Government is just getting in the way

Infrastructure inadequacies are seen by many as economic choke points, but where problems have occurred they stem from governments.

Congested road networks, gas pipelines, rail lines and the telecommunications network -- all suffer from government intervention.

But an unlikely political constellation offers hope.  While regulators try to maintain and extend their empires, constraining the creation of necessary infrastructure, two or three of the most important federal politicians in this field are showing great foresight.  Energy Minister Ian Macfarlane took the lead in refusing to regulate gas pipelines where competition already provides the discipline.  ALP energy spokesman Martin Ferguson shares that understanding and is offering tacit support.

Macfarlane is now pushing through reforms allowing greenfield gas pipelines to be free of regulation.  Legislation will allow new pipeline proposals to ask the minister, through the National Competition Council, for an upfront 15-year regulatory holiday.  Seeking to maintain control over these facilities, the Australian Competition and Consumer Commission has vigorously opposed this.  Yet there is no economic or public policy case for such opposition.  No new pipeline can be a monopoly essential facility -- life went on before it was built and those using it cannot lose by it being built.

If facilities are to be regulated, their owners need prior assurance their property won't simply be socialised by a regulator to please other users.  Pipeline owners have bitter experience of the ACCC's inability to understand the nature of business risk and the need for its adequate recompense.

The reforms represent solid progress.  They need to be built on to ensure the regulatory holiday becomes automatic.  They need to be extended to allow the removal of regulatory oversight from existing gas pipelines already subject to competition.

There is also progress on privately operated rail lines.  In the Pilbara, the NCC has long sought to require the purpose-built lines of Rio Tinto and BHP Billiton to be opened to third parties.  There are (arguably legitimate) grounds for opening up the lines on the basis that the companies agreed to this some two decades ago, but the NCC has relied on the argument that the lines have monopoly powers.

Treasurer Peter Costello declined to confirm this view.  He, with Ferguson concurring, has recognised that the firms will readily open their lines to third parties if adequately compensated.  Rio and BHP have no iron ore monopoly and thus every interest in earning more revenue, even from a competitor.  What they don't want is a leadfooted regulator setting the price and service levels they must afford other users on lines vital to their costs in a highly competitive market.  Nor does the nation want to risk valuable exports being impeded by regulatory control of its transport system.

Progress has been slower in telecommunications.  Much to the bafflement of Communications Minister Helen Coonan, Telstra chief Sol Trujillo says he simply cannot build a $3 billion optic system and leave the terms of its operation to a regulator.  Basically he is saying that if the government sees the facility as vital, it should build it itself and not with private shareholders' money.

The current approach to infrastructure is conditioned by the 1993 Hilmer report.  Great progress has been made by smashing the monopolies that once enjoyed protection.  But it is time to move on.

Competition and innovation are now sufficient to regulate all but a handful of services.  Beyond these, regulation creates a chemistry of conflict rather than commercial deal-making.  The party seeking to use the facility will see little downside in demanding better terms than could be negotiated.  This creates an asymmetry -- the owner can never obtain such better terms as the applicant can always opt out.  The process focuses on litigation rather than the creation of joint value.

We are inching towards a less interventionist framework assisted by a rare display of political consensus.  While this is to be welcomed, progress remains too slow, particularly in telecommunications.

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The Might Have Beens

Christopher Pearson appears on Counterpoint on economic reform.

Economic history, as a discipline, has gone out of fashion in Australian universities.  Ideologically driven economics, whether of the left or the neo-con variety, has triumphed over nuts and bolts empiricism.  Students who want to learn about the role of wool and wheat and labour costs in the development of the national economy mostly have to search it out for themselves in textbooks written before they were born.

This is a great pity, not only for the economics profession but for anyone trying to get a handle on the real world consequences of public policy.

There was a memorable example of how a grasp of economic history can transform policy debate a few weeks ago, in an article Richard Wood wrote in The Australian Financial Review.

Wood was talking about the 1870s, the golden age of pre-Federation Australia.  At the time our per capita Gross Domestic Product was the highest in the world.  It was 50% higher than the United States' and 15% higher than Britain's.

As he said:  "Within a few years the twin disasters of industry protection and centralised wage fixation were established, and in the following decades the country's economic performance plunged.  Wealth produced bad policy ..."

Exploring that paradox, Wood's analysis goes to the heart of the malaise that kept The Lucky Country underperforming for the next century.  "Colonial politicians believed they would always have enough money to fund any policy decision they chose to make".

To put it another way:  the political class ever since has felt entitled to buy our votes with bad, self-indulgent policy.  With Labor featherbedding the proletariat or the Liberals offering middle class welfare.  In either case the political class cheerfully presided over a radical disjunction between bad policy and its baleful consequences.

What's more -- short of outright depression phases -- they've usually been able to borrow enough to delay or disguise those consequences, or else to blame them on the weather, market cycles or flights of capital.  To blame them, in short, on everything except the root causes.

The first decade of the last century, the early years of Federation, were the turning point.  In the end, Alfred Deakin and the Victorian protectionists defeated George Reid and the New South Welsh free trade lobby.  The Deakinite Settlement, with a white Australia policy and industrial arbitration leading up to the Harvester Judgement as its other planks constrained our future and capacity to grow for decades to come.

It's always instructive to think about the alternative scenarios, the Might Have Beens in our history.  Perhaps the aptest parallel with Australia in the decades before Federation is with California, another goldrush boom economy.

Had there not been a regime of tariff walls to protect local industries, imports would overall have been much cheaper.  The proletariat in particular would not have been sorely taxed to cosset primary and secondary producers into ever-more-uncompetitive practices.  By the middle years of the Menzies regime, the average level of tariff support was 35%.  And locally manufactured goods were by and large a watchword for second-rateness.

Without the white Australia policy, competitive non-Anglo labour would in practice have undermined any attempt at centralised wage fixation.  Unemployment as we know it would never have been an issue.  Self-employment, of the kind which is only now coming into its own, would have been as much of a norm as working for someone else.

We would not have had the economic absurdity of arbitral bodies deciding minimum wages, not on a worker's worth to his employer but on the hypothetical needs of a couple with three children.  Employers would not have been coerced into funding "a social wage", as a de facto arm of social security.  Unskilled workers in Hobart would never have been priced out of a job by fixed pay rates geared to the cost of living in Sydney.  We would also have had far earlier emerging, in the tradition of the Currency Lads and Lasses, what nowadays we call an enterprise culture and with it a much more adaptive, independently minded workforce.

Without the lazy politics of the Deakinite Settlement, Australia might well have become as rich, developed and diversified an economy as California.  We'd no doubt have a larger, healthier manufacturing sector.  We'd be mostly exporting steel products rather than iron ore.  We'd have a far stronger finance sector and less of a balance of payments problem.  We would never have let shipping and rail transport become the featherbedded and dysfunctional sheet-anchors on trade that they became for most of the last 80 years.

We would almost certainly have become major global suppliers of educational services much earlier and we'd be more likely to have the capacity and entrepreneurial spirit to spend up on research and development.  Given our proven track record of technological inventiveness, too often marred by a lack of follow-through funding, we might even have given Silicon Valley a run for its money.

Opportunity Squandered: How the States have wasted their reform bonus

Backgrounder

INTRODUCTION

On 1 July 2000, the Goods and Services Tax (or GST) was introduced as the central plank of Australia's A New Tax System (ANTS).

This not only represented the largest change to the Australian tax system since the Commonwealth Government began levying personal income tax in 1942, but also the largest change to State-Federal fiscal relations -- again since the introduction of Commonwealth income tax.

The GST did not happen in isolation;  it coincided with rapid economic growth fuelled by decades of reform.  Together these should have generated "reform bonuses for the States".

If anything, the prevailing view is that the States have once again been diddled by the GST and Commonwealth.  That is, they have been left with too little money to undertake their growing tasks.

There is also the issue of reform.  All governments -- State and Federal -- understand the need to undertake a new wave of reform, and that this necessarily requires leadership from the States.  Indeed the States, led by Victoria, presented an ambitious, albeit sketchy, programme of reform to the February 2006 Council of Australian Governments (COAG) meeting. ⁽¹⁾  They claimed that, if undertaken, it "would add half a percentage point to GDP each year" and "bring fiscal dividends of between $8 billion and $13 billion a year over the next 10 years" -- which is large by any standard.

However, rather than make a commitment to reform, the States have once again demanded more money -- $10 billion over ten years -- from the Commonwealth, claiming that they lack the money to undertake the necessary changes and will, as a result of their inferior tax base, not receive a fair share of the tax gain. ⁽²⁾

This gives rise to the question:  what happened to GST and the reform bonus?  The proceeds from the GST were given to the States specifically to allow them to gain a greater share of economic growth to fund better service delivery and undertake reform.  Moreover, the States have repeatedly justified maintaining high tax rates or failing to eliminate taxes on grounds that they need to meet infrastructure demands and undertake reform of services.

Then there is the on-going question of the effectiveness of the federal system.  Fifty years of centralism and federal paternalism have had a detrimental impact on public perceptions about the usefulness of our federal system, and in particular, the role of the States.  A survey conducted last year by Griffith and Charles Sturt universities found that three-quarters of the respondents supported systemic change to the federal system, with just less than half supporting the elimination of the States.  Only 12.5 per cent supported the current structure. ⁽³⁾

As Ken Wiltshire of the University of Queensland and one of Australia's leading federalism scholars summarised it:  "Faced with the image of overlap and duplication and constant squabbling between commonwealth and states, the average citizen quickly jumps to the conclusion that abolition of one tier is the answer and will save money and acrimony". ⁽⁴⁾

While the Commonwealth has done much to undermine the standing of the States by usurping taxing and spending power, in the end, the States are responsible for their own poor reputation and for fixing it.

If the States fail to improve their standing with the public, which must include leadership in reform of their own areas of responsibility, the federal system is likely to remain in name only and the States to become little more than administrative units of Canberra.

REVENUE WINDFALL

Since the introduction of the GST, the States and Territories have experienced phenomenal, indeed record, growth in revenue -- far in excess of the rate expected at the time the GST was introduced.

At the time of the introduction of the GST, the States forecast total revenue growth over the 2000/01 to 2004/05 period of just 3.2 per cent per year. ⁽⁵⁾  Thanks to the GST, grant income was expected to grow by 10.7 per cent per year and own-tax revenue was predicted to decline over the period as a result of the loss of taxes resulting from the GST deal.  The net result was that the States did not expect to be a net beneficiary of the GST until 2006-07.

As it turns out, this was unduly pessimistic and substantially underestimated the revenue-generating capacity of the GST, the States' own taxes and other revenue sources.

During the first five years of the decade, State sector revenue from all sources grew by an average annual rate of 8.0 per cent per year.  This was 4.8 percentage points above forecast, and represented approximately real per capita growth of over 4 per cent per year.

