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Economics References Committee
Finance for the not-for-profit sector

COX, Mr Nicholas, Chief Operations Officer, YMCA Australia

ORGAN, Mr Colin, Group Manager, Finance, YMCA Australia

THORN, Mr Christopher, council member, Philanthropy Australia

LEWIS, Mr Simon, Head of Strategic Partnerships, Communications & Community, The Trust Company

WARD, Mr David, Treasurer, Philanthropy Australia


CHAIR: We welcome you all here. Would you each in turn like to make an opening statement?

Mr Cox : An opening statement from us?

CHAIR: If you wish to, an overview sort of thing.

Mr Cox : Sure. I thought I would start off with a very brief opening statement about the YMCA. We are a large, community based, not-for-profit organisation. We are in approximately 600 communities across Australia and we are made up of 30 independent associations, each of which are registered TCC members—or tax concession charities—and about half of those enjoy the benefits of being a PBI as well, with DGR status. The majority of our facilities and services are delivered in partnership with a number of commercial, not-for-profit and government organisations. I suppose a large growth area for us is around social enterprises, so I suppose there is a fair bit that has impact on our business and we are really keen to present some of our thoughts and ideas. At this point I will throw to our subject matter expert, which is Colin Organ, who is our group manager of finance.

Mr Organ : Today, I guess what we want to do is put a proposal to you; we have titled that proposal ‘Australian Charity Bonds’. It is a concept we have come up with over a period of time from facing the challenges of trying to raise capital for social enterprises. The key points about the proposal are that we have been looking to create effectively a charity bond which would be income tax exempt. That would require some legislative changes to our income tax legislation. The mechanism on which this could be based would be that you would need to be a tax concession charity to be able to be eligible to issue this type of bond.

Essentially, what we are trying to do is to bring together philanthropists and charities. The great challenge of raising funds is that in the current commercial environment banks will have their set rules on how to issue capital. Under a tax concession charity model it is prohibited to seek equity investment and maintain a tax concession charity model. Essentially, what we are trying to do is to bring together philanthropists who potentially have significant amounts of money to work with charities to solve social challenges. In terms of how this could work, it could potentially relieve government of some of the pressure around government grants, so there is a significant component. I think one of the presentations you have had included some quotes from the ABS which showed that about 55 per cent of the income of the social sector was coming from grants, so there is a significant reliance on government for grants. This creates an opportunity to raise capital that does not create a reliance on government for raising taxes and funding grants.

The yields on these income tax effective bonds would effectively be improved through the ability to have an income tax exempt status. For instance, in the example we have given in our paper, a four per cent coupon on a bond to a taxable, tax assessed individual who pays the highest rate of tax would be able to earn a yield of 7.5 per cent. So, it does not penalise the philanthropist or the investor for investing in this type of bond, but it gives the opportunity for the charity to raise funds at a cost-effective level in terms of raising capital.

In terms of other aspects of how it can work, it would still be based on just the current ATO definition of ‘charitable’ and ‘tax concession charity’. There is no need to create new government mechanisms or administrative functions. There is a well established market in the United States for tax exempt type products such as higher education bonds or municipal bonds and there are also secondary markets for them. There are other mechanisms such as ratings agencies and also the ability to utilise registry offices and registry companies to manage these bonds, so the charities are able to use most of the funds that come through these mechanisms and through the bonds to maximise social outcomes. That was an overview of the proposal that we would like to submit.

CHAIR: We will come back to you, I am sure, in questioning. Now, Philanthropy Australia.

Mr Ward : Thank you for the opportunity to present. Philanthropy Australia is the peak body for charitable trusts and foundations in Australia, with some 400 members. The size of the philanthropic sector, though, is actually very difficult to ascertain and, depending on one’s definition, we estimate there are some 5,000 foundations in Australia, controlling $7 billion to $10 billion worth of fund and disbursing between $600 million and $1 billion dollars a year to the community sector. My colleague Christopher Thorn and I are both on the council of Philanthropy Australia, but each of us is involved in a number of other community organisations, both as grant makers and grant recipients, and we are quite happy to disclose those details if the committee so wishes.

The focus of my comments today is around section (h) of your terms of reference, which is making better use of the corpus of foundations and trusts. We are not advocating any special treatment for foundations and trusts as we believe the encouragement of social investment needs to be across the board and equal across the board, but we do see some specific opportunities where some foundations may be early adopters of social investment and that may generate some much needed momentum in the sector.

