entities that are responsible for managing the primary entity may also be subject to the obligation or liability, or commit the offences, in specific situations.[71]

2.101           In effect, the bill imposes personal liability on directors of bodies corporate in certain circumstances.

2.102           However, under the Bill, only one offence, being an offence against the requirement to comply with a direction from the Commissioner under clause 85-30 of the Bill, that is committed by a body corporate, is taken to have been committed by the body corporate and each director of the body corporate at the time the body corporate committed the offence. Directors will not be taken to have committed any other offence, besides a failure to comply with a direction from the Commission, under the Bill. The rationale for this power is that:

An offence arising from a failure to comply with a direction from the ACNC Commissioner is considered to be a serious offence, as the ACNC Commissioner would generally be expected to use other means of encouraging compliance with the Bill before issuing a direction. In these cases, it is appropriate that the directors be taken to have personally committed the offence.[72]

2.103           Treasury notes that directors ‘will only be personally liable for the liabilities of the body corporate in cases of dishonesty, gross negligence, recklessness, or a deliberate act or omission’. Treasury further notes ‘that this test is used in other contexts, and has an established meaning’.[73]

2.104           Directors have two defences available to them:

The offence will not apply to a director of a body corporate if, because of illness or for some other good reason, it would have been unreasonable to expect the director to take part, and the director did not take part, in the management of the body corporate at any time when the offence was committed.

The offence will also not apply to the directors of a body corporate, if the director took all reasonable steps to ensure that the body corporate did not commit the offence, or there were no such steps the director could have taken.[74]

2.105           The evidential burden for proving these defences lies with the director; however, the evidential burden for proving the offence remains with the Commissioner.[75]

Analysis

2.106           The Committee has received a considerable amount of evidence bearing on this issue, most of it expressing concern about the application and effect of these provisions.[76]

2.107           In evidence before the Committee, the Australian Institute of Company Directors (AICD) questioned the value of placing liabilities on people who were essentially volunteers working for the community:

This bill, on its face, adds to the liabilities all these people have under the corporate law. It concerns me massively that we might be the first country in the world to make being on a not-for-profit as a director more onerous than being on a for-profit. It seems we must definitely identify what is happening with the corporate obligations before we decide to put extra obligations on the not-for-profit sector directors.

The second thing is that there is personal liability given to essentially volunteers. This has been looked at in other situations and, indeed, steered against. It seems quite wrong that people who are giving out of the goodness of their hearts, being proper people, should not be given the benefit of the corporate veil.[77]

2.108           In a submission to the inquiry, AICD noted that ‘Section 180-5(1) of the Bill gives the directors the same obligations as the company. Section 180-5(1) therefore has the effect of piercing the corporate veil.’ AICD argued that, in effect, ‘the section fails to appreciate the legal effect of incorporation, in that upon incorporation the company becomes its own legal person separate from its directors.’ It also stated that ‘Section 180-5(1) makes no distinction between the obligations or legal requirements of the company (as a legal person) and the obligations of the directors (as separate legal persons). As such there is no distinction between what the company must do and what a director must do.’[78]

2.109           AICD wanted the liability provisions in the Bill redrafted ‘so that they are clear, straightforward and easily understood’, and stated that:

Before the liability and offence provisions in the Bill can be re-drafted and finalised:

a) all of the obligations (including any director’s duties, external conduct standards, governance standards and reporting requirements); and

b) the intended interaction of the Bill with the Corporations Act must be set out and opened for public consultation.[79]

2.110           AICD also argued that ‘the Bill should impose less onerous liabilities upon directors that act in a volunteer capacity’.[80]

2.111           Chartered Secretaries Australia also questioned the extent of liabilities imposed under the Bill, stating that it was more onerous than that under corporate law:

The bill also imposes obligations, liabilities and offences on covered entities and that is those responsible for managing the registered not-for-profit entity, and where the registered not-for-profit entity is an unincorporated association the effect of the provisions is to impose all of the obligations as well as the liabilities of the unincorporated association on each member of the committee of management at the time the obligation arises or the liability becomes payable and to render any offence of the unincorporated association as being taken to have been committed by each member of the committee of management. Those liabilities and obligations are far more than are imposed on directors under the Corporations Act.[81]

