House of Representatives

Australian Charities and Not-For-Profits Commission Bill 2012

Australian Charities and Not-For-Profits Commission (Consequential and Transitional) Bill 2012

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 Background

Outline of chapter

1.1 This Chapter explains the background to the Australian Charities and Not-for-profits Commission Bill 2012 (Bill) and the context for reform.

1.2 The Bill establishes a national regulator, and a national regulatory framework for the not-for-profit (NFP) sector.

1.3 Initially, only tax endorsed charities will be regulated by the Australian Charities and Not-for-profits Commission (ACNC). However, the Bill establishes a regulatory framework that can be extended to all NFP entities in the future.

1.4 The Bill:

establishes the ACNC;
charges the ACNC with registering NFP entities (initially charities) and maintaining a register;
provides for the powers of the ACNC Commissioner in relation to the regulation of registered entities; and
sets out the obligations and responsibilities of registered entities.

Context of reform

The not-for-profit sector

1.5 The NFP sector broadly consists of entities that seek to achieve a community, altruistic or philanthropic purpose.

1.6 The NFP sector is diverse, with entities ranging from micro-sized sporting and recreational clubs to large national and multinational charitable organisations.

1.7 NFP entities play a unique role in Australian society. In recognition of this important role, NFP entities are exempted from a range of regulatory requirements and are funded by governments, both directly and through tax concessions, and by donations from members of the public.

1.8 NFP entities differ from other entity types which may be accountable to their members or stakeholders. NFP entities also need to be accountable to the public, including donors, members and volunteers.

1.9 Maintaining, protecting and enhancing public trust and confidence in the sector is essential to its ongoing sustainability, including the ability to provide the services that it delivers to the public.

1.10 A national regulatory system that promotes good governance, accountability and transparency for NFP entities will help to maintain, protect and enhance the public trust and confidence that underpins the sector.

1.11 The ACNC will play a key role in providing information and education to the public about the NFP sector. The educational role of the ACNC will help to improve public understanding of, and engagement with, the important work of the sector.

1.12 The ACNC will administer a new system of smarter regulation. The regulation will be proportional to size and risk in order to minimise regulatory duplication and compliance costs, and to allow registered entities to focus on achieving their mission.

1.13 The ACNC will prioritise working with other regulators to minimise regulatory requirements for the NFP sector wherever possible.

1.14 The establishment of a regulatory framework that reflects the unique structures, funding arrangements and goals of NFP entities will support and sustain a robust, vibrant, independent and innovative Australian NFP sector.

Outline of existing regulatory arrangements

1.15 Currently, no single institution is responsible for the regulation of the NFP sector.

1.16 At present, Commonwealth, State, Territory and local governments regulate different parts of the NFP sector for both different and overlapping purposes. For example, these laws provide tax concessions, exemptions from registration and permit requirements, exemptions or limitations on legal liability, and impose fundraising and lottery regulations.

1.17 At the Commonwealth level, regulation is undertaken to access Commonwealth taxation concessions and in relation to certain entity types, such as companies limited by guarantee, Indigenous corporations, and some corporate trustees.

1.18 In the absence of a registration regime, the role of de facto regulator for the NFP sector at the Commonwealth level has generally been shared between the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC).

1.19 The ATO acts as a regulator for NFPs that access tax concessions including an income tax exemption, deductible gift recipient (DGR) status, refundable franking credits, and fringe benefits tax (FBT) and goods and services tax (GST) concessions.

1.20 The current law requires charities to be endorsed by the ATO before they can access NFP tax concessions. Hence, the ATO, by default, is also responsible for determining charitable status.

1.21 Currently, the ATO's endorsement process requires applicants to provide information on eligibility for tax concessions, including operational and governance frameworks, and financial position.

1.22 NFP entities other than charities are generally able to self-assess their access to income tax concessions, and are therefore not regulated by any agency in an ongoing manner.

1.23 There are approximately 600,000 entities in the NFP sector, of which it is estimated around 400,000 may access Commonwealth tax concessions, either through the ATO endorsement process or by self-assessment.

1.24 ASIC has a smaller role in the regulation of the NFP sector at the Commonwealth level.

1.25 ASIC is currently responsible for regulating approximately 11,000 NFP entities incorporated as companies limited by guarantee under the Corporations Act 2001 . ASIC also regulates professional trustee companies as well as some charities which are incorporated as other types of companies under the Corporations Act 2001 .

1.26 ASIC also has responsibility for the registration of incorporated associations and cooperatives if they wish to operate outside their home jurisdiction.

