DGR tax rules 'not fit for purpose': Productivity Commission

Productivity Commission deputy chair Dr Alex Robson said Australia was a generous nation, donating more than $13 billion to charities in 2021, an increase of 26% in real terms since 2017.

If current trends continued, the commission estimated, the level of giving would rise by 7.9% to $26.5 billion by 2029–2030.

“Our draft recommendations would strengthen the foundations for philanthropy so that the benefits of giving can be realised into the future,” said Dr Robson.

The report was scathing, however, in its criticism of the DGR system and its detrimental impact on charities.

“Tax incentives influence giving – but the DGR system is poorly designed, overly complex and excludes many causes without a coherent policy rationale,” said Mr Seibert.

As an example, he said a charity preventing illnesses in children would fit the eligibility criteria for receiving tax-deductible donations, but a charity that tried to prevent injuries in children would not.

A charity with a general focus on social wellbeing could also miss out on tax breaks because its activities were too broad to be considered poverty relief.

“Distinctions like this defy common sense and community expectations – a clear sign that reform is needed,” said Mr Seibert.

The report found DGR donations by individuals were worth $4.4 billion in 2020–21 – a threefold increase in 20 years.

Attaining DGR status has become a contentious topic and was raised consistently throughout the inquiry.

The ACNC is currently embroiled in a court battle with LGBTIQ+ advocacy organisation Equality Australia, after rejecting its application to be classified under the Public Benevolent Institution (PBI) sub-category, which would allow it to claim tax deductible donations.

The Productivity Commission's draft report recommended simplifying the DGR system and introducing a new "principles based" assessment approach to determine DGR eligibility as a way of directing charitable support to where it is needed most.

Specific changes proposed included:

• ensuring most classes of charitable activity were eligible for DGR status
• excluding some classes of charitable activity that did not align with the principles proposed by the Productivity Commission, including advancing religion; and activities related to aged care, childcare and education
• an exception where the activities are undertaken by a public benevolent institution or for education activities that have an explicit equity objective.

The commissioners said if adopted, the draft recommendations would mean that more charities overall would be able to access tax-deductible donations.

This could lead to new charities, the scaling up of existing ones, and more innovation to address social challenges and generate social capital.

Dr Robson said the report had proposed a simpler, fairer and more transparent process for determining which charities can receive tax-deductible donations.

“This is evidence-based tax reform that will support giving to a more diverse range of causes, refocusing the system toward activities that deliver broader community benefits,” he said.

While it took aim at the DGR system, the inquiry found the framework governing personal income tax deduction for donations did not need substantive reform.

“Preliminary estimates by the Commission show the personal income tax deduction is likely to be an effective mechanism for encouraging donations of money and other assets,” the report said.

Empowering communities an important target

Dr Robson said setting up an Aboriginal and Torres Strait Islander philanthropic foundation would facilitate new collaborations between philanthropy and Indigenous communities, a process that was already under way.

The report found strengthening the capacity of Aboriginal and Torres Strait Islander organisations to access philanthropy could advance community empowerment and self-determination.

The report also recommended boosting the role of the ACNC.

“The regulatory and information-sharing role of the ACNC can be strengthened, including through enhanced collaboration and cooperation with state and territory regulators, so that Australians can continue to donate with confidence,” said commissioner Julie Abramson.

The report confirmed that while volunteering was widespread in Australia, with six million volunteers in 2022, the formal volunteering rate had declined over the past decade.

The commissioners said philanthropy, particularly volunteering, could help build social capital by contributing to social networks, building trust within communities, and diffusing knowledge and innovations through communities.

They also found philanthropy could provide untied, flexible or long-term funding for more innovative and riskier projects compared to what government funding could offer.

The response from the sector

Community Council for Australia CEO David Crosbie welcomed the report, particularly the recommendations to overhaul the DGR system.

"There is no doubt that the current DGR system is ‘not fit for purpose’ and should be reformed,” said Mr Crosbie.

“Governments should not be in the business of picking winners and losers amongst charities, and yet that is what our current DGR system does.

“Bigger charities with money, political influence, and good legal teams can gain DGR while smaller, less powerful organisations doing the same work struggle to be eligible.”

Mr Crosbie also endorsed recommendations to strengthen the ACNC but warned against extending the regulator's role too far.

“Regulators work with their constituency and enhance trust with the public,” he said.

“Like governments, regulators should not be in the business of picking winners or losers.”

Mr Crosbie said the CCA had long argued there was scope to significantly expand the use of data collected by the ACNC through Annual Information Statements.

“We welcome this recommendation. Better analysing the sector can only be beneficial for policy making and planning into the future.”

Mr Crosbie said while he doubted most charities would have major concerns over the draft report, there were areas CCA would like to have seen given more prominence.

These included the introduction of inheritance taxes, living wills, superannuation reforms and workplace giving programs.

“The real issue is whether the Albanese government will commit to implementing the recommendations.”