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Standing Committee on Economics
27/07/2012
Australian Charities and Not-for-profits Commission Bill 2012 and an associated bill

WARD, Mr David Harvey, Treasurer and Council Member, Philanthropy Australia

[14:40]

CHAIR: Although the committee does not require you to give evidence on oath I would advise you that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the respective houses. I will now give you an opportunity to make a short opening statement before we proceed.

Mr Ward : Charitable funds themselves make up about 11 per cent of the tax exempt charities, and therefore are a significant part of the not-for-profit sector. But perhaps more critically they are important funders of all charities across the sector. So Philanthropy Australia, as the peak body for philanthropy, is—as, in fact, it seems is everyone else—in strong support of the principles that have underlined the government's approach to reform for the not-for-profit sector—that is, delivery of smarter regulation, reducing red tape and improving transparency and accountability.

I think those principles are consistent, as we have heard in the previous session, with all the reviews over the last decade or so. It is a complicated sector with a wide range of legal structures, and we see one of the benefits of having the ACNC established is that there will be one organisation whose main game, to use the colloquial term, is to look at and regulate the not-for-profit sector.

However, Philanthropy Australia is vitally concerned that there should be nothing in the ACNC legislation that inadvertently diminishes the building of a philanthropic culture in Australia. So, in implementing these changes, if the emerging growth in philanthropy is curtailed or reversed, or if charities suffer from a reduction of people interested in becoming directors, this will not be the long expected leap forward. Hence we see a very important role for this committee and its deliberations.

The philanthropic matter, which I will address shortly, we believe can be dealt with very simply and effectively, and the director issue—I know, from listening a little early to the 10.15 group and the subsequent Treasury and ACNC questioning—is very much on the agenda. The only additional comment we would add to that is that it is very important to resolve that issue, both in the detail but also in the perception that it may leave for people interested in volunteering to become a director of a not-for-profit organisation. So, I was very encouraged by the questioning that I heard from the committee, as I think that is the right approach to be taking.

A major concern that was identified in our submission—in fact the Smith Family referred to it in their opening submission 10-or-so minutes ago—is the question about the privacy of information, particularly private information relating to private ancillary funds.

I will just give you a couple of sentences of background. Private ancillary funds were a John Howard initiative from 2001. They are known as prescribed private funds. They identified and filled a particular hole in the philanthropic structure in Australia, which led many overseas countries, particularly America, to allow families and businesses to establish tax effective philanthropy. In 2009, these were subject to significant review called Improving the integrity of prescribed private funds, and a new set of guidelines overseen by the then senator Nick Sherry was implemented, with strong support from the whole philanthropic sector.

PAFs, as they are colloquially known, are now the fastest-growing component of the philanthropic sector, both in terms of dollars and in terms of encouraging wealthy families in particular to engage with the sector.

In 2008, before the review, donations to PAFs accounted for 31 per cent of all deductible donations to the charitable sector and, importantly, the trend of increasing money into PAFs did not at all reduce the money going into other charities.

The most recent data, from 2009-10, indicates that PAFs are now distributing $197 million a year to the charitable sector. So, after a decade of growth, this new structure that has received bipartisan support is already larger than the trustee companies that have been around for 150 years.

We see it as an important component of the sector and we know from discussion with our members and with individuals that, if all the information that is contained in PAF returns is made public, there will be a number of people who will either close down their PAFs or not establish new ones. I can go into the reasons for this if the committee is interested. We see it as potentially a significant detriment to growth in the sector.

The solutions that are proposed in the legislation, we believe, are workable in terms of the minister having power to issue regulations to have the information kept private; however, we are suggesting one change in the legislation to ensure that, if the minister does issue a regulation, there is not a discretionary power for the commissioner to override that legislation. Again, I can provide details if you wish to question me on that.

CHAIR: Thank you. I actually read your submission first, and there has been a lot of stuff piling in on top of it since then, but I think I still remember it. The changes that were made since the first draft are the ones you are referring to, the ones that actually allow for privacy?