Trustees of foundations have a fiduciary responsibility to: comply with the law, the trust deed and any legislative guidelines; to act with loyalty and proper purpose; and to act prudently with diligence, care and skill. This is well understood and provides constraints within which trustees must work. I think it is fair to say that when there is any area of doubt, trustees tend to err on the side of caution rather than innovation. But for foundations, they all have a purpose that is for the benefit of the community or the benefit of a subset of the community. So, for foundations there is no sole purpose constraint to social investing in the way there is for superannuation trusts, which I know the committee looked at in its Canberra hearings. But I should be clear that there are many foundations which will be unable to consider specific social investments simply because of the restrictions in their deeds about use of capital, or restrictive defined purposes of those trusts. However, there are many foundations that are not so restricted where trustees, in the right circumstances, could seek social returns as well as financial returns on their investment portfolio.

The two most likely segments in our view—and these were touched on by the previous speaker—are private ancillary funds, of which there are about 950 now, and are the fastest growing component of philanthropy, and also public ancillary funds, of which there are about 1,600. New guidelines for public ancillary funds come into effect from 1 January next year. PAFs have a purpose of—and I use the word PAFs to be private ancillary funds in this context—providing money, property or benefits to eligible entities. But we see a number of issues that should be resolved before we get more momentum in this space. I deliberately say ‘resolved’ rather than legislated, because we believe that the framework is actually in place and no further structural change is needed. PAFs are required to distribute five per cent of their previous 30 June corpus each 12 months. There are costs to cover and inflation to offset to preserve the value of the fund. Many PAF trustees believe they cannot afford to have a significant amount of fund tied up in low yielding assets however socially beneficial those investments may be. But if any discount to the market returns on social investments can be treated as benefit for the purpose of the five per cent minimum distribution, the calculation is changed significantly. Such treatment of benefit is actually envisaged in the 2009 PAF guidelines with the example 2 under guideline 19.3 stating:

If a private ancillary fund leases office space to a deductible gift recipient at a discount to the market price the fund is providing a benefit, the value of which is equal to the amount of the discount.

However, we are only aware that this concept has been applied beyond rent once with limited success. We see two reasons why this inactivity and poor response has occurred. The first is that PAF trustees generally are unaware of this provision. Our suggested answer to that is that there should be active promotion about the social investment amongst the PAF trustees through seminars, conferences, media and so on, and certainly Philanthropy Australia is willing and able to assist in this process; we simply do not have the funds to do so.

The second is relative to commercial rent establishing a benchmark for the market price of a social bond is much more complex. Our suggested response to this is that between the Office for the Not-for-Profit Sector, PM&C, Treasury, which we know is supportive of this concept, and the Commissioner of Taxation along with some of Philanthropy Australia’s members who have expertise in this area, we draw up and publish a set of market prices for different classes of social investment—secured debt, bonds and subordinated debt, to name three.

Philanthropy Australia suggests that an early establishment of some market benchmarks would be beneficial and these rates can always be adjusted in following issues if they turn out to be not exactly right, but the benchmark rate needs to be publicly available prior to the issue launch and needs to apply for the whole term of the issue, hence I believe that the commissioner needs to be involved in the setting of those market rates.

The second issue is that PAFs must have an investment strategy and to give consideration to issues such as diversification, liquidity and risk, and they must adhere to that strategy. So, there is a need for any PAF considering social investment to write into their investment strategy an asset class around social investment. The answer to that is we know that such wording exists today amongst some PAFs and it is just a question of getting some of those templates available to a wider number of PAF trustees—again, seminars and communication is the answer.

In closing, I want to make one final comment that it is important to stress when we are talking about discounts to market price, for both private ancillary funds and under the new rules for public ancillary funds, this discount only applies where the bonds are issued by eligible entities. In all cases that is DGR Item 1, organisations, and in most cases those organisations also have TCC status. But given there is some 20,000 of those, there is certainly plenty of opportunity in the market. In conclusion, in terms of getting some traction in social investment space, Philanthropy Australia sees public ancillary funds and private ancillary funds as potentially the early adopters to provide some momentum. We would be happy to answer questions after the last introduction.