2.112           AICD suggested amending the liability provisions of the Bill to focus upon dishonest, grossly negligent or reckless behaviour, and removing liability for a deliberate act or omission of the director, arguing that this would better reflect the circumstances of the not-for-profit sector:

The first bit would be potentially fine if you are only liable where it was ‘reckless’ et cetera. But in relation to the second bit, where it arises from an omission or act, take, for example, a board of a school—maybe a school for the disabled or whatever. They could well take an act—for example, an act to build a building or to employ a person or whatever—and then, if it is not within the regulations or it is not dealt with properly, the way I read it, they have a liability, irrespective of whether they were honest or dishonest.

The second point I would make is if it is decided by the committee that this is all rectified by removing ‘omission or act’ and just making it ‘recklessness’ et cetera—which I think by the way is getting close to the point—I would still make the point that I think it is not good to have legislation which says, ‘You are liable, but by the way if you come within this exemption you are not.’ It seems to me that that is not really what we are trying to do or what I would be suggesting to you we should be trying to do, which is to foster volunteerism in the sector. It would be much better to say, ‘They are not liable if they act properly et cetera, but if it can be proved that they have acted improperly then that is a different thing.’[82]

2.113           AICD requested a conditional carve-out for directors of charities serving on a voluntary basis, with liability limited to criminal actions. Their submission stated:

We believe that an important policy objective of the NFP reforms should be to encourage volunteerism. We have previously noted that a high proportion of directors in the NFP sector serve on a voluntary basis. As a starting point these directors should be supported in their efforts. With this in mind, we believe as a matter of principle that there should be an explicit carve-out or safe harbour from liability (across all relevant Acts imposing liability on a charity director) where a director of a charity serves on a voluntary basis.

We accept there would need to be some limitation on the extent of the carve-out, such as where the director has been involved in a criminal act. In this regard, we note exclusions from liability that exist in various Acts, including the Civil Liability Act 2002 (NSW) (see Part 9 of that Act). Again, however, we would emphasize that these issues should be the subject of full and proper public consultation.[83]

2.114           Other witnesses argued for removing director liability from the Bill altogether.[84]

2.115           In evidence before the Committee, Treasury expressed concern that the purpose and scope of the directors’ liability provisions had not been understood, that the provisions were much more limited in scope than people were allowing:

We had best correct some misunderstandings. It is probably a reflection that early exposure drafts were filed wider and they were narrowed quite dramatically in scope subsequent to the issue of those original exposure drafts. I suppose, consistent with other Commonwealth, state and territory laws currently applying to charities, such as the Corporations Act and the Tax Act, the ACNC legislation imposes a number of obligations on directors of incorporated charities to ensure that the individuals do not seek to hide behind the protection of a corporate veil to protect themselves from acts of deliberate misconduct. However, unlike some of the other laws, only in very limited circumstances will directors be held liable for breaches of the ACNC Act. Those cases are where the director was the direct cause of a breach because they undertook a deliberate act that was knowingly a breach or they were acting dishonestly, with gross negligence or recklessness. Further, there is only one offence that applies to a director within the ACNC Act—that is, a failure to follow a direction of the commissioner. Such a direction can only be issued in the most serious of cases and disobeying such an order is a serious matter that needs an appropriate sanction.[85]

2.116           Treasury has also refuted claims that the director liability regime contained in the draft Bill is more onerous than that applying to large for-profit companies, stating:

This is not the case, as the governance standards are expected to be simplified, tailored for the NFP sector, and otherwise modified to take into consideration comments made during the consultation process. On 17 May 2012, the Government announced that the revised governance standards will be subject to further consultation and implemented through regulations.[86]

