Submission by Steer Incorporated

TAX LAWS AMENDMENT (2011 MISCELLANEOUS MEASURES) BILL (NO 1) 2011: TAX EXEMPT BODY “IN AUSTRALIA” REQUIREMENTS

1.	INTRODUCTION

1.1	This submission is made by Steer Incorporated [Steer] (ACN 004 552 809) which is an Australian based and domiciled, income tax exempt, charitable institution established in 1961.  

1.2	Steer is income tax exempt by virtue of being prescribed as an institution pursuing objectives principally outside Australia under s 50-50 (d) of the Income Tax Assessment Act 1997.

1.3	Steer pursues the objectives contained in its constitution by raising funds to support the activities of faith-based charitable institutions which fall into three categories:

•	Charitable institutions located and operating principally in Australia.
•	Charitable institutions located in Australia and operating principally overseas.
•	Charitable institutions located and operating principally overseas.

2.	OPERATION OF s 50-50 (d) & REGULATION 50.50.02

2.1	The intention of the Taxation Laws Amendment Act (No 4) 1997 was to prevent Australian entities passing income overseas to avoid income tax. 

2.2	The Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 1997 specifically excluded gifts and government grants when determining whether an organisation incurred its expenditure and pursued its objectives principally in Australia. 

2.3	When the Taxation Laws Amendment Bill (No 4) 1997 was introduced into the Parliament, the then Treasurer stated that it was not intended that the proposed Act should affect bona fide entities located in Australia which principally pursued their objectives overseas.  This resulted in the inclusion of section 50-50 (d) in the Income Tax Assessment Act which allowed bona fide organisations that would otherwise have been affected by the amendments to be prescribed.

2.4	Subsequently, Steer was one of a number of charitable institutions assessed by the Australian Taxation Office as being a bona fide entity and was listed as a prescribed institution in Regulation 50.50.02 of the Income Tax Assessment Regulations 1997.

3.	
CONCERNS ABOUT THE PROPOSED LEGISLATION

3.1	Steer has significant concerns about the potential impact of the proposed legislation on:

•	Bona fide faith-based charitable institutions located in Australia but operating principally overseas (see Section 4 & 5).
•	Bona fide charitable institutions located in Australia and operating in Australia, but which provide donations to charitable institutions in the first category (see Section 6).
•	Bona fide charitable institutions located in Australia and operating in Australia that make donations of money in the course of pursuing their objectives (section 7).

3.2	Steer’s concerns arise from:

•	The proposed removal of section 50-50 (d) of the Income Tax Assessment Act 1997 that allows bona fide charitable institutions located in Australia but operating principally overseas to be prescribed, and therefore to be income tax exempt.
•	The proposed limitation on donations received by charitable institutions located in Australia but principally operating overseas.
•	The proposed limitation on donations made by charitable institutions located in Australia to non-exempt entities in fulfilment of their purpose.

4.	FAITH-BASED CHARITABLE INSTITUTIONS LOCATED IN AUSTRALIA BUT OPERATING PRINCIPALLY OVERSEAS

4.1	There are a significant number of faith-based charitable institutions which are located in Australia but operate principally overseas.  They range in size from small entities staffed by a few volunteers to large entities which employ many people in Australia, as well as thousands of people overseas.

4.2	The charitable institutions are currently income tax exempt because they either:

•	Meet the current expenditure based ‘in Australia’ test, which does not include the use of donation funds from the assessment of expenditure, or 
•	Are prescribed under s 50-50 (d) of the Income Tax Assessment Act 1997.

4.3	The charitable institutions concerned carry out a wide range of humanitarian and other work.  The very large majority of these organisations work amongst people in developing countries, with a particular focus on the Asia Pacific region, and Africa.  The humanitarian activities undertaken by these organisations include inter alia:

•	Literacy and literacy development
•	Agricultural development
•	Hospital and medical services
•	Health education and promotion, including AIDS education
•	Community development
•	Leadership training
•	Primary and secondary education
•	Vocational training
•	Micro enterprise finance
•	Development of business enterprises to serve as a source of employment for local people
•	Provision of communication and transport services in remote areas
•	Provision of basic community infrastructure (clean and reliable water supply, sewerage systems, electricity, etc) 
•	Support and care of orphans and street children
•	Emergency aid and relief
4.4	Although some of the faith-based Australian located charitable institutions operating overseas operate under the Overseas Aid Gift Deductibility Scheme (OAGDS), others do not do so for reasons such as their small size, the costs of compliance, or the philosophy of the institution regarding government assistance. 