The net result was that the States received $70 billion or about 14 per cent more revenue than they expected over the first five years of the decade (see Table 1).  That is, when the State sector's actual revenue is compared with what they predicted ⁽⁶⁾ when the GST was first implemented, the sector was financially better-off by about $70 billion.  (See Graph 1 for pattern of revenue windfall growth over time.)

State Sector:  Forecasted vs. Actual Revenue and Outlays

Graph 1:  Total Revenue

Table 1:  State Sector:  Windfall Revenue 2000/01-2004/05

	Total Revenue Windfall $ billion	As share of Total Expected Revenue %
NSW	0.0	11.9
Victoria	17.9	15.3
Queensland	12.7	13.1
WA	7.9	15.2
SA	5.5	13.6
Tasmania	3.4	29.4
NT	1.2	10.9
ACT	1.6	16.3
State Sector	70.2	13.9

Source:  State and Commonwealth Budget Papers.

The two main sources of revenue growth were Commonwealth grants -- (both GST and tied grants) -- and own-State taxes. ⁽⁷⁾

As shown in Table 2, grant revenue grew more rapidly than expected and own-State tax revenue did not shrink as forecast.  The more robust growth in grants and own-tax revenue generated a $50.5 billion "grant-tax windfall" for the States.  This was equivalent to a 12.5 per cent increase in income from these sources over the five-year period.  Put another way, the State sector received 12.5% or $50.5 billion more revenue from grants and own-taxes then expected.

Table 2:  State Sector:  Grant and Own-Tax Revenue Windfall 2000/01–2004/05

	Own-Tax Windfall	Grants Windfall	Grants + Own-Tax Windfall
	$ billion	$ billion	$ billion
NSW	9.5	4.8	14.3
Share of total	(15.4)	(6.3)	(10.5)
Victoria	7.0	4.0	11.0
Share of total	(17.8)	(7.1)	(11.5)
Queensland	5.5	7.1	12.6
Share of total	(24.1)	(15/0)	(18.0)
WA	2.9	3.0	6.0
Share of total	(20.0)	(11.8)	(14.8)
SA	2.2	1.6	3.8
Share of total	(20.9)	(7.1)	(11.5)
Tasmania	0.4	1.1	1.5
Share of total	(16.7)	(13.1)	(13.9)
NT	0.04	0.7	0.8
Share of total	(3.4)	(8.3)	(7.7)
ACT	0.65	0.04	0.7
Share of total	(24.6)	(0.7)	(8.8)
All States/Territories	28.2	22.3	50.5
Share of total	(18.2)	(9.0)	(12.5)

Source:  State and Commonwealth Budget Papers.

Note:  Grants include general purpose or GST grants and tied grants, and table does not necessarily add due to rounding.

All States, with the exception of the two Territories, received a large grant+tax windfall.  Queensland benefited the most, with a grant+tax windfall of $12.6 billion or 18 per cent of total forecast revenue.  Queensland not only benefited from higher-than-expected grants (up 15 per cent) but also from a large unplanned increase in own-tax receipts (up 24.1 per cent).

WA and Tasmania also received large windfalls from both own-taxes and grants.  WA, which, along with NSW has been most tardy in meeting its GST commitments to cut agreed taxes, received an extra $2.9 billion (20.0 per cent) in own-tax receipts and an extra $3.0 billion (11.8 per cent) in Commonwealth grants.  Tasmania received an own-tax windfall (13.1 per cent) and a grant windfall (16.7 per cent).

While the other States received more modest windfalls from grants of between 6.3 per cent (NSW) to 7.1 per cent (Victoria and SA), they all received large double-digit windfalls from own-tax sources.  SA received a massive 20.9 per cent own-tax windfall while Victoria and NSW received windfalls of 17.8 per cent and 15.4 per cent respectively.

NSW, which been most aggressive on the tax front in terms of raising taxes and reluctance to meet its GST obligations to cut taxes, received a grant-tax windfall of $14.3 billion (equivalent to 10.5 per cent more revenue than forecast at the time the GST deal was agreed).  Importantly, while the growth in grants income to NSW has not been as rapid as that experienced by some of the smaller States, it nonetheless received more funds than it expected and is now a net beneficiary of the GST -- five years earlier than first predicted.

The two territories, NT and ACT, have received the smallest grant-tax windfalls to date, largely because of their dependence on grants.  While the ACT received the largest own-tax windfall (24.6 per cent) its gain from its main source of income, Commonwealth grants, was modest.  The NT received a modest boost from grants and an even more modest gain from own-taxes.

OWN-TAX WINDFALL

While the GST has provided the States with substantial additional revenue, the States' own taxes have been the main source of gains.  Own-tax receipts of the State sector were $28 billion or 18 per cent higher than expected over the period, compared with unexpected gains from the GST of $22 billion or 9 per cent (see Table 2).

All taxes proved to be much more resilient and lucrative than expected.

Payroll and land tax -- the States' broadest-based taxes -- grew on average by 6.9 per cent and 17.4 per cent per year respectively over the five years through 2004/05 (see Table 3).  However, the main source of additional revenue were the remaining stamp duties -- in particular those applied to conveyances and insurance -- the State sector's two worst taxes.

Table 3:  State Sector:  Growth in Tax Receipts 1999/00 - 2004/05

Tax Types	$ billion	Average Annual Growth (%)
Payroll	3.1	6.9
Conveyances	4.1	73.3
Insurance	1.4	63.7
Gambling	0.1	-2.4
Motor Vehicles	1.9	40.5
Land	1.7	17.4
Tall Taxes	3.8	9.9

Source:  ABS, Taxation Revenue 2004-05, 5506.0.

Note:  The taxes including Financial Institution duty, petrol liquor and tobacco excise fees and various stamp duties that were eliminated or phased-out as part of the GST deal are not listed.  Thus the columns are not additive.

Revenue from stamp duties on conveyances grew over the period by a massive 73.3 per cent or by $4.1 billion.

Revenue from stamp duties on insurance grew by 63.7 per cent over the period, thanks primarily to the inflation in insurance prices following the collapse of HIH insurance, the imposition of the GST and, in some States, higher tax rates.

The only main area of State taxation that did not increase over the first half of the current decade was gambling.  Total tax collections on gambling declined over the period by 2.4 per cent across the State sector.  This was caused by replacement of some gambling taxes by the GST and by policy decisions in some States to reduce the tax take.

The bottom line is that all States have benefited significantly from the introduction of the GST.  They received substantially more revenue than was expected at the time the Inter Governmental Agreement (IGA) was signed.  Grant income has been far higher than expected and own-tax receipts have been far more buoyant than expected.

The funds received in the form of higher-than-expected GST payments alone have been sufficient to have allowed all States to meet their tax-cutting commitments under the IGA.  But, so far, none has done so.

Indeed, the windfall revenue has also been adequate for the States to have gone beyond the GST agreement and used their windfall revenue to cut or reform their remaining taxes, but they have also failed to do that too.

The grant+tax windfall or reform bonus has also been large enough to have funded the Next Wave reform initiative being promoted by the States, but not undertaken -- supposedly for lack of funds.

THE SPENDING SPREE

In the main, the States have squandered their reform bonus.  While there is variation among the individual States in terms of fiscal performance, through a combination of sloppy budgeting, failure to control public service wages, and a propensity to throw money at problems, they have, in aggregate, consumed their reform bonus without undertaking reform or investing in infrastructure.

In 2000/01, the States projected recurrent spending to grow at a modest rate of 3.8 per cent per year over the subsequent five years.  That is, they planned to keep spending within the limits set by expected revenue growth and the desire to retain balanced budgets.

However, as revenue exceeded expectations, the States allowed recurrent spending to grow, often in an unplanned manner, driven by excessive wage deals with the public sector workforce.  As a result, recurrent spending grew by an average 7.8 per cent per year over the five-year period -- more than double the planned rate.

As shown in Table 4, over the five year period, recurrent spending by the State sector was $66 billion or 13.4 per cent above initial expectations.  (See Graph 2.)

Table 4. States:  Extra Recurrent Spending 2000/01 to 2004/05

	$ billion	As % of forecast spending	As % of windfall revenue
NSW	23.4	14.8	117
Victoria	14.2	13.3	79
Queensland	8.6	19.0	68
WA	6.5	12.6	82
SA	4.9	12.0	89
Tasmania	3.4	31.6	100
NT	2.0	15.7	167
ACT	1.6	21.4	100
Total	66	13.4	93

Source:  State and Commonwealth Budget Papers.

Note:  Revenue not spent on recurrent outlays is can be invested by reducing debt, adding to financial or spending on physical asset.

Graph 2:  Recurrent Outlays

All States participated in the spending spree.  Tasmania led the way with recurrent spending 32 per cent above expectation over the five-year period.  It was followed by the ACT (21.4 per cent), Queensland (19 per cent), NT (15.7 per cent), NSW (14.8 per cent), Victoria (13.3 per cent), WA (12.6 per cent ) and SA (12 per cent).

The State sector as a whole did increase investment on new and additional capital works -- by about $21 billion over the period's first five years. ⁽⁸⁾  However, this spending was funded, in the main, through the use of cash balances or new borrowings rather than from revenue windfalls.  Indeed, only 7 per cent of the States sector revenue windfall has been spent on investment whether in the form of new capital or debt reduction (see third column Table 4).

There was a great deal of variation among the States in terms of the extent to which their revenue windfalls were allocated between consumption and capital.

Queensland, which received a relatively large windfall, allocated a sizeable share (32 per cent) of its windfall to investment.  In contrast, Tasmania which received the largest windfall in percentage terms spent all of it on consumption.

Victoria also allocated a significant portion (21 per cent) of its windfall to investment.  NSW, on the other hand, increased recurrent spending by more than its windfall.

The States have regularly justified their failure to cut taxes on the grounds that they need to spend more on infrastructure.  Indeed this was the basis of their decision in 2005 to renege on their commitments to cut stamp duties under the GST deal.  However, as shown above, collectively the States have failed to use their gains from higher taxation to fund new infrastructure.

WINDFALL TO THE BUREAUCRATS

The main focus of the States' spending spree has been public service salaries.

The data provided by the States on their salaries and employment levels is limited, patchy and incompatible, rendering an accurate assessment of trends impossible.  Indeed, only two States (Victoria and NSW) provided forward estimates of employee entitlements on a national accounts basis over the period in question, and no State provides information on trends in employee numbers or salary movements in its budget papers.

Table 5 presents the best available data on staffing trends in the States.  While there is substantial variation across States and years, there are a couple of noticeable common trends.

