Submission
EXECUTIVE SUMMARY
- Charities and related organisations provide important social benefits to the Australian community.
- They are a part of a much larger system of transfers to the disadvantaged and less well off.
- Their definition is value based and should reflect a broad Australian consensus.
- The Inquiry into definitions cannot be divorced from their intended uses.
- The definitions should be tight and watertight.
- They should include both the nature and purpose of the organisations.
- Their activities should fall exclusively within the definition and otherwise not qualify.
- Charities should be narrowly defined with a strong emphasis on direct relief action.
- Their core definition should be simply stated with supporting elaboration.
- Religious organisations are virtually self-defining and should be considered for exclusion.
- Community service organisations should be included under the heading of charities.
- The ATO should have the responsibility to supervise the application of the definitions.
- A new statutory definition is necessary.
CHARITIES AND RELATED ORGANISATIONS IN CONTEXT
Although the statistics for this sector are not comprehensive and its boundaries are unclear, its importance to Australian society is undoubted.
According to the 1999 report of the Australian Institute of Health and Welfare, non-government community service organisations dispose of some $6.4 billion, which they receive mainly from government ($3 billon), households ($2 billion) and fundraising ($1 billion).
In 2000/01 their activities will be supported by a significant proportion of the $400 million of tax expenditures available to not-for-profit organisations.
Almost half a million people work in the sector, a very substantial figure even in relation to a total workforce of 9.6 million.
These raw facts do not give an adequate impression of the range quality and volume of services provided by the sector as a whole. While there are questions about the value of some of the activities of the sector, the provision of poverty and crisis relief, aged services and education facilities give direct benefits to a large segment of the population that might otherwise not receive them.
This effort should be set in the context of the broader system of transfers of income and wealth in Australia and the direct provision of services to the less well off through government (which are paid for by the taxpaying public) and other entities.
These include:
- the steeply progressive Australian income tax system, which begins to appropriate almost one half of marginal income at a level less than twice, average weekly earnings. This both "levels down" most incomes and provides the wherewithal to effect transfers to the less well off;
- the social security and welfare payments made through Australian governments (including grants to the sector), estimated at $69.7 billion in 2000/01. These cover a wide variety of circumstances including unemployment, age, youth, childhood, disability, carer responsibilities, housing, injury, ethnicity, aboriginality, single motherhood, regions, emergency and many others;
- significant elements of government expenditure on health ($38.1 billion), education ($32.3 billion), housing and community amenities ($8 billion) and a proportion of the spending on general public services ($19.5 billion);
- total tax expenditures of $19.7 billion, of which two-thirds falls under the heading Social Security and Welfare;
- an unmeasured range of discounts available to those with pensioner cards of various kinds including cheap travel and access to other goods and services; and
- direct individual and corporate sponsorship of activities and facilities such as hospitals, local events, blood, environmental upgrades, scholarships etc.
Even allowing for some overlap and churn this is a truly massive array of intra-society transfers.
It is worth setting down these figures not only to put the sector into perspective but also as a corrective to the regular criticism by some politicians, charities and journalists of the charitable contributions of the Australian public and the corporate sector. Our governments, which jointly appropriate well over a third of national income in a way that dramatically redistributes most individual and corporate incomes, are poorly placed to criticise the considerable charitable efforts of individuals and corporations.
Australia is a society in which huge income transfers take place with little credit given to those from whom they are made. More recognition of this sacrifice might help to explain and diminish the "donor fatigue" that many charitable, religious and community service organisations are facing.
SOME CONCEPTUAL POINTS
There has been discussion of the reasons for the existence of charitable and related organisations; particularly those engaged in social welfare activities. Such organisations have a very long history, often commencing with religious bodies and incidental to their spiritual mission. It is sometimes suggested that their genesis lies in the failure of the market and the government to provide directly for unmet needs. Attribution of failure to one mechanism or another and the consequent assignment of blame ignore the history and miss the point. Rather the respective sectors should be seen as having distinct and valid tasks.
There is overlap. Both government and charities draw resources from the private sector. There is extensive government intervention for what can be described as charitable purposes and the private sector makes a major charitable effort. But not the government nor the market nor any other mechanism, individually or jointly, is capable of meeting all needs, even all "basic needs" which are both enormous and ever expanding as our society grows more prosperous and the definition of needs expands. Our definition of poverty would seem like affluence to most of the world's population and for most of history. Even so, social welfare cannot be subsidised indefinitely much less some of the other activities undertaken by charities.
