Future foundations for giving – Inquiry Report

On 18 July 2024, the Australian Productivity Commission publicly released its Future foundations for giving – Inquiry Report (Report) into the philanthropic habits of Australians. The Report considers where there is a role for government to support philanthropy and where policy changes may be required. The Productivity Commission estimates that, by 2030, philanthropic giving will have increased by 48%, just shy of the Commonwealth Government’s 50% target.

The Productivity Commission assessed, amongst other things, the barriers to philanthropic giving under the current framework and opportunities to increase giving (and the impact giving has) in the charitable sector. This article will outline the findings of the Productivity Commission, their relevant recommendations and the important takeaways for charitable organisations and charitable donors. 

DGR status/rules

What is the current system?

The deductible gift recipient (DGR) system underpins the Australian Government’s financial support of giving in Australia. People who give more than $2 to an entity with DGR status and have taxable income can claim a 100% tax deduction for their donation. it is a common misconception that all registered charities have DGR status. In reality, only charities with very specific purposes outlined in the Income Tax Assessment Act 1997 (Cth) Subdivision 30 B-A can obtain DGR status and these purposes are significantly narrower than charitable purposes.

What is suggested in the report?

The Report found that under the current system, tax deductibility is effective to incentivise and increase giving and should remain in place.[1] The Report suggests however that the current policy rationale is unclear about the scope for DGR coverage – and why some charities fall within it and some do not. For example, charities that work in advocacy or prevention are typically excluded from endorsement, as well as charities that do not fall neatly within one DGR category. The Report notes that the ‘complexity of the system has made it unworkable, in particular for small charities’.[2] For example, where an entity does not fall into a DGR category, it may instead be specifically listed in legislation as DGR endorsed entity. However it is generally only large charities with significant lobbying power that can achieve the political support that is necessary to obtain this specific status. The process was said to lack transparency, is time consuming for charities seeking endorsement and can lead to inconsistent outcomes.

The Report identifies a wider scope of charities that could be classified as DGRs and therefore allow more choices for donors seeking tax-deductible donations.

Under the proposed wide scope, charities that support multiple groups of people, rather than pursuing only one activity, would be eligible under the proposed reforms. This benefits charities that typically have more than one purpose including those which support women, young people, Aboriginal and Torres Strait Islander people and communities as they now would be assessed as DGR charities.

Regulation of charities

What is the current system?

The Report provides that while current regulation is sound, the presence of multiple regulators leads to inconsistencies. Strengthening the ACNC’s information gathering powers, and promoting cooperation in the existing framework, would improve regulation.[3]

What is suggested in the report?

Recommendations include enabling the ACNC to:

• require a charity to provide information necessary to form an opinion on whether it is a ‘federally regulated entity’;
• require a charity undergoing revocation of its ACNC registration to evidence the distribution of its net assets to an eligible entity, unless the ACNC Commissioner waives that requirement; and
• have standing so it can seek orders in the Supreme Courts of all jurisdictions, where necessary, to protect charitable assets.

As the ACNC progresses through its second decade of operation, it may have greater ability to assume a more assertive enforcement and compliance posture, where necessary, to support trust and confidence in the charitable sector.

Private and public ancillary funds

What is the current system?

Ancillary funds are a type of trust, established for the purposes of providing money, property or benefits to eligible entities with DGR status – allowing donors to receive a tax deduction for donations into the fund. Currently, the general rule is that public ancillary funds must distribute the greater of 4% of net assets or $8,000 each year; while private ancillary funds must distribute the greater of 5% or $11,000 each year.

Currently, there is no framework to explain the distribution rate, except for the 3 principles outlined by the Commissioner, that:

• ancillary funds should operate for the purpose of supporting DGR entities to further their charitable purposes and provide benefits to the community;
• the minimum distribution rate should be set to facilitate the desire of some ancillary funds to operate in perpetuity without guaranteeing that all funds do so or incentivise that particular outcome; and
• the minimum distribution rate should be appropriately targeted so that charities receive funding when they need it most.

What is suggested in the Report?

Recommendation 1: Improving the effectiveness and performance of ancillary funds for the whole community by having the current government guidelines amended to:

• set the minimum distribution rate between 5-8% for ancillary funds; and
• require that ancillary funds develop a ‘distribution strategy’ outlining how they will support eligible entities to further their charitable purpose.

Recommendation 2: Enabling distributions of funds to be smoothed over three years

Increase the flexibility of regulatory regime by amending the private ancillary fund and public ancillary fund guidelines to enable smoothing of the distribution rate over a period of up to three years, with integrity measures to ensure the resulting distributions are at least equal to (or higher than) the amount that would have otherwise been payable under existing rules.

Recommendation 3: Improving public information on ancillary funds, by having the ATO

• publish additional aggregate information on distributions to ancillary funds;
• collect and publish additional information on sub-funds within public ancillary funds; and
• raise public awareness of information on ancillary funds, including by collaborating with the ACNC to include additional information in the Australian Charities Report.

Why is it important to get legal advice?

Under the current stat of the law, charitable organisations and donations are complex nuanced. You should seek legal advice when establishing a charity, setting up a private ancillary fund, or if if you require clarification about any of the points raised in this article.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

• Unlocking philanthropy: streamlining governance through the ATO's deductible gift recipient reforms
• Key legal trends for 2024: Generative AI and increased focus on ESG
• What Is A Non-Charitable, Not-For-Profit Company?
• The Clock Is Ticking: Apply Now For Your Director ID!

Order related document packages

• Public Company Limited By Guarantee
• Not-For-Profit Pty Ltd Company Registration
• Company Registration

[1] Future foundations for giving Inquiry report, page 6.

[2] Future foundations for giving Inquiry report, page 8.

[3] Future foundations for giving Inquiry report, page 15.