Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 3 Streamline gift fund and integrity arrangements for deductible gift recipients
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to remove the requirement for certain deductible gift recipients (DGRs) to maintain a gift fund. It also amends the Taxation Administration Act 1953 (TAA 1953) to allow the Commissioner of Taxation (Commissioner) to review whether an entity listed in the law continues to be eligible to receive deductible gifts, in the same way that the Commissioner can review the eligibility of those entities that require the Commissioner's endorsement. All DGRs are now required by law to maintain adequate accounting records.
Context of amendments
3.2 As part of the 2006-07 Budget, the Minister for Revenue and Assistant Treasurer announced on 9 May 2006, measures to enhance philanthropy and streamline DGR arrangements.
3.3 The amendments reduce compliance costs associated with maintaining DGR gift funds. The amendments are also intended to streamline and strengthen the DGR integrity arrangements and hence increase public confidence in DGRs.
3.4 As part of the DGR integrity arrangements, endorsed DGRs are required to maintain gifts and contributions in a separate fund. To reduce compliance costs the amendments, in some cases, remove the requirement for DGRs to maintain gift funds; and for DGRs to maintain one gift fund rather than multiple gift funds.
3.5 Currently the Commissioner is empowered to review endorsed DGRs to assess if they continue to be entitled to endorsement, including whether their activities remain consistent with the principal purpose for which DGR status was granted. The amendments standardise integrity arrangements across all DGRs by allowing the Commissioner to review listed DGRs in the same manner as endorsed DGRs.
Summary of new law
3.6 These amendments standardise the integrity arrangements for all DGRs, so that listed DGRs can now be reviewed by the Commissioner in line with the Commissioner's current powers to review endorsed DGRs, to determine if they continue to meet the conditions of their DGR status. To this end, the amendments empower the Commissioner to request information that is relevant to the listed entity's DGR status.
3.7 These amendments also remove the gift fund requirement for an entity that is a deductible fund, authority or institution. For an entity that operates a deductible fund, authority or institution, the requirement to maintain a separate gift fund remains. However, where an entity operates more than one deductible fund, authority or institution, it can consolidate its multiple gift funds into a single gift fund.
3.8 These amendments also make explicit the current requirements for all DGRs to maintain adequate accounting records so that donations of money or property can be identified separately from other receipts and their uses can be tracked. Tax deductible donations continue to be used solely for the principal purpose for which the organisation was granted DGR status.
Comparison of key features of new law and current law
|New law||Current law|
|All DGRs can be reviewed by the Commissioner to determine if they continue to meet the requirements for holding DGR status.||Entities that are endorsed as DGRs do not have to maintain a gift fund. For entities that are not eligible for DGR endorsement but are endorsed to operate a deductible fund, authority or institution, a gift fund must be maintained. These entities may, however, consolidate multiple gift funds.|
|All DGRs are required to maintain adequate accounting records.||Only endorsed DGRs can be reviewed by the Commissioner to determine if they continue to meet the requirements for holding DGR status. Listed DGRs cannot be reviewed.|
|Each endorsed DGR requires a separate gift fund be maintained for each deductible fund, authority or institution.||All DGRs are expected to maintain adequate accounting records.|
Detailed explanation of new law
Enhancements to DGR integrity arrangements
3.9 Currently the integrity arrangements differ between DGRs that have been endorsed by the Commissioner and those listed in the ITAA 1997. To align the integrity arrangements for all DGRs, these amendments allow the Commissioner to review listed DGRs in the same manner as endorsed DGRs and to request information from a listed DGR that is relevant to its DGR status. [ Schedule 3, item 8, subsection 353-20(1 ) of the TAA 1953 ]
3.10 The Commissioner is currently empowered to request information that is relevant to an endorsed DGR's status. These powers are outlined in Division 426 of the TAA 1953 which deals with the Commissioner's role in endorsing DGRs.
3.11 The DGR must comply with the Commissioner's request for information. Failure to comply is an offence under section 8C of the TAA 1953. The inclusion of an offence provision for listed DGRs is consistent with the penalty that is applicable for all failures to comply with requests for information by the Commissioner.
3.12 The revocation powers conferred on the Commissioner under Division 426 do not extend to listed DGRs. The authority to remove a listed DGR remains with the Government and Parliament.