Mr Ward : The current draft has provision for the minister to issue regulations and, under section 4.34, I think, of the explanatory memorandum, it is indicated that these regulations could, for instance, be used to protect private information. That is seen as something that could happen rather than something that will happen. We are happy with that intention. The one specific clause is, I think, clause 40-10(2) which gives the commissioner the ability to override any regulation if they think it is in the public interest. To our minds, if the minister issues a regulation, the public interest has been taken into account at that point and, therefore, we would have thought, a regulation from the Governor-General should not be overridden by the commissioner.

CHAIR: As a taxpayer, it is of great interest to me to know how much tax concession is going to these organisations and what the multiplier is, relative to other forms of charities. Do you imagine or do you see that perhaps there is a need for an aggregated reporting in this area?

Mr Ward : Absolutely. In fact that currently exists. The ATO—and Myles McGregor-Lowndes as part of his research from QUT—publishes each year a report on the aggregate amount of money going into PAFs, the amount of money coming out of PAFs. It splits up the sectors which the money goes for. So there is more known about what these particular vehicles do in terms of their philanthropy than any other part of the sector, simply because of the collection of the data by the ATO and then the analysis that is done on that in aggregate. That is something we supported when it first came in, and we still support it unambiguously.

CHAIR: Apart from the director issue and the privacy issue, are there other things that either are in the bill or you think should be in the bill, which you would see would grow philanthropy?

Mr Ward : We have a number of what I would call relatively administrative suggestions in our submission, but they are really very much about tidying loose ends up rather than points of principle. Our view is that the taxation environment for philanthropy in this country is now pretty good. The issue is that there needs to be more of it. History tells us that, every time there has been a question about whether concessions are going to change or whether information is suddenly going to become public, the level of enthusiasm for philanthropy falls away and then it takes some time for it to build back up again.

CHAIR: The possible or likely arrival of the ACNC has not led to that at this time?

Mr Ward : There are certainly some people, those who are aware that there is the potential for public disclosure of private information, who are concerned at that. In the main, there are some people who are simply not aware that that is potentially an issue, given that it was visited in 2009 and explicitly rejected at that point, when it was decided that the reporting would be at an aggregate level, as we discussed earlier. The fact that it is being revisited is of concern to some people. Others would say, 'Well, yes, that's what you expect, but we should keep on fighting the fight,' which is that, for some people, giving is a very private activity. They do not seek acknowledgement for it. In fact, some of them think that acknowledgement is almost counterintuitive to the generosity of giving, whether that is from religious or personal reasons. And there are some individuals, for instance, who work as volunteers in not-for-profit organisations and support those organisations through their family philanthropy, and they do not want to be recognised within that volunteering role as being the person that is also funding the organisation, because they just believe that that would be totally inappropriate as far as their personal values are concerned.

Dr LEIGH: I think I am probably reflecting my ignorance on PAFs, Mr Ward, but wouldn't such a person who wanted to maintain anonymity then simply give as you or I would give a charitable donation, claiming a deduction on our tax return and maintaining anonymity in that way?

Mr Ward : That is certainly one of the options. The benefit for funds like private ancillary funds is that it allows you to separate the giving in from the giving out. There are some people, for instance, when they might sell a business or an investment property or when they retire, who decide for particular personal reasons that that is the time to give a fair bit of money into an organisation. They can move that into a foundation then and then actively engage with the community over the following five or 10 years as the money is passed back to the charities themselves. That is the preferred vehicle that they would rather use, rather than give all the money directly to one or two charities right at the outset.

Dr LEIGH: So the PAF lets you claim a tax deduction in a single year but then pass the money out over subsequent years?

Mr Ward : Yes.

Dr LEIGH: Okay.

Mr Ward : And there are guidelines that PAFs can only pass money out to organisations that are also DGRs, so to organisations that would give you a tax deduction if you gave to them directly. They can only give to a controlled number of ATO endorsed charities, and there is a minimum requirement that at least five per cent of the corpus must be given out each year as part of the donation or the distribution strategy.

