Australia's expanding charitable sector is set to undergo major reform. But will these changes save an industry bound by bureaucracy? Briana Everett investigates

In the 2011/12 federal budget, the Gillard Government revealed it would introduce a number of reforms impacting the nation's third sector - charities and not-for-profit (NFP) organisations - aimed at providing consistency amid a regulatory maze and reducing the red tape that has had a stranglehold on the industry for decades.

With charities and not-for-profits become increasingly significant players in the Australian economy, the current regulatory framework is failing to meet the needs of this sector - one that received $25.5 billion in direct funding from the Federal Government in 2006-07 and $3.3 billion of total quantifiable Commonwealth taxation expenditures in 2010-11.

But while the Government has announced its grand plan to remove the complexity within the third sector, NFP lawyers aren't getting excited just yet. Until they see the fine print, some lawyers are concerned that the proposed reforms will have the opposite effect and instead increase the red tape.

A national watchdog

In May, Minister for Human Services and Social Inclusion Tanya Plibersek and Minister for Financial Services and Superannuation Bill Shorten, announced the establishment of a new statutory body to serve as a one-stop-shop for the support and regulation of the NFP sector - a rapidly growing area comprising about 600,000 organisations.

The proposed Australian Charities and Not-for-profits Commission, to operate from 1 July 2012 and be chaired by former productivity commissioner Robert Fitzgerald AM, will be responsible for determining the legal status of groups seeking charitable, public benevolent institution and other NFP benefits on behalf of Commonwealth agencies.

In its announcement, the Government revealed that the commission will also implement a "report once, use often" framework for charities, provide education and support the sector on technical matters, and establish a public information portal by 1 July 2013. And from 1 July this year, a newly established Implementation Taskforce will consult with the public, the NFP sector and government agencies on the proposed reporting framework and public information portal.

"The NFP sector provides vital services to many of our most disadvantaged and vulnerable citizens, but the ability of the sector to undertake this work has been impaired by complex regulatory arrangements and unnecessary red tape for far too long," said Shorten at the time of the announcement.

"We will continue our negotiations with the states and territories on national regulation for the charitable sector, recognising that the greatest reduction in red tape can only be achieved with national co-ordination."

Much of the concern surrounding the sector's policy and compliance burdens, and the need for an independent body, stems from the fact that the majority of NFPs operate outside the sector's regulatory framework, resulting in a lack of supervision.

As a result, the Australian Taxation Office (ATO) has, by default, assumed the role of NFP regulator. However, its role as the sector's watchdog has attracted criticism due to an alleged conflict of interest between determining charitable status and the role of administering tax concessions.

"Some tasks of the ATO will be transferred to the commission and I think that is a good idea. I think it looks better for some of those decisions to be made somewhere outside the ATO"

Darren Fittler, lawyer, Gilbert + Tobin

"Some tasks of the ATO will be transferred to the commission and I think that is a good idea. I think it looks better for some of those decisions to be made somewhere outside the ATO," says Gilbert + Tobin lawyer Darren Fittler.

In contrast, Makinson & d'Apice partner Bill d'Apice isn't too concerned about the ATO's involvement. "The ATO play the role of regulator at the moment and they do a pretty good job," says d'Apice. "They're pretty impartial about it. A lot of people might think the tax office is just about getting extra revenue, but they're pretty good about it."

In response to the perceived conflict of interest, the Government has revealed that the ATO will immediately begin structurally separating its role of determining charitable status from its role of administering tax concessions for the new commission.

According to a 2011 survey by Makinson & d'Apice Lawyers on the NFP legal landscape, Australian Not-for-Profits Speak, 58 per cent of respondents believe the creation of a national regulator is a positive step.

"I think it's a fantastic idea. The sector has been crying out for something like this for some time," says Fittler. "It appears to be a stand-alone body, which I think is important. But it's being very ambitious... If you include all the unincorporated not-for-profits out there, we're talking around 700,000 to 800,000 organisations. So it has its work cut out for it before it even starts."

Although the proposed commission has received support from the sector, some industry members are not yet convinced it will provide the regulatory relief needed. D'Apice agrees that the sector has been looking for a unified approach from the Government for some time, but he is concerned that the commission will only add to the administrative burden of charities.

"As far as I'm concerned, the jury is out as to whether the commission is a good thing or not. The Government is committed to doing it, so it's going to happen. We've just got to get ourselves ready for it"

Bill d'Apice, partner, Makinson & d'Apice Lawyers

"As far as I'm concerned, the jury is out as to whether the commission is a good thing or not. The Government is committed to doing it, so it's going to happen. We've just got to get ourselves ready for it," he says.

The "report once, use often" model of reporting for charities, introduced as part of the Government's move towards national co-ordination, has been welcomed by the sector, which struggles with duplication and arduous compliance requirements.

