The Ministry for Funny Hats

The Federal Government’s Options Paper on the replacement of the charity regulator suggests that the Government has already made up its mind and, as with the decision to abolish the ACNC, is not really interested in what the sector thinks, writes Professor Ann O’Connell, from the Not-for-profit Project, Melbourne Law School.

The Department of Social Services has commenced ‘consultation’ on arrangements to replace the ACNC. However, the form of the Options Paper suggests that the Government has already made up its mind and, as with the decision to abolish the ACNC, is not really interested in what the sector thinks.

The Department of Social Services has released an Options Paper dealing with the Australian Charities and Not-for-Profit Commission (ACNC) Replacement Arrangements. The paper makes for interesting reading but one thing it doesn’t do is provide options. This shouldn’t come as surprise given that the ‘consultation’ on the repeal of the ACNC Act wasn’t really consultation either.

So how did we get to this sorry state of affairs?

The Not for Profit sector reform that occurred from 2010 to 2013 was the responsibility of Treasury. This seemed appropriate given the Productivity Commission Report that noted the significant economic contribution of the sector: $43 billion to GDP, 8 per cent of the workforce and 4.6 million volunteers with a wage equivalence of $15 billion.

The incoming Coalition Government moved the responsibility for the sector to the Department of Social Services in 2013, a Department that describes itself as “a social policy agency…[with a]mission to improve the lifetime wellbeing of people and families in Australia”. In other words, it is concerned with social welfare. It files the proposed reforms of the NFP sector under ‘communities and vulnerable people’, which might suggest that they have a view of the sector that is not entirely consistent with that of the Productivity Commission.

What is ‘Civil Society’?

The Department has renamed the sector as ‘civil society’. True, those within the sector have expressed reservations about the label ‘Not for Profit’ on the basis that it is not really accurate – entities can and do make profits and apply them for purposes rather than for private benefit. Another concern with the term Not for Profit is that it carries negative connotations – it refers to what the sector can’t do, that is make private profits, rather than what the sector can do.

The term ‘civil society’ has been in circulation for some time and has been used in other parts of the world. However, it probably has a broader meaning in the sense that it includes for example for-profit social enterprises as well as entities that qualify for tax concessions on the basis that they are ‘Not for Profit’.

Another worry is that the Department itself doesn’t seem to know what ‘civil society’ means. It announced on June 11 that it had commissioned the Centre for Social Impact at UNSW to develop models for the proposed Centre for Excellence. However, the CSI noted that the term “does not have a uniformly agreed definition” so they have proposed one: first, they say “a civil society organisation (CSO) is an organisation with a primary focus on social purpose whether local, regional or national, whether voluntary, not?for?profit or social enterprise and ‘civil society’ incorporates relationships and interactions between CSOs, people in communities and organisations in different sectors (including business and government) working towards stronger social outcomes”.

So to the ‘Options’ Paper

The paper deals with four matters: proposed reporting arrangements; who determines charitable status; compliance and transitional arrangements. Not a lot of options – more like: ‘this is what we are going to do – tell us what you think’.

Voluntary Requirements?

The section on “proposed new reporting requirements” states that “the Government is committed to self-reporting and self-management for charities as a guiding principle”. This suggests that any reporting will be a matter for the charity, that is, voluntary. But the paper goes on to say “charities will be required to maintain a publicly accessible website that features … details of responsible persons (undefined); details of all government funding and financial reports”.

It is difficult to see how a mandate to provide information is “self-reporting”, but perhaps the answer to this lies in what will happen if the information is not provided (see compliance below). A glimpse of whether this is a mandatory requirement comes from the reported statement from the Financial Services Council that charitable trusts will not be required to provide any information because it applies to “charities” and not “charitable trusts”.

The paper doesn’t make that distinction though so perhaps there are more details to come. Certainly the new Charities Act would include charitable trusts in its definition of charities. Another interesting feature is that the requirement appears to apply to all charities regardless of size and presumably if they don’t have a website, they will need to get one.  

However, it does say that “small” charities and “basic religious charities” (presumably as defined in the ACNC Act?) will not have to provide financial reports. What about the 50 per cent of charities that are unincorporated associations? What about churches other than “basic religious charities”? Churches are a very small percentage of charities but have been fairly vocal about not wanting to report.

The ACNC only required financial information from the top 22 per cent (by revenue) of charities. Is the proposal really a duplication of what we have, that is that medium and large charities have to report albeit not to anyone in particular? It is also noted that charities that are companies limited by guarantee will revert to reporting to ASIC and that the annual review fee will be reinstated, which must be good news for the 10 per cent of charities that use this form. Presumably all these new obligations and exceptions will require new legislation, new requirements and additional cost.

Solving the Conflict of Interest Question

The second “option” relates to determining charitable status. As predicted, the Government plans to return this to the ATO, with no other options being proposed. However, in an apparent nod to the concerns about perceptions of conflict of interest, the paper proposes two alternatives: an independent review panel or a separate area within the ATO to determine eligibility but without power to consider, for example, whether conditions for tax concessions are satisfied.

There is little detail about either option but it is likely that a review panel would have a lot of work as the only way the ATO can “regulate” the sector more cheaply than the ACNC is by having less experienced officers carrying out the functions. The suggested model for the independent review panel is three tax office staff and four external advisers. The ATO does not need to accept the advice of the panel. The second option doesn’t make much sense either because the argument in favour of returning functions to the ATO was based on the fact that they do have to determine whether the conditions are satisfied.

What does seem clear from these first two “options” is that the Government has no intention of maintaining the public register of charities set up by the ACNC. This was perhaps one of the most significant achievements of the reforms – a searchable database of charities containing basic information and a reliable source of information about the sector for the first time. It would not be consistent with notions of taxpayer secrecy for the ATO to make information of that kind available, but perhaps that is the real motivation behind the proposal.

Back to the Old Compliance Arrangements

The third “option” relates to compliance, and here the paper seems to adopt the ACNC approach of “proportionate compliance”. In essence what is proposed a return to the haphazard and inconsistent regime that caused numerous inquiries to suggest change. What is proposed is that companies limited by guarantee will be regulated by ASIC and State and Territory Governments (which “have laws in place to prevent charities undertaking fraudulent activity and misusing public funds”) will provide an “appropriate compliance framework” for entities within the jurisdiction such as incorporated associations and trusts, although given the lack of reporting required, it is not clear when they would be inclined to act.

Finally, the Commissioner of Taxation will be able to use existing powers which “are considered to be sufficient to address any potential misconduct undertaken by charities”. On this point, the lack of any reporting requirement to the ATO may make it difficult for the Commissioner to know when to act.

It is also not clear whether the powers of the Commissioner will need to be expanded to deal not only with misconduct relating to tax concessions but say with individuals appropriating money for private purposes.

Transitional Arrangements

The final “option” relates to the transitional arrangements which can be summarised as repealing the ACNC Act as quickly as possible and immediately transferring the work to the ATO but allowing charities a year or so to comply with the new requirements. And this was supposed to make things easier?

Consultation?

I suppose we shouldn’t be too surprised that the Department of Social Services has released an options paper that doesn’t have options. This is the same department that carried out “consultation” about the repeal of the ACNC Act without consulting the sector. The Department did provide an answer to Senate Estimates on February 27 about who had been consulted, and given that the answer discloses five individuals or organisations were consulted.

With that level of “consultation” it is not surprising that the Minister could say that everyone he spoke to, up and down the country, wanted the ACNC abolished.  

About the Author: Professor Ann O'Connell is a member of the Not-For-Profit Project at the Melbourne Law School at University of Melbourne. She was also a member of the NFP Tax Reform Working Group.