CHAIR: Thank you very much. Mr Lewis.

Mr Lewis : Thank you for the opportunity to appear at this inquiry. By overview, I am head of Strategic Partnerships, Communications and Community at The Trust Company, and I come with the good regards of John Atkin, who is familiar with some of your representatives here.

The Trust Company, by overview, is a corporate trustee with 126 years background in Australia and we have recently acquired a business in New Zealand. With respect to our involvement in the not-for-profit space, we oversee approximately 800 charitable trusts in our portfolio. The funds under management in that portfolio are approximately $1 billion. Each year we are distributing approximately $40 million into the not-for-profit sector. This draws attention to obviously our role in terms of finance into the not-for-profit sector as we are a significant contributor to that.

I am currently working with the executive team on a strategy with The Trust Company to review our own approach to investment in the not-for-profit sector, and I have a few remarks I would like to make with respect to that new approach. We are trying to focus more on capacity building. In the past, trustee companies have typically run traditional funding rounds where we have received a plethora of applications in the several hundreds, and grants have typically been small and on an annual project basis. We see the benefit of focusing in on certain program areas with respect to our discretionary portfolio, matching that up to the philanthropic philosophy, if you like, of big discretionary trusts, and focusing in on those with longer term strategic partnerships. Not only will that allow us as a trustee to be more efficient, I suppose, in discharging our fiduciary role; it allows us to enter into more partnership relationships over the longer term, and we believe in investing at the capacity level into the executive strategy, if you like, where we have confidence in that organisation’s direction and its governance and we believe in its track record, which is empowering that organisation to then use that funding to build its capacity and make longer term commitments in its own sector is going to be more efficient overall.

Ultimately, we want to be seeking to be accountable for greater social impact across a portfolio. If we look at the communication coming back to The Trust Company, we are going to be working with a university to help us monitor that. So, that is one important development. The other is the program areas we want to focus in on are, as I said, specifically tailored to our portfolio, but we have started to explore options in terms of seeding with respect to a consortium approach some non-grant areas. We have obviously participated in the recent SEDIF application. We were not successful, and obviously that was an initiative of government to try to seed a capital investment account for investing into the social sector.

With respect to that tender, I think we ran aground in terms of structuring it as a charitable trust structure, which we thought as a consortium was the best approach. But the impression was that the tender was very much run on a traditional structured investment line and so we were slightly on a different track. However, we applaud the initiative and we accept that this is also relatively new territory. It is new territory for us as well and as such we do not have a submission per se in terms of specific initiatives such as my other colleagues here, but we are now very interested in other proposals that we have received in terms of finance for the not-for-profit sector that we have been approached as a trustee. We are starting to see some really interesting innovations, such as peer-to-peer social platforms that can match out social grants. So, coming to the question of what is a suitable benchmark for a social bond, for example, let a peer-to-peer in that platform allow that to be determined, because everybody is going to have a slightly different interest rate at which they are prepared to give up surplus cash, if you like. So, in a way there are some neat solutions we are starting to see in the market.

From a structural perspective, I think the government not only by having this inquiry and encouraging the thinking, can also—as it has already through the SEDIF—make some seed funding available. What we need here are some good demonstration projects, and we need to see the social sector come up with a compelling solution. I think there is a few out there in the wings that will start to become apparent to us. I think in terms of a government, commercial and not-for-profit partnership it will probably be sitting somewhere in the middle.

In closing, as a trustee, given the financial leverage we have, and seeing ourselves, rather like yourselves, wanting to make sure that we are fully accountable to our own investment in the not-for-profit sector, being a finance provider, we are also looking at these new avenues around creating a much more recyclable, if you like, social capital market, because we believe this is obviously going to be a long trend that is going to grow significantly in time. That is our observation. Thank you.

CHAIR: Thank you very much. Senator Bishop.

Senator MARK BISHOP: I have just a few questions about your proposal in relation to the Australian charity bonds. Have you or your organisation, or anyone, done any scoping work on the potential size of the market you propose?

Mr Organ : No, there has been no research on scoping or size. I guess the aim was to start the idea and commence the thinking around the process. Certainly in the US you see very well established markets, for instance, for higher education bonds, but we certainly have not done any research in terms of the scope of the market.