2.117           Nonetheless, Treasury has undertaken to review aspects of the liability regime:

 Some stakeholders queried whether a ‘deliberate act or omission’ should be qualified with a reasonableness test, or some other requirement that the act or omission needs to occur knowingly in contravention of the law. This is the intention of the draft legislation, and to the extent that this intention is not clear, Treasury will examine options to clarify the drafting of this provision in consultation with the Office of Parliamentary Counsel (OPC).[87]

Conclusion

2.118           The committee is concerned that either the directors’ liability regime is unduly onerous, as suggested by a significant portion of expert evidence presented to the committee, or that, as presented in the Bill, it is not sufficiently comprehensible for people to understand its intent or purported mode of operation. The committee understands the importance of not providing disincentives for people to work in responsible positions in the not-for-profit sector. Placing an unnecessary burden of liability could be seen as such a disincentive, which is opposed to the purpose and objects of the Bill. The committee therefore recommends that Treasury redraft this section of the legislation with a view to clarifying its intent and operation.

Recommendation 6
2.119	The Committee recommends that Treasury redraft Division 180—Obligations, liabilities and offences, of the Australian Charities and Not-for-profits Commission Bill 2012, with a view to clarifying its intent and operation.

Procedural fairness

Background

2.120           Division 35 of the Bill provides the Commissioner with the power to revoke the registration of entities and the power to revoke the registration of an entity as a type of entity or subtype of entity. The Bill details the grounds for revocation and provides, in line with other clauses of the Bill, that the entity has a right to object to a decision in line with the review and appeals provisions outlined in Part 7-2 of the Bill.[88]

2.121           Division 100 of the Bill provides the Commissioner with power to suspend or remove responsible entities and to appoint acting responsible entities. The Bill details the grounds for suspension or removal of an entity and provides, in line with other clauses of the Bill, that the entity has a right to object to a decision in line with the review and appeals provisions outlined in Part 7-2 of the Bill.[89]

2.122           In addition, the Bill provides the Commission a wide spectrum of enforcement powers for where the Commission’s educative function fails to induce required action. The range of enforcement powers the Bill provides is intended to enable the Commission to take strong, proportional and targeted action to address actions or lack of actions that could threaten public trust and confidence in the NFP sector.

2.123           This Bill provides the Commission with the authority to:

n  issue warning notices;

n   issue directions;

n  enter into enforceable undertakings;

n  apply to the courts for injunctions;

n  suspend or remove responsible entities; and

n  appoint acting responsible entities.[90]

2.124           Clause 40-5 details information to be published on the ACN Register, including the details of the following matters (including a summary of why the matter arose, details regarding any response by the  relevant registered entity and the resolution (if any) of the matter):

(i)    each warning issued to a registered entity by the Commissioner under Division 80;

(ii)   each direction issued to a registered entity by the Commissioner under Division 85;

(iii)  each undertaking given by a registered entity and accepted by the Commissioner under Division 90;

(iv) each injunction (including interim injunctions) made under Division 95;

(v)  each suspension or removal made under Division 100.[91]

Analysis

2.125           The issue of procedural fairness, particularly around the issue of refusal or revocation of registration of an entity, was one of the issues highlighted in the evidence presented to the Committee. ACOSS stated:

…we raise again the issue of procedural fairness and the absence of explicit directions around procedural fairness within the bill. While we note that these are issues that the ACNC task force has been looking at in terms of its consultation with the sector, again the question before the committee and the question that the sector is asking is: what are the safeguards and the appropriate mechanisms in this bill that will ensure the mechanisms around procedural fairness carry through the legislative framework? That is what we look to in terms of a series of recommendations around insertions within the bill that will provide that guarantee for the sector.[92]

2.126           Sector Seven was also concerned about the lack of procedural fairness provisions in the Bill and urged the adoption of similar provisions from the Corporations or National Consumer Credit Protection Acts. The submission stated:

There is no requirement in the Bill for the ACNC to give the NFP entity procedural fairness through written submissions or a hearing (unlike the Corporations and NCCP Acts). There are provisions for procedural fairness in respect of revocation but given the implications of revocation, we believe these provisions should replicate the provisions set out in the Corporations and NCCP Acts. Under the Bill, the ACNC must issue a ‘show cause’ notice where it believes ‘on reasonable grounds that a registered entity is not entitled to be registered’. The notice must set out the grounds on which the notice is given and invite the entity to provide a written response within 28 days. There is no provision for a hearing (as required under the Corporations and the NCCP Acts) and the ACNC may dispense with the show cause notice if ‘in the opinion of the ACNC it is reasonable to do so’. It should also be noted that there are no circumstances in which ASIC may suspend or cancel a licence without first giving notice.

