Why was the Better Targeting measure initially proposed?

The Better Targeting measure is grounded in a 2008 High Court judgment against the Australian Taxation Office. It was found that Word Investments Ltd were entitled to run a commercial business (funeral services) and direct profits back into their charitable works (translating the bible) while still retaining their charitable taxation concessions relating to fringe benefits and income tax.

Following this judgment the Commonwealth Treasury provided estimates to Cabinet suggesting that the flow-on impact of the decision would be a loss to government revenue of $2 billion. This was based on the assumption that a small minority of organisations may choose to exploit the opportunity to avoid paying tax by pretending to be charities but actually operate commercial activities that did not direct all their profits back to the charitable purpose.

In 2011, the Federal Cabinet agreed they had to close off this potential loss of government revenue. The proposed new tax on unrelated commercial activities of not-for-profits (NFPs) was announced as part of the 2011 Federal Budget.

How will the proposed new tax affect NFPs?

Since May 2011, the Commonwealth Treasury circulated a discussion paper outlining a range of potential approaches to enacting proposed new arrangements as part of the Better Targeting measure and ran a number of consultations.

The NFP sector has generally been opposed to any clamp down on commercial activities in the sector, primarily because there is limited evidence that the Word Investments Ltd High Court Decision (2008) has actually led to major tax avoidance. Other potential issues have also emerged including:

• Added compliance costs
• Inhibiting the diversification of NFP income streams
• Inappropriate targeting of all NFPs for the behavior of a small minority
• General confusion about what might be considered an unrelated commercial activity.

In late January 2013 the Federal Government announced that the introduction of the proposed new tax would be delayed until 2014. What does this mean for NFPs?

This means that any new tax introduced on unrelated commercial activities will still apply to new activities that commenced after May 2011. However, these activities will only become subject to the new tax from 1 July 2014 and existing unrelated commercial activities will not be subject to the measure until 1 July 2015.

The delay has provided more time for NFPs to work with government to ensure that any new tax doesn’t stifle innovation and diversification of income in the sector, and that alternative ways of stopping tax avoidance by any organisation inappropriately using their charitable status can be explored.

What is the biggest challenge NFPs face with regards to the proposed new tax over the coming months?

While no-one supports the misuse of charitable status to avoid taxation, there may be other ways to address these concerns without making every NFP question the taxation implications of their every income producing activity, and face a potential loss of tax concessions.

The challenge now is to ensure there’s a genuine review of the proposed new approach to NFP concessions on unrelated commercial activities. The sector must ensure that whatever is eventually put in place doesn’t impede innovation or income diversification, and that any new measure doesn’t result in a significant new compliance issues.