Table 5:  Growth in State Employees:  Salaries and Staff Numbers

	Employee entitlements Average annual growth * %		Employee Numbers growth *** %
	1999/00- 2004/05	2003/04- 2005/06	Nov 1999-Nov 2005
NSW	7.5	8.9	6.9
Victoria	7.4	10.0	21.5
Queensland	10.1	9.6	9.7
WA	6.9	9.0	15.4
SA	6.8	8.5	17.0
Tasmania	5.8	11.3	19.5
NT	n.a.	6.9	24.1
ACT	8.4	12.6	3.9
State Sector	7.8	9.3	11.7

Source: * State Budget papers,

** ABS, Wages & Salary Earners:  Public Sector, 6248.0.55.001.

There has been substantial growth in expenditure on employee entitlements over the first five years of this decade -- averaging 7.8 per cent per year for the sector as a whole.  This compares with a forecast growth of between 3.7 to 4.7 per cent. ⁽⁹⁾

The rate of growth in employee entitlements tended to increase as the decade progressed, with the average growth rate over the three years to 2005/06 being 9.3 per cent across the State sector.  The State sector also increased its workforce by 11.7 per cent over the period.

Queensland has produced the most rapid growth in spending on public employees, averaging 10.1 per cent per year for the five-year period, with Tasmania producing the lowest rate of growth (5.8 per cent).  However, Tasmania has rapidly made up the difference, with its public sector wages bill growing by over 11.3 per cent per year over the last three years.  The promises made by the Tasmanian Labor Government in the recent State election will ensure that the wages bill continues to grow at this rapid rate.

The ACT has also allowed spending on public sector wages to get out of control, allowing public employee entitlements to grow, on average, by 12.6 per cent per year over the last three years.  Given the relatively low rate of growth in public servant numbers, it appears that the ACT has concentrated its additional spending on higher wages rather than greater numbers.

NSW appears to be following a similar path to that of the ACT.  It has kept growth in the size of the public sector workforce down to 6.9 per cent over the last five years, while allowing wages to blow out by 8.9 per cent per year in the last three years.

The States would argue that this spending was justified as it was used to attract and retain the best front-line professionals and thereby increase the effectiveness of these services.  The states have increased staffing levels and the wages of front-line staff.

As shown in Table 6, between May 1999 and Nov 2005, the State sector increased employment of education professionals by 56,100 (or 11.2 per cent) and health professionals by 36.400 (or 10.7 per cent).

Table 6:  States:  Growth in Education, Health and Administrative Staff
(May 1999 to May 2005)

	Staff numbers (’000)	Growth in numbers (%)
Education	56.1	11.2
Health	36.4	10.7
Administrators	44.0	30.5
Total	126	10.4

Source:  ABS, Wages & Salary Earners:  Public Sector, 6248.0.55.001.

During this same period, however, the States increased their administrator or bureaucrat workforce by 44,000 or 30.5 per cent.  Clearly, therefore, front-line staff have not been the States' sole focus.

Moreover, additional spending on front-line services is only justified if it increases the quality and capacity of the services and meets the demands of clients.  While it is not possible to provide a thorough assessment of the performance of State services, there are some clear indications that the increase in expenditures on front-line services has not been matched by comparable improvements in output.

For example, despite significant increases in expenditure on public schools -- mainly on more and higher paid teachers -- the number of students attending public schools continued to decline over the decade.  Indeed, in 2004/05, there were 20,000 fewer students in public schools in Australia than at the start of the decade, and the greatest decline took place in the most recent years when the growth in teacher numbers and wages was most rapid. ⁽¹⁰⁾  In contrast, despite high fees, families are increasingly voting with their feet against the State school systems and placing their children in private schools.  Both in terms of raw numbers and in its share of total students, the private school sector has shown continuous growth. ⁽¹¹⁾

The States have focused a great deal of their additional expenditure on public hospitals, again mainly on additional and higher paid staff.  Despite this investment, waiting times have continued to increase and through-put (separations) in all public hospitals has grown slowly (4.2 per cent over five years). ⁽¹²⁾  There are, however, substantial variations between States -- NSW is going backwards while Victoria is showing signs of improvement.

REVENUE GAINS:  STATES vs COMMONWEALTH A continuing complaint of the States, used as an excuse not to undertake reform, is that despite receiving the GST, they still do not receive a fair share of total tax revenue.  This claim is not supported by the evidence. The Commonwealth Government has experienced rapid growth in revenue.  Over the 2000/01-2004/05 period, the Commonwealth's own revenue -- total revenue less grants paid to the States -- grew at an average annual rate of 7.5 per cent per year, which, by any measure, constitutes rapid growth. In contrast, over the same period, State sector receipts from grants and own-taxes grew at an average rate of 8.0 per cent per year. The Commonwealth has also increased its spending on its own purposes at a very rapid rate of 8.7 per cent per year.  In contrast, recurrent own-purpose spending by the States grew, on average, by 7.8 per cent per year.  If spending on capital -- of which the Commonwealth does little -- is included, the records on spending by the State and Commonwealth sectors are about on a par. The big difference between the two levels of government lies with tax cuts and reform. In sharp contrast to the States, the Commonwealth has regularly shared some of its reform bonus with taxpayers.  During the period in question, the Commonwealth cut company tax to 30 per cent;  raised personal income tax thresholds;  cut the capital gains tax rate, and cut the rate and level of taxes on superannuation.  While these changes did not constitute major tax reform, they do constitute a far greater willingness to share the benefits of reform with taxpayers than has been exhibited by the States. Also in contrast to the States, the Howard Government used a sizeable portion of its reform bonus to facilitate reform.  Since coming to office ten years ago, the Howard Government has instigated a series of reforms accompanied by large increases in spending designed either to bolster support or to compensate those who lost from the changes.  During this decade these have included: large increases in funding and liberalised access to private schools in order to give families more choice and control over their children's education; the provision of a 30 per cent tax deduction for private health insurance to encourage the use of private insurance, to inject greater competition into the health system and to reduce demand on public hospitals; a number of incremental but nonetheless useful and costly reforms to the welfare system;  and most recently, major and costly reforms to the industrial relations system, as well as an overhaul of the aged care and TAFE systems. There can always be debate about the quality of the reform and whether the Commonwealth has been too generous with its compensation.  However, at least it has used its reform bonus on further reform and shared it with taxpayers, whereas the States have not.

What has been needed is not just more, highly paid staff, but innovation in the structure and conduct of the education and health systems.  This is the main challenge of the next wave of reform.  The States, as providers of the services and owner of these assets, need to play a major role.  They have received the funding to begin the process.  However, no State has gone down this path seriously.

Victoria is talking the talk.  The other States claim to be listening.  But, so far, there has been no action other than pumping more money into the status quo.  The windfall revenue received, to date, has been more than sufficient to fund a major reform agenda such as the rationalisation and reform of the public hospital system.  Yet rather than getting on with the task, the States have stuck their hands out, demanding even more money from the Commonwealth.

WHAT ABOUT THE FUTURE?

While the reform bonus flowing to the States as a whole is likely to wane somewhat, for most States it is expected to continue.  The GST is expected to generate an extra $14 billion for the States over the next five years, with all States being net beneficiaries. ⁽¹³⁾

Most States are also forecasting growth in own-tax receipts -- particularly in payroll tax.  Land tax receipts are forecast to continue to grow in many States despite the slowing housing investment market.  And some States, including Queensland and WA, expect growth in stamp duty on conveyances.

The threat to the States' finances lies not with lack of revenue growth, but with spending.

Over the last five years, all States have allowed recurrent spending to grow at a rate that exceeds revenue growth.  As revenue growth slows to more sustainable rates, the States will need to cut back on spending to match their lesser -- but still abundant -- revenue flows.  This will require a level of fiscal discipline that appears to be alien to the current crop of State governments.

Moreover, many States have locked in future wages growth far in excess of their revenue-raising capacity.

This task has been made more difficult by State politicians having constantly fed the public a message of cash shortage, and the need for more spending by Labor Governments in all states with their close ties to public sector unions.

Indeed, the current crisis afflicting NSW -- declining revenue, budget deficit, public sector lay-offs -- could spread to other States, with Tasmania, South Australia and the ACT being most like to follow suit given their heavy dependence on conveyances fees to fund large increase in wages.

AUGMENTING THE FLAWS IN THE SYSTEM

The failure of the States to use their reform bonus well should come as no surprise.  Australia's fiscal-federal system has long inculcated a mendicant mentality among the States, and the GST deal has made this worse.

Over the decades, the Commonwealth has steadily taken over ever-greater taxing and spending powers from the States.  It has become the States' main paymaster and has become directly and indirectly involved in just about every function of the States.  The GST increased this by replacing a range of State taxes with the GST and by being packaged with more tied grants.

As a result, the Commonwealth now collects, on average, 45 per cent of the State sector's revenue and nearly 65 per cent of Tasmania's revenue.  The GST also saw the Commonwealth directly assume responsibility for raising "State taxes" in all but name and for determining the composition of State taxes.  And it did so in a manner that gave it little effective control over the rate and base of the GST. ⁽¹⁴⁾

Despite periodic complaints, the States have, in the main, acquiesced in the Commonwealth's take-over of their taxing and spending powers.  They have regularly decided that more money raised by the Commonwealth was better than raising the funds themselves.  They accepted the GST deal because it gave them more money with fewer responsibilities.  The GST also gave them the scope for hand-balling responsibility for their own taxes over to the Commonwealth -- as witnessed by the need for the Commonwealth to force them to meet their tax-cutting obligations under the GST.

The extensive overlap and duplication between the States and the Commonwealth in the delivery of State services has dulled the accountability of the States to their own taxpayers.  Even the bureaucrats in charge struggle to disentangle the funding and policy responsibilities of the two levels of government.  However, since the Commonwealth controls the purse strings, it is seen by the electorate as the responsible party, even when it is not.

States' accountability is further undermined by the process used to allocate grants to the States.  Under the system, administered by the Commonwealth Grants Commission (CGC), GST grants are not allocated according to where they originated, but on a welfare basis aimed at allowing all States to provide the same set and levels of services, irrespective of their ability to raise revenue or of the cost of providing those services.

The CGC process is complex and comprehensive.  It considers all State revenue, not merely GST receipts.  Its impacts are understood by few.

While the CGC tries to make the system policy-neutral, it fails to do so.  In fact, poor policy decisions are rewarded rather than successful ones.  If a State commits to a policy which lowers its future growth -- for example, stopping industrial development -- it will eventually be compensated, in part, with higher grants.

The distortions of the system are dynamic and cumulative.  The system has been in place for decades, and its effects have become entrenched in the electorate.  These disincentives are greatest for the smaller States and the Territories as they are more dependent on the Commonwealth for revenue.

The GST has significantly increased the volume of funds pumped to the States through the CGC's system and augmented its distortions.

The quality of the States' fiscal decisions is also undermined by the structure of their tax systems.  The principle of a good tax is that it is levied on as broad and steady a base as possible, with as few rates as possible.  The aim is not only to minimise the adverse economic impacts of a tax, but to improve its transparency and fairness.  The broader the base, the fewer the exemptions, the greater its transparency and the more it is shared amongst the electorate.  The States' tax systems violate these principles -- both in terms of the tax mix and the structure of individual taxes.

