House of Representatives

Explanatory Memorandum

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

Chapter 15 Consequential amendments

Outline of chapter

15.1 This Chapter explains:

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the rationale behind the consequential legislative amendments; and

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the commencement timing of the consequential legislative amendments.

15.2 This Chapter also identifies the Commonwealth Acts which will be amended by the Australian Charities and Not-for-profits Commission Consequential and Transitional Bill (the ACNC Consequential and Transitional Bill).

Summary of new law

15.3 The Australian Charities and Not-for-profits Commission Bill (ACNC Bill) will create a 'one-stop shop' for eligible NFP entities that are seeking access to tax concessions and, consistent with the Government's announcements, to make Australian Charities and Not-for-profits Commission (ACNC) registration a precondition where charities seek access to Australian Government exemptions, concessions or benefits available to charities.

15.4 To give effect to this policy intent a range of consequential legislative amendments are required to establish the ACNC as the central regulatory body for the NFP sector.

15.5 The amendments to Commonwealth legislation alter references to 'charity', 'charities', 'charitable entities' and like terms so that concessions, exemptions and benefits that are available to charities are now available only to charities registered with the ACNC.

15.6 Minor amendments were also made to Commonwealth Acts that provide concessions, exemptions and benefits to not-for-profits (NFPs). This was done to ensure that benefits earmarked for NFPs are only accessed by charities which are registered.

15.7 Finally, consequential legislative amendments were also made in order to minimise any regulatory duplication which may exist at the Commonwealth level; and to cater for the establishment and integration of the ACNC into the Commonwealth Government.

Detailed explanation of new law

15.8 As announced during the 2011-12 Budget, the ACNC will be a 'one-stop shop' regulator for the NFP sector. The ACNC's initial responsibilities will include:

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determining the legal status of entities seeking charitable status, including public benevolent institution (PBI) status, on behalf of all Commonwealth agencies;

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registering entities under their charitable status; and

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administering a new system of smarter regulation which will be proportional to size and risk, and minimise any regulatory duplication.

15.9 Consequential legislative amendments are required to enable the ACNC to determine the charitable status of entitles on behalf of all Commonwealth agencies; to minimise any regulatory duplication which may exist at the Commonwealth level; and to cater for the establishment and integration of the ACNC into Commonwealth Government.

15.10 The ACNC Consequential and Transitional Bill also contains a set of commencement provisions which ensures that the consequential amendments achieve intended outcomes.

15.11 The commencement provisions takes into account amendments which results from several measures still before Parliament.

15.12 Amendments contained in Schedule 2 to Schedule 3 to the ACNC Consequential and Transitional Bill will become operative once the ACNC Bill commences. These amendments generally change endorsement requirements for Commonwealth concessions, exemption and benefits to include ACNC registration as a precondition.

15.13 Amendments in Schedule 4 of the ACNC Consequential and Transitional Bill will become operative once the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 commences. These amendments are used to consolidate the terms 'funds', 'trusts' and 'institution' into 'entity', standardise certain conditions for access to tax concessions, and apply a consistent definition for the term 'Not-for-profit' across Commonwealth legislation.

15.14 The form of some of the amendments contained in Part 6 in Schedule 2 to the ACNC Consequential and Transitional Bill will hinge on the commencement of the amendments to the Customs Tariff Amendment Act 1995 .

15.15 Timing elements must be kept in mind when working through the consequential amendments, as many amendments are contingent on other reforms commencing. For this reason it has been necessary to carefully sequence the amendments to certain Acts.

15.16 For example, amendments in Division 2 of Part 2 in Schedule 4 to the ACNC Consequential and Transitional Bill make changes to the amendments which are made to Part 7 of Schedule 2 of the ACNC Consequential and Transitional Bill. This is required because the latter changes can only be made once the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 commences.

Determining charitable status on behalf of all Commonwealth agencies

15.17 Charities receive concessions, exemptions and benefits from the Commonwealth Government in recognition of the public benefit they provide. Commonwealth concessions, exemptions and benefits usually appear in Commonwealth Acts.