In summary, there are well established principles in the Corporations and the NCCP Acts for procedural fairness that we suggest should be incorporated in the Bill. In our submission, these provisions would not unduly complicate the process and ensure both the ACNC and the NFP entity were properly and effectively apprised of the key issues in dispute before embarking on a more expensive and time consuming appeal process.[93]

2.127           In its submission, the Not-for-profit Project at the University of Melbourne Law School also expressed concern at ‘the absence of appropriate procedural fairness requirements in relation to the ACNC’s exercise of its powers to revoke an entity’s registration (Div 35) and the suspension and removal of responsible entities (Div 100)’. It noted that ‘both outcomes are quite severe sanctions and would ordinarily attract the obligations of procedural fairness’. While approving of the review provisions surrounding these decision making powers, the submission felt that the Bill ‘confuses procedural fairness with administrative review’, and further stated:

Imposing clear legislative obligations on the ACNC in relation to the procedures by which it makes significant regulatory decisions ensures that decisions are made properly at first instance and increases public confidence in the regulator. Without such provisions, the ACNC is left in great uncertainty as to whether it has fulfilled its obligations and increases the likelihood that its decisions will be challenged on the grounds that it has failed to provide procedural fairness in accordance with its common law obligations. It also leaves the Bill out of step with every other major piece of Commonwealth regulatory legislation, all of which clearly define the procedural steps for hearings and notices prior to regulatory decisions being made.

Including provisions in the Bill for a general opportunity to be heard prior to a decision being made is fairer, more flexible, and more likely to produce accurate decisions than the option for the review of decisions. It is fairer because it permits an entity to respond to a claim before an administrative decision is made, which may have significant practical and reputational consequences. It is more flexible because, once a decision is made the relatively formal process of objection is required.

Administratively, there may be benefits in allowing organisations to clarify concerns held by the regulator without triggering the review process. Finally, it promotes accurate decision making because decisions will be made after appropriate information is laid before the regulator.[94]

2.128           In its submission, the Public Interest Law Clearing House expressed concern about the lack of prior notification of adverse findings or enforcement actions, and particularly the potential effects of the publication of such matters on the ACN Register. The submission stated:

In particular, Divisions 80 and 85 of the Bill provide scope for the ACNC to provide directions and formal warnings to entities in contravention of (or likely to contravene) a provision of the Bill, and for such actions to be noted on the Register in accordance with Division 40. The consequences of publishing such a warning on the Register should not be understated, particularly as charities are reliant on their public reputation and perception. A reference on the Register to a formal direction or warning issued against a charity has significant repercussions, and for this reason we submit that there ought to be a stated procedure in the Bill that accords with principles of natural justice and procedural fairness. While it may be the intent of the ACNC to engage in informal discussions with non-compliant charities prior to issuing formal warnings, the procedure ought to be recognised in legislation.[95]

2.129           The Public Interest Law Clearing House  recommended that ‘the Bill incorporate principles of natural justice and procedural fairness prior to an adverse decision being made in relation to a registered entity’.[96]

2.130           In response to these concerns, Treasury emphasised existing precedents for the review and appeals framework of the Bill.[97] Treasury noted that:

The draft legislation provides a review and appeals framework, which is modelled closely on the existing review and appeals framework in Part IVC of the Taxation Administration Act 1953 (TAA). Entities that apply for a review, or appeal a decision taken by the ACNC Commissioner are required to comply with the decision being reviewed until it is overturned. As such, the framework set out in the draft legislation is consistent with standard practice. Consultation was undertaken on the review and appeals framework in the draft ACNC legislation, and there was strong support for a model based on Part IVC of the TAA.

