With donor dollars drying up the business of being a not-for-profit organisation is tougher than ever. Financial accountability is increasingly demanded of the sector as government, corporate hawks and donors seek to know where the spare change goes. On top of all that, there’s the Charities Bill. I investigatedwhether this proposed Bill will actually gag the sector for In The Black in August 2004.
They touch all our lives. But you won’t read much about not-for-profit organisations in the financial pages of daily newspapers despite the sector’s awesome size. According to Philanthropy Australia, a membership body representing the interests of the country’s givers, some 604,000 people or 6.8 per cent of Australians in employment work in the sector. It is a case of huge numbers of people and huge sums too, with not-for-profits generating $33.5 billion in 1999–2000.
The business of being a not-for-profit is tougher than ever before under the pressure of competition for funds and the upcoming Charities Bill which ostensibly puts the regulation of the not-for-profit sector under the auspices of the Australian taxation office (ATO).
The federal government financial reform agenda for not-for-profits has attracted fierce criticism from charities amid claims they stand to lose precious funding and that it is an attempt to muzzle groups that speak out against the Government.
Ross Cameron, federal parliamentary secretary to treasurer Peter Costello, says any such inference is ‘a total beat-up’.
‘There are aspects of the criticism of government in the context of CLERP 9 and the Financial Services Reform Act that I would take on the chin but this one is garbage,’ says Cameron, who is the member for Sydney electorate Parramatta.
‘Peter Costello took the view that if your principal purpose in life is to lobby government then you are probably not a charity. I think the concierge at Rydge’s Hotel Parramatta or the mall small business owner who is paying tax feels happy that bona fide charities are exempt from tax. But he would also have the view that a lobbying organisation should not attract the sort of preferential treatment that genuine charities do.’
The current draft of the Charities Bill is trying to define what constitutes charitable activity. It is proposed that a charity could be disqualified for advocating a political party or cause, supporting a candidate for political office or attempting to change the law or government policy.
This implies that any organisation that lobbies government, whether it be the Salvation Army or the RSPCA, could have its charitable status withdrawn. Ken Sehily is a partner at PricewaterhouseCoopers and a former member of Peter Costello’s GST advisory committee. Sehily believes outspoken charities have reason for concern, saying: ‘What the government was trying to do was to suggest that if you are charitable you will keep your charitable status but you can’t have everything.’
Jim Mein FCPA, executive director of the Uniting Church in Australia in NSW, says the Charities Bill poses a problem for his organisation. In particular the Uniting Church is worried that the ATO is involved. Mein says that the current legislation is unworkable although without too many changes it could become workable.
‘We have a fear that out of the Charities Bill will come the taxation of commercial activities,’ he explains, adding that society in general will suffer because there will be less funds to distribute.
Mein is happy to have regulatory oversight independent of the ATO, but he is against a Charities Commission-type organisation – as exists in the UK – in Australia as it would increase their administrative load, which would cost money to implement. ‘We’re also then concerned that the government then uses it as a tool rather than a regulatory oversight,’ he says.
Gregory Stowe FCPA, a finance manager at the Salvation Army, says the sector has to meet ever-increasing community needs with fewer resources.
The demand for welfare across Australia grows each year while more is expected from the not-for-profit sector.
In Australia, more than 2 million people or 11.5 per cent of the population live below the poverty line. Last year the Salvation Army helped more than 1.2 million people, an increase of 10 per cent on the previous year.
The Salvos are finding that government funding at both federal and state level is being cut back. Where funding is provided, stricter controls over the appropriation of those funds are being introduced, including productivity measures. This is forcing not-for-profit organisations to seek alternative sources of funding – often from commercial operations and commercial partnerships – to maintain services. At the same time charities are becoming more business-like so they don’t waste funds.
Fiona Balzer CPA, a corporate information officer at the not-for-profit Australian Shareholder’s Association agrees that one of the growing challenges for not-for-profits is the increased professionalism now required. She moved to the body after working as an equity analyst, saying she wanted to use her skills to give something back to the community.
Providing the services expected by members strains the ASA’s budget, staff and volunteers, says Balzer, who is one of four staff at the body that looks after the concerns of 7000 members.
With the introduction of the GST the ATO is now able to identify the exact commercial activities within the not-for-profit sector. Some organisations rake in huge amounts of money. For example, the Australian Rugby Union is a not-for-profit group and expects to make $50m from the recent World Cup, which it plans to reinvest in the sport. The RACV is a not-for-profit, as are the leagues clubs with rivers of gold from pokies.
Sehily, who is now on the ATO public rulings panels, is concerned what the tax office might do with its new information on charities’ commercial activities.
He says: ‘It has almost given them a base upon which to eventually start to impose possibly income tax and possibly even more GST on commercial activity.’
Sehily says that in the education sector schools have established first-class sporting venues, which are rented out to the public to raise money and fund the facilities for students. ‘If the tax office now is mindful of some time in the future putting an income tax on that commercial activity then where is the funding going to come from? That’s the context in which the charities will be worried,’ he says.
‘The government can’t turn around and say we’re never going to tax any of the activities of charities because they have already made one step a couple of years ago by imposing GST.’
There were meant to be few exemptions to the GST when introduced but in reality there have been many compromises. If something is sold for less than 75 per cent less than market value or less than 50 per cent of cost it is GST-free. Thus soup kitchens, charity shops and some retirement villages are exempt from GST.
But the tax office is reconsidering the position of some activities such as retirement villages owned by not-for-profits. They are competing in the marketplace with for-profit organisations and the tax office is reported to be unhappy with what some organisations are providing GST-free. It is likely that there will be some changes through either legislation or tax office action which will affect these charities.
Another significant funding issue facing organisations like the Salvation Army is the stringent government regulations governing compliance issues, such as accreditation of aged care homes.
The Salvation Army says it will need to spend about $100 million on capital works on compliance in aged care facilities in the next five years. The Salvos’ Stowe says that the operating costs for these facilities are becoming harder to manage, particularly with the demand created by the aging Australian population.
But the biggest area for worry, says Sehily, is compliance, with many charities relying on volunteers and non-expert staff. The ATO can only go back four years to audit GST compliance and is now going into audit mode.
Sehily stresses: ‘The tax office is being very, very tough on people to make sure that they have all their tax invoices in place. Nobody gets it perfect.’
He says the tax office has found that almost every company reviewed has some discrepancy in its tax invoices – some by up to 70 per cent.
If the tax office found a, say, six per cent discrepancy in tax invoices it would extrapolate that over the previous three year’s GST payments. To get the money back the organisation has to go back and analyse over the past three years and resource valid invoices.
Sehily says: ‘[Charities] often can’t afford or are not aware of the need for getting things absolutely right. Most people don’t believe the tax office will be that tough. But it will.
‘We are going to see charities hit with some major bills. And I’m not sure that many of them have thought what they are going to do when the ATO visits.’