15.18 To access the numerous concessions, exemptions and benefits, entities have to satisfy the Commonwealth agency which administers these Acts that they are charities within the common law definition of the term.

15.19 Providing the ACNC with a central registration function will ensure that entities have to apply for charitable status on a single occasion. This will ultimately reduce the compliance cost and regulatory burden faced by NFP entities, and the administrative burden on the Commonwealth Government.

15.20 To ensure the ACNC's registration applies across all Commonwealth agencies, consequential amendments to Commonwealth Acts which provide charities with concessions, exemptions and benefits were made. A large share of consequential amendments included in the ACNC Consequential and Transitional Bill require charities to be registered by the ACNC under their charitable status, as a precondition to accessing the concessions, exemptions and benefits.

15.21 The amendments to Division 30 of the Income Tax Assessment Act 1997 , Division 50 of the Income Tax Assessment Act 1997 , to the Competition and Consumer Act 2010 and the Do Not Call Register Act 2006 are all examples of this type of amendment. [Schedule 2, Part 2, and Part 7]

15.22 In specific cases where Commonwealth concessions, exemptions and benefits are earmarked for a particular subtype of charity, amendments require ACNC registration as a particular subtype.

15.23 The amendments to the Fringe Benefits Tax Assessment Act 1986 , the A New Tax System (Goods and Services Tax) Act 1999 , and certain item of Division 30 of the Income Tax Assessment Act 1997 are all examples of this type of amendment. [Schedule 2, Parts 1, 3, 4 and 6]

15.24 Chapter 2 of the main ACNC Bill includes a registration table which describes the range of charitable subtypes. (Further information is provided in Chapter 3 of the explanatory memorandum)

15.25 The ACNC Consequential and Transitional Bill also makes further changes to the structure of Division 30 of the Income Tax Assessment Act 1997 which sets out the endorsement requirements for entities wishing to be deductible gift recipients. [Schedule 2, Part 1]

15.26 To make conditions associated with endorsement clearer, special conditions are now divided into two columns, one of the columns specifying the conditions the entity has to satisfy to be endorsed, with the second setting out the conditions associated with the gift.

15.27 The tables listing the entities that have been specifically listed as deductible gift recipients have not been changed.

15.28 The ACNC Consequential and Transitional Bill also clarifies that endorsement under most of the deductible gift recipient categories in Division 30 of the Income Tax Assessment Act 1997 are limited to charities.

15.29 Currently, some of the deductible gift recipient categories do not explicitly require an entity to be a charity prior to being endorsed as a deductible gift recipient. However, the Australia Taxation Office's (ATO's) administrative practice and interpretation of the law would generally require entities to be charitable prior to receiving endorsement.

15.30 To be covered by a deductible gift recipient category an entity would have to have a purpose which is conducive to the public benefit and be a NFP entity. In all cases the purpose will be charitable and therefore the entity would meet the common law definition of charity, unless it is a government entity. While being charitable is not an explicit condition of endorsement as a deductible gift recipient, the deductible gift recipient categories are generally subsets of charity which imply a limitation of endorsement to only charities.

15.31 For example, in item 1.1.1 of the Division, 'public hospitals' are not legally required to be charities. However, to be endorsed under this category hospitals would need to be a NFP entity and, given the nature of the hospital's activities, would have a purpose which is beneficial to the community. A NFP entity with a purpose which is beneficial to the community would meet the common law definition of charity.

15.32 The ATO's database shows that the clarification will not affect existing deductible gift recipients. However, should the database not be up to date and some entities are not charities, they will have a 12 month transition period to ensure they meet the requirement to be a charity and endorsed under DGR categories.

15.33 The Consequential and Transitional Bill also clarifies that is certain cases special conditions and registration requirements would be required to be met by the entity that is operating a public fund.

