Australia: Not-for-Profit changes announced in 2011/12 Federal Budget

Last Updated: 27 June 2011
Article by Stephen O'Flynn

The 2011/12 Federal Budget heralded wide-sweeping changes to the Not for Profit (NFP) sector. In particular, the tax changes may be the most significant to the NFP sector since the introduction of GST.

1. The current state of play

Before turning to these developments, it is helpful to briefly recall the current position of NFP entities under the tax law.

Certain NFP entities can currently access tax concession including:

  • income tax exemption;
  • FBT exemption or rebate;
  • GST concessions;
  • refundable franking credits for charities and deductible gift recipients.

The entities which are eligible to access these concessions are outlined in Div 50 (ITAA 1997). With the exception of charities, entities may self assess their eligibility for these concessions. Charities are required to apply to the Commissioner for endorsement (the meaning of 'charity' will be discussed further below).

Certain NFP entities may also be deductible gift recipients (DGRs), though the categories of DGRs are different to those of exempt entities.

2. The 2011 Budget announcements

The main budget announcements were:

  • Establishment of the Australian Charities and Not-for-Profits-Commission (ACNC).
  • Better targeting of not-for-profit concessions (e.g. removing the income tax exemptions, FBT exemptions/rebates and GST concessions for the unrelated commercial activities of a NFP).
  • Introduction of a Statutory Definition of Charity.

The establishment of the ACNC is welcomed as it should stream line the reporting and regulatory process for NFPs.

However, the announcements to better target Not-for-Profit concessions and the introduction of a Statutory Definition of Charity pose significant risks and challenges for a number of NFPs. Therefore, it is very important for NFPs to be engaged in the legislative drafting process to ensure that the outcomes are fair and reasonable. As there has been no legislation released there is a lot of uncertainty at the moment regarding how "commercial activities" should be carried out in the NFP space going forward.

This article will consider these announcements in further detail below.

2.1 Australian Charities and Not-For-Profits Commission (ACNC)1

The Government proposes to establish the Australian Charities and Not-For-Profits Commission (ACNC), a new independent statutory agency which will be responsible for determining the legal status of groups seeking charitable, public benevolent institution and other not-for profit benefits.

It is proposed that the ACNC will be set up in Treasury from 1 July 2011 to ensure it is ready for operation by 1 July 2012. The Commissioner of the ACNC will be appointed by the Government and will report to Parliament through the Assistant Treasurer. The ACNC Commissioner will have sole responsibility for determining the status of charitable, PBI and other NFP groups for all Commonwealth purposes.

As a result of the establishment of ACNC the Tax Office will continue to focus on administering tax concessions to the NFP sector but will no longer determine charitable status, which will come into effect from 1 July 2012.

2.2 Targeting NFP concessions - Treasury's consultation paper

On 27 May 2011 Treasury released a consultation paper on better targeting of NFP tax concessions. The paper is the first opportunity NFPs and tax practitioners have had to understand the detail of the Government's current thinking.

Unfortunately there is little in the paper to please NFP entities, as it foreshadows a significantly increased compliance burden for NFPs that undertake commercial activities, and there is a potential tax burden. The paper is also disappointing for practitioners, as in many respects it seems to simply adopt the ATO's positions (e.g. on activities which are ancillary to or incidental to an entity's charitable purpose). This may suggest that the ATO is currently driving the reform agenda. It is hoped that going forward Treasury provides the sort of rigorous, independent policy analysis one would expect on such major reforms

The consultation paper addresses four main issues:

  1. What commercial activities are simply ancillary or incidental (i.e. related) to a NFP's core altruistic purposes? It proposes that these activities will continue to be exempt from tax.
  2. What are small-scale or low-risk activities of a NFP? These will also continue to be tax exempt.
  3. How should the Government tax the unrelated commercial activities of a NFP? The paper proposes three possible options.
  4. What transitional measures should be adopted?

We will address each of these issues in turn while providing some comment on each issue.

