A key recommendation of the Productivity Commission’s draft Future Foundations for Giving report was reform of Australia’s archaic and ad-hoc Deductible Gift Recipient (DGR) rules. It could see up to 20,000 charities gaining DGR status, and another 5,000 losing this important public benefit.

Organisations endorsed as DGRs can receive donations that are deductible from the donor’s income tax. This means when a donor makes a gift or contribution to a DGR endorsed charity, they may be able to claim a tax deduction.

Note DGR status and charity status are not the same thing – there are specific additional requirements that charities must meet to be endorsed as a deductible gift recipient.

According to the Commission, a reformed DGR system should be based on the following principles.which will reduce the need for exceptions listed in law:

• the activity has net community-wide benefits and would otherwise be undersupplied
• there are net benefits of providing government subsidies through tax deductible donations (as opposed to government grants, which targets funding more specifically)
• there is no material risk that tax deductible donations can be converted to private benefits for donors

Winners

The proposal extends eligibility for DGR status to more charitable activities, including public interest journalism, small (volunteer) social welfare charities, non-political advocacy and a more diverse range of animal welfare and health promotion charities. It is estimated that up to 20,000 charities could become eligible for DGR status, however this comes with compliance and reporting costs.

Losers

Informal education activities, such as school building funds and library funds for primary and secondary schools, and religious education in government schools, risk losing their DGR status. It is argued that there is a “substantial risk” of a donor being able to convert a tax deductible donation into a private benefit. An example could include a parent donating to a building fund (i.e. music school, sports or aquatic centre) for their own children’s school.

School building funds – which are widely, but not exclusively, used by nongovernment schools – were given DGR status in 1954 when government support for nongovernment schools was limited. Since then, government support for non-government schools has expanded considerably.

Activities that have the purpose of ‘advancing industry’ also risk losing their charitable status. The Commission renewed its 2017 criticism of granting charitable status to billion dollar a year agricultural trading companies Cooperative Bulk Handling Limited (CBH) and Queensland Sugar Limited (QSL). Both operate as charities for the purpose of “advancing industry”.

QSL says the income and payroll tax concessions from their charitable status saves $2.2 million a year and that its “profits” are returned to Queensland cane farmers and sugar millers. It is unclear from their latest annual report how those savings benefit the industry, except commercially. QSL also operates on a thin profit margin (see above). CBH books healthy profits and donated $400,000 to 16 charities in 2022 while its Community Grants program awarded $2.5 million to 798 community events and projects since 2014.

No change

Primary, secondary, religious education, childcare and aged care will remain outside the DGR system unless charities have an explicit wider social equity objective (e.g. charities registered as a public benevolent institution, or for scholarships or education programs for specific cohorts of students).

Charities whose purpose is to “advance religion” will also remain outside the DGR system. Religious organisations could, however, seek DGR status for community welfare activities (i.e. meals for the homeless) and create a gift fund to ensure tax deductible donations are allocated solely for this purpose. Gift funds are an existing mechanism used by many charities to oversight gifts.

The Coalition has labeled the proposed changes as a “tax grab” which “threatens to rip funding from non-government schools and charities”. Shadow Treasurer, Angus Taylor called on Treasurer Dr Jim Chalmers and Education Minister Jason Clare to rule out the recommendation urgently.

Shadow Minister for Education, Sarah Henderson, called the proposed school building tax “a direct, ideological attack on independent and faith-based schools.”

“This would be catastrophic for low fee-paying non-government schools which depend on DGR status to construct new school buildings and other vital infrastructure.

“After attacking religious freedom in schools and delivering discriminatory teaching scholarships, this is further evidence of Jason Clare’s hostility towards the non-government sector. Parents have no interest in Labor’s insidious class warfare.”

Public submissions to the Commission’s recommendations are open until the 9th February, 2024. The Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities and Treasury, is likely to see a procession of lobbyists heading to his parliamentary office in the coming months.