The Federal Government’s proposed tax concession changes for Not-For-Profits (NFPs) consider three structural options for NFPs undertaking ‘unrelated commercial activities’ under any changed regime. These are outlined in the consultation paper ‘Better targeting of not-for-profit tax concessions’ issued on 27 May 2011 by the Assistant Treasurer and Minister for Financial Services and Superannuation as follows:
Option 1 – undertaking unrelated commercial activities through a separate entity which would be taxed in an equivalent manner to other commercial activities.
Option 2 – undertaking unrelated commercial activities through a separate entity with profits retained in the entity at the end of the financial year being taxed.
Option 3 – undertaking unrelated commercial activities within the NFP entity with any element not directed to the NFPs altruistic activities being taxed.
All of these options will result in added accounting complexities and costs for NFPs and particularly in respect to the following aspects:
- The separate identification of all income, expenses, assets and liabilities of the unrelated commercial activity.
- Ensuring all transactions between the unrelated commercial activity and the other elements of the NFP are accounted for at arms length prices.
- Investing in and developing systems, procedures, controls and risk management frameworks to ensure the proper accounting for and reporting of the separate income, expenses, assets and liabilities of the unrelated commercial activity.
- Evaluating the nature and level of reporting requirements that might apply to the separated entity or division including the application of all relevant accounting standards.
- The preparation of separate financial reports for the entity or division.
- Dealing with the significant complexities of accounting for taxation under the Australian Accounting Standard, AASB 112 ‘Income Taxes’, being one of the more complex standards within the current financial reporting framework.
- Accounting for the tax and other consequences of joint venture/control type arrangements.
- Funding of and accounting for the payment and recovery of tax in situations where it is ultimately refunded to the NFP from the receipt of franked dividends.
These requirements will not be capable of being addressed by most NFPs without incurring significantly greater costs. Given that in many cases there may be no ultimate taxation consequences due to the use of all surplus funds for altruistic purposes, these added costs of compliance may see no public benefit, with the only consequence being the loss of the NFP’s resources for altruistic purposes.
The options set out in the consultation paper do not promote any particular form of entity into which the unrelated commercial activity might be separated. Most of the current regimes available for the creation of such an entity would see additional financial reporting requirements for the NFP on top of the taxation consequences. If this is not intended it will be important for the Government to rethink these proposals in their ongoing deliberations.
Many NFPs are currently structured in a form that would see it being highly problematic, if not extremely unrealistic, to separate from an accounting perspective ‘unrelated commercial activities’ as the concept is set out under these proposals. A more practical approach would ensure that unrelated commercial activities are defined so as to exclude the majority of activities where the funds are ultimately used for altruistic purposes, thus avoiding much of the accounting cost burden for NFPs.
In summary these tax proposals, if implemented in the manner set out in the consultation paper, will have major accounting implications for NFPs even if the ‘unrelated commercial activity’ is ultimately not taxable. These implications will not come without a cost burden for the Charity Sector thus reducing the fu nds available for altruistic purposes, with in many cases no added public benefit.
