Dr Matthew Turnour & Rachel Sloper (9 April 2015)
ACNC to stay – for now
The federal government has given its clearest indication yet that the ACNC is to continue, at least into the foreseeable future. Assistant Treasurer Josh Frydenberg told a Community Council for Australia forum on 8 April 2015 that while the government was not changing its commitment to remove the ACNC, it was ‘not a priority for us to proceed with that at this time’.
‘in Australia’ will also not proceed – for now
Similarly, the Assistant Treasurer said there is no plan to proceed with changes to the ‘in Australia’ conditions applying to income tax exemption and Deductible Gift Recipient (DGR) status. He said this was because the 2008 Word Investments case has not led to ‘a discernible change in the behaviour of the charities sector as it applies to the tax concessions’ as the ATO had feared it would.
PAFs to be able to transfer to other ancillary funds on winding up
The Government plans to empower Private Ancillary Funds (PAFs) to transfer their assets to other compliant ancillary funds upon winding up, rather than being required to distribute all assets to Item 1 DGR entities. PAFs are typically vehicles for family philanthropy, and will often need to wound up if no family members are prepared to continue administering the fund. If enacted, the proposed changes will resolve an anomaly in the law, with Public Ancillary Funds (PuAFs) currently permitted transfer assets in this way, while PAFs are not.
Assistant Treasurer flags FBT concessions as area of concern
In the same speech, Mr Frydenberg highlighted that charities and NFPs should be making submissions on the government’s new tax discussion paper in relation to fringe benefits tax concessions, because the concessions ‘can create distortion in the labour market’. He said exemptions had been ‘flagged in the 2010 report as well as in the 2015 as [an] issue that needs to be looked at’.
For those who may have missed our previous update on the tax paper, submissions are due by 1 June 2015. The discussion paper will inform the government’s Green Paper on taxation, due later this year, and a subsequent White Paper setting official government policy, due before the next federal election.
Implications of TR 2015/1 for NFPs with liquor and gaming licenses
We are continuing to identify ever wider implications of TR 2015/1, the ATO’s public ruling on the 2013 special conditions on income tax exemption, for not-for-profits.
It is our understanding that it is not uncommon for the constitution of a club with liquor and gaming licenses to include provisions to the effect that the club must adhere to all laws and regulations regulating liquor and gaming. Something that may not have occurred to many on the governing boards of such organisations is that a breach of the liquor or gaming laws will now, in such contexts, trigger a loss of entitlement to income tax exemption if their organisation is exempt.
That was not formerly the law, but following amendments to Division 50 of the Income Tax Assessment Act 1997 and the promulgation of TR 2015/1, the Commissioner has made it clear this is the case. Paragraph 6. 6 of the Compendium to TR 2015/1 states:
If an entity’s constitution states that the club must adhere to all liquor licensing laws and regulations, this is a ‘substantive’ requirement in its governing rules because it defines a duty of the club. It is not a ‘procedural’ requirement.
The consequences of breaching a ‘substantive’, as distinct from ‘procedural’ requirement is loss of entitlement to income tax exemption. In an example given in the ruling at paragraph 42 the ATO makes it clear that it is not the sale under state law that is relevant, but the breach of the constitution. It points out that if the constitution of the organisation did not require it to have a liquor licence, even though it sold liquor in breach of the law, there would not be a breach of the governing rules and consequently not a loss of right to income tax exemption. (We note for completeness that a condition of registration with the Australian Charities and Not-for-Profits Commission (ACNC) is compliance with the ACNC governance standards, one of which is to comply with all relevant Australian laws.)
Many within the sector had hoped that this legislation, which was enacted by the Rudd/Gillard Labor government, would be repealed by the Coalition government, but that has not come to pass. Of the approximately 600,000 not-for-profit organisations in Australia, many are licensed clubs. These developments warrant those organisations reviewing their constitution not only for potential breaches of state legislation regarding licensing and gaming but also, more generally, to see whether their constitution might have provisions like these which, if breached, might now be a potential catalyst for loss of income tax exemption.
Contact us to talk about reviewing your constitution.
DISCLAIMER: This update contains general information only. The information is not all inclusive and should not be considered to be legal advice. You should always obtain legal advice for your specific circumstances before relying on general information.