Checkup – Leaders ConnectNFP Sector Developments

18 September 2014

Roadmap Current position with ACNC Merger in the NFP sector Hunger Projects case – implications for PBIs Sneaky Tax Act changes – TR2014/D5

Current position of the ACNC ACNC commenced 3 December 2012 At 25 August 2014 there were 61,000 charities

registered Charities being registered at rate of 100 new

charities per month Composition of charities registered with ACNC is:

17% - large (revenue >$1m) 16% - medium (revenue between $250K and $1m) 70% - small (revenue <$250K)

Current position of the ACNC contd Composition of charities:

education – 34% religion – 32% PBI/community services – 16%

NFP sector was worth: $22 billion in 2006/7 $55 billion in 2012/13

I.E. a growth rate of 7.8% per annum since 2006 Turnover is $107 billion per annum which is double that in

2000 in real terms

Current position of the ACNC contd Repealed bill tabled in parliament on 19 March 2014

– first of two bills Is thought the second bill likely to be tabled by end

of October 2014 Government has released discussion paper on

alternatives; date for submissions closed20 August 2014, with results still to be released

But the sector does not want to see ACNC go Pro Bono Australia’s online survey found 82% want

ACNC to stay

Merger Merger is being driven by:

business complexity need to pay directors fees reduced government funding need for capital contestability competition from for-profit corporates

Merger contd Outcome of merger needs to be:

simplicity ability to centralise services risk and compliance asset protection restructure i.e. separating

management operations from asset owning vehicle watch legislative constraints though e.g. Affordable

Housing and Aged Care Act but mission has to be maintained

Merger contd Governance considerations in merger Right balance between strategic and operational issues Appropriate skill mix of board members Appropriate succession planning Performance review Educational opportunities for board and senior

management Appropriate framework for accountability to stakeholders Get the constitution right

Merger contd Merger alternatives are:

asset transfer

Merger contd Merger alternatives are (contd):

A and B establishing wholly owned subsidiary

Merger contd Merger alternatives are (contd):

constitutional merger – wholly owned subsidiary

Merger contd Complications can arise when trying to merge trusts from a

trust law perspective Also consider any embedded trusts

Merger contd Will merger impact bequests? Overall –v- Family Voice Australia Inc case Consider the lapse rule Implications of the case are:

ensure that objects remain unaltered during the merger process

ensure that any charitable bequest is expressed to have a general charitable intent

be able to demonstrate merged entity is a successor organisation

Merger contd Implications of the case are (contd):

this is done by ensuring a paper trail, perhaps appropriate information on website with link to the original entity for search engine purposes

ensure all resolutions are documented

Hunger Projects Court has said that there is no requirement for:

direct relief for a PBI gives broader scope to PBI alternatives, although not for

overseas entities because for DGR endorsement there is still a requirement for operations to be exclusively in Australia

TR2014/D5 Deals with special conditions amendment to Tax Act Charity must:

comply with all substantive requirements in governing rules

apply income and assets solely for the purposes for which the entity is established

Draft ruling requires an analysis of: what are the governing rules what are the substantive requirements has the entity complied with substantive requirements

TR2014/D5 It would seem substantive requirements are:

objects not-for-profit status winding up provisions obligation to keep financial records?

Ruling distinguishes between requirements for charitable institutions and charitable funds

Income and assets condition a potential concern as a backdoor means of circumventing Word Investments

The relevant example is benign and unhelpful

Any questions?

Paul Paxton-Hall

Director

Level 10, 15 Adelaide Street, Brisbane Qld 4000

Telephone: 07 3007 9200

Email: paul.paxton-hall@foxthomas.com.au