A presentation to – Association of School Business Administrators (Vic)
Wednesday 20 March 2013
Presented by:
Andrew Marks
–Director William Buck Audit (Vic) Pty Ltd
Stephen Rooke
-Principal William Buck (NSW) Pty Ltd
Not-for-profit Reform:
Accounting and Finance briefing for Schools
Overview
– Not-for-profit Reform Update – Accounting and Finance Issues – Taxation and Registration Issues – Practicalities and Examples – Business Manager’s Checklist
Not-for-profit Reform Agenda
Not-for-profit sector reforms are designed to:
— Reduce complexity, red tape and compliance costs for
operators in the not-for-profit sector; and
— Increase public confidence in the sector through increased
Your problem
governance, transparency, accountability and
ACNC Brief
education.
Not-for-profit Reform Agenda
Issue Focus Tools
Governance Increased controls and better
processes through
Self – Regulation
Government Regulation
— ACNC Governance Regulations (Consultation)
— ACNC review powers (Untested)
Accountability Financial accountability for
source and application of funds
— ACNC financial reporting regulations (Consultation)
— ACNC review powers (Untested)
— ATO Compliance review powers
— Tax law changes (Draft)
Transparency Increase public confidence in
sector by improving visibility of
activities and finances
— ACNC financial reporting regulations (Consultation)
— Public portal (In progress)
— Registrations reviews, and ACNC review powers and
ATO compliance powers (In progress)
Legislative Changes and Timing
Act Status
Australian Charities and Not-for-profits Commission Bill
2012 (and transitional bill)
Passed into Law on 3 December 2012
Tax Laws Amendment (Special Conditions for Not-for-profit
Concessions) Bill 2012
First reading in August 2012. Now on hold
pending timetable of pre-election parliament.
Charities Definition Act Undrafted, in consultation phase
NFP Working Group Review of sector concessions Consultation closed in December. Report due in
2013
Taxation of Commercial Activities No legislation, but still aiming for
commencement from 1 July 2014
Accounting and Finance Implications
Registered Entities are regulated by ACNC and include:
— Corporations which operate charities
— A charitable trust which has one or more corporate trustees
— Any other entity which seeks charitable endorsement for federal
taxation concessions – i.e. income tax exemption, deductible gift
recipient, FBT concessions
EM to the Bill provides for other Not-for-profit entities to be added to
the list of Registered Entities in later stages.
Accounting and Finance Implications
Key transitional timelines arising from commencement of ACNC:
— 6 month window for an entity opt out of the system if you no longer need
charitable endorsement – 3 June 2013
— 6 month window for a Registered Entity to notify the commissioner that
they have an Australian Law requirement to prepare financial reports
ending on a day other than 30 June – 3 June 2013
— 12 month window for an entity to be identified as a basic religious charity
– 2 December 2013
— Governing Council / Board of Directors to be notified to ASIC
— From 1 July 2013 all changes in officeholders to be notified to ASIC
Note: The approved forms to make the 3 June 2013 declarations were mailed out in late January and February 2013 and in most
cases were mailed to the address last updated in the ATO database (likely one of your activity statement addresses)
Accounting and Finance Implications
Proving a 31 December year end for schools:
— The Schools Assistance Act is the Australian Law that requires a
school to report on a 31 December year end
— This act does not, however, cover other entities associated with the
school (foundations, scholarship funds, investment vehicles, building
funds)
Accounting and Finance Implications
Financial Reporting for Registered Entities
Important – Check constitution as this may mandate an audit.
Note – Commissioner may allow an entity to remain at lower reporting threshold if it can show that the increased turnover is temporary.