Conclusion

2.131           The committee acknowledges the sector’s concerns about the lack of procedural fairness in the provisions of the Bill. The committee is of the view that in matters as serious as those covered by Division 35 and Division 100 of the Bill, the Commissioner should provide written notice of intent and an opportunity for the entity to be heard, before a decision is enforced. However, the committee also recognises that there can be some situations where immediate action is necessary, such as when a fraud or other criminal act is imminent. The Commissioner should be exempt from these provisions if it is satisfied that the circumstances require immediate action.

2.132           The Committee agrees that the effect of publication upon the ACNC Register of adverse findings and enforcement actions upon registered entities should not be underestimated. The Committee believes that provision should be made in clause 40-5 for the removal of such details from the Register once an appropriate amount of time has elapsed, the matters in question have been resolved and there are no public interest grounds for retaining the information. Furthermore, as a matter of procedural fairness, the Commission should provide written notification to registered entities of the Commission’s intention to publish information under clause 40-5(f).

Recommendation 7

2.133

The Committee recommends that the Australian Charities and Not-for-profits Commission Bill 2012 be amended to provide that the Commissioner provide written notice of intent, and an opportunity for the entity to be heard, before a decision is enforced to revoke the registration of an entity or suspending or remove responsible entities. The Commissioner should be exempt from these provisions if they are satisfied that the circumstances require immediate action.

Recommendation 8

2.134

The Committee recommends that clause 40-5 of the Australian Charities and Not-for-profits Commission Bill 2012 be amended to: n  require the Commissioner to provide written notice of intent to the relevant registered entity, and an opportunity for the entity to be heard, prior to publication of the Commission’s intention to publish information under clause 40-5(f); and n  allow the details of matters published on the ACNC Register under clause 40-5(f) to be removed from the register once an appropriate amount of time has elapsed, the matters in question have been resolved and there is no public interest grounds for retaining the information.

The administrative penalty regime

Background

2.135           Administrative penalties are imposed by Commonwealth agencies without the need for court action. The Bills propose two offences to be subject to administrative penalties. The first is the making of false or misleading statements. The penalty amounts are:

n  20 penalty units ($2,200) where the false or misleading statement was due to a failure to take reasonable care to comply with the Act;

n  40 penalty units ($4,400) for recklessness; and

n  60 penalty units ($6,600) for intentional disregard.

2.136           The penalty can be increased or decreased by 20 per cent where the entity sought to obstruct the Commissioner or voluntarily disclose the error to the Commissioner, respectively.

2.137           If an entity fails to lodge documents on time, the base penalty amount is 1 penalty unit ($110) for each 28 day period that the document is late, up to a maximum of 5 penalty units. This base amount applies to small entities. It is doubled for medium entities and multiplied by five for large entities.

2.138           Administrative penalties will be payable within 14 days of the Commissioner issuing the penalty notice. The Commissioner may remit part of or the entire penalty. If they do not remit the entire penalty, they must provide reasons to the entity. The general interest charge (GIC) will apply to unpaid penalty amounts and will be collectable by the ATO.

2.139           The Government does not expect that administrative penalties will be imposed frequently. However, it argues that appropriate sanctions are required for a deterrent effect and to protect those who seek to cooperate with the Commissioner. The regime is proportional and takes into account the conduct of the entity involved.[98]

2.140           The administrative penalty regime was criticised during the inquiry because of the perception that the Commissioner must impose an administrative penalty for these two offences. If this is the case, then the offences must then be notified to the entity and the ATO, regardless of whether the penalty is remitted. The regime is based on that applying in tax administration and was criticised as being too heavy-handed for the charitable sector.[99] The Public Interest Law Clearing House stated in its submission:

While we appreciate that the ACNC must be notified of certain matters on a timely basis to ensure the Register remains current, we submit that it ought to maintain discretion over whether it issues notices of liability for such breaches. While we note that the Bill does provide the ACNC with the ability to remit all or part of an administrative penalty once notified, it is less than ideal for the ACNC to have to notify an entity of its liability, only to subsequently remit in circumstances where, for example, the failure to notify was an oversight reasonable in the circumstances. This is also important given clause 175-70 of the Bill compels the ACNC to notify the ATO each time a notice is issued, regardless of whether the intent is to remit liability. This undermines the independence of the ACNC and this obligation should either be removed, or greater discretion should be vested in the ACNC on whether to issue a notice in the first place.

The Objects of the Bill recognise ‘the principle of proportionate regulation’, however the structure of the administrative penalty regime is such that there is strict liability for any failure to notify the Commission of certain events, or lodge documents on time. While there has been some degree of concession for small registered entities in relation to the length of time to notify the Commissioner of certain events (60 as opposed to 28 days), we submit that a discretion which allows the Commissioner to address non-compliance without a liability notification would be useful and consistent with the stated object of assisting registered entities in complying with and understanding the legislation by providing charities with guidance and education.[100]

Analysis

2.141           By way of comparison, the committee examined similar provisions in the State and Territory associations legislation. For false or misleading statements:

n  New South Wales provides for an offence under its general criminal law of imprisonment for two years and a fine of 200 penalty units, or $22,000 (sections 307B and 307C of the Crimes Act 1900);

n  Victoria provides for an offence of 60 penalty units, or $8,450.40 (section 49 of the Associations Incorporation Act 1981); and

n  Queensland provides for an offence with a maximum penalty of 10 penalty units, or $1,000 (section 121A of the Associations Incorporation Act 1981).

2.142           For failure to lodge a document:

n  New South Wales provides for an offence for larger entities in relation to submitting financial statements of 5 penalty units, or $550 (section 45 of the Associations Incorporation Act 2009);

n  Victoria provides for an offence in relation to submitting financial statements of 5 penalty units, or $704.20 (section 30 of the Associations Incorporation Act 1981); and

n  Queensland provides for an offence in relation to submitting financial statements with a maximum penalty of 4 penalty units, or $400 (section 121A of the Associations Incorporation Act 1981).

2.143           The proposed penalty amounts in the Bills for false or misleading statements are lower than two of the listed jurisdictions, but above that for Queensland. The proposed penalty amounts in the Bills for failure to lodge a document tend to be higher, especially for larger entities. However, the committee expects that larger entities would be more likely to be supervised at the Commonwealth level and smaller entities would register at the State and Territory level. Treasury acknowledged that penalty amounts had been reduced following initial consultations.[101] The committee concurs that the proposed penalties are roughly comparable with State and Territory amounts.

2.144           In examining the Bill, however, the committee is not convinced that the Commissioner is without a discretion in relation to administrative penalties. For example, there is no statement in the legislation that states there is no discretion and the committee’s understanding of the Bill is that a discretion applies.

Conclusion

2.145           The Committee acknowledges that the penalty amounts in the proposed legislation for false and misleading statements and failure to lodge are roughly comparable with State and Territory provisions. This was not contested during the inquiry.

2.146           What was contentious was the perception that the Bills propose a system whereby the Commissioner must impose an administrative penalty for these offences and advise the ATO of this, regardless of whether the Commissioner remits the penalty. The committee’s understanding is that a discretion is available and would like to see this matter clarified in the Explanatory Memorandum to the Bills.

Recommendation 9
2.147	The Explanatory Memorandum to the Bills clarify that the Commissioner has a discretion not to impose an administrative penalty.

Review of the Act

Background

2.148           In its submission, Moores Legal Pty Ltd recommended the Bill include a provision for an automatic review of the legislation after five years. The submission noted that ‘such a provision is warranted given the importance of reducing the regulatory burden on Not for Profit entities and the fact that it is likely to only be achieved over time (with the cooperation of the States and Territories’. It noted similar provision in the Charities Act 2006 (UK).[102] This suggestion was also raised in evidence before the Committee at its public hearing on 27 July 2012.[103]

… and one of the issues that have been picked up in one of the written submissions—No. 45—but that I have not seen mentioned this morning is the need for a five-year review. I think that in any redraft a five-year review would be a good idea.

