Australia: Government has NFPs in its Sights

Last Updated: 9 August 2011
Article by Bill D'Apice

After many years of inaction in the sector, 2011 appears to be the year in which the Government has NFPs fairly and squarely in its sights.

It seems that the Government has been spurred on by its losses in the Aid/Watch case (refer to Balancing Act Issue 18 for commentary at'Apice%20Balancing%20Act%20-%20Issue%2018.pdf) and the Word Investments case (at

The Government has apparently been motivated to address what it considers to be significant loopholes in the law which may compromise tax revenue.

It has also sought to clarify its position in light of those decisions to create greater certainty within the NFP sector.

In March 2010 the Government launched the national compact which was stated to establish the framework for a partnership between the Not-For-Profit sector and Government. In particular, it promised a reduction in red tape for NFPs. It is hard to see how many of the 2011 Government initiatives will go anywhere towards the reduction in red tape – perhaps with the possible and significant exception of the proposed "report once use often" accounting regime.

Some of the important developments in 2011 are:

Not-For-Profit Regulator

The Government issued a Consultation Paper in January 2011 and following consideration of the responses to the Consultation Paper, the Treasurer announced the establishment of a national regulator to be known as the Australian Charities and Not-For-Profits Commission (ACNC) to operate with effect from 1 January 2012. For further information in relation to this refer to our Bulletin at'Apice%20Bulletin%20May%2020111.pdf .

Since that time, the Government has been going full speed ahead to implement the decision. The Government has appointed an advisory board to assist in establishment of the ACNC and has also appointed a NFP Reform Implementation Task Force.

The establishment of the ACNC is now a fait accompli and we are hopeful that the "report once use often" accounting regime which is promised will assist NFPs. We will have to wait to see whether the other consequences of the establishment of the ACNC operate for the benefit of NFPs or add to the red tape.

The Government has now issued its final report on the Scoping Study for National Not-For-Profit Regulator which can be accessed at

Unrelated Business Income Tax (UBIT)

The budget announcement which is likely to have the largest impact on the activity of NFPs is the introduction from 1 July 2011 (in some cases) of income tax upon NFPs in respect of surpluses from their "unrelated commercial activities" which are not applied towards their altruistic purposes. For further information refer to our bulletin at:'Apice%20Bulletin%20May%2020111.pdf .

This tax actually came into effect more than a month ago on 1 July 2011 for unrelated commercial activities that commenced after the budget speech. Even though it is now in place, we still don‟t know the rules.

The Assistant Treasurer issued a consultation paper seeking the sector‟s view and we are awaiting further advice from the Government as to how or whether this new tax (referred to as "UBIT") comes into effect.

If it does, we anticipate the following issues that NFPs will need to address:

  • assess the need to set up separate structures (perhaps separate companies) to carry on unrelated business activities;
  • determine which of the NFPs activities are related and which are unrelated;
  • categorise activities as to whether they are active‟ or passive‟ (as passive activities are unlikely to be subject to UBIT);
  • there will be significant accounting, legal and staff costs resulting from the imposition of UBIT for all NFPs that are engaged in unrelated business activities to any extent.

We are concerned that the proposed UBIT will result in significant additional administration and cost to NFPs which will detract from funds available for their altruistic purposes.

We lodged a submission with the Assistant Treasurer which summarises our concerns which can be viewed at:

Addendum to Taxation Ruling TR2005-22

On 28 June 2011 a draft addendum was issued to Taxation Ruling TR2005-22 – Income Tax and Fringe Benefits Tax Companies Controlled by Exempt Entities. The draft addendum was issued to take into account the decision of the High Court in Word Investments.

The High Court found that Word Investments was a charitable institution because, having regard to factors such as the proper construction of its objects as set out in its Constitution, the circumstances of its foundation and the way in which it put into effect the company's objects and its activities, it was clear that its own purposes were charitable. It is our view that the draft addendum is an appropriate response to the decision in Word Investments.

"In Australia" special conditions for Tax Concession Entities

The Assistant Treasurer has released for public consultation an exposure draft of legislation that will restate the "In Australia" special conditions for tax concession entities. It seeks to ensure that:

  • income tax exempt entities must be operated principally in Australia and for the broad benefit of the Australian community; and
  • deductible gift recipients (DGRs) generally must be operated solely in Australia and for the broad benefit of the Australian community.