Entity Lodgement pack to include
Small Registered Entity
— Turnover under $250,000
— Annual information statement
Medium Registered Entity
— Turnover between $250,001 and $1,000,000
— Annual information statement
— Financial statements
— Audit report or reviewer report
Large Registered Entity
— Turnover greater than $1,000,000
— Annual information statement
— Financial statements
— Audit report
Accounting and Finance Implications
Financial Year -
30 June year end
Financial Year -
School
Lodgement requirements
1 July 2012 to
30 June 2013
1 January 2013 to
31 December 2013
Annual information statement to be provided
within 6 months of financial year end. Lodgement
of financial statements is voluntary. Mandatory
lodgement of financial statements with ASIC by 30
April 2014.
1 July 2013 to
30 June 2014
1 January 2014 to
31 December 2014
Annual information statement, Financial
statements with at least one year of correct data
and Auditor/reviewer report to be provided to
ACNC within 6 months year end
1 July 2014 to
30 June 2015
1 January 2015 to
31 December 2015
Annual information statement and Financials with
2 years (current year and comparative) with
ACNC 6 months after year end
Accounting Implications from ACNC
Other Rules
Schools
Schools are able to lodge their Schools Assistance Act annual reports
in lieu of formal financial statements for at least the first 3 years of the
new regime.
Other Entities
The ACNC may accept any financial reports
prepared specifically to report under another
government act, but no word yet on the list of
acceptable reports.
Accounting Implications from ACNC
Other Rules
Consolidations
The Commission of the ACNC may allow group reporting, subject to
an evaluation of the public benefit. If approved, the level of reporting
will be determined by the turnover of the largest member of the group,
rather than the aggregate.
To consolidate, expect that the regulator would need to see that there
was a public benefit to showing only consolidated data and the
normal rules are likely to apply that all entities applying for
consolidation have the same beneficiaries and year end date.
Accounting and Finance Implications
Summary
— The ACNC is open for business from 2 December 2012
— Registered Entities will have lodgement requirements starting with
financial years ended 30 June 2013 or later
— Financial governance requirements will start from 1 July 2013 or later
— Registration - and therefore lodgement - is
compulsory to retain tax endorsements
— The window to make amendments to
registrations expires on 3 June 2013 for
most entities
Taxation Implications
Tax Law changes for Not-for-profit entities are proposed in three areas:
— Changes to rules for income tax exempt and deductible gift recipient
entities
— Proposed reform of income tax exempt, charitable GST free and Fringe
benefit tax concessions
— Proposed taxation of commercial operations
The fact that these are proposed laws makes it difficult to give specific
guidance, but there are some clear trends that can be included in planning.
Taxation Implications
Summary of Proposed Taxation Rules for ITE and DGR entities
Income Tax Exempt Entity Deductible Gift Recipient
Must be a not-for-profit entity
(no member benefits, retention of profits)
Must operate at all times in accordance with objects
(all activities to be in accordance with objects that were submitted at registration)
Operates Principally in Australia
- Trace 50% or more of income, profits and activities
are within Australia for the benefit of Australian
recipients in the class set out in your objects
Operates solely in Australia
All activities are undertaken to benefit recipients in
Australia
Some exclusions from tracing rules Minor activities outside Australia may be allowed if
they benefit Australian recipients
Taxation Implications
Income Tax Exempt Entities (the school)
New Tracing Rules in the ‘Principally in Australia Test’
The organisation must be:
– Established in Australia
– Operate Principally in Australia
– Pursue it’s purposes Principally in Australia
Income Tax Exempt Entities
‘Principally’ means more than 50%
Income and profits must be at least 50%:
— Expended in Australia for the benefit of Australia; or
— Distributed to another Registered Entity
Control and operations must be at least 50% in Australia
These factors will be taken on balance and it will be the entity’s
responsibility to provide evidence that this test is passed.
Taxation Implications
Taxation Implications
Income Tax Exempt Entities
The tracing rules contain exclusions for the tracing of income from:
— Government grants
— Sources which did not claim a
deduction under Division 30 of the
Tax Act (which deals with
donations, gifts and contributions)
Taxation Implications
Deductible Gift Recipients
New ‘Solely’ in Australia Test. A DGR entity must be:
— Established in Australia
— Operate Solely in Australia
— Pursue its purposes Solely in Australia
Taxation Implications
Deductible Gift Recipients
In the later paragraphs of the legislation, ‘solely’ is softened to allow:
— Merely incidental activities outside of Australia; or
— Activities that are minor in reference to operations in Australia
The EM states that the intention is for the organisation to
retain its purpose and beneficiaries solely in Australia, but
permit overseas travel or expenses if minor or incidental.