This relates to another point, whether the charities are the product of altruistic impulses or whether self interest plays some part. No doubt the organisations provide the vehicle for individuals to exercise their own preferences in terms of employment and vocation. How one looks at this is in part determined by personal values. But it is not irrelevant to the definition of such bodies. This should reflect some broader community summation of their place in and value to society. We maintain that the summation is likely to be more favourable to those activities, which are closer to the older versions of charity with direct relief of distress rather than some more modern variants with their emphasis on words rather than action.
The Committee has indicated that the Inquiry will not provide comment on the taxation or legislative and administrative treatment of the charitable and related organisations. Its work will be restricted to definition.
It is possible though difficult to describe the main characteristics of these bodies and thus define them. It is difficult because the definition is partly subjective and therefore potentially so wide as to become meaningless in practice. Moreover it is not possible to provide a value-free definition. The exercise must be at least partially normative rather than simply objective. The task of the Committee is therefore complex. Even if they ignore their own inclinations they will be reflecting the values of others.
THE MATTER OF PRIVILEGE
The foregoing has a practical implication for the Inquiry. The impetus for the Inquiry does not arise purely from a wish for greater knowledge of these bodies and clarity in their definition. It stems from the facts that they undertake functions which governments see as useful to the community and, consequent upon this, they have the privilege of direct government grants, numerous and substantial tax concessions and licences to raise funds from the public.
In many cases the existing definitions determine the level and nature of the privileges enjoyed. These privileges are not available to other sectors of the community and are largely paid for by them.
Therefore, these are not simply definitions of themselves but definitions with a purpose.
This freights the exercise with much greater significance than is immediately apparent. This is not merely an exercise in semantics. Its outcome may affect the fortunes of many organisations and individuals. While the Committee must avoid comment on the structure of these privileges, it cannot ignore their existence, which gives such point to the debate on definition.
There are implications of this.
First, the Government is specifically and apparently primarily seeking advice on definition from organisations in the sector. It is essential to have such advice as it draws on the combined experience and expertise of the practitioners themselves. But we must recognise the massive conflict of interest here. Many organisations are heavily dependent on government favours and are continuously seeking more government support as essential to their work and even their continued existence. The ongoing struggle for wider GST exemptions illustrates the continuity of this pressure. Although there will be diverse views from the sector, it can be expected that there will be a strong tendency towards definitions of extended ambit to comprehend a larger number of organisations and activities within the existing circle of privilege.
Until now the definition has been largely in the hands of the courts interpreting the common law. In this process the definition has embraced a steadily increasing number of organisations over decades of cases. This Inquiry opens the way for a more or less constrained set of definitions, which makes self-definition inappropriate.
This then leads to a second counterpoint that the Inquiry ought to give at least equal weight to the advice it receives from people outside the sector. They bear the cost of the privileges granted by government to some of which they may strongly object. In our system of government, the general public can only infrequently express its views directly on identifiable expenditure policies. Furthermore, to the degree that definition determines the level of support for different types of organisation then there is a case for the public to have a say in that level. If, as is the case, this is a sector that has not been much studied, there is an even stronger case for a more open debate.
This is linked to a third question, whether the sector and its clients exist and draw on the public purse by right. Jesus said, "The poor ye always have with you", but did not comment on their rights. It has been argued that the sector ought not to be regarded as within the tax net in the first place. It does not seem either sensible or logical to allow segments of the population the right to relocate outside the tax system on the basis of their own judgement. The corollary of this is to regard the direct grants as received by right, a process already well underway in the lobbying for multi-year subventions from government budgets.
In a way this is no more than an aspect of underlying cultural shifts in Western societies towards diminished personal responsibility and the treatment of social security payments as a right without any balancing responsibility. The efforts of this Commonwealth government to confine such payments to those entitled to them and to establish a principle of mutual obligation at the level of the individual are laudable. We contend that neither the organisations nor their clients have a right to financial privileges; rather they are granted by the population at large through governments.
Finally, the reason for the privilege is that the organisations serve the public interest. This is the key to all the definitions, which we discuss below. In serving the public interest they are able to act more flexibly and creatively than governments and derive part of their unique value there from. However, there is a tension, sharpened by their financial privileges, between their independence and the requirement for some sort of public scrutiny and accountability. This accountability is important in the formulation of definitions as it signifies the quality of the activity. Special status can too easily lead to abuse and loss of public support. Henry VIII's dissolution of the monasteries was made easier by their abuse of their privileged status in wealth and before the law.
DEFINITION
Definition of the organisations comprehended in the Inquiry is complicated by their differing nature and activities.
