Submission on restating the “In Australia” special conditions for tax concession entities. 2011 exposure draft

Submission by the South Pacific Division of the 
Seventh-day Adventist Church 

Rodney Brady
Chief Financial Officer
South Pacific Division of the SDA Church
Locked Bag 2014
Wahroonga 2076, NSW
Phone: (02) 9847-3333
rbrady@adventist.org.au 

To the 
Manager
Philanthropy and Exemptions Unit
Personal and Retirement Income Division
The Treasury
Langton Crescent
PARKES ACT 2600
NFPReform@treasury.gov.au 

Executive Summary
The Organisation
The South Pacific Division of the Seventh-day Adventist Church is the regional coordinating office for the Church.  Its territory includes Australia, New Zealand, Papua New Guinea and other South Pacific countries as far east as French Polynesia. Within this geographic area are various constituent bodies of different legal and administrative status. 

The activities of the Church in Australia and this region include the ecclesiastical functions of the Church; K-12 schools; tertiary education facilities; Aboriginal education facilities and health programs; aged care; the promotion of health and wellness through the different activities of Church including hospitals and Sanitarium Health and Wellbeing; printing and publishing; Christian book shops; national and international welfare, development and aid agencies; second hand shops.

The Church welcomes the opportunity to respond to the exposure draft for the tax law amendment for restating the “in Australia” special conditions.

Summary Response
The proposed amendments in Section 50-50 (2b) remove reference to expenditure and at the same time repeal Section 50-75 that allows gift income to be excluded from the expenditure test will inequitably result in some organisations losing their not-for-profit status. This will happen if gifts made by individuals from after tax income for overseas charitable purposes are given to an organisation and those gifts equal more than 50% of the organisation’s expenditure.

The outcome if implemented in its current form would not be logical and is not equitable. This change along with other changes being proposed for the charitable sector raises a broader question if Australia is trying to curtail rather than cultivate the charitable sector.

Recommendation
To solve the problem being highlighted by this submission without destroying the main purpose of the proposed changes would not be difficult and could be accomplished as follows:

1.	For Section 50-50 amend the proposed wording as underlined:
Operating and pursuing purposes in Australia
	(2)	The entity must:
	(a)	operate principally in Australia; and
	(b)	incurs its expenditure or and pursue its purposes principally in Australia; and
	(c)	not donate money to any other entity, unless the other entity is an *exempt entity.

2.	To retain either in Section 50-75 or within Section 50-50 some of the current provisions of Section 50-75:

In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded.   

Submission

While comments could be made on many of the changes contained in the exposure draft, this submission will concentrate on two significant sections being changed:

1.	Section 50-50 that is being repealed and replaced in full.
2.	Section 50-75 that is being repealed in its entirety and not replaced.

One stated objective of the proposed change is:

 “ 1.39  This ensures that any tax concessional money stays within the exempt entity framework and gets used principally in Australia for the broad benefit of Australians”

The proposed changes make clear that gifts to a DGR organisation must be used solely for the benefit of the Australian Community except for complying Foreign Aid.  Australia does little to encourage charitable giving like countries such as New Zealand, Canada and the United States of America do. The premise of the exposure draft is that all income received by a charity is concessional and offers the donor a tax benefit at a cost to Australian tax revenue. Our organisations experience is that only a small portion of total donations give the donor a tax benefit with most donations coming from after tax income. Other faith based organisations would have a similar financial profile for donations.

The exposure draft allows charities to make grants to qualifying overseas organisations so long as those grants are less than 50% of its activity. Individuals are able to make donations direct to charities overseas and the internet provides increasing opportunities for individuals to remit funds directly overseas. Once remitted overseas the donor has little control with regards to accountability and relies on the provisions of another country.

Overseas Aid organisations that are DGR’s have to follow strict guidelines from AusAid about the type of development projects that can be supported. Many services that the community regards as basic human needs cannot be supported under AusAid guidelines as these are regarded as welfare and not development. 

Australia is a wealthy country and many people are willing to give gifts to those in developing countries even if they do not receive a tax benefit.  In our experience those gifts extend beyond ecclesiastical functions to include medical (clinics & hospitals), education, buildings and welfare programs. 

The illustration given in the explanatory information provides a valid reason for removing the expenditure test to address an anomaly for organisations that buy goods from overseas to be used for charitable purposes in Australia potentially being denied charitable status. Removing that anomaly has the effect of creating other anomalies and problems that are not equitable.

The expenditure test is a measure that can be quantified. Relying on a subjective measure of “pursues its purposes principally in Australia” can be interpreted in many ways and will be a source of legal dispute if that is the sole measure. Most of the examples given in the explanatory document use a financial measure of expenditure to explain “pursues its purposes principally in Australia”.

The effect of the changes would mean that an Australian charity would lose its not-for-profit status if it used more than 50% of its income overseas. This would happen even if those gifts were made by donors from after tax income. This would be an unfortunate consequence for the following reasons:

1.	An Australian based charity that receives gifts would have an incentive to move its operations offshore if more than 50% of its income was used overseas. That would be a loss to the Australian economy for the portion of activity that had been conducted in Australia. As far as the donor is concerned the method of communication and making donations would not have to change if the charity they supported moved overseas.

a.	An Australian charity that gives less than 49% of its income to an overseas charitable organisation will retain charitable status. Another organisation would lose charitable status if gifts to an overseas charity are greater than 51%.
b.	Australian charities can receive large one off gifts or bequests for overseas purposes. The proposed legislation could have the effect on a charity that received a large bequest for overseas purposes losing its eligibility for not-for-profit status. The charity has little control on being made the beneficiary of an estate.

2.	An Australian charity receiving donations can demand greater accountability for grants made than an individual donor can. This function is a benefit to the Australian community.

3.	Individual donors will donate direct overseas and lose the ability to have accountability for their gifts. The motives for giving will not change.

Changes to Section 50-50 will create problems for charitable organisations that are now receiving gifts from after tax income that is then used for charitable purposes overseas.  This is caused by two changes:
1.	Implementing the proposed changes to Section 50-50 part 2-
Operating and pursuing purposes in Australia
	(2)	The entity must:
	(a)		operate principally in Australia; and
	(b)		pursue its purposes principally in Australia; and
	(c)		not donate money to any other entity, unless the other entity is an *exempt entity.

The previous section 50-50 contained the words:

(a)	is a prescribed institution that has a physical presence in Australia and, to that extent, incurs  its expenditure and pursues its objectives principally in Australia.
……
Note 1: Certain distributions may be disregarded: see section 50-75

2.	By repealing Section 50-75  that has the following clause:

(1)	In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded.

The net effect is that by removing the expenditure test and at the same time disregarding gifts (even after tax gifts) means that charity that now receives after tax gifts for charitable purposes overseas greater than 50% of their income will lose their not for profit status. The current legislation allows gifts to be disregarded in the principally test.     
To solve the problem being highlighted by this submission without destroying the main purpose of the proposed changes would not be difficult and could be accomplished as follows:

1.	For Section 50-50 amend the proposed wording as underlined:
Operating and pursuing purposes in Australia
	(2)	The entity must:
	(a)	operate principally in Australia; and
	(b)	incurs its expenditure or and pursue its purposes principally in Australia; and
	(c)	not donate money to any other entity, unless the other entity is an *exempt entity.

2.	To retain either in Section 50-75 or within Section 50-50 some of the current provisions of Section 50-75:

In determining for the purposes of this Subdivision whether an institution, fund or other body incurs its expenditure or pursues its objectives principally in Australia, distributions of any amount received by the institution, fund or other body as a gift (whether of money or other property) or by way of government grant are to be disregarded.