Taxation Implications
Deductible Gift Recipients
Funds paid out of a DGR entity must go toward:
— Direct expenses of DGR entity in furthering it’s objects in Australia;
— A Registered Entity that also has DGR status with the ACNC
(note, an income tax exempt entity is not sufficient – it must have
DGR status); or
— Another Registered Entity that is registered as an Overseas Aid
Fund or Environmental Organisation and named by parliament Note: Even if funds are paid to another DGR or overseas Aid fund, the objects of your DGR entity must be aligned with
that entity. It is no good having a foundation for advancing education in Australia and giving money to an aid fund that will
send the money overseas – the Australian education fund has exceeded the scope of its objects if it makes the payment.
Taxation Implications
NFP Working Group
Reform of NFP sector concessions, including:
— Availability of Income tax exempt and DGR status
— GST free status
— FBT Concessions
— Access to charitable endorsements
— Has the potential to make the biggest impact on day to day
function and costs for the School
Taxation Implications
Taxation of commercial operations
— Proposed to commence
between 1 July 2014 and 1 July
2015.
— Final form of proposed regime
is not available
Taxation Implications
Preparing for change without having the details:
— Review existing accounting ledgers, processes and controls and
make sure that the information relating to each type of income,
expense, activity and legal entity is able to be reported separately
— Collect information on existing access to GST, FBT and Income
tax concessions so this is on hand if the issues crystallise
— Fix any issues identified in the review process that don’t match the
current rules and be ready to adapt in the future
Taxation Implications
Summary
— Tax endorsement requires registration with the ACNC
— Once registered, the ACNC will have line of sight on your activities
through financial reporting requirements
— Endorsed entities will need to demonstrate that they meet the tests for
ITE or DGR entities, including changes to these rules over time
— Other not-for-profit entities are expected to be included in the process
at a later point in time
— Planning and internal review is the best approach for the moment.
Practicalities and Examples
Beyond the theory, what are the practical issues for Schools that
emerge when we combine the information that is already available?
Practicalities
Financial Reporting
— Is your current financial system up to the challenge?
— Do you have an auditor for all entities and/or do you need one?
— Do you currently have year end accounts for non-school entities
finalised before 31 October? (This gives your auditor a chance to
finalise in the 5-7 working weeks before 31 December.)
— Are your accounting policies up to date or has it been a long time
since your accounts were subject to external review?
Practicalities
Tracing Rules for ITEEs
— Does your current accounting process allow you to
separate government grants, not-for-profit income,
commercial income and donations?
— Are these activities formally separated or managed
through a joint bank account account/shared
general ledger?
— Do you need to revisit your contracts and
relationships with third parties non-charitable
suppliers to help with the tracing rules?
Practicalities
Deductible Gift Recipients
Can you prove the Solely in Australia test? Sound easy?
If you say yes to any of the following the answer may not be straight forward:
— Do you deliver services or benefits through third parties? Can you prove that
your payments were delivered to your organisation’s beneficiaries?
— Do you have a mixed investment fund (holding the reserves of more than
one not-for-profit entity)? How do you allocate income between the entities?
— Do you deal with or provide funds to ITEE entities that send funds offshore?
— Do you have accounting policies and systems that keep separate ledgers for
the income and activities of your commercial and charitable operations?
Practicalities
Specialist Regulator
With a single, specialist regulator in place to administer the Federal
Not-for-profit sector in Australia, the chances are much higher that
previously unreported issues or variations to the rules will be picked
up.
Now would be a good time to review your organisation’s operations
and make sure that the passage of time has not allowed issues to
arise.