They do so, not as the States claim because of the lack of a broadly based tax, but because of the States' desire to avoid accountability.  The States have long had two potential growth taxes -- payroll tax and land tax.  The base of both these taxes is potentially large and tends to grow with the economy as a whole.  In fact, in the 1970s, in response to demands for a "growth tax", the Commonwealth eliminated its payroll tax to create space for the States.  The States duly took up the tax and it quickly became the States' largest tax source.  Over time, however, the States have systematically distorted their payroll tax systems by levying it on employers rather than employees, by increasing the tax rate, by exempting "small business", allowing a large range of exemptions and by widening the range of income included in the base.  As it now stands, only about 11 per cent of firms pay payroll tax and the top rate of tax is 6 per cent.  A similar process has been applied to land tax.  As a result, these taxes do not raise as much money as they could, distort economic decisions and force the States to rely on even worse taxes such as stamp duties.

REFORM OPTIONS

It is tempting to argue for the renegotiation of the GST deal.  The deal was flawed.  It failed to achieve its aims of reforming the indirect tax system, and it allowed the States to reap, and to an extent waste, a huge reform bonus.

It also gave the States enough money to drown the voices of opposition, thus dulling the most potential sources of accountability in our democratic system.

The fact is that the deal is effectively set in stone.  It is the subject of an IGA which in turn is enshrined in Commonwealth law.  Under this law, any changes to the tax base, or rate, or means by which is distributed to the States requires the unanimous support of governments at both levels.

It is also tempting to urge the Commonwealth to take on a greater role to ensure that the States pursue reform and to ensure that at least the funds raised and handed to them by the Commonwealth are spent well.

However, this is likely to further erode the accountability of the States and the functioning of the federal system.  The key reason for the failure of the States to spend their reform bonus well is that the federal system shelters them from accountability.  The Commonwealth is not an adequate surrogate for direct accountability.  Moreover, the Commonwealth has proven to be more interested in taking over State functions and dictating State policies than it has in being an agent of State accountability.

The solution lies with rebuilding the functioning of the federal system.  This must include more intense scrutiny of the performance of the States and their own citizens holding them politically accountable for their actions.

It is also time to put reform of the federal system back on the agenda and this must include reducing state dependence on the Commonwealth for revenue.

---

ENDNOTES

1.  COAG, National Reform Initiative Working Group's Report to COAG

2.  Press Release, "Feds must show states the money for reform agenda", 28 March 2006

3.  Reported in M. Steketee, "Unwanted, but state governments are here to stay", The Australian, 27 April 2006.

4.  Ibid.

5.  In 2000/01, when the GST was first introduced, each of the States produced a set of forward estimates formulated on a common basis which projected the expected level of revenue, expenditure and budget balances for the next three years.  These were used as the basis for negotiating the GST deal and for planning spending and revenue collection policies.  Combining the 2000/01 forward estimates (which cover four years) with those for 2004/05 gives an estimate of the governments' revenue and spending expectations during the first five years of the GST (from 2000/01 to 2004/05).

By comparing these with the actual results (something no government does, other than for the year just completed) one can obtain an estimate about whether revenue, outlays and borrowings exceeded expectations -- in other words, whether the States have gained or lost from the introduction of the GST.

These forecasts were undoubtedly pessimistic.  All State treasuries, and, for that matter, Federal treasuries, have a tendency to take a conservative approach to forecasting future revenue flows, as the last thing they want to do is encourage their political masters to spend revenue which they do not have or might not receive.  In the case of the GST, the incentives towards pessimism were even stronger.  Low rates of growth in revenue would not only help convince the Commonwealth to provide higher minimum payments, but help keep the use of windfall revenue off the agenda.

Nonetheless, these are the official forecasts, and the forecasts used to set tax and expenditure policy and negotiate the GST.  They are, therefore, the benchmarks against which the States should be judged.

6.  Comparing the actual results obtained from the various budget papers 1999/00 to 2005/06 inclusive.  The forward estimates were, as discussed in footnote 3, obtained from those presented in a national account basis in the 2000/01 budget paper (for the years 2000/01 through 2003/04) and the 2001/02 budget papers (for 2004/05).

7.  The state budget or general government sector has numerous sources of funding.  Two of the largest are grants and taxation which together make up between 73 per cent (QLD) to 82 per cent (SA) of total revenue.  The other sources include fees and fines (which have grown markedly in some state, particularly Victoria), payments from public trading business enterprises and earning on investments.

For over a decade all states have pursued a policy of setting aside funds to meet future public sector superannuation liabilities.  Queensland has been pursuing this policy for longest and has accumulated a very large fund -- in excess of $15 billion.  These funds have in the main been invested in the stock market and have generated large increases in earning in recent years.  These earnings are passed back into the budget and represent a large source of revenue growth in many states.  In most cases these earnings have been used to reinvest in meeting future superannuation liabilities and thus reduces state liabilities.

In some states -- such as Queensland, which has already fully funded its future superannuation -- the earning above newly accruing liabilities is put into general revenue.  It must be noted that the policy of fully funding super is a sound investment in the future, at least to the extent that the expenditure growth referred in this paper is driven by the full funding of super.

8.  State and territory budget papers 1999/00 through 2005/06.

9.  As reported in State budget papers.

10.  Commonwealth Grants Commission, State Finances -- Report on State Revenue Sharing Relativities 2006, Update Documents, Appendix B, Table B-12.

11.  Productivity Commission, Report on Government Services 2006

12.  Report on Government Services 2006, Volume 2, Attachment:  Public Hospitals, Table 9A.7, Productivity Commission, January 2006.

13.  As a result of it reluctantly agreeing to cut the taxes as agreed under the GST Deal, NSW will not be a net beneficiary from the GST in 2006-07, but it will be in subsequent years.  Source:  2006-07 Commonwealth Budget, Budget Paper No. 3.

14.  Under the Inter Government Agreement, neither the GST, nor the base, nor the method of redistributing it can be changed without the unanimous agreement of the States.  The IGA was subsequently incorporated into Commonwealth legislation.  As a result, the Commonwealth gave away any ability to alter the GST.

Yes, minister, it takes ages, costs more

Last week the Government issued its 20-year transport strategy.  There were two gorgeous documents full of vacuous words and phrases such as "liveability", "world class", and "encouraging people to make more sustainable travel decisions".  There were lots of press releases, with opinion pieces by Premier Steve Bracks and Transport Minister Peter Batchelor.

But if you wanted to find out how much faster or slower trips were going to be, you would have searched in vain.  The plans, like the patient-free hospital in Yes, Minister, regarded transport as something valued in its own right -- not a means of getting from A to B in the shortest time.

Victorians surely have a right to see objectives in terms of measurable and achievable outcomes in their goals of moving around the city.

Most road spending is earmarked for regions and outer suburbs;  only 9 per cent of the budget is for major arterial roads.  Seventy per cent of total spending is allocated to public transport, which handles fewer than 10 per cent of trips at a considerable subsidy.

Even so, there was a chorus of criticism from the public transport lobby.

Paul Mees, in "A plan with no one in charge" (Opinion, 18/5), argued we should have more tram lines to Ikea stores.  He paraded Vancouver as an example, claiming that its policies have increased use of public transport.  So they have.  Use in Vancouver increased from 10.3 per cent, in 1999, to 10.8 per cent, in 2004, not 13 per cent, as he claimed.

This small increase was achieved by spending a fortune on light rail and reducing central business district parking places by 3000.  If Vancouver is the answer, we are asking the wrong question.

Light rail, with a well resourced lobbying strategy, is pressing strongly for a share of the public's tax tribute.  Brian Buckley, in "Road transport has been let run wild" (Business 19/5), as well as offering us his insights into the future rising price of petrol, offers seductive information on stunning patronage increases from some overseas light rail systems.

Greater public transport patronage is, of course, possible.  You need to spend vast sums of money and throttle car use.  Proponents of these solutions offer no evidence of saved travel time, and less on cutting costs.  That's because there are no such benefits.

The fact is that successful cities have to adapt to the modern economy.  This means greater flexibility in transport to correspond with a greater diversity of home, shopping and working locations.

The radial links that characterised cities in the past two centuries are being replaced by greater cross-suburb travel, and public transport is ill-equipped to deal with this.

Its role, though important, is fated to decline and trying to prevent this will mean regulatory controls on trips or starving road funding -- both of which will bring about a less efficient and, dare one say, less liveable city.

While public transport-bicycling fanatics were loudly claiming that a plan that spends 70 per cent on modes of transport that provided 10 per cent (and declining) of trips was inadequate, motoring lobbies were strangely muted.  Perhaps they were relieved that previous proposals for 20 per cent of trips by public transport by 2020 were downgraded.  Attempting to achieve that would have bankrupted the state and transformed the city into a decaying piece of antiquity, with clogged roads and disappearing jobs.

The pattern in the US is clearly being replicated here.  In 1960, mass transit trips were 3 per cent of those by car.  By 2004, they were 1 per cent.  Mass transit costs in 1960 were the same per person mile as car trips.  By 2004, petrol price increases notwithstanding, they were more than four times as dear.  And commute times averaged 43 minutes by transit compared with 25 minutes by car.  A city based on public transport needs extremely high density levels -- the sort of levels that amiable planners consider the hoi polloi should endure, but which they reject for themselves.  New York, the world's capital, has a vast central business district, including Manhattan, that has a population density 10 times that of Melbourne.  Even so, New York's transit provides fewer than 10 per cent of trips.

Modern cities have no alternative but to adapt to the cars that people want to use and that governments profit from by taxing that use.

Some of this revenue is properly redirected to public transport, which has a clear role in serving central business district workplaces (which account for 10 per cent of jobs).

Support for other services is also warranted since a small minority has no access to a car.  More funding should, however, go to providing roads to allow faster trips.

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Promoting Freedom and Community: Civil Society Organisations in Australia

Backgrounders

PRINCIPLES GUIDING THIS SUBMISSION

1. Australian society is best served by a strong, diverse and vibrant civil society.  Civil society organisations, including charities, constitute a vital part of Australia's civil society.
2. A vibrant civil society assists in building social capital which is important for the prosperity of Australian communities.
3. Individual voluntary participation in civil society organisations, whether through giving or volunteering, increases individual and collective freedom.
4. Civil society organisations that receive benefits from governments accrue obligations.
5. Civil society organisations and charities should be subject to regulations and restrictions that achieve a reasonable balance between strengthening civil society and ensuring that they are accountable for public resources.