1.27 The Office of the Registrar of Indigenous Corporations (ORIC) is an independent statutory office that regulates NFP Indigenous corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 .

1.28 The States and Territories regulate incorporated associations and charitable trusts (although public and private ancillary funds are regulated at the Commonwealth level), as well as fundraising activities, and impose reporting and governance requirements on entities that receive State and Territory government funding.

1.29 Current reporting requirements across the sector are inconsistent; there is minimal reporting for some organisations and complex and burdensome reporting for others. There is also no single reference point for the NFP sector to access information, education or guidance.

1.30 There is limited easily-accessible information available to the public on the activities of NFP entities. The current lack of information available to the public acts as a barrier to the optimal allocation of resources, thus undermining philanthropic engagement and potentially weakening the generosity of donors.

History

Reviews and Inquiries

1.31 There have been several reviews into the regulation and taxation of the NFP sector in Australia over the last 17 years.

1.32 A consistent theme that emerged from these reviews is that the regulation of the NFP sector would be significantly improved by establishing a national regulator and harmonising and simplifying regulatory and taxation arrangements.

1.33 The 1995 Industry Commission Inquiry Report, Charitable Organisations in Australia , recommended a sector wide focus on best practice to strengthen the contribution the charitable sector makes to Australian society.

1.34 The 2001 Report of the Inquiry into the Definition of Charities and Related Organisations recommended that establishing a comprehensive national administrative framework for the charitable and related sector and an independent administrative body for charities and related entities, be considered.

1.35 The 2008 Senate Economics Committee Inquiry into Disclosure Regimes for Charities and Not-for-profit Organisations recommended the establishment of a single independent national regulator for NFP organisations. The Committee recommended a broad role for the regulator, including registering NFP organisations, educating the sector and encouraging compliance and developing and maintaining an accessible, searchable public information portal.

1.36 The 2010 Review into Australia's Future Tax System (The 2010 AFTS Review) recommended that a national charities commission should be established to monitor, regulate and provide advice to all NFP organisations.

1.37 The 2010 Productivity Commission Report on the Contribution of the Not-for-profit Sector (2010 PC Report), recommended the establishment of a 'one-stop shop' for Commonwealth regulation by consolidating various regulatory functions into a new national registrar. The report recommended that the regulator undertake a variety of functions, including assessing organisations for Commonwealth tax concession status, providing a single reporting portal for corporate and financial information, and investigating compliance with regulatory requirements.

1.38 The 2010 Senate Economic Legislation Committee in its Inquiry into the Tax Laws Amendment (Public Benefit Test) Bill 2010 recommended the establishment of a single independent national commission for NFP organisations.

Scoping study for a national regulator

1.39 A scoping study for a national NFP regulator was undertaken to determine the role, functions, feasibility and design options for a 'one-stop shop' NFP regulator.

1.40 The Government released a consultation paper in January 2011 to ascertain the views of the NFP sector on the goals of national regulation, the scope of national regulation and the functions and form of a national regulator. The consultation process demonstrated significant support for a national regulator and national regulation, and for NFP reform to be undertaken as a matter of priority.

1.41 The Final Report on the Scoping Study for a National Not-for-profit Regulator (Final Report), produced by the Treasury, presented the findings of the scoping study and provided a blueprint for implementing a national NFP regulator.

1.42 The Final Report recommended that a single regulator should be established for the purposes of governance, accountability and transparency of NFPs and that the regulator should, as far as possible, be responsible for regulating all NFPs.

1.43 The report also recommended that the regulator should administer a principles-based regulatory framework to apply broadly across the NFP sector, although regulation should be proportional and tailored to address the specific needs and size of NFPs.

Budget announcement

1.44 As part of the 2011-12 Budget, the Government announced the first stage of an ambitious reform agenda for the NFP sector.

1.45 To progress its NFP reform agenda, the Government announced that it would:

establish the ACNC as a 'one-stop shop' regulator for the NFP sector;
introduce a statutory definition of 'charity';
introduce a general reporting framework and the establishment of a public information portal;
better target NFP tax concessions to ensure they are targeted only at those activities that directly further an NFP's altruistic purposes; and
undertake a number of further reviews into the sector.