15.34 This occurs for example in items 9.1.1 and 9.1.2 in subsection 30-80(1) of the Income Tax Assessment Act 1997 , and items 12.1.2, 12.1.3, 12.1.4 and 12.1.5 in subsection 30-100(1) of the Income Tax Assessment Act 1997 .

15.35 These amendments ensure that where public funds are set up by registered charities, for example to provide resources for disaster relief, the public fund does not have to go through a registration process. The amendments also ensure consistency with the ATO's current administrative practice.

15.36 The ACNC Consequential and Transitional Bill also make changes to Division 50 of the Income Tax Assessment Act 1997 . The Division provides certain entities with access to income tax exemption, usually in recognition of the public benefit these entries provide.

15.37 The change amalgamates the 'religious institution' exemption into the broader charitable exemption. The 'religious institution' exemption is a relic of history made redundant after the Extension of Charitable Purpose Act 2004 .

15.38 The ATO has advised that no entity should currently be accessing income tax concession under item 1.2, instead these entities should be accessing concessions as charities established for the advancement of religion. Therefore, this amalgamation does not amount to a change in policy and will have no effect on the scope of entities that can access the exemption.

15.39 The amalgamation similarly applies across other Commonwealth tax laws, such as fringe benefits tax and goods and services tax where they itemise both religious institutions and charities in the same provisions but where the former is merely a subset of the latter.

15.40 To cater for cases where an entity is inadvertently accessing income tax exemption through the 'religious institution' category, the Consequential and Transitional Bill transitions these institutions into a 'registered religious institutions,' where these entities notify the ACNC in the prescribed manner. [Schedule 1, Item 6]

15.41 This transitioning of this subtype ensures consistency with the policy of transitioning subtypes that have unique tax concessions (such as public benevolent institutions and health promotion charities). [Schedule 1, Items 3 and 4]

15.42 Associated changes were also made to Division 50 to take into account and adopt the amendments being proposed by the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012.

15.43 Currently, charitable funds are exempt from paying tax under the items 1.5 of section 50-5. Section 50-5 separates certain charitable trusts into different items to reflect distinctions between institutions and funds, and that trusts established on or after 1 July 1997, or the funds or assets acquired by charitable trusts on or after 1 July 1997, are subject to the special conditions introduced in 1 July 1997.

15.44 The Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 is standardising the special conditions for charities, and therefore there is no longer any basis to separate these charitable entities into these categories and a requirement to have a distinction between fund and institution.

15.45 The ACNC Consequential and Transitional Bill eliminates the final distinction between fund and institution, which also ensures consistency with the ACNC Bill which will register charitable entities and not institutions or funds. [Schedule 2, items 26 to 30]

15.46 To ensure that funds established prior to 1 July 1997 (including returns earned by these funds on their stock of assets) are not required to comply with additional requirements a transitional provision in the Income Tax (Transitional Provisions) Act 1997 . This ensures that the updated special condition only apply:

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to charitable trusts established on or after 1 July 1997; or

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to any funds or assets acquired or given to a charitable trust on or after 1 July 1997 where a charitable trust was operating prior to 1 July 1997. This includes any income derived from these funds or assets.

[Schedule 2, item 40]

15.47 Further changes to the tax law provisions clarify that references to entities listed in Division 30 means those entities that are endorsed as deductible gift recipients. This includes amendments to the Income Tax Assessment Act 1936 . [Schedule 2, items 1 to 3]

Establishment and integration of the ACNC

15.48 The ACNC Consequential and Transitional Bill makes consequential amendments to related Commonwealth legislation to cater for the establishment of the ACNC and ensure the smooth transition of the ACNC into the Commonwealth Government.

15.49 These amendments eliminate the need for the Australian Securities and Investments Commission (ASIC) to continue to regulate NFP entities that are incorporated under the Corporations Act 2001 , and ensure that the ACNC has the legal infrastructure required to function effectively, for example to enable the ACNC to share information with other regulators. [Schedule 3, Part 3]

15.50 The ACNC Consequential and Transitional Bill amends Subdivision 426-B in Schedule 1 to the Taxation Administration Act 1953 . This Subdivision sets out the ATO's endorsement processes for charitable entities under numerous tax laws including the A New Tax System (Goods and Service) Act 1999 .