"There would be enormous benefit in all governments committing to a policy of 'report once, use often', especially in relation to organisational and compliance data requests," said Uniting Care Australia in its submission to the 2010 Productivity Commission report Contribution of the Not-for-Profit Sector.

While sceptical of the commission's ability to positively impact the sector, d'Apice is supportive of the suggested model. "I think I'd probably prefer there wasn't a commission, but if everything the Government says about the commission, and the underlying philosophy, comes to fruition, then it could be of benefit to the sector - particularly the proposed 'report once, use often' idea."

The lack of information about the commission's role is also a concern, according to Mills Oakley partner Vera Visevic. "We know very little about it," says Visevic. "Most of us just don't know what exactly it's going to do from day one."

The case for consistency

Also on Gillard's reform agenda for the sector is another attempt to introduce a statutory definition of "charity", which is something the Federal Government failed to achieve in 2001. In the past decade, the Government has introduced five reviews in relation to the regulation and taxation of the NFP sector - including a 2001 inquiry into the definition of charities and related organisations, which ultimately was unsuccessful.

"The Government tried in 2001 and completely failed," says Visevic. "They're having another go, and I admire them for that, but it's a case of 'wait and see' as to how it all works."

Under the new reforms, the Government is proposing that the statutory definition of "charity" will apply across all Commonwealth agencies from 1 July 2013.

"The current definition of 'charity' is based on over 400 years of common law and is complex, inconsistent between Australian jurisdictions, outdated and creates considerable uncertainty for the sector," said Shorten last month.

With widespread calls for a standardised approach to the sector's laws and regulations, the case for a statutory definition has been put forward as a means of streamlining the laws and providing consistency across the country. With 182 pieces of legislation, the sector must deal with arduous reporting obligations. Despite this, however, industry members doubt whether a statutory definition is necessary.

"I do not think there is a need for a statutory definition," says d'Apice. "I think it's fair to say there have been a lot of cases that consider these issues over the years. There's a relatively clear idea, in my mind anyway, as to what is or what is not a charity."

"How do you create a statutory definition that doesn't erode what the common law says? How do they fit together?"

Vera Visevic, partner, Mills Oakley

Visevic concurs, saying that those who have practised in the area have a good understanding of what a charity is, based on common law. "How do you create a statutory definition that doesn't erode what the common law says? How do they fit together?" she asks.

Fittler points out that while a statutory definition may be helpful, the concept of what is charitable and what is a charitable purpose changes as society changes, meaning arriving at a definition will be a challenge.

"I think it will be a good baseline to have. Unifying the way in which all Commonwealth departments view charities is helpful. I would like to see state and local governments also do the same and adopt a standard approach," he says.

"I'd like to see the Government make charitable fundraising uniform or maybe - which I don't think will happen - the states giving up the power to the Commonwealth and letting it regulate fundraising. I'd like to see nationalisation."

In addition to the establishment of a commission and a new definition of charity, the Government has also announced it will change the use of tax concessions by businesses run by NFP entities.

Under the reforms - which will only affect new unrelated commercial activities that commence after 10 May 2011 - NFP entities will pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose and they will not be able to use input tax concessions, such as FBT and GST concessions, for their unrelated commercial activities.

"It is important that charities use their tax concessions only to assist disadvantaged people and not for unrelated commercial activities. The Government's reforms will encourage charities to direct profits generated by unrelated commercial activities back to their charity's altruistic purposes," said Shorten.

Room for improvement

Regardless of whether these wide-ranging reforms bring the consistency and clarity the sector has been crying out for, the transformation will certainly lead to more work for lawyers as NFP organisations approach specialist third sector lawyers to help them decipher the new regulations and to ensure their organisation complies with the new framework.

"Because the ATO and this new entity are going to be a little more proactive in regulating, more organisations are now thinking, 'OK, we've been coasting along and think we're OK, but we might need to get someone to look at our activities, our constitution ... see what we're up to and give us an audit before the big audit'," says Fittler.

"I am seeing an increased awareness in the NFP sector of the fact that it ought to be complying with various obligations. Even though I haven't been asked explicitly yet to give a regulatory or legal impact assessment on anyone's activities, it's likely."

According to d'Apice, whose firm has serviced the charities and NFP sector for about 150 years, the increased regulation of the charitable sector is leading to a greater need for specialist advice - something the legal industry still fails to adequately provide.

An area of improvement identified by the Makinson & d'Apice 2011 survey is the relationship between charitable and NFP organisations and law firms.

"I think the relationship is weak because of a lack of lawyers' skills in the particular area. There is a lot to be gained by going to those who are skilled in that particular area, rather than just going to a lawyer who's on the board," says d'Apice.

"There are a number of larger law firms that might have made a commitment to pro bono work, which is very admirable. However, in the exercising of that pro bono advice, work is given to junior lawyers. Essentially, there's a lack of empathy with NFP organisations. Firms are very generous in providing those services, but there may be an element of weakness in those relationships."