Failing to learn from failure is the worst failure of all

In its wisdom, the government considered the report’s recommendations, noted them all, and decided to do not much at all. In part of its response the government said:

“The requirement for not-for-profits to lodge a self-review return was put in place by the Morrison government through the 2021–22 Budget. The Australian Taxation Office (ATO) has been administering the reporting change in line with the Morrison government’s policy decision. The Albanese government has recognised that many affected organisations will be small and have limited resources, so we have ensured the ATO will take a practical compliance approach to help organisations meet the new reporting requirement….

“The Government supports the ATO and ACNC continuing to provide guidance to charities and NFPs on their obligations. As independent bodies, the ATO and ACNC decide the best ways of providing such guidance.”

I could discuss the government’s response to each recommendation in some detail, but I think there’s one over-riding concern about the way both the ATO and the government have addressed the significant issues raised by many NFPs and their representatives about this measure. Neither the government nor the ATO has in any way acknowledged the findings of the Senate Economics References Committee that the implementation of this flawed policy is a major burden on many small volunteer-run NFPs and is not working.

The ATO identified that “around 155,000 NFPs are currently self-assessing as income tax exempt and are now required to lodge the new annual self-review return.” The ATO also said it generally seeks to achieve an above 80 per cent return rate on required tax returns.

The current rate of return on this measure – completed NFP returns – is around 20 per cent, despite numerous extensions of return dates and final deadlines. And yet in giving evidence to the Senate inquiry, the ATO representative noted that “the ATO was ‘proud’ of its efforts to date in terms of the delivery of the policy.”

At what point can we say the implementation of this policy has failed? If the vast majority of the targeted NFPs have not completed the required return or alternatively registered as a charity, the policy is not working. Around 80 per cent or 120,000 targeted NFPs have not completed the required return.

The ATO may be a very effective agency in collecting tax, but this incredibly low rate of return indicates the ATO is not very effective when it comes to engaging positively with charities and NFPs. And that’s not surprising given charities and NFPs are a little outside its core business.

The ATO has tried over more than two years to make the NFP self-assessment policy work and it’s still trying, but the vast majority of targeted NFPs have not lodged returns. We can argue about why, but what we cannot argue about is that the measure has failed to achieve the desired policy outcome.

The ACNC is a world leading agency in terms of regulation and engagement with charities. The ACNC achieves around 75 per cent annual returns lodged by the due date from eligible charities.

Why not do what was always intended for the Australian Charities and Not-for-profits Commission – the reason it has “not-for-profits” in its title – and have the ACNC collect annual returns from NFPs, beginning with the larger NFPs? This was recommended by the expert review panel that reviewed the ACNC in 2018, and the recommendation was supported by the ATO and the broader charities sector.

If we want returns from NFPs, let the experts at sector engagement collect them. The ATO can do its assessments and approvals after the returns have been processed by the ACNC in much the same way it does with ACNC registered charities.

The ATO has tried and failed. Now is the time for a new approach rather than continuing an implementation strategy that’s negatively affecting the NFP sector and not achieving the desired outcomes. Now is the time to learn from failure.

David Crosbie has been CEO of the Community Council for Australia for the past decade and has spent more than a quarter of a century leading significant not-for-profit organisations, including the Mental Health Council of Australia, the Alcohol and Other Drugs Council of Australia, and Odyssey House Victoria.