Australia: Treasury submission on scoping study for a NFP regulator consultation paper (Part 2)

See also Treasury submission on scoping study for a NFP regulator consultation paper (Part 1)

Functions the national regulator may undertake

Functions the national regulator may undertake

Access to taxation concessions

Consultation questions

Q7    What impacts would simplifying and streamlining mechanisms for the assessment, granting and monitoring of concessional tax treatment have on the NFP sector? In particular, what impacts would this have on small and new NFP entities?

The simplification and streamlining of mechanisms for the assessment, granting and monitoring of concessional tax treatments for the broad cross section of organisations in the NFP sector would have multiple positive impacts on the NFP sector.  In summary, it would ensure that clarity, consistency, certainty in such processes is delivered at a reduced cost to all NFPs, thereby contributing to the achievement of all the goals of NFP regulation in paragraph 38.  There would be a greater benefit to small NFPs directly as a result of their limited resources.

Q8    What are the likely compliance cost savings from improvements to taxation arrangements?

Savings would include staff costs and time currently allocated to obtaining taxation concessions and the costs of obtaining external taxation advice and would simplify the process.

Q9    Does the current complexity of the taxation framework discourage entities from applying to access tax concessions? If so, what elements of the framework are most problematic?

In our experience, the current complexity of the taxation framework does not discourage entities from applying to access tax concessions, however the lack of uniform criteria and reporting to different bodies is problematic.  Having one set of criteria to satisfy and one body to report to would greatly reduce the current complexity of the taxation framework and enable the proper re-allocation of NFP resources to the achievement of philanthropic objectives.
We would also anticipate that the simplification of the system would enable a broader range of small entities to seek the tax concessions particularly at a grass roots level.

Regulation and supervision

Regulation and supervision

Education and compliance

Consultation question

Q10    What value would educational and compliance initiatives managed by a new national NFP regulator provide to NFP entities?

Educational and compliance initiatives managed by a new national NFP regulator would reduce the need for NFPs to obtain external advice, thereby lowering their costs for re-allocation to the pursuit of philanthropic objectives.

However, the value of educational and compliance initiatives would primarily depend on their nature and scope.  Significant organisations within the sector may have appropriate levels of resources and other regulatory or statutory obligations to ensure that there is an appropriate level of compliance.  For the majority of NFPs, their resources are limited and are primarily directed towards their mission.

Accordingly, initiatives which provide educational and compliance support at nominal cost to these organisations would be beneficial in promoting best practice, compliance and clarity surrounding compliance.

The overriding objective of these initiatives should be focused on obtaining a better quality outcome for the NFP organisations and the recipients of their services.

Reporting

Consultation questions

Q11    What benefits would a 'report once, use often' model of reporting offer?

A 'report-once, use-often' model of reporting would reduce external costs and / or staff costs and time, enabling re-allocation of resources to the pursuit of philanthropic objectives.
In our view the current disclosure regimes for NFPs are inconsistent and at times inappropriate for the nature of organisations involved. This inconsistency has arisen predominantly through the range of legal structures, regulations, legislation and multi departmental involvement on both a state and federal basis.

A national regulator providing a central body to manage the collection of reports from the NFP sector, and provide a single reporting point for all NFPs would reduce the level of compliance certain NFPs currently experience.
Providing a reporting model developed that is acceptable to all parties, a one off report would reduce compliance costs.

Therefore the reporting model developed should enable these organisations to be dealt with on the basis of their public interest as opposed to simply their size, for example their revenue levels or asset base.
As many NFP agencies operate and raise funds throughout Australia as well as receiving funds from more than one government department, there are distinct advantages to moving towards a single national disclosure regime however in our view, due consideration would need to be given to:

• i.     understanding of the diversity of the sector;
• ii.     establishment of a differential reporting regime to provide cost effective and appropriate levels of disclosure based on objective measurements;
• iii.     identification of the level of disclosure which is appropriate to the type and style of organisation; and
• iv.    clear distinction of the level of disclosure based on the degree of public interest.

