Independent Schools Case (UK)

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NFP Reform – An Update
Paul Ingram, Partner, Minter Ellison
14 November 2012
What is happening?
Proposed Measure
Progress to date
Proposed start date
Unrelated commercial activities
Consultation Paper
1 July 2012?
In Australia and other special
conditions
Bill in HOR
First income year starting after
date of assent
- General
Bill passed, awaiting Assent
Assent
- Non-financial reporting
Bill passed, awaiting Assent
1 July 2013
- Financial reporting
Bill passed, awaiting Assent
1 July 2014
- Governance rules
Consultation Paper
1 July 2013
Statutory definition of charity
Consultation Paper
1 July 2013
NFP Sector Tax Concession
Working Group
Discussion Paper
?
Establishment of the ACNC:
Unrelated Commercial Activities
‘Better Targeting of Not-for-profit Tax
Concessions’
•Government to reform the use of tax
concessions by businesses run by NFP
entities
• Will cover ‘Unrelated Commercial Activities’
(UCAs)
• Started 1 July 2012???
• Transitional relief for pre-10 May 2011 UCAs
• No legislation as yet
Key Aspects
•NFPs will pay income tax on profits from
UCAs but only where those profits are not
directed back to their altruistic purpose (ie.
accumulated)
•DGR, FBT and GST concessions cannot be
used to support UCAs
What are ‘Unrelated Commercial Activities’?
•Consultation Paper is quite vague
• Reforms will not affect commercial activities
which ‘directly further an NFP entity’s altruistic
purpose, even where the activity is done in a
commercial way’
• Such activities will be ‘related’ (and ok)
• But no clear definition
Definition of UCAs
•Perhaps three ‘easy’ categories
• Activities that are intrinsically charitable, but
carried out in a commercial way
• NFP hospitals, op shops and child care centres
• Businesses providing meaningful employment to
the disadvantaged
• Passive investment
•Beyond that?
• Is activity ‘incidental’ or ‘ancillary’ to the
altruistic purpose?
Likely Issues for Schools?
•Some activities clearly related
• Tuck-shop, inc. sale of uniforms and text books
• Using hall and volunteers to run Bingo two
afternoons a week to raise money for the school
•But what about:
• More extensive public use of school facilities?
• Property development?
UCAs: Impact on State Taxes?
•Payroll Tax exemptions
• Already attempt to tax wages paid to workers
not engaged exclusively in work of a kind
ordinarily preformed in connection with the
conduct of school/the charitable purpose
• May be toughened?
UCAs: Impact on State Taxes (cont.)
•Land Tax exemptions
• Currently broad
• Used solely or mainly (educational institutions)
• Wholly or mainly (charitable purpose)
• Reform?
In Australia (and other special conditions)
Proposed Rules
•Three separate aims
• Standardise the ‘in Australia’ and other special
conditions for income tax exemption
• Standardise the ‘in Australia’ requirement for
DGRs
• Insert a new definition of ‘not-for-profit entity’
Definition of ‘Not-for-profit entity’
•Main requirements:
• Not carried on for profit or gain of its owners or
members, neither while operating nor upon
winding up
• Governing rules must prohibit distributions to
members
• Unless to NFP entity with a similar purpose
• Unless compensation for services, expenses
Definition of ‘Not-for-profit entity’ (cont.)
•Most constitutions will need minor
amendments
• But Bill not yet passed
• Once it is passed, will have at least 12 months
to amend rules
The ACNC
The ACNC
• New national regulator for the NFP sector
• Three key objects
• Public trust and confidence in NFP sector
• A robust, vibrant, independent and innovative
NFP sector
• Reduce red tape
• Will take over part of ATO role
The ACNC
•Key regulatory issues
• Registration
• Reporting
• Governance
Registration
•If endorsed as charity by ATO now, will be
deemed to be registered with ACNC
• Reviewed upon adoption of new statutory
definition on 1 July 2013
•Building and Scholarship Funds?
• External funds will be separately registered
• Internal funds will not be
Reporting
•Reporting requirements will be
proportional
Small
Revenue less than $250,000
Medium
Not small
Revenue less than $1,000,000
Large
Not small
Not medium
Reporting (cont.)
•Reporting Requirements
Lodge Annual
Information
Statement
Lodge Annual
Financial Report
Financials
Reviewed
Financials
Audited
Small
Yes
No
No
No
Medium
Yes
Yes
Yes
No, unless choose
to do so, or
directed to do so
Large
Yes
Yes
No
Yes
Reporting (cont.)
•Substituted Accounting periods
• Commissioner will have power to approve
• But approval deemed to be given where:
• Charity automatically registered on
commencement of ACNC; and
• Charity notifies Commissioner within 6 months
• ACNC will send material out
Reporting (cont.)
• Start dates
First Reporting Year
First Report Due By
General
SAPs
General
SAPs
Non-financial
2012/13
2013
31 Dec 2013
30 June 2014
Financial
2013/14
2014
31 Dec 2014
30 June 2015
Reporting (cont.)
•Amendments made by HOR
• Commissioner must treat reports under the
Schools Assistance Act 2008 as satisfying
financial reporting requirements of ACNC Act
• Applies until at least 2014/15 (or 2015 for
SAPs), and perhaps longer
•ACNC/DEEWR working group
Governance
•One of the conditions for registration will be
that the entity meets the governance
requirements of the Act
• But will only apply from 1 July 2013
•Two categories:
• Governance standards
• External conduct standards
Governance (cont.)