Dr LEIGH: I suppose the public benefits in the broad suite of reforms that we are putting in place would seem intuitively to me to outweigh the fairly narrow benefit you have described—a loss of confidentiality in a situation in which an individual wishes to claim a tax deduction in one year but give in subsequent years. Do you expect that there would be a substantial number of donors who would cease giving if they were not able to use a tax vehicle of this kind?

Mr Ward : Yes. And it is also the view of the other people that are active in talking to individuals that it will diminish the likelihood that people will want to set up new foundations, because they want to remain private.

On the issue about the broad suite of reforms: to our mind, this is not contrary to the broad sweep of reforms. We see the importance of good governance and the importance of accountability applying to all forms of charity, particularly those charities that get tax deductions. That is enshrined in the private ancillary fund guidelines of 2009 and more recently the public ancillary fund guidelines of this year, both of which Philanthropy Australia and the sector strongly supported. In fact, we run governance workshops to help individuals understand their compliance obligations under those guidelines, so we have no issue about the idea that people who get tax deductions for money given to charity should be accountable and have governance standards imposed on them. There is no issue there.

The single issue is around the question of full public disclosure of not only what they are putting in but also potentially which organisations they are supporting. There is no public disclosure of all donations to other charities. There is no public disclosure of all tax deductions that individuals make, whether it is for negative gearing or anything else. The specific issue around private ancillary funds is that, because they are restricted on who they can receive money from—that is, it can only be from family members, with a few slight exceptions and variations—there is a clear nexus between who controls a private ancillary fund and who has donated to it. It is clearly identifiable back to a founder or a family.

Dr LEIGH: So then your core proposal governing this is your recommendation 3 in your submission:

That the section of governing rules containing the Founder’s name and address be withheld from appearing on the public register.

Mr Ward : Yes, and recommendations 1 and 2, above, that the (e) is removed from 40-10(2) and it is left finishing at (d), which then gives the minister power to have a regulation, and then the minister issues a regulation saying that elements of the private information ought not to be made available on the public register.

Dr LEIGH: You do not have an issue with the requirements of disclosure to the ACNC; your concern is simply over what the ACNC then does with that information?

Mr Ward : Absolutely correct. We have absolutely no issue at all with the disclosure to the regulator—that has been the case; that has worked well to now. It is simply the public disclosure, because we think it will be negative for the sector, and we struggle to see what the public benefits that flow from that public disclosure will be.

Often it is pointed out that in America they have full public disclosure. That is absolutely true, but public disclosure does not always lead to good accountability or good governance. I bring the committee's attention to the Madoff affair, which I am sure you have read about. Forty-five American foundations lost more than 90 per cent of their capital as a result of the Madoff affair. Their information was all made available on the public register. It was not an issue of transparency; it was an issue of governance and accountability. That is where we believe that the current legislative framework and guidelines that have been developed over the last 10 years, starting from John Howard and then reformed by the current government, are an appropriate form of regulation and accountability for those funds.

Dr LEIGH: I do not think that anyone is arguing that transparency will solve all the world's problems, but as a policy maker my natural inclination is to be on the side of letting the sun shine in unless there is a strong public policy argument against it. What I am trying to get my head around is how big the impact on total donations would be. You have told us that the introduction of PAFs did not crowd out other charitable donations. I guess it is difficult to know the quantum of those donations otherwise and how many donors would simply shift to standard charitable giving if PAFs were to become more transparent. Can you bring any better evidence to bear on that than what you have in your submission?

Mr Ward : There is anecdotal evidence. There is also the data that Myles's group produces in terms of the number of PAFs being set up and the amount of money going into them declining substantially from 2008. The GFC probably had a role to play there as well, but there were certainly a lot of issues around what the new framework was going to be, and those numbers have now just started to head but up again. Yes, we believe there was a significant impact, but you are right—it is anecdotal evidence; it is evidence from people like Peter Winneke, who is the head of the Myer family office.