1.46 The Government further announced that the ACNC would:

be headed by an independent statutory office holder, the Australian Charities and Not-for-profits Commission Commissioner (ACNC Commissioner);
administer a regulatory framework to simplify the NFP sector's interactions with the Australian government;
initially be responsible for determining the legal status of entities seeking charitable status, including public benevolent institution (PBI) status, on behalf of all Commonwealth agencies;
maintain a register of registered entities and, through its website, provide an information portal which will act as the central reference point for information about and for the NFP sector;
provide NFPs (particularly small and newly established NFPs) with a first point of call for accessing information and educational materials to answer questions through its website;
administer a single Commonwealth governance and regulatory framework for NFPs; and
administer a 'report-once, use-often' general reporting framework, to simplify reporting arrangements for registered entities.

1.47 The Government also announced the establishment of an Advisory Board of NFP sector experts to provide advice to the ACNC Commissioner.

1.48 In the long term, the role of the ACNC will expand to include responsibility for the regulation of all NFP entities which access tax concessions or other Australian government benefits, regardless of their legal form.

1.49 The ACNC may also take additional roles in the future pending the outcome of any reviews into the NFP sector.

1.50 To take this into account, this Bill, which establishes the ACNC, makes provision for additions to its regulatory responsibilities over time.

1.51 The Explanatory Materials uses the term NFP when general reference is made to the sector and in expectation of the future expansion of the regulatory responsibilities of the ACNC, although the application of the Bill is currently limited to charities.

Benefits of reform

1.52 The Government's NFP reform agenda will implement the most significant reforms the sector has experienced over the last century.

1.53 The reforms recognise the vital services and benefits that the NFP sector provides to communities throughout Australia.

1.54 These reforms take into consideration the matters outlined in the Final Report, and the recommendations of the 2010 Productivity Commission Report and the 2010 AFTS Review.

1.55 As stated in the Final Report the current ad hoc approach has resulted in 'significant disadvantages in having multiple regulators of the NFP sector. Specifically, it results in complex, overlapping and duplicative regulation, and a lack of transparency, making it difficult for the public to understand the NFP sector. Ultimately it leads to an unnecessarily high regulatory burden for NFPs'.

1.56 The establishment of a regulatory system for NFP entities will provide significant benefits to the NFP sector by:

reducing red tape through processes to avoid or minimise duplication where possible;
improving public engagement with the NFP sector through a public information portal;
providing the sector with better protection from possible breaches of trust and confidence by a few;
offering information to help the public understand the work of the sector; and
providing information and guidance to the sector to assist registered entities to comply with their regulatory obligations and to fulfil their diverse and important goals.

Staged approach to reform

1.57 NFP entities generally operate for the broad public benefit, and are relied on by many Australians, often by the most vulnerable in our community.

1.58 NFP entities play a unique role in Australia for which they are given funding from governments, both directly and indirectly, and from donations from members of the public. This unique and important role means that governments often afford them exemptions, concessions and benefits under a range of laws and fee structures.

1.59 The Government announced on 17 May 2012 that the financial reporting framework and governance standards, including the external conduct standards, will commence on 1 July 2013.

1.60 The Government will consult on the content of financial reports and the governance and external conduct standards, including with key stakeholders and advisory bodies such as the NFP Sector Reform Council and the public more broadly.

1.61 The two-staged approach means that the financial reporting requirements and governance standards for registered charities will not come into effect until 1 July 2013. The extended start dates will give more time for charities to transition to the new regulatory framework and for the ACNC to provide guidance materials to help with the transition. The first financial reports will not need to be lodged with the ACNC until 31 December 2014.

Consultation

1.62 The Government has undertaken extensive consultation on the ACNC legislation and the establishment of the ACNC. These consultation processes build upon the findings of past reviews and inquiries, as discussed earlier in this chapter.

1.63 The consultation process included a consultation paper on the Scoping Study for a National NFP Regulator , which was released on 21 January 2011. Consultation on the paper closed on 25 February 2011, and over 160 submissions were received from stakeholders.

1.64 An exposure draft of legislation to establish the ACNC, along with related explanatory materials, was released on 9 December 2011 following almost a year of detailed consultations and discussions. Consultations on the exposure draft closed on 27 January 2012.

1.65 A wide range of stakeholders participated in the consultation process, including NFP entities, academics, accounting and legal experts, and representatives of States and Territories.

1.66 The Government also consulted with peak advisory bodies, such as the NFP Sector Reform Council, the Charities Consultative Committee, and the Clubs Consultative Forum.

1.67 The Government has taken these comments into consideration in developing the draft legislation.

1.68 In addition, the Government undertook targeted consultation on the draft legislation in May 2012 with a wide range of NFP representatives including the Charities Consultative Committee, the Clubs Consultative Forum, the NFP Sector Reform Council, NFP sector experts and representatives of the States and Territories.

