FACULTY OF LAW FIERCE EXTREMES: WILL TAX ENDORSEMENT STYMIE MORE NUANCED ENFORCEMENT BY THE ACNC? Assistant Professor Ian Murray
Overview Obligations of ACNC’s ACNC Registered Enforcement Role Charities Tax Enforcement Income Tax Enforcement Endorsement Crossover Problems & Scope Enforcement Possible Comparison Outcomes Solutions The University of Western Australia
ACNC’s Role FUNCTIONS OBJECTIVES • Gatekeeper to NFP status - Support registration Public Trust & Confidence • Educator to aid registered Cs in complying Support & • Monitoring & enforcement to sustain NFP ensure compliance by registered Cs sector • Maintaining a public register Decrease on registered Cs unnecessary • Cooperating with other regulation regulators & government agencies The University of Western Australia
Obligations of Registered Charities Registration Obligations Record keeping ABN Reporting NFP Notification Complies with governance and Governance external conduct standards standards External conduct No terrorist or standards criminal activities Charity The University of Western Australia
ACNC Enforcement ACNC’s Role ACNC, ‘ACNC Regulatory Approach Statement’ (Consultation Paper, December 2012) 11 The University of Western Australia
Income Tax Exempt Endorsement Current Proposed* (TLA (Special Conditions for NFP Concessions) Bill 2012) Registered charity Registered charity ABN ABN Meet one of s50-50 Modified geographic nexus tests: ITAA97 tests: • In Australia • In Australia • Item 1 deductible gift recipient • Item 1 deductible • Prescribed by law gift recipient Comply with all substantive requirements in • Prescribed by law governing rules Apply income and assets solely for purpose for which the entity is established NFP: not carried on for the profit or gain of owners/members & prohibited from distributing profits/assets to owners/members The University of Western Australia
Tax Enforcement Permitted? Commissioner’s responses TAA sch 1 s 426-55(1): Commissioner ‘may’ revoke the endorsement Ignore loss of entitlement to endorsement Relevance of range of factors considered by the ACNC Commissioner? Revoke endorsement Relatively broad range of circumstances if Bargwanna reasoning Seek prosecution for failure to is applied to proposed endorsement notify of loss of entitlement requirements The University of Western Australia
Enforcement Crossover Coordination / cooperation • Joint application form • ACNC/ATO MOU Tax endorsement conditions overlay ACNC • Information disclosure registration requirements provisions for charities Yet, separate and on-going roles in relation to income tax exempt charities The University of Western Australia
Scope Comparison – Circumstances for Enforcement Current External conduct Section 50-50 ITAA97 Disparate foci, standards tests focus on a so degree of sufficient geographic overlap may be Focus is on whether link with Australia, or small funds are used for whether alternative ‘legitimate purposes’ and reasons/conditions reach ‘legitimate justify the exemption beneficiaries’ The University of Western Australia
Scope Comparison – Circumstances for Enforcement Proposed ACNC Requirement Tax Comment Endorsement Conditions Maintain status as a NFP. Must be and ‘NFP’ likely to have largely similar maintain its content for tax and ACNC Notify of a significant status as a purposes. contravention of ACNC NFP. obligations which has caused the Substantive requirements would entity to stop being NFP. Comply with include NFP provisions. substantive ACNC governance standards also Bargwanna is an overlap example. requirements relate to maintenance of NFP in governing status. rules. The University of Western Australia
Scope Comparison – Circumstances for Enforcement Proposed ACNC Requirement Tax Endorsement Comment Conditions Maintain status as a charity. Comply with Not all rule breaches or substantive misapplications of assets will requirements in result in an entity ceasing to be Notify significant contravention governing rules. a charity, so there may not of ACNC obligations which has always be overlap with ACNC caused entity to stop being a charity status obligations. charity. Apply income and assets solely for However, ACNC governance the purpose for ACNC governance standards also standards likely to require on- which the entity relate to acting in accordance going administration in was established. with charity status. accordance with core rules, such as use of funds for charitable purposes = overlap. The University of Western Australia
Scope Comparison – Circumstances for Enforcement Proposed ACNC Tax Endorsement Comment Requirement Conditions Comply with Comply with ACNC governance standards not yet ACNC substantive determined, but likely extensive duplication. governance requirements in ACNC governance standards focus on the standards. governing systems an entity has to govern its rules. operations to reduce maladministration and enable it to carry out its purposes. ‘Substantive requirements’ in governing rules look to ‘rules of core importance to the operation of [an] entity’ such as ‘those related to an entity’s object and purpose’ and its ‘not- for-profit status’. The University of Western Australia
Enforcement Outcomes • Aloe Wishes (AW) enters into a related party transaction. • The terms of the transaction contravene the ACNC Act. • AW has not yet completed the transaction. • Prior to this, AW has never contravened the ACNC Act. • ACNC Commissioner decides to issue a direction to AW not to perform the transaction - in circumstances where AW appears not to wish to take voluntary action. Based on Example 3.16 ACNC Revised Explanatory Memorandum The University of Western Australia
Enforcement Outcomes • Charity controllers acted honestly, but carelessly • Charity breached governing rules by misapplying funds for non- charitable purpose, resulting in personal benefit to controllers • Charity breached governing rules by mixing charity funds with the money of others and failing to obtain interest • Controllers indirectly attempted to rectify breaches by repaying misapplied amounts plus compensation • Over the relevant years, charity had distributed to other charities between 25 and 40% of the funds it received or generated One interpretation of the facts in Bargwanna The University of Western Australia
Problems and Possible Solutions Problem Solution? Divergent strength of compliance Leave tax endorsement special tools used for same circumstances conditions largely in current form. • Yet, significance of tax concessions • Limits duplication as motivation for ACNC registration • May not adequately protect revenue • Plus, uncertainty over ATO response Enact proposed endorsement special conditions, but: ACNC role as independent statutory regulator of NFP sector is undermined • Confirm ATO discretion over revocation by tax endorsement requirements that • Require ATO to consider ACNC regulatory involve the ATO separately action in exercising it determining NFP status and on-going • Publicly state principles upon which ATO is compliance with charity status to cooperate with ACNC, preferably in TAA The University of Western Australia
Ian Murray | Assistant Professor | Faculty of Law Tel: +8 6488 8520 Email: ian.murray@uwa.edu.au University of Western Australia The University of Western Australia
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