Senator CHRIS EVANS (11:36 AM) —In speaking today to the Appropriation (Parliamentary Departments) Bill (No. 2) 1998-99 and related bills, I want to raise an issue concerning the taxation treatment of the charities and not-for-profit organisations in this country—in particular, the proposed treatment they would receive under the government's taxation package. It is an opportune time to raise this issue because yesterday the Senate Community Affairs Legislation Committee inquiring into the impact of the GST and the taxation package reported to the Senate in what I think is a highly valuable report. I do not want to concentrate today on the narrower subject of the GST, but that report did provide a highly valuable process exposing a range of issues about the taxation treatment of the charitable and not-for-profit sector in this country, and these are issues that I want to raise. It is important that we do have some public debate about these issues in the coming months.

Governments have long recognised the role of charitable and community organisations in promoting community welfare and delivering essential services that traditionally no other sector was willing to provide. In order to support the role of charitable and community organisations, governments in this country have, over time, exempted them from a range of taxes. More recently, the coalition government appears to be walking away from that responsibility and that positive encouragement of the not-for-profit sector and seems hell-bent on dragging that sector more and more into the taxation regime and subjecting it to a range of taxation measures.

Underlying the government's approach is the new philosophical thinking that is going on inside the conservative parties in this country. The argument is that somehow it is seen as being unfair to provide more favourable tax treatment for the not-for-profit sector than is provided for the for-profit sector. This seems to be the philosophical underpinning to the government's approach. It is well known that the Minister for Aged Care, Mrs Bishop, has stated many times to community groups and providers that she does not like the term `not-for-profit', because she believes that every organisation should be making a profit. Perhaps it is this philosophical approach that underpins the government's thinking in the taxation area.

Under the government's tax package, charitable and community organisations will be drawn further into the tax system. Despite many of their activities being GST free, they will have to collect the tax and then seek reimbursement. That is just one of the measures in the proposed tax package that will impact on them. While the non-commercial activities of charitable and community organisations will be GST free, all other activities conducted by charitable and community organisations will have GST applied to them.

It is important in this context to remember that these not-for-profit and charitable organisations use commercial activities to subside the non-profitable services that they provide to the disadvantaged. A charitable organisation might well be running a fairly profitable business enterprise, but the money from that enterprise often goes to supporting and helping the homeless and providing food to people living on the street—the social services that those charities and not-for-profit organisations provide in our community that alleviate the poverty and suffering of so many. It is important that we understand the cross-subsidisation nature of the activities of these groups. It is that cross-subsidisation activity that the government is not taking into account in its plans for the taxation treatment of this sector.

The other problem that arises is that these organisations that deliver both GST free and GST applied goods and services will be forced to spend a significant amount of their income on administering and complying with the proposed new taxation regime. Millions of dollars will be spent on the paperwork and the accountability mechanisms to ensure that they comply with these new laws. The fact that they are GST free means little, because the mere act of becoming GST free may well cost them a considerable amount of money. All the money that they spend on that activity is money that is not being directed at the poor, the disadvantaged and the needy in our community.

The compliance costs that these organisations bear will be directly drawn out of the services provided to those in need. The question the government has to answer is: why? What public purpose is served by that approach? What good is served by forcing these organisations to be involved in the taxation system in this way, only for most of those funds to be reimbursed? The costs of compliance, administration and paperwork being drawn into the taxation system in this way will mean fewer services for those in need in our community.

In addition to the costs involved in the GST issue, a major—and in some cases a more important—issue for some organisations is the proposal to introduce a limit on the use of FBT concessions for charitable and community organisations. The government is proposing to limit the level of fringe benefits that are exempt from FBT to $17,000 per employee. The existing FBT exemption was introduced as a way of providing assistance to charitable and community organisations in attracting and retaining qualified staff. Because they could not afford to pay the salaries paid in the private sector, they were allowed the device of using their FBT exempt status to salary package so that their employees could have competitive salaries. Most of the people who work in these sectors have a smaller total salary package, but the FBT exemption allows them to at least arrange a package that provides some opportunity for these charitable and not-for-profit organisations to attract staff.