The exposure draft can be accessed at The closing date for submissions is 12 August 2011.

In our view, this proposed legislative change is likely to present significant issues for a number of NFPs. Our concerns are:

  • NFPs which are presently entitled to tax exemption as charity, education, science or religious funds or institutions, community service organisations, employee or employer associations (including trade unions), funds contributing to other funds, hospitals, sports and cultural organisations may lose their entitlement to tax exempt status if they do not strictly comply with the proposed new section 50-50;
  • to maintain tax exempt status, an entity must operate principally in Australia and pursue its purposes principally in Australia. The exposure draft does not define principally except to say that it means "mainly or chiefly" and less than 50% is not considered "principally";
  • if an NFP donates money to another entity which is not a tax exempt entity in Australia then it may lose its entitlement to tax exemption;
  • the NFP must comply with all (our emphasis) the requirements in its governing rules. This may be particularly harsh in the event of a minor breach by an NFP of its governing rules. It would be important for NFPs to consider the content of their governing rules to ensure that they will not be impacted by this proposal. Many religious NFPs do not have "governing rules" and it is difficult to understand how this section can apply to those NFPs;
  • to maintain exemptions, NFPs are required to use their assets and income solely (our emphasis) to pursue the purposes for which it was established. This is a harsh requirement as there is no apparent relief from this strict requirement;
  • there is a definition of "not-for-profit entity" in the legislation which will apply not only to the Income Tax Assessment Act but also for FBT and GST legislation. The section does not allow an NFP entity to distribute its surplus or assets to its owners or members. In our view this definition will need to be amended to allow for such distributions where the owner or member is itself an NFP;
  • a tax exempt entity which is entitled to the benefit of franking credits would need to be entitled for the whole of the year in question to obtain a refund of franking credits.
  • The "In Australia" requirements will not apply to Overseas Aid Funds that are endorsed as DGRs. However, if an organisation is also engaged in other activities involving donations overseas, it may be subject to the limitations on donation outside Australia in respect of those other activities.

We urge NFPs to consider the impact of this proposed legislation on their activity and lodge a submission by the due date, ie 12 August 2011.

Public Ancillary Funds

On 14 July 2011 the Assistant Treasurer released for public consultation an exposure draft of legislation and draft guidelines providing a new regulatory framework for public ancillary funds.

The time frame for comment was extremely short and submissions in relation to the exposure draft were required by 1 August 2011 however, curiously, comments can be lodged concerning the draft guidelines up to 31 August 2011. Copies of the documents can be accessed at It is apparent that the Government has resolved that it will establish binding guidelines on how public ancillary funds are operated which are similar to the guidelines established for private ancillary funds in 2009.

Some of the important aspects of the draft documents are:

  • the Treasurer has power to make legislative guidelines about the establishment and maintenance of public ancillary funds (PAF);
  • there will be a minimum level of annual distribution required from PAFs. The level proposed is 4% of the net assets of the PAF as at the end of its prior financial year or $11,000.00 per annum whichever is greater;
  • there will be a requirement for all trustees of new PAFs to be corporate trustees. There is a grand-fathering provision to allow for PAFs that exist prior to the commencement date (1 January 2012) to continue without a corporate trustee;
  • PAFs will be required to lodge income tax returns each year. This is yet another example of increased red tape for the NFP sector;
  • the Commissioner of Taxation will have significant powers to remove trustees of PAFs and to appoint new trustees and direct trustees as to how they must act.

Definition of Charity

Finally (!), the Government is proposing a new definition of what constitutes a "charity". We refer you to our Bulletin of 11 May 2011 at'Apice%20Bulletin%20May%2020111.pdf.

The Government has indicated that it will release a consultation paper on this proposed definition shortly. It has foreshadowed that the definition will be based upon the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations taking into account the findings in the Aid/Watch case.

All these proposals will mean changes to the administration and structuring of almost all NFPs. Hopefully, the imposition of further red tape can be minimised in the process but we have concerns that the additional administration involved by NFPs will mean that some of their income and assets that would otherwise be applied for their altruistic purpose will now be caught up in additional administration expense.

Should you require further information or assistance in relation to the drafting of submissions or how these changes may impact on your NFP please contact Mr Bill d'Apice of our office.

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