Changes to NFP tax exemption
While charities represent about one third of all not-for-profits, most NFPs don’t have a charitable purpose but may still self-assess as tax exempt. They are organisations formed to serve a specific aim, many meeting the requirements for special tax treatment.
Non-charitable organisations that can self-assess their exemption from income tax fall into eight categories: community service, cultural, educational, health, employment, resource development, scientific, and sporting.
NFPs that self-assess their own eligibility for income-tax exemption are not required to report their eligibility to the ATO.
Following reforms in last year’s federal budget, however, from 1 July, self-assessing NFPs with an active ABN will be required to lodge an annual self-review return with the information they ordinarily use to decide their eligibility for income-tax exemption.
The ATO has begun talks with the NFP sector to discover the types of guidance and support needed for NFPs to transition smoothly to the new requirements. Consultations are expected to be concluded in June.
Super guarantees for all
As part of the 2021–22 Federal Budget, the government announced that it will remove a $450 a month threshold to expand coverage of super guarantee to eligible employees regardless of their pay.
The change has been gazetted through the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Act 2021.
From 1 July, employers will be required to make super-guarantee contributions to eligible employees’ super funds regardless of how much the employee is paid. Employees must still satisfy other super-guarantee eligibility requirements.
Employers will need to check that their payroll and accounting systems have been updated for super payments made after 1 July to ensure that they correctly calculate their employees entitlements.
New rules for meetings and documents give flexibility
Thousands of Australia’s registered charities will enjoy greater flexibility when staging meetings – as well as signing and executing documents – through recent amendments to federal legislation.
The changes are included in the Corporations Amendment (Meetings and Documents) Act, and cover charities that are registered under the Corporations Act.
The amendments make permanent temporary laws first introduced in response to the COVID-19 pandemic, allowing companies to execute and send documents electronically and hold virtual meetings.
The changes mean that:
- Documents (including deeds) may be executed by signing either physically or electronically.
- A person will not be required to sign the same form or page of a document as another person, or use the same method of signing as another person.
- Agents (authorised representatives) may execute documents on behalf of companies without appointment by deed and without using a common seal.
- Documents may be sent physically or electronically, and
- Companies may hold meetings physically or as a ‘hybrid’ (using one or more physical venues and virtual-meeting technology). Wholly virtual meetings are also permitted if expressly provided for in a company’s constitution.
Changes relating to signing and executing documents came into effect on 23 February. Changes about meetings come into effect on 1 April.
While the amendments provide a minimum standard, charities’ governing documents may require more. Charities must continue to comply with them, and those that are corporations could consider reviewing governing documents and seeking legal advice.
You might need a director ID
Anyone who is a director of a charity that is a company or Aboriginal and Torres Strait Islander corporation will need to apply for a director identification number.
A director ID is a unique 15-digit identifier that someone keeps forever. You may apply for one online at myGovID opting for ‘standard or strong’ identity strength.
Directors must apply personally so that identities can be verified. No one can apply on their behalf.
When you need to apply for the ID depends on when you became a director for the first time, and under which act you were appointed.
If appointed under the Corporations Act:
- From 1 November 2021 to 4 April 2022, you must apply within 28 days of being appointed
- On or after 5 April 2022, you must apply before being appointed, and
- Before or on 31 October 2021, you must apply by 30 November 2022.
Aboriginal or Torres Strait Islander corporation directors have longer to apply.
For more information about who needs to apply and when, including a full list of key dates, visit the Australian Business Registry Services website.
Guidance for board secretaries
With the support of the Commonwealth Bank, the Institute of Community Directors has produced the free 48-page guide Damn Good Advice for Board Secretaries – Twenty-five questions every not-for-profit secretary needs to ask. This guide is aimed to improve your understanding of governance roles within organisations.
A good secretary is a good leader and a fount of knowledge about an organisation. They can keep your NFP on top of its governance obligations.
Download the guide online here.
Report how NFPs use financials
CPA Australia has released Annual Reports of Australian Not-For-Profit Organisations: Insights from Internal and External Stakeholders.