LOOSE OR TIGHT
Consistent with our thinking above, we would argue for relatively tight and watertight definitions for each of the three categories where this can be achieved. Generally accepted definitions of charity etc may well be broad and divergent but the definitions arising from this inquiry will have a purpose and should be clearly circumscribed by the function they are intended to describe. Loose definitions will widen the application of financial privileges, which ought to be confined to cases, which would stand comparison with other priorities in public expenditure.
Nor should we accept that there are classes of individuals or organisations, which are, by right, outside the normal obligations of society. We would prefer the definition to be limited to organisations that provide direct relief for poverty, sickness or like distress -- in other words, the traditionally accepted meaning of charity, which is direct giving to those in need. This is similar to the definition of public benefit institution used by the Australian Tax Office. Such a definition would have the merits of confining privileges to organisations that most clearly and directly provide public benefit. They would be easier to administer, as the test would be fairly simple.
It follows that we would prefer the definition to be the only test and that there be no list of special cases that do not fit the definition, as is now the practice. Such a list is not only unfair in the broad but gives rise to personal favouritism by Ministers, which is no more than a form of corruption.
NATURE OR PURPOSE
The question has been asked whether the definition should rest on the nature or purpose of the organisation. This seems like a non-question. For the definition to be effective it should cover both nature and purpose.
To take purpose; if this is not consistent with the underlying intent of the definition then the organisation should not qualify. If it has some other purpose but, for example, undertakes charitable work, then it should change its purpose. Otherwise, given the almost inevitable weakness of the monitoring of the privileged institutions, it will be too easy for them to change course and cease charitable activities without any internal check. Moreover one might accommodate all sorts of activities which turn out to be largely charitable, such as the Darwin to Alice Springs railway, but are clearly not charities in the accepted sense.
Likewise, the nature or behaviour of the organisation must be inherent in the definition or we will accommodate the Pharisees who loudly profess but don't act. For example, if its purpose is religious but its activities are primarily commercial or the provision of a fleet of Rolls Royce's for its leader then a definition that rested solely on purpose would be insufficient to disqualify it.
In short, the definition should rest on both what the organisation purports to be and what it actually is which, in turn, must reflect what it does.
This raises other questions.
An organisation may do many things, some qualifying and some not. We would argue that, to satisfy the definition, an organisation should be wholly engaged in the activity that defines the charity, religion or community service organisation. The focus is then on the qualifying activity rather than the organisation. It overcomes the potential problem of gradual change of the complexion of an organisation. It should not be impossible for multi-purpose organisations to arrange division of their activities to limit any privileges to those activities that qualify. Ancillary commercial, social, or recreational activities would therefore need to be hived off.
THE WORDING OF THE DEFINITION
It will be apparent that the definitions, to have practical value, cannot consist of a few simple words although the general intent may be expressed in this way. There will need to be some supporting material, which both elaborates and restricts the definition. Drawing on case law, this is what the ATO has done in TR1999/D21 for charities but that is a very lengthy document.
Charities. The Oxford Dictionary supplies a good starting point and perhaps a core definition. Any diffidence at using an English definition ought to be dispelled when we appreciate the basic definition for tax purposes has been the Statute of Elizabeth 1601. The definition reads "Giving voluntarily to those in need". This combines a number of useful features. "Giving" implies a direct act of beneficence rather than a wider set of activities that provide benefits indirectly. We believe that unless there is a strong link to direct relief action then the definition will become so vague as to admit a wide class of organisations whose purposes and activities would be only loosely targeted at the common good. This should not preclude the provision of benefits from one organisation through another that provides them direct. Nor would it preclude benefits such as direct advice or counselling to those in distress. The term "voluntarily" indicates activities undertaken mainly by private entities and excludes anything done under statutory obligation. It also implies an element of self-sacrifice. "To those in need" defines the recipient group as those who cannot help themselves. Ideally, it would exclude those that can but won't. It also implies universality so that the benefits cannot be confined to individuals of the donor's choice.
Such a definition is close to that of the public benefit institution used in determining the deductibility of gifts. It focuses on the relief of distress arising from poverty, sickness, and age or like direct needs. It also makes it easier to ensure that the benefits of the organisation go to the intended recipients rather than to the donors or administrators. The risks of this not happening were starkly illustrated recently by the behaviour of certain office holders in the Olympic movement who appeared to treat it as a private club both before and during the Games.