•Governance standards likely to cover aspects
such as:
• duties and minimum standards of responsible
individuals, including rules for proper organisational
management and running of the entity
• disclosure requirements and managing conflicts of
interest
• risk management procedures
• the coverage of the minimum requirements of
governing rules
• relationships with members
Governance (cont.)
•External conduct standards
• Will ensure that funds sent outside Australia
• Reach legitimate beneficiaries
• Are used for legitimate purposes
• Not contributing to terrorist/criminal activities
Governance (cont.)
•No detail as yet
• To be prescribed in regulations in due course
• Mandatory consultation beforehand
• Additional Parliamentary scrutiny as well
• Cannot include ‘gag clauses’
Statutory Definition of Charity
Proposed Statutory Definition
•Will apply from 1 July 2013
•Will be based on draft Charities Bill 2003
• That Bill was intended to merely ‘replicate’ the
Common Law, but probably went a bit further
• Will Gillard Government want to go further
again?
Proposed Statutory Definition (cont.)
•Traditional four heads may be expanded
•Potentially controversial issues
• ‘Exclusively charitable purpose’ vs ‘dominant’
• Focus on purpose or activities?
• No presumption of public benefit
Proposed Statutory Definition (cont.)
•Removal of presumption of public benefit
• How significant is it?
• Presumption actually of limited scope at Common
Law anyway?
• Independent schools in UK have largely overcome
Proposed Statutory Definition (cont.)
•Independent Schools Case (UK)
• Key question was whether class of persons who
can afford fees is sufficient to constitute a
section of the public
• Total exclusion of the poor is certainly not
acceptable – there must be some access beyond
fee-paying students
• But Charities Commission guidelines held to be
too restrictive
Proposed Statutory Definition (cont.)
•Independent Schools Case (UK)
'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 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. That
is something entirely different from imposing on
the trustees the view of anyone else about what is
"reasonable".'
Proposed Statutory Definition (cont.)
•Independent Schools Case (UK)
• Commissioner has accepted decision and
withdrawn relevant guidelines
• New guidelines to be issued in late 2012/early
2013
Proposed Statutory Definition (cont.)
•Will Australian independent schools face the
same issues?
• Consultation Paper on statutory definition does
refer to the UK debate (at 86):
‘While some issues may not arise in Australia
because of differing school systems, it is
nonetheless expected that guidance similar to
that issued by the Charities Commission…will be
provided in Australia but modified where
necessary to suit Australian conditions and laws.’
NFP Sector Tax Concession Working Group
NFP Sector Tax Concession Working Group
•Formed in response to the Tax Forum
•Discussion Paper now released
‘The purpose of the paper is to stimulate
discussion, debate and feedback…It is not a
position paper and the options canvassed are
not recommendations.’
Income Tax Exemption
•Reviewing current categories of exemption
• No specific mention of schools
•Other possible reforms:
• Extending public benefit test beyond charities
• Extending ATO endorsement beyond charities
Refunds of Imputation Credits
•Expanding range of entities that qualify
•But capping the amount that can be claimed
Deductible Gift Recipients
•Making all charities DGRs
• But perhaps not those for advancement of
religion, charitable child care services, primary
and secondary education
• Significant private benefits?
•Gonski idea of Govt controlled philanthropic
fund
Deductible Gift Recipients (cont.)
•Incentivising donors, reducing compliance
• Tax offsets rather than deductions
• Testamentary and workplace giving
• Increasing threshold from $2 to $25
• Eliminating public fund requirements
Fringe Benefits Tax
•Clearly the big issue for the Government!
• Inconsistency of treatment
• Competitive neutrality
• Use of concessions outside of policy intent
• Meal entertainment
• Entertainment facility leasing
• Compliance burden
Fringe Benefits Tax (cont.)
•Short-term reform options
• Including meal entertainment and entertainment
facility leasing benefits within the FBT caps
• Preventing use of multiple FBT caps
• Reducing 48% rebate rate
• Extending minor benefit exemption to tax
exempts
Fringe Benefits Tax (cont.)
•Long-term reform options
• Phasing out exemptions and rebates and
replacing them with:
• Government grants
• Refundable tax offsets for employers
• Tax offsets or tax free allowances for employees
• Limiting FBT concessions to benefits that are
incidental to employment
• Staff carparks
• In-house meals
• Incidental use of cars
GST
•Reforming the fundraising concession
•Simplifying rules re supplies for nominal
consideration
Other Developments
Red Tape Reduction
• ACNC intended to become ‘one-stop shop’
• ACNC Act contains express object re red tape
• ACNC will have to report on it annually
• Commonwealth Grant Guidelines to be amended
• COAG NFP Reform Working Group
• SA has already announced ‘harmonisation’
amendments
• Reporting
• Charitable collections
Building Funds
•Draft Ruling TR 2011/D5
• Issued on 5 December 2011
• Rejects the ‘more than 50% school use’ rule of
thumb
• Non-school use must be ‘minor’ or ‘occasional’
• Still not finalised
• Not expected until February 2013
Personal Liability for Corporate Fault Reform
•COAG project
• Ensure criminal liability only imposed on
directors where fair and reasonable to do so
•Commonwealth has reviewed its laws
• Bill before Parliament
•SA Govt has passed one Bill
• Another one to come?
Some Concluding Remarks
•ACNC registration information (SAPs)
•Keep an eye on future developments
• Unrelated Commercial Activities
• Governance rules
• Building Funds
•Update Constitution in due course
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