4.5	Irrespective of whether these institutions operate under the OAGDS or not, most undertake activities that:

•	Are aligned with Australia’s overseas aid objectives, and therefore,
•	Contribute to Australia’s broad public benefit and national benefit.
•	Consist of initiatives which aim to improve the well being of whole communities in the countries in which they work. 

4.6	In addition some of the charitable institutions concerned undertake activities that:

•	Are carried out in conjunction with, or the support of United Nations agencies.
•	Are recognised by the governments of the countries concerned as being linked with or funded by Australian agencies.

4.7	In undertaking their humanitarian and other activities overseas, these charitable institutions effectively contribute many millions of dollars a year to Australia’s overseas aid effort, without drawing on the government purse except for the general tax concessions available to charitable institutions.

4.8	The large majority of funds used by these charitable institutions to carry out their humanitarian and other activities come from the after tax income of individual donors.  Tax deductibility does not apply to the funds because the institutions are not deductible gift recipients, and the gifts are made without the expectation of a tax deduction.

4.9	Apart from pursuing their objectives overseas, the majority of charitable institutions concerned meet the other requirements for income tax exemption under the proposed amendments.  Specifically they:

•	Are located, resident and incorporated in Australia
•	Are managed and controlled independently in Australia, and are not agents, although they may form a part of an international network of charitable institutions.
•	Employ some of their employees in Australia
•	Are not-for-profit institutions
•	Meet the accountability requirements applying to incorporated entities under either the Corporations Act 2001 and are subject to the scrutiny of ASIC, or state incorporated association legislation.
•	Meet the professional fundraising standards and other organisational standards required by industry associations in Australia
•	Are audited annually which reduces the risk that the funds are not used for the projects they are donated for, or are being misdirected to inappropriate and unauthorised operations.

4.10	In addition to the above, the charitable institutions which are prescribed institutions are also subject to review by the Commissioner of Taxation and the initial scrutiny of Parliament before being prescribed.

4.11	As referred to above, the main source of funding for the charitable institutions concerned are gifts received from:

•	Individuals, 
•	Other charitable institutions, including churches and schools, and
•	Not-for-profit organisations, such as service clubs.

4.12	The number of Australian individuals and churches which provide gifts to charitable institutions located in Australia but operating principally overseas, number in the hundreds of thousands (individuals and churches combined) and represent a very broad based group from all states of the Commonwealth, and in the case of churches from every denomination.

4.13	Not only are the individuals and churches that donate to the charitable institutions located in Australia but operating overseas aware that the funds donated will be used overseas, but they donate because they have specifically targeted these gifts for overseas use.  There is no intention or expectation from donors that the funds will be used in Australia for the direct benefit of the Australian community per se.

4.14	Most of the donations provided by individuals and churches are given to support specific selected projects, seeking to achieve specific objectives.  The charitable institutions normally provide frequent detailed reports on the progress of these projects, including from workers on the field.  In this regard they normally meet a significantly higher level of accountability to their donors than the majority of charitable institutions and deductible gift recipients operating principally in Australia.

4.15	In undertaking their humanitarian and other activities overseas, the charitable institutions concerned employ Australians both in Australia and in the projects overseas.  This represents a demonstrable benefit to the Australian community.

5.	NEGATIVE IMPACT OF PROPOSED LAW ON CHARITABLE INSTITUTIONS LOCATED IN AUSTRALIA BUT OPERATING PRINCIPALLY OVERSEAS

5.1	It is evident from the Exposure Draft of the proposed legislation that a large number of Australian located charitable institutions which principally pursue their objectives overseas and undertake significant and constructive humanitarian work, will lose their income tax exempt status because they will:

•	No longer meet the ‘in Australia’ test because donated funds will be incorporated in the test.
•	No longer have the option of being prescribed because of the removal of s 50-50 (d) of the Income Tax Assessment Act 1997.

