After almost two decades of reports and debate, a new regulator of Australian charities, the Australian Charities and Not for Profit Commission (ACNC), began operating late last year. If you are a director of a not-for-profit organisation, this change will have an impact on you. Similarly, trustees or directors of trustee companies for foundations will also be affected, so the potential impact is widespread.
The ACNC has been established as the dedicated charity sector regulator. The previous regime had different regulators (some state and some federal) for specific segments of the sector with the ATO being the de facto regulator and doing most of the heavy lifting on the critical matters around tax exemptions. There were both significant gaps and widespread duplication. The ACNC as a sector focused organisation brings together at least Commonwealth supervision with the purpose of maintaining and enhancing public trust in the sector, providing support and reducing red tape. The hope is that state apparatus will be now be unwound to remove the remaining duplication, and South Australia has already started that process.
This is important for foundation trustees because charitable trusts come within the ACNC’s jurisdiction for supervision and reporting and, as importantly, so do the many charities that trustees work with to implement their programmes.
Charitable trust and foundations
While it is often observed that the philanthropic sector in Australia is less developed than in the US in particular, there are over 6,000 charitable funds with income tax exemption. Australia’s 60,000 charities depend much more on government contracts for service provision and individual donor support for funding than they do grants from philanthropic foundations. But foundations are often the critical gap funders of the difficult, new and sometimes politically marginal projects. This mean foundations’ importance is greater than their simple dollar value.
Furthermore, there is a long history of foundations in Australia tracing back to the Wyatt Benevolent Fund origins in South Australia in the 1880s. There are also clear cases of significant impact including the National Gallery of Victoria’s world class collection that owes much to the 1904 Felton Bequest and the Miller homes in many Victorian country towns providing accommodation for poor pensioners for almost 100 years.
For trustees of private charitable trusts and testamentary charitable foundations arising from wills, the ACNC has become the first effective regulator. This means for most charitable trusts, explicit governance standards, information returns, and financial reporting for larger trusts (with income over $250,000 pa), are commencing. Some did argue that this is additional red tape, but the more balanced view is that trusts that receive significant public support through tax exemptions should at least report. There are trusts claiming in excess of $1 million in franking credit refunds that until now have not been required audited financial statements, let alone report to anyone.
While exemptions from probate or estate taxes up until the late 1970s encouraged philanthropy, growth in the philanthropic sector today is driven by tax-effective Public Ancillary Funds (introduced in 1963) and Private Ancillary Funds (introduced in 2000 as Prescribed Private Funds). More than 1000 wealthy families and individuals have now structured their giving through a Private Ancillary Fund. Community foundations, wealth advisers and others are now widening the scope and reach of Public Ancillary Funds through the use of subfunds to open options for structured philanthropy to more people. Both structures allow individuals and families to get actively involved in their community through increased philanthropy and offer tax deductible donations. Ancillary Fund trustees are used to reporting to the ATO under their respective guidelines, so the new regime brings little substantive change. Most Private Ancillary Funds and Public Ancillary Funds are already under ACNC supervision with the remainder (those having opted to become an Income Tax Exempt Fund) likely to transition under the Statutory Definition of Charity Bill. At this stage, the Annual Ancillary Fund Return is still required to be lodged with the ATO. To underpin continued growth the Government acted in May this year on its commitment to allow those individuals who have established Private Ancillary Funds but want to keep their giving private to do so as long as they continue to adhere to the compliance and reporting requirements.
Wider charitable sector supervision
All foundations, irrespective of their legal structure, implement their charitable purpose through grant-making to charities that actually run the programmes in the Australia or overseas. So in terms of foundations’ grant-making programme, the ACNC will regulate governance and reporting aspects of those charities and will make more readily available sector and organisation specific information. This is welcome and will facilitate cost effective and non disruptive due diligence by all foundations as part of their grant-making processes. Hopefully the ACNC itself or others will develop smart apps to enable ready access to and analysis of the public access component of ACNC database.
The ACNC legislation has been generally welcomed by the sector. The Coalition opposed the legislation on the basis the sector did not need more regulation and has indicated it will scale back the ACNC’s regulatory powers should it win the September election.
But perhaps the greatest opportunity for the sector is in the ACNC mandate to reduce red tape for charities to allow them to focus resources on implementing effective programmes and not administration and filling in forms. Progress on removing the varying state requirements, which are a serious administrative burden particularly for national charities, will be a critical ‘success’ benchmark. This will require state and federal co-operation with all the politics that involves. One would hope that with all state governments focused on deficit reductions, maybe the opportunity to utilise the one federal regulator will become compelling.
So the ACNC has some challenges, but for the first time the sector has a dedicated regulator.
David Ward is Technical Director at Australian Philanthropic Services.