15.51 Amendments to the Subdivision ensure that changes to the endorsement conditions resulting from ACNC registration are taken into account when the ATO endorses charitable entities. [Schedule 2, items 131 to 134]

15.52 The ACNC Consequential and Transitional Bill removes certain administrative decisions taken by the ACNC from being subject to the Administrative Decisions (Judicial Review) Act 1977 . [Schedule 3, item 1]

15.53 The ACNC Bill establishes processes for an entity to challenge certain decisions of the ACNC. These processes are consistent with the review and appeal rights under other Commonwealth legislation (including taxation law), and cater for both internal and external merits review, and judicial review.

15.54 The ACNC Bill also allows appeals and reviews to be considered jointly with related administrative decisions of the Commissioner of Taxation, which are also not subject to the Administrative Decisions (Judicial Review) Act 1977 .

15.55 Enabling the Administrative Decisions (Judicial Review) Act 1977 to apply to the Commissioner's decisions is not required given the clear and robust review and appeal options available in the ACNC Bill, including the possibility of judicial review.

15.56 Additionally, given that administrative decisions of the Commissioner of Taxation and the ACNC will in practice be interlinked and jointly considered, subjecting ACNC decision to the Administrative Decisions (Judicial Review) Act 1977 may allow entities to initiate multiple judicial reviews in order to frustrate the implementation of ACNC decisions at significant expense and inconvenience to relevant regulators, the Administrative Appeals Tribunal, and Federal Courts.

15.57 The ACNC Consequential and Transitional Bill also amends the definition of Australia in the Australian Business Number Act 1999 . In the ACNC Bill, entities are required to have a Australian Business Number (ABN) prior to being eligible for ACNC registration.

15.58 The amendment ensures that where an entity is entitled to be a charity or deductible gift recipient but is unable to obtain an ABN because the entity is located in one of Australia's external Territories, these entities will nonetheless be able to obtain an ABN and therefore be entitled to be registered by the ACNC. [Schedule 3, item 2]

15.59 The ACNC Consequential and Transitional Bill also makes technical amendments to provisions of the tax laws conferring deductible gift recipient status on all entities providing volunteer based emergency services. The amendment ensures that all State and Territory government bodies that coordinate volunteer fire brigades and state emergency services can access deductible gift recipient status. [Schedule 5, items 1 to 4]

Minimising regulatory duplication

15.60 Establishing the ACNC as the central regulatory body for the NFP sector will assist the sector through reduced regulatory duplication and will promote the good governance, accountability and transparency of NFP entities by ensuring that only those charities that are registered with and regulated by the ACNC can access Australian Government concessions, exemptions and benefits.

15.61 Registered NFP entities would be required to comply with governance standards and meet reporting and notification obligations included in the ACNC Bill.

15.62 Currently, charities are regulated by numerous agencies at the Commonwealth level, and therefore, are likely to be reporting and providing the same set of information to multiple Commonwealth agencies.

15.63 The 'charity passport' which the ACNC will develop will enable registered entities to meet the majority of their financial and governance reporting requirements by reporting to the ACNC. This will help in minimising duplication in reporting obligations.

15.64 Consequential legislative amendments will be required to ensure that registered entities do not have the legal obligation to report on multiple occasions and meet duplicative regulatory obligations. The passport would ensure that the same information does not have to be provided on multiple occasions but would not eliminate the legal obligations on entities to provide this information.

15.65 The ACNC will not be responsible for monitoring service delivery outcomes and quality standards of NFP entities. Agencies that oversee these aspects of NFP entities operation will continue to play this role. Therefore, these entities will still require the legal authority to be able to collect information and regulate the quality standards of registered entities.