5.2	 Steer holds the view that the loss of income tax exemption by these charitable institutions will have a number of significant negative and unintended consequences.  As a result:

•	The significant donations received from individual donors out of their after tax income may also be taxed in the hands of the charitable institutions concerned, meaning that the income may be double taxed.  This is inconsistent with many of the Government’s policies.
•	Churches will not be able to provide donations to the institutions without losing their income tax exempt status.  This will deprive the charitable institutions of a significant percentage of their funding.
•	The charitable institutions concerned will be forced to reduce the number of projects they undertake because of the reduction in donated funds, and in some cases are likely to be forced to cease operation altogether.
•	The contribution towards Australia’s overseas aid objectives currently made by the charitable institutions concerned will be significantly reduced.
•	The number of Australians employed both in Australia and overseas will be significantly reduced.

5.3	Individual donors currently supporting those Australian charitable institutions will be very likely to be encouraged to forward donations directly to institutions overseas or to individual charitable workers overseas to avoid double taxation.

5.4	Individuals forwarding funds directly overseas, rather than donating to charitable institutions which are no longer income tax exempt, will create a number of risks and circumvent the purpose of the new law.

5.5	Donations from individuals will be directed to overseas organisations which, unlike Australian charitable institutions, are not:

•	Incorporated, controlled and managed in Australia.
•	Subject to the accountability requirements of either the Corporations Act 2001 and subject to the scrutiny of ASIC, or state incorporated association legislation.
•	Subject to regular audit in Australia.
•	Subject to the professional fundraising standards and other organisational standards required by industry associations in Australia.
•	Subject to review by the Commissioner of Taxation and Parliament.
•	Donations transferred directly by individual Australian donors to overseas organisations or individuals are at greater risk of not being used for the projects they are donated for, or of being misdirected to inappropriate and unauthorised operations.
•	Donations transferred directly by individual Australian donors to overseas organisations or individuals will carry a higher risk of being used for money laundering or being used to finance terrorism.

6.	NEGATIVE IMPACT OF PROPOSED LAW ON CHARITABLE INSTITUTIONS “IN AUSTRALIA” DONATING TO OTHER CHARITABLE INSTITUTIONS OPERATING PRINCIPALLY OVERSEAS

6.1	The proposed changes to the law will prevent income tax exempt entities donating to other charitable institutions operating principally overseas without losing their own income tax exempt status.

6.2	Steer holds the view that the proposed new law will have a number of significant negative and unintended consequences on donor charitable organisations.

6.3	A significant additional administrative burden will be placed on churches and charitable institutions such as schools and service clubs that wish to donate to other charitable institutions to ensure that the recipient institutions are income tax exempt, or if they were previously assessed as income tax exempt, that they retain their exemption.  This will be a critical issue because under the proposed legislation, if the donor institution donates as much as ten cents to a charitable institution that is not income tax exempt, the donor institution will lose its own entitlement to income tax exemption.   In addition the loss of income tax exemption will be permanent and irreversible.

6.4	This penalty is severe, highly disproportionate in its consequences, and does not exist under the current legislation, but has the potential to affect thousands of charitable institutions around Australia.  

6.5	Many of these charitable institutions are managed by volunteers who do not have a detailed knowledge of the tax law on charities, and who could from a single, well intentioned philanthropic act inadvertently cause their charitable institution to lose a range of tax concessions.