Senator MARK BISHOP: In a totally different market, we pay for our higher education in different ways, called loans. It is a different method of return. So, no scoping work. You made some introductory comments about grants. It is my experience that, even if the Australian charity bond concept got up one way or another, and there is a number of people who chose to invest in that, the demand for grant applications is exponential and would never, ever contract; just a different set of people would apply. You do not need to comment on that.

Mr Organ : I totally agree. There will always be pressure on government for grants. I guess we are just trying to identify some other avenues of raising capital that would solve social issues.

Senator MARK BISHOP: That is fine. Let us go down that path a little. There is always, in a tax-free bond, an opportunity cost. The opportunity cost is borne by the Commonwealth here. It means of course it has less revenue to spend in the grants area inter alia. Do you have any idea of the opportunity cost involved in creating this new asset class?

Mr Organ : Again, there is no scoping study. The concept in developing the capital for these charitable bonds is that it can solve some social issues where philanthropists and charity work together to solve the issue and hopefully takes pressure off government to solve those social issues to relieve the pressure on government grants.

Senator MARK BISHOP: I understand the argument.

Mr Organ : It is really an offset.

Senator MARK BISHOP: I understand the argument. I am just bringing the perspective of a government senator who is involved sometimes in budgetary discussions to the table. In that context, a bond that returned a tax-free income of 7.5 per cent per annum in the current environment is a very attractive proposition.

Mr Organ : Yes, I think we have an underdeveloped bond market in Australia. Certainly in the US and other maybe European markets there is a much more developed bond market. Australians, for want of a better thing, tend to put term deposits in major banks as their main cash or fixed interest option. There is an opportunity there to develop the bond market in Australia, which is fairly limited. There are wholesale bonds and there are some ASX listed securities at the moment that have bond-like features, but it is a very undeveloped market compared with other well developed economies.

Senator MARK BISHOP: Of course, in the United States, which I know about extensively—not so much Europe—bond issuers do go bust and people do lose. They rarely lose, if ever in this country in terms of the six or seven per cent they received from term deposits in banks and institutions perhaps like yours, do they?

Mr Organ : It is still debt. All charities would have their governance responsibilities, and their governance responsibilities around solvency. Nothing changes there. It still needs to be sustainable levels of debt. That is critical and we have seen that through Europe through sovereign debt and through the GFC.

Senator MARK BISHOP: I wanted to talk about this impact investment. Who was the representative from The Trust Company? Do you have a definition of ‘impact investment’?

Mr Lewis : I think one of the challenges in this sector is definitions overall. So, no, is my answer to you.

Senator MARK BISHOP: Can you give me a conceptual overview of where it is aimed at, then?

Mr Lewis : I think conceptually social impacts at the highest level would be—sorry, not wanting to do this on the hoof—trying to move the dial in terms of the not-for-profit sector, affecting the welfare and wellbeing of those that fall in the gaps, if you like, in terms of making sure that the impact can be certainly accounted for as best as possible. I know that is also a notoriously difficult area and one that is coming into its own in terms of how to do that. We are very conceptual about impact ourselves and, in fact, the strategy that we are developing at the moment, we are going to be getting engaging with us, with this new program, a university that has a centre for social impact. So, we want to be learning in terms of what impact means and how to account for it. To answer your question, it is conceptual and we want to understand it better. With respect to impact, I think you need to obviously focus in on what program areas you are trying to impact, because they will each have a slightly different determination of what ‘impact’ means. We are certainly on the learning curve with respect to that issue.

Senator MARK BISHOP: We have heard from a range of witnesses on this argument or discussion around impact investment. They argue it should be for all investors, including parties such as superannuation funds, trusts and foundations, individual investors, managed funds, pension funds, insurance funds and common funds. That is fine. Is there a role for the for-profit sector in impact investment? I particularly refer, by way of example, to the NRAS scheme, which tried to tap into the private sector and property developers for significant investment into social housing as defined. It was not aimed originally at the not-for-profit sector or the like, so do you have any problems with impact investment vehicles being extended to private sector?

Mr Lewis : My response is, no, I do not have a problem with that. I think you always have to be aware of any predatory investment, if you like, taking advantage of maybe softer governance or regulation within the not-for-profit sector. I think there would be a concern that some might be seeking advantage or wanting to expand their influence in that space, but I think in principle what you want to do is attract as much capital that is not wanting to achieve the market rate of return, if you like, and move into more the social investment space. From a corporate social responsibility point of view, I think that should be applauded and I think that is likely going to be a trend we will see.