1.69 A series of ACNC Implementation Taskforce community consultation sessions were held in all Australian capital cities and Townsville, and concluded in February 2012. These sessions were attended by around 1,600 people, and provided an opportunity for stakeholders to provide comments and seek clarity over various aspects of the reform.

1.70 The Government referred a draft version of the ACNC Bill to the House of Representatives Standing Committee on Economics for an inquiry over the Winter 2012 Parliamentary recess.

1.71 The Treasury made an initial submission to the House of Representatives Committee, and also made an additional submission following the Committee Hearing process.

1.72 The Committee's comments, as well as issues raised during the inquiry process, have been taken into consideration in the final preparation of the Bill and this Explanatory Memorandum.

The ACNC Commissioner's functions under the Bill

1.73 The ACNC Commissioner has the general administration of the Australian Charities and Not-for-profits Commission Bill 2012. The ACNC Commissioner therefore has all the rights, powers, responsibilities and obligations provided to the administrator of such laws under statute and common law.

1.74 As such, the ACNC Commissioner's role will include providing guidance material to the sector, educating the sector and the public, running a website and communicating with the public as well as administering the powers contained in the Bill such as those relating to registration, collecting reports, enforcement and monitoring.

1.75 The ACNC Commissioner will primarily achieve the objects of the Bill by providing the NFP sector with guidance and educative materials to assist the sector to understand and comply with regulatory obligations. This is specifically provided for in the ACNC Commissioner's education function in the Bill.

1.76 The Bill contains a wide spectrum of enforcement powers reflecting that the ACNC would not have powers of enforcement unless specifically provided for in legislation.

1.77 Importantly, the legislation also provides for appropriate limitations on these powers and considerations for the ACNC Commissioner to consider in any exercise of these powers.

1.78 The ACNC Commissioner's enforcement powers are expected to be exercised in a small number of serious cases where the circumstances require it.

1.79 However, where enforcement action is required, the ACNC Commissioner's range of enforcement powers allows the ACNC Commissioner to provide a proportionate, balanced and effective regulatory response.

Objects of the Bill

1.80 The objects of the Bill are: to maintain, protect and enhance the public trust and confidence in the NFP sector; to support and sustain a robust, vibrant, independent and innovative NFP sector; and to promote the reduction of unnecessary regulatory obligations on the NFP sector. [Subsection 15-5(1)]

1.81 These objects will be pursued through:

the establishment of a national regulatory framework specifically focussed on NFP entities to reflect the unique goals, structures and funding arrangements of NFPs;
the establishment of the ACNC Commissioner who will be responsible for:

-
registration of entities according to type and subtypes;
-
administering the national regulatory framework; and
-
assisting registered entities to comply with and understand their regulatory obligations.

[Subsection 15-5(2)]

1.82 Registration with the ACNC is voluntary. However, NFP entities must be registered with the ACNC in order to access certain Commonwealth concessions, exemptions and benefits which are contingent on registration. [Subsections 15-5(3)]

1.83 Registration is a necessary prerequisite for access to Commonwealth tax concessions. Registration may also be necessary for NFPs to access other concessions, exemptions and benefits. [Subsections 15-5(3) and (4)]

1.84 Registration is explained in Chapter 3 - Registration.

Public trust and confidence

1.85 The terms 'public trust' and 'confidence' have their ordinary meaning and are used throughout this Bill to refer to the positive ways in which the Australian public views the NFP sector.

1.86 The NFP sector is held in high regard by the Australian community, as it provides vital services, assists the needy and contributes to creating vibrant and diverse communities across the country.

1.87 This Bill aims to support public trust and confidence in the NFP sector into the future. It does so in a variety of ways, including by establishing a national regulatory framework for the sector, by creating a publicly available Register, and by ensuring that entities meet principles-based governance standards.

1.88 High levels of public trust and confidence in the NFP sector encourage philanthropic giving, volunteerism and public engagement with the sector.

1.89 Public trust and confidence is strengthened by information, transparency, accountability, openness and effectiveness. It may be weakened by misconduct, opacity, misinformation and illegality.

1.90 Just as the positive actions of one NFP entity can reflect positively on the sector, the negative actions of one NFP entity can reflect negatively on the sector.

Promoting the reduction of unnecessary regulatory obligations on NFPs

1.91 The ACNC will work with other regulators and cooperate with other government agencies to promote the reduction of unnecessary regulatory obligations on the NFP sector. [Section 15-5(1)(c)]

1.92 The regulatory framework set out in this Bill establishes the ACNC with sufficient powers to enable it to take the central regulatory role for the NFP sector, undertaking functions that were previously performed by the ATO or ASIC.

