The Productivity Commission has released its draft report into motivations for philanthropic giving in Australia and opportunities to grow it further. If the Commission’s proposed reforms are adopted, there will be substantial changes to the Deductible Gift Recipient (DGR) system. In particular, the Commission’s recommendations to remove school building funds from the DGR system will have a substantial negative impact on many schools and religious organisations.

Philanthropy Review
The Productivity Commission was asked by the Government to analyse motivations for philanthropic giving in Australia and to identify opportunities to grow it further. It has now released its draft report.
The Commission has made a number of recommendations. These include the establishment of an independent philanthropic foundation controlled by and for the benefit of Aboriginal and Torres Strait Islander communities. It also recommends reforms to the role of the Australian Charities and Not-for-profits Commission (ACNC) and to the charity register. However, the most significant recommendations relate to reforms to the Deductible Gift Recipient (DGR) system. It also proposes the removal of the concept of basic religious charities.

DGR Proposed Reforms
Not surprisingly, the Commission has concluded that the DGR system is “poorly designed, overly complex and has no coherent policy rationale”. It also acknowledges the difficulty for entities with broad or multiple purposes to fit within a single DGR category.

In assessing DGR eligibility, the Commission proposes a three step process.
1. There is a rationale for government support
2. There are net benefits from providing government support for the activity through subsidising philanthropy
3. The activity is unlikely to create a material risk that tax-deductible donations can be converted to private benefits for donors.

Under the Commission’s proposed reforms, most classes of charitable activities would meet the above requirements and be eligible for DGR status. This would include charitable activities that are currently not eligible for DGR endorsement, such as:
• Advocacy in furtherance of another charitable purpose
• Public interest journalism
• Smaller social welfare charities that do not meet the criteria to be a public benevolent institution (PBI)
• A more diverse range of animal welfare charities
However, the following classes of activities should be excluded:
• All activities for the purpose of advancing religion
• All activities relating to aged care (unless the charity is a registered PBI)
• Childcare (unless the charity is a registered PBI)
• Primary, secondary, religious and informal education (other than PBIs or scholarships and education programs for specific cohorts of students, such as disadvantaged children)
• Activities of advancing industry

Charities that conduct both eligible and ineligible activities can obtain DGR endorsement just for their eligible activities. Charities would only need one DGR endorsement from the ATO which would cover all eligible activities, even if they are in different categories. Currently, charities can have multiple DGR endorsements if they carry on range of DGR activities.

DGR Impact on Education Providers
Schools with school building funds will be the biggest losers if the Commission’s proposed reforms are adopted. The Commission outlines a number of concerns around school building funds, including its position that donors may be able to convert tax deductible donations to private benefits. Donations may reduce the cost of school fees. As donors are likely to have children at the school, this might be considered to be a private benefit. Accordingly, the Commission recommends that school building funds no longer be eligible for DGR status.
It is unclear whether a school’s public library would still be eligible for DGR endorsement. The Commission does say that scholarships for disadvantaged children should still be eligible.

DGR Impact on Religious Charities
Churches and other religious organisations that currently have a school building fund would lose DGR status for this fund. It is also proposed to remove the DGR category for religious education in government in schools.
It will become possible for a religious entity to obtain DGR status for activities that advance social or public welfare without needing to set up a separate PBI. Presumably the activities would need to exclude any religious connection, such as evangelism. It is unclear whether cultural funds for religious performances would still be eligible for DGR status.

Basic Religious Charities
The Commission also proposes that the concept of basic religious charity be removed so that all charities are subject to the same ACNC governance and reporting requirements. This would mean that charities that are currently basic religious charities would be required to comply with the ACNC’s governance standards and provide financial information in their Annual Information Statements. Depending on their size, they may need to submit financial statements that have been audited or reviewed.

Submissions
Submissions on the draft report can be lodged up until 9 February 2024. Details on how to make a submission can be found at Philanthropy – Public inquiry – Productivity Commission (pc.gov.au). The final report is due to be handed to Government by 11 May 2024.

How we can assist
Saward Dawson assists many organisations with obtaining DGR endorsement and with meeting their charity and DGR obligations. If you would like to discuss the possibility of obtaining DGR endorsement or have questions regarding the proposed reforms, please contact us.