2.2.1 Core activities and ancillary and incidental commercial activities

In its original budget announcement the Government said it would ensure the altruistic activities of a NFP entity would continue to have access to the current tax concessions, even if they were operated in a commercial way. This has necessitated a new conceptual separation between the core activities of a NFP (and any ancillary or incidental commercial activities) on the one hand, and its unrelated commercial activities on the other.

The consultation paper addresses this dichotomy by proposing methods to identify the core activities of a NFP, as well as those commercial activities which are simply incidental or ancillary to its core activities. It draws on definitions in comparable common law jurisdictions which have adopted such tests. For example, the United Kingdom has adopted a definition of 'primary purpose activities' as being activities exercised in the course of the actual carrying out of a primary purpose of an entity. The United States does not define 'related activity', but it does define unrelated activity. This is defined as:

"any trade or business the conduct of which is not substantially related (aside from the need of such organisation for income or funds or the use it makes of the profits derived) to the exercise or performance by such organisation of its charitable, educational, or other purpose or function constituting the basis for its exemption ..."

The paper also cites similar definitions used in Canada, Ireland and South Africa.

A common problem with these definitions is that they are arguably somewhat vague. Consequently any similar definition introduced into Australian law would create significant uncertainty for taxpayers. Although any overseas experience could certainly serve as a guide, Australian income tax law and charities law have developed in different ways to overseas jurisdictions. It may not be appropriate to assume that an overseas definition could be introduced without creating further difficulties in Australia.

Further, the vagueness inherent in the various definitions is perhaps unavoidable, as it is arguably difficult, if not impossible to distinguish related commercial activities from unrelated commercial activities. Provided a NFP is truly carried on to perform its altruistic purpose, and not for the benefit of its members, it is difficult to see how all commercial activities are not simply incidental or ancillary to its altruistic purpose. This was the conclusion reached by the High Court in FCT v Word Investments Ltd (2008) 70 ATR 225, and it is arguably difficult to fault the Court's logic.

2.2.2 Small-scale or low-risk commercial activity

As we have mentioned, the Government intends that these activities will continue to access tax concessions. Obviously this creates issues around identifying what is 'small-scale' or 'low-risk'.

The (somewhat cliché) examples given in the consultation paper are lamington drive fundraisers and school fetes. However rather than defining small scale by reference to the type of activity carried on, the paper appears to propose setting a cap, with activities falling below the cap being considered small scale. It provides two overseas examples:

  • The United Kingdom – where the cap is currently £5,000, or 25% of the NFP's total income resources subject to a limit of £50,000; and
  • South Africa – where the current cap is R150,000.

Unfortunately the paper doesn't address further issues posed by the introduction of any small-scale cap. For example, what would count towards the cap? Would it include both related and unrelated commercial activities? The paper also notes that United Kingdom law prevents charities from engaging in non-primary purpose trading where there is a significant risk of loss to the assets of the charity. It is easy to see the public policy behind this proposal; that charities should not engage in speculative commercial activities. However a similar legislated rule in Australia is arguably unnecessary, as very few (if any) NFPs currently engage in speculative activity.

2.2.3 Taxing unrelated commercial activity

The consultation paper proposes three separate options for taxing these activities:

  • Option 1 — Unrelated commercial activities could be undertaken through a separate entity which would be taxed equivalently to other commercial entities in Australia;
  • Option 2 — Unrelated commercial activities could be undertaken in a separate entity, and profits retained in the entity at the end of the year would be taxed; or
  • Option 3 — NFP entities could undertake unrelated activities within the NFP entity.

Option 1

This is probably the least challenging of the proposed options, however it could create difficulties for existing NFPs.

The paper proposes that unrelated commercial activities could be undertaken through a separate entity (e.g. a wholly owned subsidiary), which would be subject to tax in the normal manner. However any profits directed back to the NFP's altruistic purposes (carried on by the head entity) would effectively be tax exempt.

This would be achieved by building on existing tax concepts. Where the parent was an endorsed DGR the subsidiary could make a tax deductable donation to the parent. Similarly if the commercial activity was carried on through a trust, the trust could distribute all its income to the charity. Finally, the subsidiary could pay a franked dividend to the parent. If the parent was endorsed as a charity it would be entitled to a refund of the attached franking credit, and hence effectively a refund of the tax its subsidiary had paid. Many NFPs which aren't charities are not currently eligible for a refund of franking credits, however the paper flags amendments which would extend this eligibility.