ABBREVIATIONS

ATO:  Australian Taxation Office
CDI:  Report of the Inquiry into the Definition of Charities and Related Organisations, 2001
CSO:  Civil society organisation
DGR:  Deductible Gift Recipient

RECOMMENDATIONS

In response to the issues faced by civil society organisations and charities in Australia, this paper recommends that:

1. A new definition of charitable purposes be enshrined in a Charity Act.  The new definition should be based on broad categories within which purposes can be further specified, similar to the recommendation of the Charity Definition Inquiry.
2. The existing classification of non-profit organisations be replaced by a classification framework for all civil society organisations to include:  benevolent charities;  charities, altruistic community organisations and civil society organisations.  A hierarchy of benefits should match the CSO classification framework, with the available benefits reflecting the extent of the public benefit derived from each organisation's status.
3. The following purposes be specified as not constituting charitable purposes and that approved charities should be prohibited from undertaking such activities where they are anything more than merely incidental to a charity's purpose:
   • The commission or facilitation of illegal acts;
   • Involvement in party political campaign activity;
   • Operation of purely commercial enterprises;
   • Governmental functions;
   • Conferment of private benefit.
4. CSOs be exempt from regulation that significantly hinders their community activities and instead allow individuals to choose how best to bear risks.  Possible exemptions may include food labelling laws, public liability, certain occupational health and safety regulations and other regulations that do not provide significant benefit in return for their financial and social costs.
5. The ATO assume responsibility for granting charity and other status through which CSOs are able to obtain tax exemptions and concessions according to a transparent, objective and impartial process designed for application and acceptance across all Australian jurisdictions.
6. The ATO be empowered to review the activities of CSOs against legislative requirements when there is evidence of breaches of the regulations governing charities and, where necessary, revoke the relevant status.
7. CSOs in receipt of financial benefits be subject to accountability requirements which minimise any administrative burden but allow individuals to understand how public support is expended.  This should include a public register of involvement with government as proposed in The Protocol:  Managing Relations with NGOs. ⁽¹⁾
8. Other initiatives be examined to encourage involvement in CSOs through volunteering and giving, such as a register of CSOs, their activities and contact details, to make it easier for individuals to give and volunteer.

1 INTRODUCTION

Civil society organisations (CSOs), which include charities, not-for-profit and non-government organisations, are significant in Australian society in both financial and participatory terms.  The voluntary participation of Australians in CSOs -- whether through financial support, volunteering or other avenues -- allows individuals and communities freely to pursue the values they hold dear.  CSOs therefore represent a tremendous opportunity for the fulfilment of the individual and collective aspirations of Australians.  CSOs and participation therein strengthens Australia's civil society.

CSOs are also a significant part of the Australian economy.  Estimates of the contribution of not-for-profits to the Australian economy range from around 3 to 10 per cent of GDP and are even higher if their non-financial activities and services are included.  In 2004 alone, Australians volunteered more than 836 million hours of their time working with and in CSOs.

Despite the prominent role that CSOs have in Australian society, CSOs are not well supported by government regulation.  The benefits available to CSOs, particularly from Deductible Gift Recipient (DGR) status, lack transparency and are the subject of political manipulation rather than objective tests of charitable and public benefit.  CSOs also face an increasing regulatory and compliance burden from which only marginal public benefit is derived.  Public liability and insurance requirements provide the most obvious recent example of the enormous harm that has been done to CSOs by the absence of a coherent, nationally consistent legislative framework which supports the activities of genuine CSOs.

The large direct and indirect resources provided by government through a combination of grants, tax concessions and exemptions to the sector require accountability commensurate with the disbursement of government and public resources.  There are a number of examples where some organisations (albeit a minority of CSOs) that receive direct or indirect support from government have undertaken activities which are either clearly not charitable in nature, not appropriate for an organisation of their status or directly break laws.  Without discouraging individual participation in civil society, organisations that behave in such inappropriate ways must be held accountable for their actions.  Government support should be confined to purposes and activities which meet charitable and public benefit tests.

In this report, "civil society" is understood as the voluntary association of individuals and existing societal institutions through which society, its aspirations and values are expressed.  CSOs and institutions maintain and further the interests of individuals, family, friendship and community groups, and society in totality.  This report examines the regulatory issues surrounding CSOs, particularly charities and related entities.

Over at least the last two decades, a large and growing literature has developed to explore the importance that "social capital" has for human interactions and individual and societal well-being.  This literature has attempted to understand the importance, benefits and virtues of mostly intangible elements intrinsic to human relations and interaction, such as trust, norms of reciprocity, levels of social interaction, political engagement and community participation.  Empirical observations suggest that communities and societies with high levels of "social capital" (broadly defined) are more likely to exhibit desirable outcomes on measures such as health and economic attainment.

In its 2003 research paper on Social Capital, the Productivity Commission noted that the "presence of significant social capital may broaden the range of policy options open to the government.  It may be more effective to enhance and harness social capital in some cases than to rely on government-funded social services". ⁽²⁾  It further noted that the presence of social capital may protect disadvantaged communities from more severe social problems and that its promotion might therefore overcome the need for more drastic interventions. ⁽³⁾  CSOs in the form of charities and other community-based groups are a potential seed from which social capital can grow in communities around Australia.

This report begins with a brief overview of the charitable sector in Australia and an evaluation of the existing regulatory regime governing charities.  The report then considers the need for a Charity Act, the definition of "charity" and the availability of benefits for charities.  The report continues with an examination of the activities that a charity should not be permitted to undertake, the need for an activity test to be part of any regulatory regime and identifies the ATO as a potentially suitable regulator for the sector.

This report explores the importance of civil society organisations in Australian society and makes a number of recommendations ultimately aimed at providing a clear and transparent framework within which CSOs can grow and prosper while being accountable for their actions.

In discussing "charities" the report refers generally to organisations whose purpose conforms with those permitted under the definition of a charity -- that is, that they pursue a charitable purpose and seek to bestow public benefit.  This discussion in no way precludes, either theoretically or practically, enterprises which operate in accordance with commercial disciplines for charitable purposes.

2 CIVIL SOCIETY ORGANISATIONS IN AUSTRALIA

Civil society organisations play an important role in modern Australian society.  The most recent figures available estimate that the non-profit sector in Australia includes approximately 700,000 organisations which are predominantly small and wholly dependent on the voluntary support of members, ⁽⁴⁾ with the largest 30,000 employing approximately 8 per cent of Australia's workforce ⁽⁵⁾ and approximately 20,000 having DGR status. ⁽⁶⁾

Giving Australia:  Research on Philanthropy in Australia, a study commissioned by the Prime Minister's Community Business Partnership, estimates the value of total giving to non-profits in 2004 at $8.9 billion, comprised of $5.7 billion given by individuals and $3.2 billion from business.  Individual financial giving is complemented by individuals volunteering 836 million hours of their time.  Table 1 shows the distribution of giving and volunteering in 2004 across non-profit sectors.

Table 1:  Giving and volunteering in 2004 by recipient sector

	Individual donations (% total value)	Individual volunteering (% total hours)	Business giving (% total value)
Arts or cultural associations	2.3	3.4	9.3
Community or welfare services	12.8	28.2	30.5
Education	6.6	12.2	5.0
Environmental or animal welfare groups	4.8	2.6	0.9
Health (including medical research)	14.2	10.3	18.5
Sporting and recreational groups	3.7	19.7	17.7
Religious institutions	36.1	15.0	n/a
International aid	13.3	1.4	n/a
Other non-profit sectors	6.2	7.2	18.1
Total	100	100	100
Total value	$5.7 billion	836 million hours	$3.2 billion

Source: Giving Australia, October 2005, page 22.

Giving Australia found evidence of substantial real increases in the proportion of the population giving and the average value given.  Between 1997 and 2005, the real increase in the value of giving was approximately 58 per cent. ⁽⁷⁾  Australians now give around 0.68 per cent of GDP, which compares favourably with 0.46 per cent in Canada but is less than half the 1.6 per cent observed in the USA. ⁽⁸⁾  It would appear on this measure that Australians are becoming more, not less, engaged in civil society.

The Tax Expenditures Statement 2005 estimates that the value of tax deductions claimed for donations to entities with DGR status was $630 million in 2004–05 (including donations with an associated minor benefit). ⁽⁹⁾  Even adjusting for the portion of donations which are not tax expenditures, the large discrepancy between the $8.9 billion total given and the $630 million of DGR tax expenditures demonstrates that most individual giving is not undertaken in order to claim tax deductions.

Public benevolent institutions received fringe benefit tax exemptions estimated at $240 million in 2004–05, which they use to increase the after-tax value of staff remuneration packages. ⁽¹⁰⁾  Certain non-profit societies, promotion and development non-profit societies and non-profit, non-government bodies receive a combination of income tax exemptions and fringe benefit tax rebates estimated to be worth $70 million in 2004–05. ⁽¹¹⁾  These figures do not include the exemptions and concessions available to CSOs from State governments.

The Tax Expenditures Statement 2005 suggests that more than $1.1 billion in benefits were provided to CSOs through the federal tax system in 2004–05.  The total value of benefits for the non-profit sector is likely to be much higher, as there are substantial CSO groups that receive tax benefits for which no estimate is provided.  This is particularly true for tax exemptions provided for religious, scientific, charitable or public educational institutions where amounts are classified as unquantifiable.  For such a large and important sector in the economy and Australian society, this is a glaring inadequacy in the management and support of the sector.

When asked their concerns about giving to the non-profit sector, respondents expressed concern about duplication, wastage and excessive salaries and benefits in the sector. ⁽¹²⁾  A 1997 study by ASSIRT found that 69 per cent of donors would give more if there was more information on charity efficiency, while 79 per cent of donors would give more if there was assurance that the money was going to the cause. ⁽¹³⁾

In contrast to the expectations and concerns of givers, Givewell has found that the number of charities that separately disclose their fundraising costs has continued to decline:  from 59 per cent in 2001 to 40 per cent in 2004. ⁽¹⁴⁾  Givewell further commented that despite increased media focus on the need for accountability and transparency in charity fundraising and expenditure, many charities do not publicly release their annual reports and financial statements.

This evidence endorses the important place of CSOs in Australian society.  It also emphasises, however, that CSOs need to give serious consideration to the level of transparency and accountability in their activities and the influence that this has on the trust and confidence of givers.

3 THE NEED FOR REGULATORY REFORM

This section deals with the regulatory and policy issues which affect CSOs.  Specific consideration is given to the need for a Charity Act governing charities and related organisations.

3.1 NEED FOR A CHARITY ACT

The most recent attempt to define "charity" for practical application in the context of modern Australian society occurred in taxation ruling TR 2005/21, issued by the Australian Taxation Office (ATO) in December 2005.  The ATO's ruling defines "charity" by reference to a disparate combination of legislation, tax rulings, common-law precedent and legal concepts.  These referents include the Statute of Elizabeth and the four heads of charity.  In referencing the Statute of Elizabeth, the ATO fails to venture beyond a definition of charity codified in 1601, while Lord Macnaghten's four heads of charity are more than 110 years old, having been handed down in a court judgment in 1891. ⁽¹⁵⁾

Although the Statute of Elizabeth might once have been a pithy and cogent description of admirable purposes, it is undoubtedly outdated.  The statute's failure to account for the changing nature of relations between, and the aspirations of, members of a free democratic society, be they governments or individuals, makes it an inappropriate and inadequate construct by which to define a charitable purpose in modern Australian society.

