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Charities & Not-For-Profits Law in Australia

Tax Reform for Charities: UBIT is Coming

Posted in General, Tax Exemptions & DGR Status

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.
  • “In Australia” special conditions for tax concession charities. The Government intends to tighten the requirements for charities to operate in “in Australia” and to comply with other new requirements – if they fail to do so, then they would lose their tax exempt status.  Again, we are waiting on the Government to respond to the submissions lodged by advisors and members of the charities and Not-For-Profit sector.

View our submission (pdf)

There are many aspects of this proposal that are concerning, particularly the definition of “Not-For-Profit entity”, which would apply across all federal taxation legislation.  Also, it is clear that there are significant unintended consequences, particularly for missionary religious activities conducted outside, but from, Australia.

  • Public ancillary funds. The government issued draft guidelines confirming its intention to impose greater regulation on public ancillary funds in a similar way to what it did for private ancillary funds in 2009. This legislation has just been passed and received Royal Assent.  A separate blog will be published shortly on this topic.

Arising from the proposals there will be:

    • minimum annual distribution requirements;
    • a requirement for all trustees of new public ancillary funds to be corporate trustees; and
    • a need for public ancillary funds to lodge income tax returns each year.

In each case, more administration!

  • “Charity” definition. In addition, the government is to issue its proposed statutory definition of the word “charity”.  The time for lodging submissions expired on 9 December 2011 and we expect a further consultation paper and a draft definition early in the New Year. Any new definition may have consequences such that some organisations presently endorsed as charities will lose their endorsement and therefore their tax exemptions.

We can expect a response from Government shortly in regard to these controversial matters.  We could be in for a bumpy ride!