In 1995, there was a report by the Industry Commission into charitable organisations. In considering the removal of tax concessions to charities, it stated:

The above disadvantages of input tax exemptions and concessions suggest that they may not be a good way of providing assistance to the sector. Given the major benefits which CSWOs as a whole currently derive from input tax exemptions, however, the Commission considers that any proposal to remove these benefits should include alternative ways of providing the same aggregate level of government assistance to the sector.

So the Industry Commission in 1995 recommended that we phase out the FBT concessions to charitable organisations but that we recognise that their level of service would be severely reduced as a result of those changes and that we would need to make other arrangements to ensure that the government assistance to the sector was maintained.

Unfortunately, what has happened in the sector since that time is that the use of the FBT concession has grown quite considerably. It is often only anecdotal evidence, but I think it is true to say that the use of the FBT concession is now a much larger component in the sector than it ever was before. It is certainly true in the public benevolent institution areas, such as state government public hospitals, particularly in my home state of Western Australia and in Victoria, but I think it is true also of the wider charitable and not-for-profit sector.

The Labor Party supports the proposed limit on FBT concessions. It accepts there is a need for greater regulation in this area and for transparency and accountability in the use of the exemption. There is no question of that. The Labor Party remains firm in that position. The current regime where organisations rely on informal unwritten advice from the Taxation Office about how to apply the concession is clearly not good public policy and not acceptable. We need a proper regime which provides transparency and accountability. In supporting the government's proposed limit, we recognise—particularly since the GST inquiry by the Senate Community Affairs References Committee—the very real needs of the sector which arise from these moves. There are issues that need to be addressed in terms of the impact on the sector.

The existence of uncapped concessions opens charitable and community organisations to accusations of abuse if a small minority do not abide by the limits the sector has itself set. Most have seen fit to apply the 30 per cent limit encouraged by the taxation department. I note that this morning the Treasurer once again stated that the vast majority of charitable and community organisations were not involved in the rorting of FBT concessions. I think generally that is the case. The Treasurer stated that the government's primary concern is in the state public health systems where there has been widespread use of the FBT exemptions to shift costs from the states to the Commonwealth. For once, the Treasurer and I are in complete agreement. He is dead right. There is a major problem in the use of FBT concessions in state public health systems. The Commonwealth really does need to take a serious look at that problem.

There is also the issue of making sure that we do not reduce hospital services. The concession, in my view, was never designed for the needs of the state public health system. It was designed to facilitate the needs of charitable and not-for-profit organisations.

The other problem with uncapped concessions is that they have allowed governments to continually wind back the direct assistance they provide to the sector. State governments and the federal government have advised charitable and community organisations to move into salary packaging and use of the FBT exemption in order to stretch shrinking budgets. These organisations have been caught between their need to meet increasing demands on their services by the disadvantaged and government budgets that are either frozen or declining. The answer has been to expand the use of the FBT concessions—a perfectly natural response, but one that has led to a real growth in the use of that concession.

The government's proposal presents a serious problem. On the basis of its own figures, the changes to the FBT exemption will raise over $100 million a year from charitable and community organisations as a result of the proposed limit on FBT concessions. The impact will be to pull $100 million out of the sector. I note the Prime Minister the other day, in his speech about philanthropy, thought that even on his best estimates the use of philanthropy may provide $50 to $70 million a year in the longer term into the sector.

Senator Sherry —Tax driven.

Senator CHRIS EVANS —Tax driven. But what is the point of doing that? Are we pulling out $100 million from the sector and hoping that philanthropy will fill the hole? That clearly is not the answer. We have to deal with the fact that the withdrawal of the FBT concessions will have very serious impacts on the industry, that on the government's own figures—and I am not sure of the veracity of those figures, but the industry certainly supports the argument of the severity of the impact—$100 million will be drawn out of the sector. That can have only one impact in the charitable and not-for-profit sector: they must reduce services. There are no other answers for that sector. The impact of taking that sort of money out of the sector is that they will reduce the services to the poor and to the needy.