TR 2005/21 fails to provide CSOs that wish to obtain certainty and clarity about their legal status when undertaking community-focused activities that may be charitable in nature.  This lack of clarity has the potential to discourage CSOs from seeking endorsement as charitable entities.  In the absence of such endorsement, many charitable activities in the community may simply not occur.

Although efforts could be made to adapt the contents of TR 2005/21 to suit modern circumstances, the nature of the document makes it unlikely to yield a result which effectively reflects the needs of the community.  Put simply, a taxation ruling is not the appropriate place to define charitable purposes.

As recommended by the Charities Definition Inquiry (CDI) in 2001, the definition of a charitable purpose and hence a charity should be enshrined in a Charity Act.  The CDI noted that, under the current arrangements, extensions to the definition of charitable purposes are not pursued because of the cost involved in taking such cases to court. ⁽¹⁶⁾

Enshrining the definition of a charity within a Charity Act would deliver greater transparency to CSOs and greater accountability for the government.  A Charity Act would give responsibility for the definition of a charity to the government and parliament in preference to legal precedents.  This responsibility could deliver clarity and certainty to CSOs while permitting the definition of a charity to be regularly updated as the needs of the community and the charitable sector change.

Defining "charity" within a Charity Act could also mitigate the legal costs associated with testing the current definition of charitable purpose in the courts.

3.2 CLASSIFICATION OF CHARITABLE ORGANISATIONS

Current regulatory arrangements for CSOs are disparate and, due to a lack of transparency and a reliance on Ministerial discretion, are subject to political manipulation.  Under current arrangements, a number of complex legal and regulatory regimes determine the legal status of a CSO and hence the benefits to which a CSO is entitled.  Current legislation and regulation in the State and Federal jurisdictions allow for a variety of different tax exemptions and concessions for the non-profit sector and donors to non-profit entities.  These are determined with reference to the purpose and activities of an entity.

In the Federal jurisdiction, a form of hierarchy already exists whereby a particular status begets corresponding benefits.  As demonstrated by the CDI, however, the current classification system is complex and poorly understood. ⁽¹⁷⁾  The existing classifications of CSOs within the non-profit sector are community service, charity, religion and public benevolent institution (PBI).

The CDI proposed a new framework for the classification of CSOs under which only three classifications would be applied.  The CDI's proposed classification system improves on the current arrangements as both a theoretical and practical system of classification.  In contrast to current classifications which overlap and intersect obliquely, the CDI's classifications have concentric domains.  A proposed classification system based on that recommended by the CDI is shown in Diagram 1.

Diagram 1:  Proposed classification of CSOs ⁽¹⁸⁾

3.3 LEGAL AND TAX TREATMENT

The regime of tax benefits for CSOs, including charities, should be reformed to reflect changes to the definitional framework.  Reform should seek to continue to support CSOs through tax concessions, exemptions and DGR status.  Reform should also seek to further strengthen the sector by removing inefficiencies and providing positive incentives which encourage the pursuit of charitable and altruistic purposes for both individuals and organisations.

Subject to administrative processes and feasibility, altruistic community organisations might receive access to exemptions for income tax and other state-based taxes, with charities and benevolent charities both receiving access to DGR status and capped fringe-benefits tax exemptions in addition to income and State-based tax exemptions.

If a transparent process were to be adopted for the independent evaluation of all charities, it is not clear, except for the potential revenue implications, why all charities (so assessed) should not have access to DGR status.

4 SPECIFIC REFORM PROPOSALS FOR
CHARITIES AND RELATED ORGANISATIONS

The following issues are specifically raised in the taxation ruling issued by the ATO and should form the core of a Charity Act. ⁽¹⁹⁾

4.1 DEFINING A CHARITY

Defining "charity" adequately and comprehensively is the issue around which the greatest controversy exists.  The CDI recommended that a charity be defined with reference to a broad group of categories within which further specification of both purposes and dominant activities could occur.  As outlined above, the CDI recommended the creation of the classifications of benevolent charity and charity, both of which were to be defined in accordance with the following statement:

... a charitable entity must be not-for-profit. ⁽²⁰⁾  Its essential or dominant purpose or purposes must be altruistic and for the public benefit, that is, they must be aimed at achieving a universal or common good, they must have practical utility and they must be for the benefit of the general community or a sufficient section of it.  An entity's activities must support its dominant purpose or purposes, and the purposes and the activities of an entity must not be unlawful or contrary to public policy, nor promote a political party or a candidate for political office. ⁽²¹⁾

In addition to fulfilling these criteria, a benevolent charity (designed to replace the notion of "public benevolent institutions") would have as its dominant purpose "to benefit, directly or indirectly, those whose disadvantage prevents them from meeting their needs". ⁽²²⁾

If society's aspiration is, as far as is practicable, to strive for the political equality of all citizens, this commends benevolent charities ahead of others by virtue of their purpose, which is to provide benefit to those whose disadvantage prevents them from meeting their own needs.  Benevolent charities, by definition, have a purpose that seeks to overcome sources of disadvantage which prevent the full political participation of individuals in the Australian community.  Hence, of all the CSOs, benevolent charities are the most deserving of direct and indirect support from the public and government.

Charities deserve both public and government support by virtue of their purpose being charitable and altruistic.  According to the CDI's classification, charities are distinct from other altruistic organisations of civil society because of the charitable purposes they pursue for public benefit.  Those who receive public benefits must do so by being part of a group which has sufficiently open and non-discriminatory criteria for membership that it can legitimately be classified as public.

4.2 CHARITABLE PURPOSES

As stated above, the question of what should be included within the definition of a charitable purpose has not advanced markedly since 1601 and the Statute of Elizabeth.  Rather than referencing common-law precedents developed over many years, this report supports a legislated definition of charitable purposes based on broad categories within which charitable purposes can be further defined.  This approach follows that proposed by the CDI, however the final definition should ultimately be determined by the parliament in a Charity Act.  A suitable definition of charitable purpose for use in legislation would be (similar to that proposed by the CDI):

Charitable purposes shall be: the advancement* of health, which without limitation includes: the prevention and relief of sickness, disease or of human suffering; the advancement* of education; the advancement* of social and community welfare, which without limitation includes: the prevention and relief of poverty, distress or disadvantage of individuals or families; the care, support and protection of the aged and people with a disability; the care, support and protection of children and young people; the promotion of community development to enhance social and economic participation;  and the care and support of members or former members of the armed forces and the civil defence forces and their families; the advancement* of religion; the advancement* of culture, which without limitation includes: the promotion and fostering of culture;  and the care, preservation and protection of the Australian heritage; the advancement* of the natural environment;  and other purposes beneficial to the community, which without limitation include: the prevention and relief of suffering of animals. * Advancement is taken to include protection, maintenance, support, research, improvement or enhancement.

These categories would not, in themselves, define or bestow charitable status.  Charitable status would only be conferred when an entity conformed to the other necessary conditions:  pursuing public benefit, being not-for-profit and having an altruistic purpose.  These issues will be explored below.

The categories and specific purposes proposed by the CDI are a good starting point for a definition of a charity within a Charity Act rather than within regulation, ministerial decree or tax ruling.  Reference to civil and human rights has been excluded from the foregoing list because they refer to purposes which are contested in the political sphere and may not constitute rights.  The advancement of rights about which there is significant argument regarding their existence should not constitute charitable purposes because they are, by their nature, essentially political rather than charitable purposes.

Some of the purposes listed above should also be subjected to further debate as to whether they are genuinely charitable in the sense of bestowing public benefit.  For example, where things are preserved or protected merely for their own protection, rather than for any discernible benefit to society, there should be discussion over the extent to which these purposes are altruistic or bestow public benefit.  This will be particularly relevant where preservation and protection of the environment and heritage is concerned.  These debates should properly be held both in and outside the parliament as part of the legislative drafting process.

The extent to which charities can pursue purposes or undertake activities that are not exclusively charitable must also be specified.  The ATO's stipulation that an entity is charitable only if its "sole purpose is charitable" ⁽²³⁾ is reasonable given that the activities of charities are not subject to the same test.

The benefits accruing to charitable status are not intended to support either non-charitable purposes or non-charitable activities.  Hence, it is appropriate that charities have purposes that are exclusively charitable and undertake activities which predominantly serve that purpose.  Activities of a charity which do not directly address a charitable purpose should be no more than incidental to doing so.  This presumes that the scope of possible charitable purposes, as defined by legislation, is sufficiently broad so as not to constitute an unwieldy restriction on charitable purposes and the activities a charity undertakes to achieve its purposes.

4.3 GRANTING OF CHARITABLE STATUS

When the definition of "charity" has been determined, a process must be defined to endorse entities that claim to have charitable purposes and conduct activities which serve these purposes.

The current process for granting charitable and DGR status is disparate and too often subject to political considerations in preference to objective assessments.  This process should be significantly reformed.  The process should be entirely transparent and objective for all applicants, regardless of their purposes and activities.  This applies, in particular, to organisational classifications which are currently subject to ministerial discretion -- for example, for groups with environmental purposes.

The charity sector and by implication civil society in Australia could derive benefit from greater certainty about the criteria upon which DGR and charitable status are granted.

Ministerial discretion should be limited to instances such as disaster appeals which are designed to have a finite life.  Otherwise, Ministerial discretion should be entirely eliminated for organisations whose purpose clearly falls within or outside the provisions of a Charity Act which defines a charity.

In order to make the process of assessment of charitable status independent and transparent, it should be undertaken by an independent, a-political body.  The ATO is well placed to administer this function.

The ATO's stated objective is to ensure that Australia's revenue system remains sustainable. ⁽²⁴⁾  Despite the possibility that support for charities through the tax system could conflict with this objective, the ATO is well placed to engage in the approval, monitoring and potential investigatory functions required to manage the financial entitlements of the charitable and related sector.  Directed by legislated definitions of CSO status, the ATO could efficiently and effectively balance the interests of Australian taxpayers with those of Australia's civil society.  This responsibility would complement the existing organisation of the tax office which includes an organisational focus on non-profit and government organisations as a segment of taxpayers.

The CDI recommended that a Charity Commission be established to administer the regulatory regime governing the charitable sector.  While there may be merit to this approach, it seems unnecessary to create an additional body when all the required functions might satisfactorily be managed within an existing institution, namely the ATO.

Where practicable, in order to minimise the resources consumed in compliance, consistent with current practice, the ATO should seek to create thresholds that ensure accountability for altruistic or charitable entities commensurate with the value of the benefits received.

4.4 RELATIONSHIPS BETWEEN CHARITIES AND NON-CHARITABLE ENTITIES

Civil society is best furthered by organisations which are able to respond to the dynamic requirements of society and the individuals within it.  Legislation and regulation which prohibits or privileges particular organisational arrangements above others is potentially counter-productive to the achievement of a stronger and more vibrant civil society.

Any regulatory regime should not impose structural inefficiencies on CSOs.  Charities and CSOs should be free to structure their activities in the way which they determine best serves their purposes.  This may mean that they adopt structures analogous to the corporate sector.  Assuming that appropriate levels of accountability and transparency are maintained, structural and administrative arrangements should not jeopardise the benefits available to charitable entities.