This option has the advantage of building on existing tax law concepts. Hence it could be introduced without substantially re-writing the tax law. However it would still create difficulty for many NFPs which do not carry on commercial activities through a separate entity. It will often be difficult for these entities to unwind their current structures. Also, there are likely to be some NFPs which, for a variety of commercial reasons, cannot undertake their commercial activities in a separate entity. Such NFPs would risk losing their tax exempt status completely.

Option 2

Under this option NFPs would also be required to carry on their unrelated commercial activities through a separate entity, such as a subsidiary. Any profits retained in the subsidiary at year end would be subject to tax in the normal manner. The consultation paper notes that this option could have a cash flow advantage over option 1, as the NFP would not need to pay tax. However this advantage would arguably be outweighed by the disadvantages recognised in the paper: it would be complex and costly for both NFPs and their advisors to administer. The complication would be exacerbated by the need to introduce new tax rules regulating the approach.

Option 3

Unlike the other two options, this option would allow NFPs to carry on their unrelated commercial activities in the same entity as their core altruistic activities. However the unrelated commercial activities would need to be accounted for separately, and subject to tax.

The advantage of this option is that it avoids the need for any restructuring of current activities. However it would be incredibly difficult and complex to administer. All NFPs would need to develop internal systems for separating their core activities (and ancillary commercial activities) from their unrelated commercial activities; potentially a very expensive exercise. As I have already discussed, distinguishing a NFPs core activities and ancillary commercial activities from its unrelated commercial activities is likely to be a process riddled with uncertainty, if not conceptual difficulty.

2.2.4 Transitional rules

The new rules will apply from 1 July 2011. Initially they will only apply to unrelated commercial activities commenced after 7:30pm on 10 May 2011 (i.e. budget night), however it is anticipated that they will eventually apply to existing activities. It is not clear when this will occur, but the Treasury consultation paper suggests this transitional period is being provided to allow NFPs to restructure. This suggests it is likely to take effect sooner rather than later.

The paper proposes that during the transitional period NFPs should identify whether they are carrying on a new unrelated commercial activity by reference to the indicia outlined in TR 1999/9 for determining whether a company has satisfied the same business test. These factors include:

  • changes, including improvements or increases, in the goods or services provided by the NFP;
  • a change in the market for the goods or services;
  • changes in the customer mix of the NFP;
  • changes in the selling methods used;
  • changes in locations;
  • changes in trade names, trademarks etc;
  • changes in the number of employees or contractors used;
  • periods of dormancy;
  • taking over another entity;
  • amalgamating with another entity.

Given that the same business test is not renowned for being either straight-forward or 'user friendly', I anticipate that this requirement will only lead to increased compliance burdens for NFPs.

2.3 Introduction of a statutory definition of charity

Following the Scoping Study for a not-for-profit regulator (Consultation Paper - January 2011) the Treasurer announced in the 2011/12 Federal Budget that the Government will introduce a new statutory definition of charity applicable across all Commonwealth agencies from 1 July 2013. In addition the Government will consult with the States and Territories with the aim of introducing a definition (of charity) that could be adopted by all jurisdictions.

There are a number of tax concessions utilised by charities at the Federal, State and Territory levels. A streamlined definition across the States would be advantageous for the NFP sector.

I have outlined below a brief history of the charities definition below:

2.3.1 History

There is no definition of charity in the income tax legislation, therefore the definition of charity has been based on common law dating back to the Statue of Elizabeth.2 Charitable purposes are commonly grouped, under the 'four heads of charity'3 :

  • the relief of poverty;
  • the advancement of education;
  • the advancement of religion; and
  • other purposes beneficial to the community.

The ATO has recently released Draft Taxation Ruling TR/2011/D2 (see 2011 WTB 20 [725]) to update TR2005/21 (withdrawn on 11 May 2011) to incorporate various changes as a result of a number of relevant tax cases since 2005, including the following key changes:

Interestingly, TR 2005/22 (Income tax: companies controlled by tax exempt entities) has not been withdrawn.