Q12    What information do NFP entities currently provide to government agencies? Do these include general purpose financial reports and fundraising reports? What other reports are currently required? What do the reporting requirements involve? What information is required for the purposes of grant acquittals?

The information required by government agencies varies greatly between the various forms of NFPs.  Whilst some have strict requirements covered by specific legislation (e.g. companies limited by guarantee and entities falling under Charitable Fundraising Acts), many others have no public reporting mechanisms or are exempt from certain disclosure requirements. Additionally the type of funding received by NFPs governs the level of reporting and information required. Funding is provided on the basis of general purpose financial reports through to a basic 'cash basis' of accounting.  The diversity is broad and can be inconsistent even within the same government organisation.
Consideration must also be given to recognising that many NFPs have operations which include not only services the subject of grant funding, but other services for which no public funding is contributed.  Consequently a report for the entire organisation may not be appropriate in such circumstances.

The primary reporting requirement in the acquittal of funding is to certify that the funds received have been spent for the purposes they were provided for.  A secondary requirement would be to ensure that, if further funding is to be offered, the services provider will be in a position to offer those services.

Therefore information required to be provided should be limited to these aspects.  In this regard please refer to our comments in relation to Question 13 below.

Q13    How significant is the compliance burden imposed by requirements for acquittal of grants?  Where could these be simplified?

Given the comments noted under Question 12 above, compliance with requirements can be quite burdensome particularly where a number of different types of grant funding are received from a number of agencies with varying levels of accountability both in respect to the specific format of acquittal reports and acquittals in accordance with the specific requirements of the particular service agreement.

While recognising that there will clearly be some differences due to the nature of the services required, there are many opportunities to streamline processes to provide efficiencies at both the NFP and the provider level by:

• a)    Encouraging service providers to follow a standard chart of accounts which has been set up to provide uniform classification of receipts and payments, thereby facilitating  standard form of health assessment, budgeting, monitoring and reporting processes;
• b)    Developing a standard form of agency agreement, where possible, thereby facilitating a better understanding of the requirements;
• c)    Developing a standard form of financial reporting, where possible, building on from the standard chart of accounts referred to above; and
• d)    Where a service provider provides many (or a number of) services on behalf of one agency, the agreement and reporting requirements are prepared on a consolidated basis.

In developing such processes, consideration must always be given to recognising that many NFPs have robust, independent processes for the delivery of services which may or may not include services on behalf of the government.  This independence must be respected in the formulation of any policies in this area.
If such agencies were to agree to a common form of grant reporting using a commonly acceptable accounting framework, considerable simplification of the acquittal function could be achieved.

Q14    What benefits would the establishment of a NFP sector information portal have for the public, the sector and governments? What information should be available on the portal?

The establishment of a NFP sector information portal would be beneficial depending on the nature of the information available and the efficient exchange of information already held by other government organisations.

It is our view that any development of a NFP sector information portal would need to include an effective mechanism to enable the reporting of information to other bodies.
Currently, limited information on the majority of NFPs is available through the Australian Business Register (ABR). This is an effective mechanism and has broad acceptance in the public for the access of information for both for profit and not for profit organisations.

In addition, Incorporated Associations and Companies Limited by Guarantee also have certain information publicly available through the National Names Index and ASIC database.

It would be essential for the effectiveness of any NFP sector information portal for it to be co-ordinated with these databases to ensure that there is no duplication of these registers and that all records can be updated effectively through the NFP portal.

This would provide a level of confidence for all stakeholders for the portal to be the central depositary of information concerning the sector.

The centralisation of this information would reduce the administrative burden for the sector and provide clarity for both the government and public at large.

With respect to the information that should be available on the portal this would depend on the level of reporting that is determined to be appropriate for the public interest.

Based on the effectiveness of the ABR and ASIC databases, we would suggest that the Portal should include the following information in relation to specific NFPs:

• Information already publicly available on the ABR (including tax concessions) and the National Names Index;
• Information regarding the address, type of entity and key office holders of the organisation;
• An accreditation or compliance status for the organisation for key areas such as holding of fundraising authorities, gaming or associated permits;
• Where other information such as financial information is publicly available on government websites then this information should be accessible via the portal.