Senator MARK BISHOP: There are all sorts of worthy social purposes—low income housing, funding of private hospitals, aged care accommodation, drug rehabilitation and road networks. The list is virtually endless and all can be argued to have a defined social purpose. In terms of impact investment and impact investors, do you see the need for the creation of a distinct asset class or would you prefer to go down the path of niche regulation for each subsector of the industry that comes within the concept of impact investment? Does anyone have any thoughts on that?

Mr Thorn : This came out in the last conversation. One of the tantalising things people chase is one simple solution across the sector, and I think whether it be in terms of asset class, particular financing solutions or particular products, there is not going to be one solution across-the-board. When I think of impact investment, it is really any investment that is creating social impact. Whether that is more at the financial end, where more of the return is financial with some social impact, or more at the impact end, which is more social impact and less financial, you will have a spectrum. So, part of the challenge is creating the vehicle, or the instrument, that is actually going to respond or attract the finance to where you are trying to make a difference. Part of the challenge around the structure that you are using is that the reason we are moving from philanthropy and government funding into commercial markets is trying to access capital that is not available. Going to your point earlier, there are unlimited grant recipients. What we are trying to do is open up sources of capital that are not otherwise available.

Therefore, the solution that is being put here is a great idea for a particular group of investors, but it is not going to be available to every investor. So, what we need to do is work out what is an appropriate both governance model and then an appropriate return for that particular investment class or investor. Really, the point we were trying to make in our submission is that one of the challenges for government is if you try to come up with one solution for this broad investment area you have unintended consequences. So, where trusts and foundations have been set up to invest funds to deliver an income stream, and where they have regulation around distribution requirements, are they are asked to invest in, say, a product that has a lower gross yield, that therefore means that their ability to distribute at the same rate is diminished, that product may be less attractive to the market that it has been pitched at because of the regulation that sits around that, whereas for some not-for-profits that can use the franking credits a franked return might be more appropriate than a lower return.

Likewise, for a commercial investor there may be reasons why actually paying tax and getting a higher return is more attractive than getting a lower return with no tax. There will be other investors that for getting a lower return with no tax is more appropriate. So, really it comes back to saying what are trying to raise the money for, who are we trying to raise it from and therefore what is the best framework to have that discussion? Our view is that, rather than trying to find one set of regulations or structures that sits across the top, there is now with the Office for the Not-for-Profit Sector, the ability to actually have a body that has the visibility and understanding of that and, if you like, set areas of benchmark where someone with TCC status comes along to create a new instrument. The office could actually determine what class or sector of investment that is to ensure the greatest, or the widest, body of investors could invest in that product.

Senator MARK BISHOP: Does the Office for the Not-for-Profit Sector have the expertise at this stage to establish the appropriate taxation regime, the appropriate regulatory regime, the appropriate regime that makes it attractive to both profit and not-for-profit superannuation, and the appropriate regime for for-profit organisations?

Mr Thorn : No, it does not, but I think the point is—and it is open to discussion, obviously—in terms of a whole-of-government approach it is potentially the body that could coordinate that response across government. We are arguing that if you have an instrument coming forward that needs to be, if you like, regulated, or an appropriate benchmark targeted, it would come to the appropriate government to coordinate that classification, if you like, of where that investment should sit.

Senator MARK BISHOP: You mentioned the Office for the Not-for-Profit Sector, and that has necessary implications of regulating that sector, but we—and by ‘we’, I mean government and others—are also interested in tapping into the for-profit sector and the wider commercial market for capital raising for impact investment for social purpose. The ethics of the Macquarie Bank officers, for example, and other investment banks, are qualitatively different—not necessarily superior or inferior to those of the not-for-profit sector. I just raise that as a preliminary point as a bit of a limitation. If you do not have peak for-profit organisations involved, you might be missing out at the beginning.

Mr Thorn : Again, my response to that, in the context of the previous discussion, was that in terms of social purpose, if you are using a for-profit structure to achieve some social purpose as well as commercial return; if you are a for-profit you should be governed by the for-profit regulatory environment. If you are a not-for-profit, you are governed by the not-for-profit regulatory environment. If you are somewhere in the middle, by definition it is a hybrid. I do not think you have to create a hybrid regulator, but you have to create an arm of government that understands the objectives that are trying to be achieved and be able to work within that framework. By definition, what we are talking about here is a hybrid.