15.66 A balance needed to be struck between minimising regulatory obligations and ensuring agencies have sufficient power to fulfil all of their legal obligations.

15.67 Consequential legislative amendments were made where there is direct regulatory duplication. These include for example amendments to the A New Tax System (Family Assistance ) ( Administration) Act 1999 , the Aged Care Act 1997 , and the Corporations Act 2001 .

15.68 The amendments to A New Tax System (Family Assistance ) ( Administration) Act 1999 and the Aged Care Act 1997 ensure that where information is provided to the ACNC, entities would not be legally obligated to provide this information to the ACNC. [Schedule 2, items 142 and 148]

15.69 The ACNC Consequential and Transitional Bill will make consequential amendments to the Corporations Act 2001 (the Corporations Act) to address duplication for NFP entities, clarify the delineation of responsibilities between the ACNC and the Australian Securities and Investments Commission (ASIC), and reduce regulatory burden on the NFP sector. [Schedule 3, Part 3]

15.70 The consequential amendments will remove duplication by turning off the following requirements in the Corporations Act for entities registered with the ACNC: [Schedule 3, Part 3]

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the requirement for entities to notify ASIC of various matters, such as changes to its address or its directors, as these notifications will now be provided to the ACNC, as part of its 'one-stop shop' function;

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certain director's duties for entities registered with the ACNC, as under the new regime, the responsible entities will be subject to equivalent governance standards that will be specifically tailored for the NFP sector. These governance standards will be set out in regulations that will commence on 1 July 2013;

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the financial reporting requirements in the Corporations Act, as these requirements are contained under the draft ACNC legislation. Further detail about the content of financial reports will be set out in the regulations that will commence on 1 July 2013; and

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the procedural requirements relating to the conduct of Annual General Meetings (AGMs), as an equivalent procedure, which will be simplified and tailored for the NFP sector, will be set out in regulations that will commence on 1 July 2013.

15.71 A regulation making power will enable other provisions of the Corporations Act to be turned off in respect of registered entities, and allow conditions to be imposed in respect of the provisions which are being turned off. This regulation making power is needed to allow further duplication in the Corporations Act to be addressed, as a result of future reporting and governance standards that will be developed following consultation and will commence from 1 July 2013.

15.72 Consequential amendments are also being made to expand the category of individuals able to conduct a review of a medium sized entity, which is intended to increase the supply of reviewers, and lower the costs associated with these reviews. [Schedule 3, item 32]

15.73 At the same time, appropriate safeguards will be maintained by ensuring that such individuals are subject to the oversight and continuing professional development requirements of the three professional accounting bodies, CPA Australia, the Institute of Chartered Accountants, and the Institute of Public Accountants.

15.74 The consequential amendments also clarify the responsibilities of ASIC and the ACNC, as entities registered with the ACNC will be primarily regulated by the ACNC, rather than ASIC, in relation to the day-to-day activities of the registered entity.

15.75 Under the new regime, ASIC will continue to register companies, including companies limited by guarantee, but will have limited oversight of the financial reporting and governance arrangements of those companies that choose to register with the ACNC, as oversight of these arrangements will be performed by the ACNC.

15.76 Currently, ASIC conducts surveillance of financial reports prepared by companies, registered schemes and disclosing entities, and their compliance with Part 2M.3 of the Corporations Act. ASIC will not continue to be responsible for financial reporting surveillance in respect of entities registered with the ACNC from 1 July 2013, as this function will instead be performed by the ACNC.

15.77 ASIC is currently responsible for registering authorised audit companies and registered company auditors, and will continue to do so under the new regime. As part of consequential amendments to the Australian Securities and Investments Act 2001 , ASIC will retain the power to obtain information in respect of ACNC audits. [Schedule 3, items 20 to 23]

15.78 ASIC will also continue its current oversight role with respect to external administration processes, such as liquidations and administrations, undertaken under the Corporations Act.Do not remove section break.