6.6	It should be noted that the penalties involved are made more severe by the fact that the majority of funds donated by churches, etc, for the most part come from after tax income, and therefore do not involve any loss of tax revenue.
7.	NEGATIVE IMPACT OF PROPOSED LAW ON CHARITABLE INSTITUTIONS “IN AUSTRALIA” DONATING TO NON-EXEMPT ENTITIES IN AUSTRALIA

7.1	The proposed changes to the law will prevent income tax exempt entities donating money in the course of pursuing their objectives to non-tax exempt entities in Australia.  This means that charitable institutions which are not DGRs, such as churches, schools and service clubs, will not be able to provide assistance to individuals in need because of poverty, or as a result of natural disasters such as fires and floods, because the individuals receiving the assistance are not tax exempt entities.  While churches, schools and service clubs may continue to donate towards public funds to assist such people, they currently provide substantial direct assistance to individuals in the pursuit of their objectives.

7.2	Steer is of the view that preventing charitable institutions from giving donations to individuals in need as a part of pursuing their bona fide objectives is an unreasonable limitation.  

7.3	Preventing charitable institutions from giving donations to individuals in need will have the effect of turning off a significant flow of assistance to such individuals, who will then be more reliant on government for assistance and thereby place a greater burden on the taxpayer.

7.4	The proposed limitation on tax exempt entities is made more unreasonable because the majority of funds which are used in this way come from after tax income  and therefore do not involve loss of tax revenue.

8.	COMMENTS REGARDING MONEY LAUNDERING AND TERRORIST FINANCING

8.1	The explanatory documentation issued with the Exposure Draft for the proposed legislation, states that one of the purposes of the restatement of the ‘in Australia’ special conditions for tax entities is to reduce the risk that funds passed overseas will be used for money laundering and the financing of terrorism.  Steer is supportive in principle of this purpose.  However, charitable institutions are already subject to the requirements of the Anti-Money Laundering and Counter-Terrorism Act 2006.  

8.2	The Anti-Money Laundering and Counter-Terrorism Act 2006 and the associated Guidelines for not-for-profit organisations provided by the Commonwealth Attorney General’s Department, require that charitable institutions carefully investigate who will use the funds and for what purpose before funds are transferred overseas.

8.3	The requirements under the Anti-Money Laundering and Counter-Terrorism Act 2006 and the Attorney General’s Guidelines arguably provide a more effective regime to reduce the risk of money laundering and the financing of terrorism than a blanket ban on funds being transferred overseas by bona fide charitable institutions as proposed under the Bill.

9.	CONCLUSION AND SUGGESTED CHANGES TO PROPOSED LEGISLATION

9.1	Steer contends that the proposed legislation will:

•	Have  a negative impact on a large number of bona fide charitable institutions which carry out valuable humanitarian and other activities overseas, and therefore
•	Have a negative impact on Australia’s national interest.
•	Place an unreasonable burden on, and potentially penalise a large number of charitable institutions located in Australia which support humanitarian work overseas.
•	Place an unreasonable limitation on charitable institutions in Australia which assist individuals in need in Australia as a part of pursuing their legitimate objectives.

9.2	On the basis of the above,  Steer requests that the current provision for charitable institutions located in Australia but operating principally overseas to be prescribed under s 50-50 (d) of the Income Tax Assessment Act 1997, be retained by amending section 50-51 of the proposed legislation as follows:

•	Adding the word ‘or’ after the words ‘this subsection’ in subsection 50-51 (3) (b) (iii), and
•	Adding the following words after subsection 50-51 (3) (b):

‘(c)	an entity that:
(i)	is an Australian resident operating principally overseas; and
(ii)	is prescribed in the regulations for the purposes of this subsection; and 
(iii)	satisfies the conditions (if any) prescribed in the regulations for this subsection.’

9.3	Steer requests that the proposed legislation be amended so that charitable institutions are not prevented from donating funds to entities located and operating in Australia.

9.4	To avoid the heavy penalties described in section 6 above on charitable institutions that commit small or inadvertent breaches of the proposed new section 50-50 (2) (c) of the Act, Steer requests that the proposed legislation be amended to incorporate:

•	A de minimus threshold, and
•	Discretion for the Commissioner of Taxation to disregard small or inadvertent breaches.

(Dr) Richard L Dickins								12 August 2011
National Director

CONTACT DETAILS

Steer Incorporated
P O Box 211
BOX HILL  VIC  3128

Phone:  03 9899 6413
Email:  richard_dickins@steer.org.au