Senator MARK BISHOP: Yes. Thank you, gentlemen.

Senator STEPHENS: Thank you, Chair. Thank you for your submission. Mr Ward, you spoke about PAFs entering into uncommercial transactions with DGRs and then claiming the difference as a charitable DGR contribution. You said that one of the things we need to do is to actually educate PAFs that that capacity is available. My first question to you is: can a PAF that has already been established and registered its constitution and its objects change its objects to include that additional clause?

Mr Ward : Trustees of PAFs can change their objects, but that particular object requires the commissioner’s approval to change. But in most cases PAFs are established with the broad clause to provide money, property and benefit to the community. That is the standard clause out of the model deed that most PPFs before PAFs and PAFs are now being established. So, the word ‘benefit’ is already in most PAF founding documents.

Senator STEPHENS: So, really, the question is about educating the trustees of the PAF that they are able to take advantage of this arrangement?

Mr Ward : Simply the combination of educating but also making sure that the market benchmark for the social bond is established before they invest so they know exactly the full return they are going to get. As I understand it, on the recent issue earlier this year, between 150 and maybe 200 of the 900 PAFs were probably aware that the issue was out there, but the level of specific interest and then transaction got down to much smaller numbers. So, it is a case of getting it out but also making sure that the full return, which includes that discount to the market, is known at the time of investing rather than being left uncertain to have a discussion with the commissioner when you file your PAF return at the end of the financial year.

Senator STEPHENS: Thank you for clarifying that. The second issue I wanted to raise with you is the whole issue of DGR status and where that fits in the philanthropic environment. We had some evidence this morning from an organisation that cannot receive philanthropic donations because the work they are doing is engaged in on a global scale and so it is not in Australia. Their argument was that they are an international citizen and in a globally acknowledged project that is around the UN compact they should be able to attract philanthropic monies. Firstly, do you have a view on that? Secondly, how big an issue is it for philanthropic funds that they can only give to DGR registered organisations and what limitations does that put on philanthropists?

Mr Ward : On the first question, there are something like 175 DGR organisations, or deductible gift recipients.

Senator STEPHENS: Perhaps you could just explain a little bit more for Senator Bishop about what that means and why it is important, just for the record.

Mr Ward : A deductible gift recipient is a classification by the ATO that allows any person who is giving a donation of $2 or more to get a tax deduction. As to the issues with private ancillary funds and public ancillary funds, because they are themselves DGRs, when founders set them up and put money in they get a tax deduction on that money going into the foundation. The rules mean that those foundations can then only fund organisations that, if you gave a deduction directly to that organisation, you would have also got a tax deduction. So, a PAF cannot fund an organisation that an individual could not give to and get a tax deduction, to make sure there is a consistency and an integrity in terms of consolidated revenue. That is the logic of why setting up a PAF there are constraints on who you can give to. With a private charitable trust there is no tax deduction for the money going in. Therefore, that trust can distribute to a much wider range of solely charitable purposes, simply because they are not constrained by that requirement to meet the DGR rules.

Just coming back, firstly, to the global issue, there are about 175 or so organisations that are DGRs that operate overseas—say, Oxfam and World Vision. That list goes to 175. There are a lot of organisations—PAFs, public ancillary funds—the public can donate to that operate overseas. It is certainly a smaller list than those that can operate in Australia, but there is a mechanism whereby Australian and tax deductible gifts can find their way to global international events.

Secondly, in relation to DGRs, to my mind the logic of private ancillary funds only being able to distribute to organisations which, if you gave to directly you would get a tax deduction, makes sense, because essentially what it says is that the foundation is simply a holding vehicle for money that is going from an individual’s pocket to the community; it is just pausing on the way through this intermediary vehicle. The logic of the system does make sense. The logic of how you become a DGR, though, as you were pointing out, is really very complicated and there are, I think, seven different DGRs. There are restrictions on which—particularly for foundations—you can make grants to, and so it does get a little more complicated again.

