Revamping DGR system would ease angst over tax on trusts: sector leaders

Philanthropy Australia, Justice Connect and the Community Council for Australia all used the government’s consultation process, now closed, to say the proposed minimum tax would adversely impact charities, unless matched by widened and revamped DGR eligibility.

The campaign to reform the DGR system has been long and loud since the Productivity Commission listed needed reforms in its 2024 Future Foundations for Giving report, and the proposed new tax put a spotlight on the sector’s ongoing argument for change.

The government has proposed implementing a 30 per cent minimum tax on discretionary giving funds (formerly private ancillary funds, or PAFs), as it chases more tax from wealthy families and businesses. However, sector leaders, such as the CEO of the Community Council for Australia (CCA), David Crosbie, have argued that this would be a disincentive for discretionary trusts to maintain their current levels of giving.

“Australia has more than 800,000 discretionary trusts, and academic and charity experts project the proposed trust tax will reduce giving to charities and NFPs by over $500 million a year, which will see losses grow to $3 billion over a five-year period,” the CCA’s submission said.

“The real figure is uncertain, and the government has been asked to provide its modelling during the most recent 2026–27 Budget Estimates hearings.

“But what is certain is that under the proposed trust tax, a significant amount of money that used to reach charities will now go to the Australian Taxation Office (ATO) instead.”

The government has suggested trust distributions to DGR-status charities might be exempt from the 30 per cent tax, but sector leaders say this is even more problematic because almost 60 per cent of Australia’s 65,000 registered charities have been unable to achieve DGR endorsement under current rules and would therefore be shut out of receiving those donations.

In a statement, Justice Connect said that while it believes the government’s overall plan is good public policy, it is concerned that there could be negative implications for charitable giving.

“At present when a discretionary trust distributes income to a tax-exempt entity, no tax is paid on the distribution. This acts as an incentive for the trustee to reduce the taxable income of the trust with distributions to tax-exempt not-for-profit organisations, including charities. With the implementation of a minimum tax on the income of the trust, there will be less incentive to give,” said Clare Ozich, Justice Connect’s Unlock DGR campaign manager.

Broadening and simplifying the DGR system was a solution that would allow distributions from giving funds to DGR-endorsed charities to be treated as tax deductible, in line with how individuals are taxed, she said.

The problem is, Justice Connect argues, that less than half of Australia’s charities have DGR status, meaning the suggested change would entrench and exacerbate the problem of locking out non-DGR-status charities from potential donations.

“Without accompanying DGR reform, simply making gifts to DGR-endorsed charities tax exempt will entrench an unfair and unjust system. Too many worthwhile charities will continue to miss out on access to philanthropic giving,” Ozich said.

“In fact, the very existence of the problem demonstrates why DGR reform is necessary. We should have a DGR system that is fit for purpose, providing a framework governing the tax deductibility of donations and gifts whether from individuals, companies or trusts.”

Pointing to the Future Foundations for Giving report, which advocated for major DGR reform, Justice Connect said government action was overdue, and it should allow charities battling on local community issues and looking to build social capital and resilience to have tax-free donations opened to them.

“If we are serious about strengthening the charitable sector – particularly at a time when charities are grappling with increased demand and constrained funding – we need to ensure more charities can access philanthropic support,” said Justice Connect CEO Chris Povey.

“We urge the government to back the charitable sector and act on this urgently needed reform to extend DGR status to the majority of Australia’s charities.”

Speaking to the Australian Financial Review, Philanthropy Australia CEO Maree Sidey agreed, saying the scope of the DGR system has to be expanded if the plan is to go through.

“By implementing DGR system reform, more charities would be eligible to receive tax-deductible donations, whether they are from an individual taxpayer or from a discretionary trust,” she said.

The Community Council for Australia’s submission to Treasury said that to offset the “significant and adverse” impact that the tax on trusts could have on donations, the government needed to open DGR status up to the majority of charities registered by the Australian Charities and Not-for-profits Commission (ACNC).

It also needed to ensure that no upfront tax was applied to distributions made by discretionary trusts to an expanded list of DGR charities as part of DGR reform, the CCA said. “These distributions must be tax deductible upfront and in full, without the need for a rebate or refund process imposing extra administrative burdens and delays,” the submission said.

The government should also commission and release a cost-benefit analysis of the planned tax, addressing the economic, community and social impact of reforming and expanding DGR, the CCA said, as well as suggesting that as part of DGR reforms, the government needed to address significant data and research gaps in the charity and NFP sector; support a research centre of excellence, to track the flow of philanthropic funds; and provide accurate information about the impact of government policy changes on charitable giving.