Analysis

2.149           The committee notes that five-year reviews of legislation can be mandated in Commonwealth legislation, although this is by no means universal. Examples are:

n  section 61A of the Australian Crime Commission Act 2002;

n  section 72 of the Fuel Quality Standards Act 2000;

n  section 76A of the National Greenhouse And Energy Reporting Act 2007;

n  section 37 of the Governance Of Australian Government Superannuation Schemes Act 2011; and

n  Section 64 of the National Environment Protection Council Act 1994.

Conclusion

2.150           The committee is of the view that, given the complexity of the legislation, and the challenges in its implementation, it would be useful for the new laws to be subject to a thoroughgoing review after five years, with a view to identifying problems and suggesting improvements.

Recommendation 10
2.151	The Committee recommends that the Australian Charities and Not-for-profits Commission Bill 2012 be amended to provide for a review of the legislation after it has been in operation for five years.

Overall conclusion

2.152           These Bills have been a long time coming. A national regulator for the sector was first proposed in 2001 and has been a consistent theme in reviews of the sector since then. Charities and not-for-profits have been subject to an inefficient regulatory framework spread across many agencies and more than one level of government. The Bills offer a way to remedy this.

2.153           The sector itself supports the change. Bodies in the sector must prove their bona fides each time they deal with government, and they anticipate the day when this information is located in one easily accessible place.

2.154           The Bills will establish an independent, national regulator for the sector. Charities and not-for-profits will provide streamlined information to the Commission, which will determine their charitable status and pass on officially required data to other Commonwealth agencies, including the ATO. It will implement flexible, proportional regulation in accordance with entities’ size and through graduated enforcement powers such as warnings and enforceable undertakings.

2.155           In major reforms such as these Bills, stakeholder uncertainty is a major risk and the committee appreciates that some organisations are apprehensive about them. The committee examined a number of issues, such as financial reporting, and concluded that the regulatory details will be covered in upcoming consultations and that there is substantial time before these matters must be finalised. What will be of benefit for the sector is for the legislation to pass and the new Commissioner to be formally appointed so that they can work with the sector in finalising requirements and explaining the practical details of how the legislation will work. The Not-for-profit Sector Reform Council made this argument in evidence:

Given that the government has taken on board the sector's request for further time to discuss and be consulted in relation to the reporting requirements and the governance standards, it can take on its role from day one to be engaged in those consultations about how it will implement its requirements under the legislation.[104]

2.156           Broadly, the committee covered three major policy areas in the inquiry. The first is the capacity of the Commission to reduce red tape. Work has already begun. The Commonwealth is seeking to ‘turn off’ any duplication, such as reports to ASIC or other Commonwealth agencies. It is also discussing whether States and Territories might wish to do the same with their associations legislation to the extent that these organisations are covered by the Bills. This is a long term project, but the committee is confident that, over time, duplication will be minimised.

2.157           The second policy area was the liability of directors, trustees and management committees for the conduct of their organisations. Key stakeholders were very concerned about how these provisions would operate and the committee found the legislation and explanatory materials very confusing. For the sake of clarity, the committee has recommended that these provisions should be redrafted.

2.158           The third main policy area revolved around procedural fairness. The committee has recommended that the Commission notify entities prior to enforcement action.

2.159           There have been considerable efforts to harmonise business regulation across the country recently, and it is only fair that a similar process occurs for the charities and not-for-profits sector. The sector holds great hope that the Bills will deliver this result and the committee agrees that, with some amendments, this will occur. The Bills should pass.

 

Recommendation 11
2.160	Subject to the recommendations in this report, the House pass the Australian Charities and Not-for-profits Bill 2012 and the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012.

 

Julie Owens MP
Chair
9 August 2012