We would take the view that part of the role of the ACNC hopefully will be to sort out this distinction between DGRs, charitable status and eventually come up with a much more coherent package. For instance, less than half the tax concession charities—so charities that the ATO have said, ‘You do not have to pay income tax’—are DGRs. Sometimes there is no logic.

Mr Thorn : You would also be remiss not to add that that complexity has unintended consequences. So, an organisation like Philanthropy Australia, which is representing DGR grant makers, we actually cannot receive funds from any of our members, because we cannot get DGR status. That was obviously not necessarily the intent.

Senator STEPHENS: A challenge, of course. So, you in and of yourself are a member organisation but you do not fit the criteria?

Mr Thorn : That is correct.

Senator STEPHENS: Okay.

Mr Thorn : The 17 criterion—one of the 17.

Senator STEPHENS: I want to tease that out a bit more, because I know that Senator Bishop is quite interested in this. You said there are all these different ways of getting DGR. Are there some types of organisations where it is easier to get DGR, say, environmental organisations or art and cultural organisations, as opposed to community service or social welfare organisations? Do some organisations seem to be able to get it more easily than others?

Mr Ward : The process, as I understand it, is you have to fit entirely within one of the pigeon holes that exist of the 17, or whatever the number is, of DGRs. As long as you fit absolutely within that, the process is straightforward. The issue is often that organisations do not fit completely within one box; they maybe within two boxes. In a lot of cases, that does not allow them to become a DGR, because all of their activity does not fit within one criteria, even though both of the criteria might be acceptable. That is part of the complicated mechanism that we have and one would hope eventually would be reviewed rather than added to.

Senator STEPHENS: We all have high hopes for the charities commission. Returning to the notion of the public trust funds, I did not appreciate there was $40 million a year. That is quite a lot of money going into the sector.

Mr Lewis : Yes, across-the-board.

Senator STEPHENS: That is pretty amazing. Can you explain to us a little bit about the sorts of tools or assessment strategies that you have developed within the trust around determining financial investment in a not-for-profit organisation?

Mr Lewis : I will use the word ‘grants’ instead of ‘financial investment’, if I may. That would be the traditional word and the word that has been used up to now. Obviously I alluded in my comments earlier that we are trying to get this shift away from this grant making to investment, and so this is clearly the direction we want to be taking. Given I have been in this area for six months, I am looking at this with an objective view, if you like, but do see that with relation to our assessment of investments that have been made in the past it is pretty rudimentary acquittal forms basically that would come back from the investees, if you like, and they get filed together, but there has not been a deliberate attempt to assess social impact of the portfolio as a whole. The difficulty there is, I suppose, as a trustee we have many different stakeholders. We are a listed company and we have a suite of 15 or 16 service lines, of which philanthropy is one. We need to be mindful of what are appropriate resources to be putting in philanthropy, given our responsibilities here and our responsibilities to our other stakeholders.

The reason, as I described earlier, for focusing and being much more strategic about how we make these grants—moving to investment—is that the four or five people in our team can be focused on really getting to understand, with these partners, the work that they are doing, the investments they are making, and getting a much more two-way collaboration, and indeed working with this university to start determining our own definition of ‘social impact’. I suppose coming back to the questions earlier, every sector is going to have a view on social impacts and a way of measuring it. By virtue of choosing two program areas, we want to be determining that view, but we want to be doing it in partnership with an independent expert, if you like.

As a trustee, in the past we have had a very broad philanthropic footprint. You can imagine, through 800 charitable trusts, of which three quarters do prescribe investment to particular areas, you create a very large matrix and spread. We are going to start with our discretionary investments and work out an investment strategy with respect to those two program areas I mentioned, and with the university develop a social impact assessment model. But by virtue of going longer and deeper with partners—and we will have fewer of them—we believe it is much more manageable.

We are in new territory in a sense, and to answer your question, yes, the acquittal forms are going to look quite different. In fact, it is going to be a collaborative process. While we get acquittal forms from different organisations we need as a trustee to wrap that all up and say, ‘Okay. In our portfolio what has our social impact been and how do we thread that narrative through?’ Hopefully at the next inquiry I will have an update for you.

Senator STEPHENS: Thank you. That is useful. We heard from Mr Organ, and the YMCA has put up the proposition of charities bonds. Hypothetically, would trusts consider investing in those types of bonds or would trusts be able to invest in the kinds of bonds being proposed?