We note the suggestion for an activity summary and summary financial report to be included on the portal. We would be of the view that the level of the information provided would need to depend on the differential reporting determined for the NFPs. 

We note that in particular within certain areas, NFPs compete both with one another and at times with for profit organisations for funds, grants etc. Any provision of information would need to ensure that no commercially sensitive information would be publicly available through these reports to the disadvantage of the NFP entities and recognise the public and private interest aspects of NFPs.

We would also support the recommendation that the portal be a conduit for resources for the sector and general information for the public concerning the sector as a whole. This could be similar to the information provided on ASIC and ATO websites to assist the public and the NFPs to understand the regulatory environment.
The portal should also enable NFPs to update and maintain their information with the regulator.

Q15    What information might need to be provided to a national regulator but not made public through a NFP information portal?

We can envisage a range of information which may be provided through the portal to the regulator and then indirectly provided to government which would not be appropriate to be made public. We would anticipate that this would primarily relate to information concerning grant applications and acquittals, commercially sensitive information and potentially elements of an annual reporting process.
The type of information may also vary depending on the organisation involved, for example, the certain details of an essentially mutual organisation could be provided via the portal to ensure that the entity maintains its status as a not for profit organisation and various accreditations etc but given the nature of the organisation involved may not be appropriate to be in the public domain.
The determinate factor in not making information provided to a national regulator public could be based on a public interest benefit test.

Q16    What benefits would be provided by the application of SBR to the NFP sector, following the implementation of the SCOA so as to minimise any additional compliance costs?

In isolation, the implementation of the SBR may result in reduced compliance burdens for the NFP sector, however, consideration would need to be given to the interaction between the reporting initiative and the NFP portal.  Were an NFP portal to be implemented the reduction of any additional compliance costs would occur only where there was an effective interaction between these two systems.

Q17    Given its voluntary nature, are many NFP entities likely to use SBR? What barriers, such as preferences for providing reports in paper form or reluctance to upgrade accounting software, might reduce usage of SBR by NFP entities?

The likelihood of NFPs to utilise the SBR would depend on the underlying nature of the organisations. As already identified, the sector is quite diverse and it is likely that if the benefits of the SBR are significant to the larger organisations they would see benefit in implementing the system.
However, there is a significant number of small NFPs for which this initiative in isolation would not have a clear benefit.
It is our view that it would only be organisations which have paid administrative personnel who would be likely to use SBR.
The majority of small NFPs would require additional support or encouragement to utilise the SBR, given the nature of small NFPs the reporting requirements for taxes etc would be minimal.

Governance, disclosure and compliance

Consultation questions

Q18    Are the suggested core rules and regulatory framework adequate?

The suggested core rules and regulatory framework are appropriate to ensure that, if followed, they would provide a minimum level of appropriate governance and ensure entities remain accountable and transparent.

Q19    What powers does the regulator require to improve governance and regulatory oversight?

As a general comment the measures outlined in the Consultation Paper at paragraph 111 could be introduced to improve governance and regulatory oversight.
As a minimum the following powers should be available:

1. to establish NFP 'user groups' and consultative committees to research issues, concerns and improvement measures identified within the NFP sector
2. to establish 'best practice' guidelines for NFPs;
3. to propose legislative amendments required to enable NFPs to operate and fulfil their mission in a more beneficial way;
4. to enforce governance rules;
5. to issue warnings and penalties to non compliant NFPs and their officers;
6. the power to commence investigative processes to uncover actual or potential malfeasance; 
7. to undertake dispute resolution processes, which would permit the regulator to intervene in any dispute of which an NFP is party, both within the NFP and between the NFP and another entity

Fundraising

Consultation question

Q20    What role should a national regulator play with respect to fundraising?

Fundraising has been a State / Territory based matter and we note that there is currently a project being undertaken to harmonise the fundraising legislation.

We are of the view that there is a potential role for the regulator to play with respect to fundraising. The States regulation generally occurs through Gaming and Racing, Fair Trading departments and there are existing efficiencies with the administration of these activities at this level for both for profit and not for profit.