This evidence was presented at great length before the Senate Community Affairs References Committee during their GST inquiry. Groups such as the Spastic Centre of New South Wales, the Wesley Central Mission, the WA Deaf Society and a whole range of charitable and not-for-profit organisations have given evidence as to the impact of this measure on their activities. These organisations will service fewer deaf children, they will provide fewer meals, they will care for fewer poor people and they will provide fewer homes for the homeless. All the basic fundamental works that charities and the not-for-profit sector provide in this country will be diminished as a result of this measure.

We cannot accept that that impact will be applied to the sector. We have to do something about it. The Industry Commission provided some guidance, as I said earlier, in that they identified that the government, in closing the exemption, would have to fund assistance to the charitable sector to make up for the assistance removed. The problem has grown much bigger since then. Obviously, the size of compensation required has grown much larger, even if we only go down to the sort of limit proposed by the government. They are not going as far as the Industry Commission recommended in terms of removing the exemption altogether, but what we must do as a parliament is address the very real concerns raised by the charitable and not-for-profit sector on the impact or disadvantage in our society of this taxation measure.

The bills are not currently before the parliament. I understand they will be introduced some time later this year. What I think is important is that we begin to have the debate about how we ought to respond. I make it very clear that the Labor Party is still committed to the capping of the exemption and providing the accountability and transparency in this measure that has been lacking. It cannot be allowed to continue in the current state.

The real issue for us is the impact on the sector and on the sector's ability to deliver to the disadvantaged, the needy, the poor and the disabled in our community. Their very proper and important role in the community will be diminished by this measure unless we take steps to ensure that the efficiency of the overall sector is not impaired by this taxation measure.

The Labor Party is willing to play its role in that. I note that the Democrats indicated in their minority report on the GST inquiry of the Senate Community Affairs References Committee the other day that they have concerns about the impact of the proposed change to the FBT limits. Labor Party senators—me included—in compiling the majority report raised the problem and highlighted the needs of the sector if this FBT limit were to be pursued. The government now has the opportunity to listen and respond to those concerns raised by the sector and highlighted in the Senate community affairs committee report.

We need to find the appropriate balance between the joint public policy outcomes of a proper, transparent and accountable system in terms of the FBT exemption and the needs of the charities and community service organisations to deliver to the disadvantaged in our society. All of us, Labor and Liberal state governments included, are culpable for allowing the situation to get to this point. All governments have encouraged organisations to take advantage of the FBT concession in order to stretch their budgets to provide very necessary and essential services.

What we need now is a solution to the problem of the impact on the sector. The Labor Party is prepared to play its role in providing leadership. But what is desperately required is for the government to analyse properly the needs of the sector, listen to their concerns about the impact of limiting of the concession, and work with the sector to find ways of meeting their funding needs to continue to provide the vital services that they provide in our community.

As I say, a range of issues were raised in the community affairs committee GST report that need the attention of the government and of parliament. There is the wider issue of the charitable sector and its taxation treatment generally. There is the FBT exemption limit proposal, which I have discussed at some length today. There is also the broader debate about the role the not-for-profit sector ought to play in our community and whether the government is continuing to encourage the constructive and necessary role that that sector provides in our community. This obviously relates to the government's intentions in relation to philanthropy in the community and the role of business in contributing to the charitable and not-for-profit sector.

So there is a wide range of debates that we need to have. I hope I have highlighted some of those issues today. I do not pretend to have all the answers. In terms of the FBT issue, I want to signal that, while the Labor Party remains committed to supporting the proposed exemption, the government has to address the very real problem of the impact on the charitable sector. We have to do something about ensuring that the sector can continue to provide the services to the needy and disadvantaged in our community. We cannot go on blindly supporting the tax policy changes without assessing the real impact on that sector and, more importantly, on the people that they serve.