3.13 The amendments require the Commissioner to provide information to the relevant Minister where the Commissioner finds that a listed DGR no longer meets the conditions for which it was granted DGR status. The Commissioner must give written notice to the relevant Minister within 28 days of being satisfied that certain conditions relevant to the DGR status of the listed entity have been met. [ Schedule 3, item 8, subsection 353-20(4 ) of the TAA 1953 ]
3.14 The Commissioner is to provide to the relevant Minister all information that is relevant to the DGR status of a listed entity. In considering what information is required for this purpose the Commissioner will have regard to guidelines and conditions that may attach to a listing, including those that cover prescribed private funds, that are issued to assist the assessment of DGR status. [ Schedule 3, item 8, paragraph 353-20(4)(c ) of the TAA 1953 ]
3.15 The amendments require that the Commissioner, in giving written notice to the relevant Minister regarding the status of a listed DGR, may only include such information that is relevant to the DGR's status. The amendments also limit the use of information to assess whether the organisation's continued DGR status is warranted. In this way, safeguards exist within the legislation to constrain the use of such information for the administration of DGRs. [ Schedule 3, item 8, subsection 353-20(3 ) of the TAA 1953 ]
Removal of the gift fund requirement
3.16 Currently all DGRs are required to maintain a separate gift fund to hold deductible gifts or contributions. To reduce administrative costs associated with this requirement, the amendments:
- remove the requirement to maintain a gift fund for an entity that is endorsed as a deductible fund, authority or institution (Type A DGR); and
- allow an entity that operates a deductible fund, authority or institution (Type B DGR) to consolidate its multiple gift funds into a single gift fund.
3.17 The amendments modifying the gift fund requirements do not override existing requirements where an entity must maintain a public fund to gain endorsement as a DGR and that a gift or contribution may only be used for the principal purpose for which it was granted DGR status.
Type A DGR entities
3.18 The amendments remove the requirement for Type A DGRs to maintain a gift fund. For example, the Bloedworth Service is a public benevolent institution that operates a hostel and a detox centre through its two Divisions. All the money or property handled by Bloedworth Service is used to further DGR purposes and therefore it is not required to maintain a gift fund, however, it retains the option to retain a gift fund if it chooses. [ Schedule 3, items 1 and 2, subsections 30-125(1 ) and ( 2 ) of the ITAA 1997 ]
Type B DGR entities
3.19 The amendments continue to require a gift fund to be maintained for Type B DGRs. That is, all gifts and contributions must be maintained in a gift fund that is maintained separately to all non-DGR property of the entity. However where a Type B DGR operates more than one deductible fund, authority or institution, it can choose to consolidate its multiple DGR gift funds into a single gift fund. [ Schedule 3, item 7, subsection 30-130(3 ) of the ITAA 1997 ]
3.20 For example, the Knoxville parish of the Uniting Church is endorsed to operate a school building fund in each of the two schools within its parish. The parish also operates a refuge centre that is endorsed as a public benevolent institution. The Knoxville parish can consolidate the gift funds into a single gift fund. It will not, however, be able to consolidate money or property contained in its parish account with the single gift fund.
3.21 The existing requirement that gifts and contributions are only to be used for the principal purpose of the fund, authority or institution to which that gift or contribution relates continues to apply. While these amendments allow donations across multiple DGR gift funds to be consolidated into a single gift fund, donations provided to one DGR may not be transferred to support another.
3.22 A DGR is still required to transfer all remaining gifts and contributions to another DGR on winding up. The amendments define the assets that are required to be transferred to another DGR on wind up to include all remaining gifts, contributions and any income earned in respect of those gifts and contributions. [ Schedule 3, item 4, subsection 30-125(6 ) of the ITAA 1997 ]
3.23 All DGRs are currently expected to maintain adequate accounting and other records to show that DGR funds are only used in a manner that is consistent with the principal purpose of the fund, authority or institution that has been granted DGR status.
3.24 The separate identification of gifts and contributions from other monies or property forms an important integrity requirement of the DGR arrangements. To enhance those arrangements, the amendments require all DGRs to keep records that explain all transactions that are relevant to the DGR status of the fund, authority or institution. [ Schedule 3, item 10, subsection 382-15(1 ) of the TAA 1953 ]
3.25 The amendments detail the record-keeping requirements that must be maintained by all DGRs (including those endorsed or listed DGRs including prescribed private funds) to verify that tax deductible gifts or contributions are used only for the principal purpose of the fund, authority or institution. [ Schedule 3, item 10, subsection 382-15(2 ) of the TAA 1953 ]
3.26 Where an entity has consolidated a number of funds, the records must be able to identify donations made in respect of each separate fund, authority or institution and to show how the gifts to each fund, authority or institution have been used to further the principal purpose of that fund, authority or institution.
Application and transitional provisions
3.27 This measure commences on Royal Assent.