Without the benefit of the outcomes of the harmonisation of the fundraising project, we would see the operation of the National Regulator's role as more towards providing an effective means for organisations to deal with registration as a fundraising organisation and for a mechanism for regulated fundraising permits at a national level.

As a result of the nature of the current enforcement activities and due to the significant brief a national regulator would already need to deal with in its formative years, we would recommend enforcement activities to be maintained at a State level. 

Consultation questions

Q23     What form of the national regulator best meets the objectives of simple, effective     and efficient regulation of the NFP sector?

A new body within ASIC, given our previous submissions, the UK model and the lower costs of this option for the Commonwealth.

Our view is that the national regulator should be an additional function and separate division of ASIC. This view has been formed on the basis that ASIC:

• a)    currently registers and regulates a number of NFPs;
• b)    currently deals with the fundraising aspects of for profit entities;
• c)    is currently the national portal for the collection of corporate and financial public record information for entities under the Corporations Act;
• d)    deals with the adoption of accounting and auditing standards and is the regulator for Company Auditors who predominately undertake the audits of NFPs; and
• e)    has an infrastructure which is suited to this type of Registrar role.
  

We consider that whilst there is a mirroring of the fundamental functions and skills sets required by a national regulator and ASIC, the national regulator would need to be a clearly distinct division. This position is founded in the current diversity of the sector both from a perspective of existing legislation but also from the level of reporting and transparency currently in existence. The regulator would need to have more of a supportive role than the current ASIC position given that it would be dealing with a different range of stakeholders and the fundamental different objectives of NFPs.

Our concern with a separate agency would be the duplication of resources; the initial cost of establishing the entity and the time it may take for the agency to be in a position to promote confidence in the sector.

Q24     Would a Commonwealth only regulator provide sufficient benefits to the sector?

As previously stated, given the operation of NFPs throughout and across Australia, the regulation should be at a national level.

Q25     Are there benefits from establishing an interim regulator through an existing     Commonwealth regulator, to undertake immediate reform? 

As stated above, we recommend the establishment of the national regulator as an additional function and separate division of ASIC at this stage. We note that consideration has been given to the regulation of the sector through the Australian Taxation Office as it currently is responsible for the administration of the DGR and Tax concession status.

It is our view, that the incorporation of the regulator within ASIC would be more suitable to the goals of the Regulator. The tax status of the sector is one aspect of the regulation of the sector.

It is our view that the overall regulatory principles and objectives of ASIC are more clearly aligned to the needs of the government, the public and the beneficiaries of the NFP activities. We acknowledge regulation through the ATO would allow the one element of the regulation to in effect remain with the same national body.

However, we are of the view that there is an opportunity to promote enhance and support the sector and that for reasons stated above, ASIC or a separate regulator are better suited to achieve these goals.

FUNDING IMPLICATIONS

Options for funding regulator

Consultation questions

Q28     What level of contribution should NFP entities make to the cost of the national NFP regulator?

We note the Consultation Paper's comments in relation to overseas regulators and their respective fees. We acknowledge that there will be significant costs in the establishment and on going operations of a national NFP regulator. However, we also anticipate that there will be cost savings at both a government and entity level where there has been substantial duplication of the provision of information to various state and federal government departments.

We are of the view that the contribution of the NFPs should be nominal in relation to compliance fees and that these fees should be directly injected into the education and compliance activities of the regulator. In addition where government funding is received, there would be an opportunity for a small percentage of grant income to be returned to the regulator for its ongoing cost.

We note that consideration of the contribution to society and government's objectives in relation to the provision of social services should be made when considering the level of contribution made by the sector and individual entities to the cost of the regulator. The benefits to Australia of this sector is significant and in many structures at no cost with a key objective of this regulation is the ability of the sector to more keenly focus on its objectives in a strong governance framework.  To require any significant contribution from the NFP to the cost of this regulation redirects resources away from the main goals of these organisations.

Q29     Should there be a differential cost for smaller NFP entities?

We are of the view that a significant contribution to the community is undertaken by a large number of smaller NFPs and accordingly the costs should be proportionate to their size.

See also Treasury submission on scoping study for a NFP regulator consultation paper (Part 1)

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