The sector is now starting to grow and it has the right framework. We are of the view that unless there is a compelling public policy reason to change it, why would you want to change something that clearly has had bipartisan support and is now starting to reinvigorate a culture of philanthropy in this country? It is not only the money; it is the fact that families are starting to engage. We particularly see younger individuals of wealthy families—the kids of those who have made the money—getting much more involved in their community because there is a family foundation. They sit around the table and discuss with their parents not whether they are going to buy an Xbox or something else but which charity they will support this year. It is not only the dollars. It is also about the culture that is being developed in Australia.

CHAIR: Is it usual for PAFs to advertise for applications, or would they appear in the old free money book?

Mr Ward : No. There are some, and certainly there are some PAF holders that take a very public view about what they are doing. We have no issue with those, but a lot do not do that. They have charities that they perhaps have supported over a long period of time or in some cases perhaps established because a family member or other has been afflicted by a particular disease. Therefore they know exactly what it is they want to support and there is no public seeking of submissions or applications in the way some of the big traditional testamentary foundations would do.

CHAIR: I guess one of the unintended consequences of making the names public would be an inflow of requests—an increased administrative burden, if you like.

Mr Ward : Certainly. Most private ancillary funds have no staff. They are run from the kitchen table, and if there is a lift in the number of requests that they receive most people would have the view that if someone has written to them they should write back, particularly if there are 27,000 DGRs or thereabouts out there. If you have even a small proportion of them starting to write, that becomes a burden. What is more, it is probably only the larger ones that have got staff to write back. One of the benefits of philanthropy is that it has the capacity to support smaller, newer and emerging organisations, but they still must pass the ATO's DGR status before they can be supported by a PAF.

CHAIR: Do you have issues with the reporting requirements and is it clear about what revenue is for a PAF?

Mr Ward : The reporting requirements are that PAFs have to file a full financial return as they stand today to the ATO today. There was an issue that was suggested in the earlier document as to whether you could still use special purpose financial statements, which most PAFs do use rather than general purpose financial statements. We understand that that has now been resolved and that they will be able to continue to use special purpose financial statements. It would be useful if the return that has to be sent to the ATO had the same definition of income as the financial accounting standards, but those are issues that we just have to learn to deal with.

CHAIR: I was wondering about that myself.

Mr Ward : The view of people is that we get tax deductions on this money; there is a requirement to be fully transparent with the regulator. Whether that regulator is the ATO or the ACNC, the acceptance is that they are a tax-privileged vehicle and therefore there is a requirement to be accountable to the regulator. There is no issue with that.

CHAIR: Thank you. Do you have anything further to add?

Mr Ward : No. We wish the committee luck in its deliberations. I realise I am the last person appearing. As I said, we believe that having one body that is going to focus as its 'main game' on the sector in the same way we have had other bodies federally focus on other sectors is a step forward. We also accept that everything is not going to be perfect from day one and, quite clearly, the implementation plan that the minister and the commissioner have produced gives us a sense of where they are going.

CHAIR: I just have one more question. In the definitions of small, medium and large, based on revenue and not capital, would the PAFs cover that range or would they mainly be one or the other?

Mr Ward : Most PAFs would fit into the small category. In terms of the wider charitable sector, effectively the revenue requirement is that you would have to have over $20 million worth of FUM to be in the million-dollar revenue if you take, say, a five per cent return. That is a sizeable foundation and would therefore be filling out the full financial forms anyway.

CHAIR: They would be doing it anyway, and they would probably know how to.

Mr Ward : Those thresholds are not viewed as an issue and they are in fact slightly more generous than the thresholds that exist in the public ancillary fund guidelines, because that is revenue or FUM so it is slightly different. Of the charitable trusts, PAFs and public funds are the DGR group of trusts, and they make up roughly half of them. The other half of the charitable funds are testamentary trusts or private charitable trusts that are not DGR but they are tax exempt.

CHAIR: Thank you, and thank you for your attendance here today. If you have been asked to provide additional material, would you please forward it to the secretary. You will be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact. Thank you very much for finishing off the day.

Committee adjourned at 15:08