1.93 The Bill also provides the ACNC with broad powers to share information with other government agencies (subject to the protections on personal and confidential information, explained in Chapter 11) in order to facilitate regulatory cooperation.

1.94 The ACNC will work collaboratively to ensure that NFPs are regulated appropriately in a balanced manner which maintains an appropriate level of oversight but does not unnecessarily burden the sector.

1.95 The Bill establishes the ACNC as a single interface for core matters minimising the interactions that NFPs must engage in with government.

1.96 The ACNC will cooperate with other regulators, including the development of memoranda of understanding that will govern the way that regulators will work together. The ACNC will also work to put in place administrative practices to ensure appropriate levels of regulatory supervision without the imposition of unnecessary procedural requirements including administrative procedures and practices.

1.97 As a regulator, the ACNC will co-operate and work with other agencies to consolidate and standardise information that is sought from NFPs to minimise the burden which repeatedly seeking the same information would impose on NFPs.

1.98 The ACNC will advance initiatives to reduce unnecessary reporting, including implementing a "report-once, use-often" framework and developing the charity passport (which is a collection of core information that has already been gathered by the ACNC as part of the registration process or annual information statement) which can then be provided to other government agencies negating the need for other agencies to collect that information, minimising the interactions that NFPs need to have with government.

1.99 This framework will promote better regulation of the NFP sector, minimising the regulatory burden on NFPs while allowing for the better and less resource intensive management of risk through coordinated action.

Furthering the objects of the Bill

1.100 In undertaking his or her role, the ACNC Commissioner will have regard to a number of factors to ensure that he or she considers all stakeholders (for example, the public and NFPs) in exercising his or her powers and functions, and that the ACNC Commissioner pursues best practice regulation. [Section 15-10]

1.101 In undertaking his or her role, the ACNC Commissioner will have regard to:

the maintenance, protection and enhancement of public trust and confidence in the NFP sector;
the need for transparency and accountability of the NFP sector to the public (including donors, members and beneficiaries) by ensuring they have access to information about NFP entities;
the benefits of providing information to the public about NFP entities;
the maintenance and promotion of the effectiveness and sustainability of the sector;
the upholding of principles relating to regulatory necessity, risk and proportionality;
the need to cooperate with other Australian government agencies, including in order to minimise procedural requirements and procedural duplication;
the effective administration of the laws that confer functions and powers on the ACNC Commissioner;
the benefits derived from assisting NFP entities with their obligations under the Bill, including through the provision of education and guidance to NFP entities; and
the diversity of the NFP sector.

[Section 15-10]

1.102 The list of factors that the ACNC Commissioner will have regard to is similar to those provided for other Commonwealth regulators such as ASIC and the Tertiary Education Quality and Standards Agency (TEQSA).

1.103 As they do for ASIC and TEQSA, this list of factors sets out how the ACNC should approach all its activities so that they are in line with the objects of the Bill.

1.104 While the nature of these factors means that there will be some overlap between them, each factor is integral to guiding the ACNC's approach to regulation.

1.105 The ACNC Commissioner will have regard to issues of regulatory necessity, risk and proportionality to ensure that his or her actions are suitable and relative to individual circumstances. These concepts involve ensuring that regulatory responses give consideration to the different circumstances of different entities, including entity size, revenue and donations received from the public.

1.106 In furthering the objects of this Bill, the ACNC will work to ensure cooperation with other regulators so as to ensure that procedural requirements and duplication are minimised where possible. The ACNC will also work to educate the sector about regulatory requirements.

1.107 The ACNC Commissioner will have regard to the need to ensure that the law is administered effectively, and that it imposes a minimum of procedural requirements on registered entities.

1.108 The ACNC's approach will take into account the size, level of risk and history of each registered entity. This means that the ACNC Commissioner will have regard to the diversity of the NFP sector, and will respond accordingly.

1.109 The ACNC will also provide education to the sector and to the public about the NFP sector. The ACNC will thus be a platform for greater engagement between the NFP sector and the public and vice versa.

1.110 The Bill does not allow the Commissioner to collect fees for providing information, or for other purposes. Therefore, guidance and education provided by the ACNC must be provided for free.

1.111 Taking these factors into account will ensure that when undertaking its role, the ACNC balances these important considerations to provide a regulatory framework which underpins a strong and vibrant NFP sector.


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