Where activities are merely incidental to a charity's purposes, regardless of the structure adopted to undertake them, the tax concessions, exemptions and other benefits available to them should be unaffected.

5 TRANSPARENCY AND ACCOUNTABILITY

5.1 REPORTING REQUIREMENTS

CSOs that receive public benefits from the government, citizens and taxpayers have an obligation to report on how such resources are expended on the public's behalf.  Irrespective of whether benefits are obtained directly through grants or indirectly through tax exemptions or concessions, CSOs should be accountable for the value of support they receive.

Analysis by Givewell suggests that donors are more willing to give to charities that maintain higher levels of transparency and accountability.  Therefore, charities that adopt greater transparency should receive greater public support than charities that are less transparent in the conduct of their activities.  The prospect of increasing support from donors should provide a sufficient incentive for charities to maintain high levels of transparency.

Subject to requirements concerning the expenditure of public resources, individual CSOs should be free to decide the effective and appropriate amount of information to make available to donors and volunteers.  Any reporting requirements additional to these should only be required via regulation where it will result in clear and substantial benefits for CSOs, governments and the Australian community.  Such additional requirements should give specific consideration to the further provision of positive rather than punitive incentives that increase the public's confidence and trust in CSOs and charities.  Adopting this approach will ensure that CSOs devote their resources to activities which most effectively achieve their stated purpose and therefore yield the greatest benefit for the public.

CSOs should also be subject to transparency in their dealings with government.  Consistent with previous recommendations in our work on an NGO Protocol ⁽²⁵⁾ governing the transparency of relations between government and NGOs, the public should be able to ascertain easily the extent and nature of institutional relationships between CSOs and government bodies.  This would ensure greater transparency and accountability for both government and CSOs.

5.2 RESTRICTIONS ON CHARITABLE ENTITIES

In defining what constitutes a charitable purpose or activity, certain purposes and activities need to be specifically excluded as incompatible with the concept of "charity".  TR 2005/21 specifically defines the purposes listed below as not charitable.  According to the ATO, charities should be not be permitted to have purposes or undertake activities relating to these categories:

• Purpose to confer private benefits to individuals other than as members of the public;
• Purpose is sporting, recreational or social which is more than merely incidental to a charitable purpose;
• Purpose is political or lobbying;
• Purpose is illegal or against public policy;
• Purpose is commercial in the sense of carrying on a business or commercial enterprise;
• Purposes of government in carrying out its functions;
• Purpose is vague or has insufficient value for the community.

Charitable status confers benefits on charities provided by the community.  When charities receive these benefits they accrue certain obligations to the community.  Such obligations include being prohibited from pursuing certain purposes and undertaking certain activities.  The purposes and activities of charities should be beyond reproach and subject to a broad political consensus because of their privileged status with respect to the available benefits.

The ATO's list constitutes an entirely appropriate and reasonable restriction on charitable entities -- with two clarifications.  No restrictions should limit the free speech of individuals, whether the content of such speech is political or otherwise.  Further, no restrictions should diminish the important role of CSOs, particularly charitable entities, from contributing through established mechanisms and avenues to policy and legislative processes.

CSOs have the potential to offer independent and informed representation in their areas of operation, drawing on their knowledge of the purpose(s) they pursue.  The purposes excluded from being charitable purposes above do not diminish the contribution that charities can make in these areas.  The restrictions on charitable purposes and activities listed above are therefore reasonable.

The most contentious of these prohibitions are briefly examined individually below -- specifically, the prohibition on purposes which are illegal or against public policy and purposes which are political or lobbying.

5.2.1 Purposes which are illegal

The submission of the National Roundtable of Nonprofit Organizations in response to the ATO's draft taxation ruling proposed to amend the ruling to permit charities to engage in "non-serious breaches of laws" ⁽²⁶⁾ without any consequence for their charitable status.  This report accepts that individuals should decide their own actions with respect to the law, provided that they are willing to accept the consequences of their actions.  However, from this belief it does not follow that entities who receive support from governments and the community are legitimately entitled to break the law, whether the breach is serious or not.

Illegal acts that are intentionally committed by CSOs and charities in the pursuit of their purpose, even so-called "non-serious" illegal acts, are intrinsically incompatible with charitable purposes.  This restriction does not prevent individuals from engaging in whatever action they feel justified in undertaking and facing the consequences of any such actions before the law.  The capacity of individuals to exercise free choice in such matters has no bearing on the desirability of governments and the community to support such action through the financial resources available to charities and CSOs.  Hence this stipulation does not constitute a restriction on free speech.

The available evidence demonstrates that a few organisations with privileged legal status are misappropriating this support for illegal activities which they conduct in the pursuit of their purposes.  For example, on a number of occasions, Greenpeace Australia-Pacific has engaged in illegal protests.  These protests have included illegally impeding Australian Navy ships and breaking into the nuclear reactor site at Lucas Heights in NSW. ⁽²⁷⁾

Governments and taxpayers should not endorse illegal acts in any way.  These are matters more appropriately left to the realm of personal, political and legal contestation and should not be classified as charitable activities.

5.2.2 Party political campaigning and activity

There are important distinctions between the purposes and activities of political parties and those of charities which commend the maintenance of substantially different regulatory regimes to govern the conduct of each.  If charities are permitted to conduct political activities without limitation, the potential for a significant inconsistency will arise.  The involvement of charities in politics beyond what is merely incidental to their charitable purpose would be incompatible with the principles which currently distinguish charitable from political purposes.

Registered political parties in Australia do not currently receive charitable status.  In many instances the regulatory regime governing political parties demands greater accountability than that covering the conduct of charities.  Political comment, advertising and literature published by political parties must carry an authorisation and disclosure of those involved.  Political parties that are registered federally are currently required to disclose the origin of donations valued at $1,000 and above and meet minimum membership requirements. ⁽²⁸⁾  The value of any single donation to a political party in terms of tax deductibility is also capped.

Political conduct is an activity central to democratic participation and therefore deserves special consideration as to the circumstances governing what is known about participants and the circumstances under which they participate.  The purpose of political parties' existence is to participate in the political contestation of ideas, policies, elected positions and ultimately government.  The importance of the transparent and accountable conduct of public debate is vital to the community's confidence and trust in the effective functioning of the processes and institutions of democracy.

In contrast to democratic political purposes which entail conflicting ideas and policies, charitable purposes should reflect a community consensus and hence should not be political.  Charities should therefore be prohibited from undertaking political activity such as political campaigning that is more than merely incidental to their charitable purpose.

The effect of restricting the participation of charities in political campaigning should not prevent charities from expressing views and continuing to contribute to the normal mechanisms and channels for public debate.  This measure will merely continue the important and long-standing distinction between charitable and political activities.  This distinction has an important role in ensuring the effective functioning of Australia's democracy.

Despite opposing the imposition of a political activity test for charities, the former head of ACOSS and a member of the CDI, Robert Fitzgerald, has publicly stated that "It's absolutely appropriate that organisations that promote political parties or candidates or act in their legal way should not be charities." ⁽²⁹⁾

Evidence suggests that, too often, organisations which are otherwise considered charitable are explicitly aligned with political parties and actively support them through advertising and political and election campaigning.  The Wilderness Society provides perhaps the most blatant and public example of an organisation with privileged legal status engaging in explicitly political activity.

According to its Website, the Wilderness Society has played an extensive role in many of the State election campaigns which have occurred in the last five years, particularly focusing on marginal seats and targeting voters who they can turn towards its favoured party.  The Wilderness Society's own Website states that "The Wilderness Society's election campaigns have determined the outcome of marginal seats at both state and federal elections." ⁽³⁰⁾  Such blatant political campaign activity cannot be justified as merely incidental to the Wilderness Society's purpose and is not charitable in nature.

Charities should be prohibited from providing funding or resources to political parties, and from arguing for or against political parties and their candidates.  This would not prohibit charities from publicly advocating, or lobbying for, particular policies in a way that is informative on the substance of a policy area, rather than explicitly endorsing one political party over another.

Any political activities in which charities engage should be merely incidental to a charity's purpose.  Activities such as the distribution of literature only to marginal seats in an election period or the provision of paid staff to political campaigns should prompt more detailed consideration of the extent to which a charity's purposes and activities are charitable rather than political.  In these cases, it would seem reasonable to classify the purposes pursued as political rather than charitable.  Such instances should prompt a revocation of charitable status.  Under such circumstances, charities and other CSOs receiving public benefits would be encouraged to conduct themselves with care.

Political activity undertaken by charities should be subject to an activity test like any other activity when evidence is produced that raises doubt about purposes or activities being strictly charitable.  Political activity undertaken by a charity, like any other activity that is not directly charitable, should merely be incidental to a charity's purpose.  Where a charity has particular experience, knowledge and expertise, political advocacy and the provision of information to the public is legitimately incidental to its charitable purpose.  Extensive involvement with political campaigns or candidates falls outside the realms of mere advocacy and constitutes political campaigning.  If charities wish to receive the financial benefits associated with charitable status, they must decide whether they wish to pursue charitable purposes or political purposes.  Where they choose the latter, they should be subject to the same regulatory conditions as those governing political activities.

UK charities have been prohibited from directly assisting political parties or candidates and from advocating specific party or candidate policies.  Charities are, however, entitled to advocate and evaluate policy initiatives based on their purposes, but they must not seek to compare their own views with those of candidates or parties. ⁽³¹⁾

Charities should seek to serve charitable purposes for the public benefit rather than involve themselves in politics where contest, rather than explicit pursuit of public benefit, is the central goal.  By virtue of their preferred tax status, charities should be restricted in their political activities but this should in no way prevent them from serving their stated charitable purposes.

5.2.3 Purposes against public policy

TR 2005/21 is ambiguous with respect to the meaning of "purposes against public policy".  If this specification entails that charities are prohibited from expressing a view to government (or even to their supporters) regarding government and public policy and its merits based on their experience and activities, then this is questionable and needs further clarification before it can be accepted.

If "against public policy" denotes that it is inappropriate for charitable purposes to be aimed exclusively at political or policy contestation, then it might constitute a reasonable restriction.  The appropriate realm for public policy contestation is with political parties or non-charitable organisations.  It is therefore reasonable to restrict charitable purposes in this way.

5.3 ACTIVITY TESTS FOR CHARITIES

Charities, by virtue of their status as charities, receive direct and indirect support from the government.  It is therefore appropriate that they be held accountable for the expenditure of community resources in conducting their activities.  Any activity undertaken by a charity should either directly serve its charitable purpose or be incidental to its charitable purpose. ⁽³²⁾  If an activity is more than incidental to a charitable purpose, then it is more appropriately undertaken by an entity which is not a charity.

