Henry’s forgotten sector?
Mark Lyons raises concerns about the Henry Review’s capacity to deal with nonprofits.
There is a degree of uncertainty about the extent to which the Henry Tax Review will deal with the nonprofit sector. Neither nonprofits nor the charity subset were specifically mentioned in the Henry Review’s terms of reference. When newspaper reports speculated that some of the concessions the churches enjoy might be under threat, (triggering a ‘What’s this?’ response from some churches), Head of Treasury and Review Chairman Ken Henry seemed to imply that nonprofit tax concessions were not on the agenda. Some in the ministry, particularly Senator Ursula Stephens (Parliamentary Secretary for Social Inclusion and the Voluntary Sector) have been assuring nonprofit leaders that the contradictory and confusing tax treatment of nonprofits will be addressed by the Review. Yet two of the seven Treasury drafted terms of reference for the Productivity Commission Inquiry into the Contribution of the Nonprofit Sector deal exclusively with tax issues. These terms of reference would appear redundant if Henry were dealing with nonprofits.
When one notes that there are 34 ways in which a nonprofit organisation may qualify for income tax exemption (only two of which apply to charities), and 47 ways of qualifying to be a deductible gift recipient (DGR), it would appear that some tidying up of nonprofit tax rules is long overdue. But this should be done by people who know something about the nonprofit sector, which the Henry Review members manifestly do not. The Consultation Paper issued by the Henry Review in December 2008 does have a chapter on nonprofits. It raises an odd mix of issues: some old chestnuts that have been part of the Treasury wish list for decades (such as abolishing tax deductions for gifts and replacing them with a government grant); others that reflect issues raised in a small number of submissions to the Review on the tax treatment of nonprofits. Over all, the chapter does not give one confidence that the Review and its staff have any capability to address the interesting theoretical and empirical issues raised by the exemptions and concessions for donors to certain nonprofits.
It is likely that the Review will not address the nonprofit sector directly, but that some of its other reforms will affect parts of the sector in damaging ways. For example, at present tax exempt nonprofits can claim the dividend imputation on shares they own. This is worth around $330 million. If (as it appears likely), the Review recommends abolishing tax imputation, much of this revenue will be lost. If the Review recommends taxing fringe benefits in the hands of employees, it will be interesting to see if the Fringe Benefit Tax (FBT) exemption of up to $30,000 per employee enjoyed by Public Benevolent Institutions (PBIs) and the rebate that can be claimed by many tax exempt nonprofits (including charities that are not PBIs) survives. This FBT exemption has been important for the large social service providers that are entitled to it, because it enables them to provide additional benefits to employees – and hence attract managers with better experience – than they could otherwise afford.
The Henry Review does not appear to have any nonprofit experts among its members or on its staff. This means it is possible that parts of the nonprofit sector could suffer significant – even if largely unintended – colateral damage.
A Positive Proposal – Supporting Social Enterprise
Cheryl Kernot points the way forward – taxation concessions for social investment.
The Henry Tax Review is supposed to propose an Australian tax system that is oriented to the 21st century. There are a range of initiatives aimed at making capital available for social purposes that would immeasurably help the Third Sector of the economy (including nonprofits) orient itself to the challenging future the country faces, and obtain the resources it needs to innovate. This is particularly important for social entrepreneurs and social enterprises and businesses, which are currently held back by a range of factors including the inability to access capital.
The Henry Tax Review and the Australian Government need to engage with the quiet revolution that has been created by social entrepreneurs setting up social businesses and enterprises around the world. The Henry Tax Review is a generational opportunity to redesign the tax system to facilitate paradigm shifts congruent with the trends illustrated in the accelerating economic relationship between government, business and the Third Sector: a new blurring of traditional boundaries which has been incredibly successful in delivering social (including environmental) value in communities and addressing inequalities in sharing the world’s resources and opportunities.
Two examples of global scale social businesses that you may already be familiar with are:
- The Grameen Bank – a micro-lending model for financing individuals out of poverty. The Grameen Bank challenged the banking orthodoxy that collateral was required for loan risk and that poor women would be the most likely to default on repayments. It was pioneered with poor women in Bangladesh and, having been demonstrated as replicable and sustainable, now reaches half of the world’s poorest families. Having also moved into secondary markets, the Grameen Bank is an example of global systemic change taken up as a product offering by major commercial banks.
