Tuesday November 2011

There was a flurry of activity in relation to tax provisions in the first half of 2011.  As a result the Government appears to be fully occupied digesting the numerous comments provided by charities and NFPs, their advisors and the broader community. The following tax related issues have received attention:

For a new tax that has not received much NFP support the UBIT certainly has NFPs concerned
  • The Unrelated Business Income Tax (UBIT). UBIT seeks to tax the non‑core income of charities which is not applied for their altruistic purposes.  Even though the UBIT tax was announced by the treasurer as being effective in some cases on 1 July 2011, the rules are still unknown!  We understand there were a significant number of submissions lodged and they overwhelmingly rejected the tax.  In fact, we have not been able to identify a submission supporting the proposed tax.

View our submission (pdf).

In our view:

    • the UBIT is unlikely to raise significant revenue.
    • there have also been no examples of significant abuse of the existing system.
    • furthermore, the existence of a UBIT will undoubtedly result in significant additional administrative expenses to charities and NFPs distracting them from their principal altruistic purposes.
    • this is an unnecessary and bad tax.
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As indicated in our recent pdf bulletin, the Federal Government promised to issue a Consultation Paper proposing a new definition of what constitutes a “charity”. This has now issued and submissions closed on 9 December 2011.

The consultation paper discussed a proposal for the provision of “public benefit” to be a charity, as is required under the Charities Act 2006 (UK).  There is no definition of “public benefit” in the UK Charities Act and, as a result, there is uncertainty as to whether organisations satisfy that requirement.

There is uncertainty about how the Government will define a 'charity' – some guidance may come from a Government consultation paper and from two UK cases

There are two cases on this issue heard by the UK Charity Tribunal this year.  These have given charities, NFPs and their advisers in the UK some indication as to how the “public benefit” provision will be interpreted.

  1. The first case (“schools’ case”) involved fee-charging schools.  They have to establish that they provide a public benefit and, therefore, qualify as charities.  Previously, proof of “promotion of education” was enough to qualify them as a charity under accepted case law. In this case the Tribunal ruled in favour of the schools and found that “although it is necessary that there must be more than a de minimis or token benefit for the poor, once that low threshold is reached, what the trustees [of a private school] decide to do in the running of the school is a matter for them, subject to acting within the range within which trustees can properly act.”
  2. The other case (“poverty case”) will determine whether charities provide a public benefit if they exist to relieve poverty only among a small group of people, such as the employees of a certain firm or industry.
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The harmonisation of the nine different occupational health and safety (OH&S) laws across Australia into one national set of laws [Work Health and Safety Act 2011] will happen on 1 January 2012, although it is likely that Victoria and WA will delay the introduction probably until 1 January 2013.  Still, you must be ready for this!

How will the OH&S changes affect you?

  • There will no longer be a reliance on the traditional “employer” and “employee” relationship in determining who owes a duty of care and who is entitled to OH&S protection.  All “persons conducting a business or undertaking” (PCBU) will now hold the primary duty of care.
  • A PCBU includes an employer, corporation, association, partnership, sole trader and certain volunteer organisations.  A charity or Not-For-Profit (NFP) that employs anyone will be included in the concept of PCBUs.  PCBUs must provide the highest level of protection to workers, customers and visitors that is reasonably able to be provided.  You need to identify who is a PCBU in your organisation.
    Work Health and Safety laws are being harmonised into one national set of laws
  • The word “employee” has been replaced by a broader definition of “worker” which even includes volunteers.  Who are the workers in your organisation?
  • Officers” in an organisation will have a positive personal obligation to ensure health and safety as far as reasonably practicable, as well as a duty to exercise due diligence to ensure that a PCBU complies with the new legislation.  Who will have a role as an “officer” in your organisation?
  • There has been a substantial increase in penalties for breaches of the new legislation – fines of up to $3million for corporations and $600,000.00 and/or 5 years in jail for individuals.
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For charities that invite and rely upon donations from the public, their reputation and the public confidence in them is fundamental to their livelihood and success.  Bad press of any kind can lead to a significant reduction in donations, embarrassment for supporters of the charity, and may even invite investigation by regulatory bodies into the charity’s management.

A timely example of the impact of negative publicity can be seen in Sydney Morning Herald’s investigation into the Small Miracles Foundation.  The foundation in question provides grief counselling to parents that have lost their baby.

Risk to reputation can be managed by transparency, proper record-keeping and reporting and having proper staff management practices

The article reported:

  • allegations from a number of parties, including the charity’s accountant, alleging the charity’s “mismanagement” and refusal to give access to financial records;
  • allegations of unfair dismissals made by former staff; and
  • confusion as to who runs the charity and that detail of board members, management or staff are not available on the charity’s website.

Whether or not the allegations are correct, they are serious.  They have the real potential to drive away donors and result in further undesirable consequences.
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