In order to be deemed a charity, an entity must have a purpose which is exclusively charitable.  In order to maintain a clear delineation between charities and other organisations, activities undertaken by a charity should exclusively serve a charitable purpose or be incidental to it.  When any doubt exists as to whether or not a charity's activities genuinely conform to its charitable purpose, a charity should be subject to an activity test.  An activity test should be instigated to protect the reputation of all organisations with charitable status.

The possibility of an activity test need constitute nothing more than a reasonable expectation that, when scrutinised, a charity's activities will in fact serve or be incidental to their charitable purpose.  That is, an activity test would merely seek to confirm that a charity's activities do in fact happen as a consequence of its stated charitable purpose.

An activity test need not entail an additional administrative or reporting burden on charities.  An activity test need only operate by exception.  If evidence arises that an activity appears to be more than incidental to a charity's purpose, this evidence should constitute grounds for a review of a charity's status.  If, upon a reasonable investigation, such evidence is confirmed to contravene the requirements of charitable activities, it should initiate the revocation of charitable status and its associated benefits.

Consideration should also be given to punitive measures for charities which abuse their status.  Such measures should be in proportion to the value of charitable benefits that have been wrongly appropriated.  Overall, the cost of administration by the appropriate oversight body and the cost of compliance by charities should be balanced against the adverse consequences for the entire charity sector if an organisation abuses its status.

6 PROMOTING AND STRENGTHENING
CIVIL SOCIETY ORGANISATIONS

6.1 POLICY INITIATIVES TO STRENGTHEN THE CHARITABLE SECTOR

Recent policy initiatives, such as the instigation of workplace giving through regular payroll deductions, are continuing to create opportunities for individuals to give easily to charities in a planned way.  Such initiatives create greater potential for the efficient and effective pursuit of charitable purposes.  The potential result of the increased certainty and possibly greater magnitude of giving is likely to be a stronger and more vibrant charity sector.

Where possible, further efforts should be made to make individuals aware of the benefits available from planned giving and make it easier for individuals both to gather information about charities they may wish to support and to make regular and planned contributions.  The availability of personal management tools approximating those now available for the management of personal financial investment portfolios may facilitate greater giving and volunteering.

A culture of voluntary civic involvement and giving throughout Australian society, regardless of geographic or demographic identity, should continue to be nurtured.  Just as the purposes and activities of CSOs reflect a large diversity of interests, so the possible policy options considered should be equally diverse.

6.2 REGULATORY EXEMPTIONS FOR CSOs

In a research paper investigating social capital in Australia, the Productivity Commission noted that public liability laws have had deleterious effects on social capital and by implication on CSOs.  While such laws intend to provide incentives for businesses to operate safely and compensate people who are injured, they have affected "the viability of community events and organisations and, thus, the opportunities to enhance local social capital.  Many regulations and paperwork compliance burdens may have similar unintended adverse impacts on social capital". ⁽³³⁾

CSOs which pursue altruistic purposes and advance the freedom of individuals should be exempt from laws and regulation which substantially hinder their operations without yielding any significant benefit to individuals, the community or CSOs.

Using the simple example of a cake stall organised to raise money for a small CSO, it is evident that the regulations "protecting" those involved quickly become so onerous as to discourage such activities from taking place at all.  A cake stall may be required by food labelling legislation to state all the ingredients used in every item for sale to very precise specifications.  Health regulations may also stipulate that any food which is sold is prepared in an environment which meets stringent hygiene requirements which most household kitchens will find difficult to satisfy.  Any staff working to prepare food for the stall may also be subject to occupational health and safety legislation which dictates that training occurs and that the chef's own kitchen be inspected for risk.  Any one of these regulations could make the compliance cost for a CSO prohibitive and prevent the establishment of a simple cake stall.

Viscusi and Gayer (2002) have systematically examined the justification for many regulations and found them wanting. ⁽³⁴⁾  While there is little or no quantitative data examining the effects that such regulation has on CSOs in Australia, the anecdotal evidence suggests that it is significant.

Where possible, governments should exempt CSOs from complying with burdensome regulation and instead allow individuals to determine how best to manage their risk.  Individuals may choose to purchase insurance, take precautions they judge to be reasonable or even bear the risk themselves.

Regulatory exemptions should be particularly focused on assisting those CSOs which receive little financial support as a result of their non-profit status.  These regulatory exemptions might be tied to the creation of a new legal entity tailored for the needs of CSOs.

The Irish Law Reform Commission has recently recommended that a new legal structure, specifically designed for use by CSOs, be created. ⁽³⁵⁾  The structure, to be known as a Charitable Incorporated Organisation (CIO), will provide protection for directors and managers of CSOs analogous to those available to corporate entities, but with lowered reporting requirements.  In Australia, such reporting requirements could be designed to provide for a reasonable balance between the need for accountability and the desire to encourage CSO activity.  The relevance and usefulness of such a CIO legal structure should be evaluated in the Australian context as part of a legislated definition of charities and CSOs and a new CSO classification framework.

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REFERENCES

1.  Wood, R.J.  The Protocol:  Managing Relations with NGOs, April 2004.

2.  Productivity Commission, Social Capital:  Reviewing the Concept and its Policy Implications, 2003, page 2.

3.  Loc. cit.

4.  Department of Family and Community Services, Giving Australia:  Research on Philanthropy in Australia, Summary of Findings, October 2005, page vii.

5.  Givewell, Giving Statistics at a Glance, 2005.

6.  Giving Australia, page vii.

7.  Giving Australia, 2005, page 7.

8.  Figures for Australia and USA are 2004, Canada is for 2000;  Giving Australia, 2005, page 8.

9.  Department of the Treasury, Tax Expenditures Statement, 2005, page 69.

10.  Public benevolent institutions and certain non-profit and non-government bodies institutions receive an exemption for fringe benefits tax of up to $30,000 of grossed-up value of fringe benefits taxable value per employee;  Tax Expenditures Statement, 2005, pages 120 and 127.

11.  Ibid., pages 76, 77, 127.

12.  Giving Australia, 2005, page 32.

13.  ASSIRT study quoted by Givewell, Giving Statistics at a Glance.

14.  Givewell, Australian Giving Post-Tsunami:  Australian Charities Financial Analysis 2004.

15.  Charities Definition Inquiry, Report of the Inquiry into the Definition of Charities and Related Organisations, 2001, pages 133, 139.

16.  Ibid., page 35.

17.  Ibid., page 2.

18.  After Report of the Inquiry into the Definition of Charities and Related Organisations, 2001, page 2.

19.  Australian Taxation Office, Taxation Ruling Income tax and fringe benefits tax:  charities 2005/21.

20.  "Not-for-profit" denotes that an entity is prohibited from making distributions of funds for purposes other than to directly advance its purpose or the purpose of other entities deemed to be charitable.  It specifically prohibits the dispersal of funds for private benefit to members or shareholders.

21.  Report of the Inquiry into the Definition of Charities and Related Organisations, 2001, page 154.

22.  Ibid., page 9.

23.  Australian Taxation Office, Taxation Ruling Income tax and fringe benefits tax:  charities 2005/21, page 7, paragraph 27.

24.  Australian Taxation Office, Annual Report 2004–05.

25.  Wood, R.J.  The Protocol:  Managing Relations with NGOs

26.  National Roundtable of Nonprofit Organizations, Submission to the Australian Taxation Office (ATO) on Draft Taxation Ruling TR 2005/D6 and TR 2005/D7, 22 July 2005, page 2.

27.  Philip Cornford and Mark Forbes, "Protesters and 'clowns' delay warship's departure", The Age, 9 April 2003.

28.  Australian Electoral Commission, Federal Registration of Political Parties Handbook;  Funding and Disclosure Handbook for Political Parties.

29.  Transcript of Tony Jones interview of Robert Fitzgerald on Lateline, "Former ACOSS chief concerned over charity legislation", broadcast, 31 July 2003.

30.  Wilderness Society, Wilderness Society activists campaign in 10 marginal seats for Tasmania's world class forests, Media release, September 3, 2004.

31.  UK Charities Commission, CC9 -- Campaigning and Political Activities by Charities;, September 2004;  Guidance for Charities, Charities and Elections (Version April 2005) accessed 9 December 2005

32.  "Incidental" is taken to mean "liable to happen as a consequence of" as defined in the Compact Oxford English Dictionary

33.  Productivity Commission, Social Capital:  Reviewing the Concept and its Policy Implications, page 2.

34.  Viscusi, W.K. and Gayer, T., in "Safety at any Price?", (Regulation, Fall 2002;  25, (3) pages 54–63) find that the estimated financial benefits from avoided deaths as a result of regulation introduced in the USA for the purpose of protecting the health and well-being of individuals is dramatically less than the estimated costs of the additional regulation.

35.  Coulter, Carol, "Law reform body urges new legal structure", The Irish Times, accessed 18 January 2006.

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BIBLIOGRAPHY

ASSIRT study quoted by Givewell, Giving Statistics at a Glance, 2005.

Australian Electoral Commission, Federal Registration of Political Parties Handbook;  Funding and Disclosure Handbook for Political Parties.

Givewell, Australian Giving Post-Tsunami:  Australian Charities Financial Analysis 2004

Australian Taxation Office, Annual Report 2004–05

Australian Taxation Office, Taxation Ruling Income tax and fringe benefits tax:  charities 2005/21

Cornford, P. and Forbes, M., "Protesters and 'clowns' delay warship's departure", The Age, 9 April 2003

Coulter, Carol, "Law reform body urges new legal structure", The Irish Times, accessed 18 January 2006.

Family and Community Services, Department of, Giving Australia:  Research on Philanthropy in Australia, Summary of Findings, October 2005.

Givewell, Giving Statistics at a Glance, 2005

National Roundtable of Nonprofit Organizations, Submission to the Australian Taxation Office (ATO) on Draft Taxation Ruling TR 2005/D6 and TR 2005/D7, 22 July 2005

Noble, J., "The Future of Volunteering:  A Volunteer's Perspective", in J. Warburton & M. Oppenheimer (eds), Volunteers and Volunteering, Federation Press, Leichardt NSW, 2000.

Productivity Commission, Social Capital:  Reviewing the Concept and its Policy Implications, Research Paper, AusInfo, Canberra, 2003.

Transcript of Tony Jones' interview of Robert Fitzgerald on Lateline, "Former ACOSS chief concerned over charity legislation", broadcast, 31 July 2003

Treasury, Department of the, Tax Expenditures Statement 2005, Commonwealth of Australia, CanPrint, 2005.

UK Charities Commission, CC9 -- Campaigning and Political Activities by Charities;  September 2004

UK Charities Commission, Guidance for Charities, Charities and Elections (Version April 2005) accessed 9 December 2005

Viscusi, W.K., and Gayer, T., "Safety at Any Price?", Regulation:  Fall 2002;  25, (3), pages 54–63.

Wilderness Society, Wilderness Society activists campaign in 10 marginal seats for Tasmania's world class forests, Media release, September 3, 2004

Wood, R.J.  The Protocol:  Managing Relations with NGOs, April 2004.