- Fair Trade – One example, Café Direct, is a United Kingdom cooperative and the innovative result of Oxfam, Equal Exchange, Traidcraft, and Twin Trading’s decision to bypass the conventional market and buy coffee direct from disadvantaged growers in developing countries. Since 2000 alone they have invested more than £3.3 million of their profits directly into the businesses and communities of their growers, and paid more than £13 million over and above market prices for their raw materials. Similarly to the Grameen Bank, this initiative has driven change in the traditional market with Cadburys recently announcing that it would source all the cocoa beans for its ‘Dairy Milk’ range from Fairtrade growers.
The potential reach of social enterprise is endless – just think about affordable housing, indigenous employment, renewable energy and digital inclusion, like Australia’s InfoXchange social business in Melbourne. Social enterprises aim to earn profits to reinvest in the enterprise’s core social/environmental objectives. This is profit with a purpose. This is why the Henry Tax Review needs to look forward to a new understanding of the place of new forms of ‘for profit, for social good.’
Social entrepreneurs are driving social innovation, social and economic transformation. And in the context of taxation, social businesses require new forms of social investment.
The Henry Tax Review is an opportunity to engineer a 21st century paradigm shift:
- from charity to enterprising solutions;
- from grant-making to social investment; and
- from dependence to interdependence and genuine cross-sector partnerships.
Key measures to accelerate a paradigm shift are being implemented in the United Kingdom, where an Office of the Third Sector within its Department of Prime Minister and Cabinet has been established to coordinate these developments. Some key measures include:
- A flexible regulatory environment to facilitate the development of independent Community Development Finance Institutions (CDFIs).
- Tax incentives for investments made through accredited CDFIs
- Tax relief for social enterprises
- Creating a social investment wholesale bank
- Establishing a Community Development Venture Fund
CDFI’s are independent organisations focused on using financial mechanisms to develop and service individuals, organisations and communities who have been excluded from or underserved by mainstream financial institutions. The current focus of CDFI’s tends to be on the individual; there is a need to extend the model to address financial exclusion experienced by traditional nonprofits, social enterprises and micro enterprises.
Encouraging the growth of CDFIs requires both the development of a specific flexible regulatory environment and a tax incentive for investments made through accredited CDFIs. In 2002, the United Kingdom introduced Community Investment Tax Relief (CITR) to reduce the investor’s income tax (or corporation tax) liability. The relief is worth up to 25% of the money invested spread over five years (5% a year) and is worth 8.33% gross a year for higher rate taxpayers, 6.41% a year for standard rate taxpayers, and 7.14% a year for main rate corporation tax payers. The CDFIs must then ‘on-lend’ or invest the money they raise in businesses and organisations.
In the United Kingdom Budget of April 22, 2009 the Chancellor announced that ‘to support the long-term growth of a thriving third sector, the government will consult on the design and function of a social investment wholesale bank‘ (connecting the social sector to the capital markets.) The money is to come in the first instance from the myriad of dormant bank accounts.
Other pre-budget suggestions included tax relief for businesses where more than 25 per cent of employees are disabled, tax relief for social enterprises that re-invest their profits back into their local community, tax breaks for investment in social enterprise and funding for social enterprises through social bonds.
The Community Development Venture Fund (CDVF) was launched in May 2002 and was a £40 million new equity venture capital fund. The United Kingdom Government invested up to £20 million on a pound-for-pound basis with private sector investors. The Fund aimed to stimulate the provision (and benefits) of venture capital to viable small and medium-sized enterprises that were capable of substantial growth and were located in the 25 percent most deprived wards in England, as classified under the Index of Multiple Deprivation (IMD) ranking.
We are no less socially innovative than other nations and we have the same need to enable socially innovative policy responses to pressing unmet social needs, including, for example, in health and ageing; needs which social enterprises can creatively and inclusively meet. The Henry Tax Review is a critical mechanism to provide Australia and Australians with the opportunities to do this.