Mr Lewis : With respect to our philanthropic portfolio of public funds—and as mentioned by Mr Ward earlier, the sort of DGR type 2 and type 1 is of most interest to us—in the main we distribute to DGR 1s predominantly. To the extent that the charity bonds would not necessarily fall under that guise—and obviously we appreciate there are changes ahead—that probably would not be appropriate. However, from our own corporate account, and in the sense that from our own corporate social responsibility if you want to make an investment we could—and this comes back to this overlap between corporate investment and philanthropic investment, if you like—by virtue of the couple of examples I mentioned we have been playing with a few areas and a few ideas. We tried to answer that with respect to the consortium approach we made for the SEDIF application. We actually structured it as a charitable structure in order to get over the DGR 1 issue, and seeing that as an opportunity for us to make an investment into the sector that would actually generate its own return rather than that being seen as a grant. Hence picking up the language of this session—moving from grant into investment. However, the charitable structure did not get over the line with respect to the panel that were reviewing the various options. We are looking at ways of keeping that option alive, if you like, to see whether we can get other not necessarily government leverage but other leverage—our other partners—into that to make it work, because that is I suppose a neat solution that deals with our requirement to invest into DGR 1 as well as making a sort of investment vehicle that will provide the likes of charitable bonds.

Senator STEPHENS: Senator Bishop, do you understand the difference between DGR 1 and 2? Okay.

Mr Ward : Could I add to that answer as well?

Senator STEPHENS: Yes.

Mr Ward : As my colleague Mr Thorn said earlier on, there is a need for a range of products. Social bonds is an interesting case. Because most charitable trusts are tax exempt themselves, a tax exempt social bond at a lower rate is not something that is, say, as attractive as a social bond with synthetic franking credits attached to it in a way that I think Lifehouse and The Benevolent Society presented our ideas in their submission. From a trust perspective, a social bond with franking credits would be more attractive than a social bond that is income tax exempt.

Senator STEPHENS: I think we are going to have them appear in Sydney. We will be able to explore that whole issue with them further. Thank you. I have no other questions except to ask whether there is anything else that you wanted to put on the record—any of you—around this issue.

Mr Thorn : Can I just add to that last point? Again, from an investment perspective, it is not just about the income; it is about the risk taken in the capital that is being invested. Again, one of the issues for the trusts and foundations, which we are talking to today, is that their ability to take a risk, whether it be implied or real, is potentially less than a larger institutional investor. Again, the nature of the bond is not just about the tax status and the social motivation but also about the ability of an investor to make that investment. Again, if we come back to the reason—we are thinking about all of this, trying to tap into commercial pools of capital. It is then a question of working out whether they can take more or less risk and what the tax status of that is. It is important to keep that separate, because a lot of trusts and foundations have been created through people donating capital, receiving a tax deduction to create an income stream. If that capital—and it is only a fairly small proportionate pool in the global investment market—is then put at risk through taking investment risks or investing in bonds that are new, innovative or different, you potentially have other impacts on the ability of that pool of capital to fund. I think that overall risk needs to be taken into consideration without in any way diminishing the intent of organisations trying to raise capital.

Senator STEPHENS: Thank you, Mr Thorn. That is a good point.

Mr Cox : I have something else to add to your question earlier around whether it is easier for some organisations to obtain the DGR status than others. Perhaps I can give a case study. We have a YMCA in Katherine that was providing direct relief of young offenders through diversionary programs. The ATO deemed that it was not providing direct relief of poverty, sickness or destitution, according to the status, and was not able to obtain the DGR status, yet the YMCA up the road, which was the Darwin YMCA, was quite able to provide evidence that the service that it was delivering was in fact benevolent and therefore was entitled to the DGR status. Perhaps just using that as a case study, internally as part of a YMCA family one was deemed to be benevolent and therefore was able to access the DGR status; another YMCA was not, even though the objects and the intent behind what they were doing was very much the same. I offer that as a bit of a case study whereby there is confusion even internally within our own organisation let alone in various markets or various organisations across the spectrum.

Senator STEPHENS: That is a good point. Thank you.

CHAIR: That concludes this session. I thank you all for appearing. It has been very helpful evidence. We will now have a 15-minute break.

Proceedings suspended from 15:15 to 15:31