The report examines how:
- NFPs use annual reports and financial statements to show they are accountable, and
- How stakeholders use NFP annual reports and financial information.
NFPs are highly diverse, having varied legal structures, sizes, tax concessions, missions, activities and results.
CPA Australia wanted to discover who used NFP annual reports, what they wanted to know, whether their questions were answered, and whether report preparers knew what they needed to do.
Were there red-tape challenges, and what are the costs of NFP annual reporting?
As diverse as the participants, the findings were categorised under rubrics such as annual reporting, accountability, accounting standards, measuring outcomes, and risks.
- As the sector receives taxpayer funds, whether directly or indirectly through deductible-gift-recipient status, this is generally accepted to create a moral obligation for transparency and storytelling about organisations’ missions and performance against their missions. There was little enthusiasm for performance measurement, however
- In terms of application of accounting standards and the threshold for general-purpose financial reporting, the feeling was that the current reporting trigger needed to be increased and a turnover of $5 million was mentioned.
- Several participants noted the different treatment of charities compared with other NFPs and anomalies that this created.
- The heavy reliance on audits and auditors by many in the sector, especially users of financial reports who are not always financially literate, preparers who sometimes are volunteers and ill-equipped for the task, and boards struggling to keep up with changing accounting standards.
- Auditors were under pressure to minimise costs and some NFPs misunderstood what auditors took responsibility for when providing an opinion on financial statements, and
- Regulators thought that not all auditors understood the regulations and frameworks under which they reported.
NFPs indirect costs fail to get funded
New research from Social Ventures Australia and the Centre for Social Impact has found that NFPs lack funding for indirect costs such as IT and marketing.
Their report Paying what it takes – Funding indirect costs uncovered four key points:
- The size of indirect costs such as for training and marketing fail to assess charities well. NFPs that spend less on indirect costs are not necessarily more effective than those that don’t. Indeed, there is clear evidence that spending insufficient resources on indirect costs can potentially reduce an NFP’s effectiveness.
- Charities’ true indirect costs fail to be covered by funders. On average, charities’ real indirect made up 33 per cent of overall costs. Yet NFPs believe (potentially incorrectly) that funders are mostly unwilling to fund above 20 per cent, or even lower.
- Indirect costs underfunding leads to lower capability and effectiveness. Case-study NFPs universally under-invested in their core capabilities. Compared with them, a corporate-sector study suggested that corporates spent twice as much per employee on key capabilities such as training, IT, quality, and marketing. The lack of funds forces charities to spend time searching for untied funding and leads to inefficiencies, and
- The drivers of indirect-costs underfunding are complex and interrelated. The complexity of measuring NFP effectiveness, the power dynamics in the funder/fundee relationship, and a lack of consistent measuring all contribute to the issue.
Fundraising – new reporting guidelines announced
The Federal Government and the Fundraising Institute Australia have announced new guidelines for the reporting of charitable fundraising during natural disasters.
Charities can sometimes face intense public scrutiny during natural disasters about the timeliness of donation distributions. Frequent and transparent communication from charities involved in response efforts is key to assuring the public that their donations are funding critical assistance.
Minister for Housing Michael Sukkar said the government had partnered the FIA to deliver a way of improving transparency.
“These guidelines are intended to improve transparency obligations for charities and give the public a better understanding of how their donations are being put to work,” said Mr Sukkar.
“Good communication by charities supports public trust and understanding of the recovery process.”
FIA CEO Katherine Raskob said a new practice note established a set of minimum conduct standards that charities may follow and expand upon to achieve best-practice and reporting during natural disasters.
The standards include requirements to publish disaster-appeal intents and progress reports on the use of donations in response and recovery efforts.
To maximise coverage and benefit to the sector, charities without FIA membership will be able to volunteer as ‘practice note signatories’ at no cost and without the commitment to comply with the full FIA code. FIA Members will adhere to the guidance in the practice note as part of their FIA membership which is a commitment to ethical best-practice fundraising.
The practice note is published on the FIA website, along with accompanying FAQs.