Watching over the helpers: why regulation of charities matters

Kevin Andrews, the minister responsible for the not-for-profit sector, has confirmed that the government will abolish the Australian Charities and Not-for-profit Commission (ACNC) that began operation just 12 months ago.

One of the main functions of the ACNC is to regulate charities claiming tax concessions which include income tax exemption, gift deductibility, FBT and GST concessions, which Treasury has estimated costs A$5 billion in foregone revenue.

The coalition government wants to return the ACNC’s regulatory functions back to the Australian Taxation Office and replace it with a “Centre of Excellence”, which will have a mandate of supporting the not-for-profit sector, rather than regulating it.

But how much evidence has there been that the ACNC has been a tyrannical bureaucrat? And will its abolition weaken the regulation of those who seek to exploit the system?

Red tape and the ACNC

Andrews has cited excessive red tape as one of the reasons for the Commission’s abolition:

…the establishment of the Australian Charities and Not-for-profits Commission was proposed with the object to protect and enhance public trust and confidence for the not-for-profit sector by establishing a national regulatory framework. Nowhere has the mischief that requires this new monolithic regulatory structure, or that justifies the sweeping powers of the ACNC, been identified.

Just how fair is this charge of excessive red tape? Presumably this refers to the requirement to provide information in the form of annual reporting. The statutory reporting framework adopts a tiered approach so that “small” charities - those with less than $250,000 revenue per year (78% of all registered charities) - do not have to submit a financial report. These small charities need only complete an online annual statement with 20 questions aimed at ensuring the charity is complying with its charitable purposes.

The Commission’s website has guides that provide detail about what is required and the Commission operates an advice service to assist charities with queries. It may be that some charities are confusing the reporting required by the Commission with other requirements such as the need to apply for a fundraising licence. Fundraising is regulated by the states and each jurisdiction has quite different requirements, making it potentially confusing.

It has also been said that there is unnecessary duplication of information required. Before the Commission commenced operation, 40% of charities were set up under state law as incorporated associations and had reporting obligations to state authorities.

Approximately 20% were structured as companies limited by guarantee and reported to the Australian Securities and Investments Commission (ASIC), while about 40% had no public reporting obligations whatsoever. This group covers bodies that have not incorporated - for example, smaller bodies that operate with a committee and some religious organisations.

As a result of an agreement with ASIC, companies limited by guarantee now only report to the ACNC. A COAG working group is also looking at ways to harmonise the reporting requirements between the states and the ACNC to share information and thus reduce duplication in reporting to different agencies.

The 40% of entities which previously had no obligations to report will now have increased obligations - but again this is arguably necessary to justify access to tax concessions and retain public confidence in the integrity of the not-for-profit sector.

Accountability in the sector

One important point that seems to be missed is that the reason for the Commission is to ensure minimum levels of transperancy and accountabilty. The value of having a regulator was summed up by the 2001 report under the Howard government which said that “a clear and consistent accountability framework would help to maintain and enhance public confidence in the integrity of charities and related entities”.

This report recommended establishing an independent administrative body to monitor the accountability of charities accessing tax concessions, as well as providing advice and support to the sector. Similar recommendations were made again in 2008 by a Senate Committee; in 2010 by the Productivity Commission and also by the Henry Tax Review.

Before the Commission was created, charities had to be endorsed by the ATO to access various tax concessions and before this, charities and related entities self-assessed their eligibility.

Under the ATO regime, there were no annual or other reporting requirements for charities, although the ATO could revoke endorsement if it became aware of wrongdoing. Realistically, the Tax Office did not have time or resources to regulate the activities of charities. So, in one sense, some regulation is the price these organisations pay for access to the tax concessions.

Light touch versus firm policing

A final point should be made about reports that the ACNC has not vigorously pursued charities suspected of wrongdoing. Clearly the Commission has a difficult line to walk with trying to assist charities on the one hand and ensuring that wrongdoing by those operating charities is appropriately dealt with on the other.

The Commission has said it decided on a “light touch” approach to regulation and compliance, starting with the presumption that charities act honestly and prudently, although it recognised it would be necessary at some stage to deal with those who use charities to obtain private benefits or who engage in fraudulent activities.

According to a pre-election survey, more than 80% of organisations within the sector are happy working with the ACNC and see an independent regulator as preferable to the situation where the Tax Office determined access to tax concessions.

Yet, the Minister still maintains that he is articulating the concerns of stakeholders. Hopefully the government will undertake further consultation before abolishing a body that can enhance the integrity of the sector and justify the revenue foregone through the tax system.

Professor O’Connell was a member of the Tax Concession Working Group established by the Assistant Treasurer in 2012.