Discrepancies between Commonwealth and State Not-for-profit
regimes will still arise in the short term as these regimes remain
managed by State Authorities, with different charitable definitions.
Practicalities
Other issues that are coming for Not-for-profit entities:
— Trickle down of Director responsibilities issues – ‘Centro’, WH&S
— AASB Changes – recognition of income in AASB 1004
Examples
ABC Student
Association Ltd
(ITEE)
Turnover - $1.2million in student education
and community services; Surplus - $200,000
Education for
disabled students
Fund (ITEE)
African Education fund (all monies
directed to fund schools in Africa)
$70,000 $130,000
Registered entity size for annual statements is
large as turnover is greater than $1million
Per the EM - ABC student Association
does not meet ‘primarily in Australia’
test as more than 50% of profits from
commercial activities have been
directed to overseas entity
Examples
Mixed Revenue: Typical School
XYZ School Bank
Account
(ITEE)
Receipt of Schools fees
plus Building Fund Donation
Building Fund
Bank Account
(DGR)
Transfer of net donations
at end of month
Quick Questions:
— Is income accounting process correct?
— Are correct amounts transferred to DGR entity?
— How long are funds held in trust for DGR entity?
— Do they earn any interest whilst held?
— Is this interest also passed to DGR?
— Is the net gain or loss minor or incidental for
DGR entity?
Examples
School with mixed investment fund
XYZ School Bank
Account
(ITEE)
Receipt of Schools fees
plus Building Fund Donation
Building Fund
Bank Account
(DGR)
Transfer of net donations
at end of month Shared Investment
Fund for surplus
cash
Quick Questions:
— How are investment proceeds split
between DGR and ITEE entity?
— Does DGR meet income and assets
test?
Examples
Foreign Income
ABC Wellness
Association
Donations from foreign
benefactors
Receipts from Australian
Benefactors Services to Australian Beneficiaries
Funds transferred to Foreign Beneficiaries
Examples
Foreign Income ITEE
ABC Wellness Association
Donations from foreign
benefactors
Receipts from Australian
Benefactors Services to Australian Beneficiaries
Funds transferred to Foreign Beneficiaries
Income from foreign sources needs to be tracked and excluded under tracing rules,
then ITEE entity passes ‘primarily in Australia Test’ through application of Australian
income to purpose
Case Studies
Foreign Income – DGR entity
Funds transferred to Foreign Beneficiaries
Overseas Aid Fund
Donations from foreign
benefactors
Receipts from Australian Benefactors – can
be donations Services to Australian Beneficiaries
ABC Wellness
Association
Business Manager’s Checklist
Helping your school to prepare:
— The final details of the reforms are not yet available , including the
ACNC regulations, details of financial disclosures and approved forms
— The goals, processes and timelines,
however, are available now and
should be assumed to be correct
— Start now to avoid being rushed
when the final regulations and tax
legislation is released
Business Manager’s Checklist
An orderly approach would include:
— Identify income, activities and operations and put them into
categories
— Review financial policies and systems to understand treatments
that are below best practice
— Source education or advice for directors/trustees/Boards if needed
— Consider early appointment of an auditor
— Fix any immediate issues and wait for the next wave of regulation
and clarifications before making pre-emptive changes
Conclusion
Most organisations in the not-for-profit sector should expect higher
standards of governance, accountability and transparency to apply in
coming years.
Endorsed Charities will be the first entrants to the system, with other
entities to follow later.
The good news is that there is time for all entities to tackle these
issues in an orderly manner.
Some changes are going to be more fundamental than others
(updating systems and policies, changing legal structures), so should
be started earlier.
Contact Details
Andrew Marks
Director
William Buck Audit (Vic) Pty Ltd
Level 1, 465 Auburn Road
HAWTHORN EAST VIC 3123
(03) 9824 8555
Contact Details
Stephen Rooke
Principal
William Buck
Level 29, 66 Goulburn Street
SYDNEY NSW 2000
(02) 8263 4000