The definition would exclude a wide range of organisations currently regarded as charitable under the common law. For example, environmental, cultural, sporting, education or research bodies and many peak groups would cease to be defined as charities. This would have the advantage of removing anomalies whereby, for example, arts societies have status and cinema clubs do not and some environmental bodies appear to have a preferred status over others. If this course were thought to be too drastic then this non-charitable group of not-for-profit entities could perhaps be classified in a separate heading with income tax exemption but no more.
Elaboration of the definition should certainly require proper and regular accountability of organisations or the definition would become meaningless.
Other criteria might cover requirements for not-for-profit, apolitical/non-lobbying, payout rates and the quality of outputs and management. This would exclude a number of what are, in reality, political action groups falling under environmental and ethical and other headings.
Religious Organisations. In the past it has been accepted that a religion will attempt to convey a profound spiritual message and will involve observances and practices. This ought to be sufficient to suggest the wording for a simple definition.
It will be apparent that this approach will make it difficult to exclude from this category almost any self-professed group. The retreat of the established and other major churches, the entry of other faiths with substantial followings in the immigrant communities, the proliferation of new faiths or variants of the old, the general decline in religious observance together with the strong anti-discrimination laws all reinforce the trend towards religious free-for-all.
The difficulty of placing meaningful limits on access to the defined category and the increasing secularism of Australian society make a strong case for looking closely at the question whether this is a category that can be meaningfully defined or has any special need either for definition or the privileges that go with it. Its purely religious purposes and activities are quite dissimilar to those of a charitable kind and it would be interesting to know what is the level of support for them in the community at large and whether that support extended to continuation of their privileged status.
Community Service Not-for-profit Organisations. Given the discussion above we doubt whether this category has continuing relevance, as we would define charities in a way that comprehended all the organisations that ought to have special status. The nature and purpose of the community service organisation would then determine its status vis a vis the definition.
More generally, if there is to be modification of the definitions from their present courts-based and rather confused state then there seems little alternative to a new statutory definition. Without this the courts will continue to apply the common law definition in cases that come before them.
INSTITUTIONAL ARRANGEMENTS FOR APPLYING THE DEFINITIONS
Until now, given the privileged tax status of this sector, much of the work of supervising the definitions administratively has rested on the ATO with the guidance of the case law. Other government agencies have borrowed the definitions for the purpose of determining entitlement to grants. At the State level attempts have been made to apply their own definitions.
It is essential that a definition that confers privileges not available generally be properly and tightly supervised. It is desirable that there be some consistency in the definitions.
Employing the ATO to supervise does have several advantages:
- Focus in one agency ensures greater consistency of treatment of individual organisations although there is some criticism even of the ATO in this respect.
- The ATO is experienced in dealing with exemptions and generally takes a hardheaded approach to sloppy or dodgy claims. It can thus also be effective in declassifying an organisation.
- The ATO is used to dealing with annual returns and applying tests to purpose and to levels and nature of activity.
The alternative would be to set up a separate supervisory body such as exists in the United Kingdom. This would have the advantage of a special purpose agency with powers to research and perhaps licence organisations for both tax and other purposes. It might promote greater national consistency, which is highly desirable on equity grounds; although it is doubtful that the States would cede any of the powers they wield to favour particular institutions at the State level. There are some disadvantages:
- The cost of setting up such an agency would undoubtedly exceed that of the equivalent resources applied in the ATO.
- It would be more subject to political jobbery and special pleading. In present circumstances, appointments to such offices are often on the basis of political allegiance, which increases the exertion of influence and the risk of special favours.
- This also increases the potential for regular turnover of office holders with the risk of inconsistency and general weakening of the definition.
CONCLUSION
We believe that the accumulation of centuries of statute and cases and the growing financial privileges attaching to the defined categories has led to a wide extension of the definitions. The Inquiry represents a unique opportunity to produce a more robust and focussed definition of these entities. We believe that this should be based upon those organisations that provide direct relief to those in distress.
REFERENCES
- Australia's Welfare Services and Assistance 1999 -- The Australian Institute of Health and Welfare.
- Tax Expenditures Statement 1997-98 -- The Commonwealth Treasury.
- Charitable Organisations in Australia -- Report No. 45 -- Industry Commission 16 June 1995.
- Budget Strategy and Outlook -- 2000-01 -- Budget Paper No. 1 -- The Commonwealth Treasurer.
- Government Financial Estimates -- 2000-01 -- Australian Bureau of Statistics.
- Draft Taxation Ruling -- TR1999/D21 -- Income tax and fringe benefits tax: charities -- The Australian Tax Office.
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