Whilst the Assistant Treasurer has stated that "the current definition of charity is ... outdated and creates considerable uncertainty for the sector"7, I would argue that a lot of this uncertainty was created by the positions taken by the ATO in its rulings. To a large extent as a result of the decisions in Word Investments, Aid Watch and Central Bayside a lot of the uncertainty around the charity definition has been removed from the sector. My suspicion is that the introduction of a statutory definition of charity has more to do with the ATO's concerns with the breadth of the common law definition of charity than any uncertainty within the NFP sector.

As opposed to rewriting the common law definition of charity, I would hope that as a result of the establishment of the ACNC, a lot of the confusion and red-tape would be significantly reduced.

3. Conclusion

Good legislative design should be assessed against the goals of the legislation. The Assistant Treasurer has stated that the proposed reforms would be introduced to:

  • ensure that valuable government assistance is directed to support NFPs' altruistic purposes, while delivering a level playing field between small, large and NFP businesses; and
  • to protect community assets from unnecessary commercial risks.8

Unfortunately, I can not see how the proposed imposition of income tax on commercial activities can achieve these objectives. Charging tax on unrelated commercial activities may reduce the funds available to be used for altruistic purposes. It does not create a level playing field. In addition, the current Australian tax regime allows franking credits to be refunded to charities and deductible gift recipients. Therefore, any efforts to tax these entities would only result in additional red-tape without any permanent tax gain to the Government.

While the removal of the FBT rebate and GST concessions may assist in delivering a level playing field, it will make NFPs less viable and may lead to increased costs for government as the Government may be required to support service delivery that is currently provided by the NFP sector efficiently.

With regard to point (ii) there may be some advantages in NFPs setting up separate entities to protect their assets from commercial risks and this is what a number of organisations currently do. Fortunately, the decision in Word Investments has made this a viable option for NFPs. The previous ATO view was forcing NFPs to carry out commercial activities in the same entity as the entity carrying out their altruistic purposes. Other than mandatorily requiring commercial activities to be carried on outside the entity carrying on the altruistic activities, any changes to the system will not enhance asset protection any further than is available under the current rules.

While the common law definition of charity may not be 100% clear and there has been confusion at the fringes (particularly in relation to the Commissioner's views over the last decade) there would also be confusion at the fringes of a statutory definition. The advantage of a common law definition is that it is fluid and can be adapted to the current thinking of the courts. However, a statutory definition is more likely to be set at a current point in time and will require constant updating to adapt to the conditions and public sentiment that prevail at the time.

It is not clear what the Government is trying to achieve by introducing a statutory definition of charity. While it is clear that the Commissioner has lost a number of NFP tax cases in recent years, is there a problem with this? In my view it has merely settled some of the uncertainty surrounding the charity definition. A statutory definition can only make some entities that are currently considered to be charities worse off. The question is which charities does the Government have in its sights?

Author: Stephen O'Flynn, Tax Director, Moore Stephens Melbourne

Moore Stephens has obtained tax exempt charity concession status for a number of subsidiary entities since the Word Investment Case and has considerable experience dealing with NFPs. For further information on the proposed Not for Profit tax concession reform please contact the author or your Moore Stephens Relationship Partner.


2. Statute of Charitable Uses 1601 43 Elizabeth 1 c.4.

3.following the terminology used in The Commissioners for Special Purposes of Income Tax v. Pemsel [1891] AC 531; [1891-1894] All ER Rep 28

4. Aid / Watch Incorporated v. FC of T [2010] HCA 42; 2010 ATC 20-227; (2010) 77 ATR 195

5.Federal Commissioner of Taxation v.Word Investments Limited (2008) 236 CLR 204; [2008] HCA 55

6.Central Bayside General Practice Association Ltd v. Commissioner of State Revenue (2006) 228 CLR 168; [2006] HCA 43

7. Media Release No. 077 Making it easier for charities to help those who need it.

8. Page vii of Better targeting of not-for-profit tax concessions – Consultation Paper 27 May 2011.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions