The five weeks between mid July and mid August saw nonprofit organisations receiving more political and public attention than they would normally receive in a year. The flurry of stories, ministerial statements, leaks, journalististic opinion pieces and letters to the editor showed how little is known and understood about Australia’s nonprofit sector and the laws that govern it, especially by politicians and journalists.

This period of heightened attention began quietly enough. In a speech to the Sydney Institute in mid-July, the Treasurer, Peter Costello spoke on the topic of “Building Social Capital”. In anticipation of a paper on social capital which the Productivity Commission was to release later that month, he spoke of the importance of trust to a market economy and of the role of “networks and associations” in building trust. He noted Robert Putnam’s claim that this source of social capital and thus trust may be declining and went on to deplore the possibility that such a “culture of public engagement” may be shrinking in Australia. He argued that governments should ensure that they did not act in ways that harmed these associations through which people engaged in wider public affairs. Governments, he said, should choose to deliver services in ways that enhanced public engagement; they should protect the voluntary sector from threats to its viability, such as the insurance crisis.

The remarks were the first public endorsement of social capital and the importance of nonprofit organisations by a senior government minister, and to that extent were noteworthy. But, as several commentators observed, he made no attempt to review the practices of the government of which he is Treasurer against the sentiments he espoused – not surprisingly, as the government would be found sadly wanting. As the crisis that erupted later that month made clear, no one in the government has much knowledge about nonprofit organisations and the legal and policy regimes under which they labour.Discusses the lack of knowledge and policy regime under which non-profit organizations

A week later, the Treasurer tabled his proposed charities bill and referred it to the Board of Taxation to take public submissions and report to the government. The bill was itself a further slow step in the government’s glacial response to the so-called Charities Definition Inquiry conducted by Justice Sheppard, David Gonski and Robert Fitzgerald and which reported in June 2001. That review had made the best of narrow terms of reference and had suggested making several useful changes to the way the courts interpreted the meaning of charity along with some other organisational enhancements. The government’s response and subsequent proposed legislation adopted some of the proposals but left others to languish unremarked. However, one clause in the proposed legislation stood out. Without providing any reasons, it directly contradicted a recommendation of the review, by appearing to prohibit charities from engaging in political lobbying.

To understand what was proposed, the reader needs to understand that there is no statutory definition of the term charity in Australian law. The term is used in many laws, but for its definition, legislators have relied on judicial interpretation over 400 years since the 1601 Statute of Elizabeth. As simplified by a famous case in the 1890s an organisation would be a charity if it could demonstrate that its dominant purpose fitted under one of four “heads of charity”: the relief of poverty, the advancement of education, the advancement of religion and other purposes of benefit to the community. The latter is a veritable grab-bag which the courts have interpreted in ways that we might consider strange, but which reflect changing social concerns over the past 400 years. For instance, gun clubs are charities, because once it was considered that helping citizens acquire the ability to shoot was a benefit to the community. Popular understanding has departed great distances from the legal interpretation. These days most people consider that only organisations that ask for donations to help the poor and the sick or to cure disease are charities. The popular view has thus conflated the meaning to only the first head of charity. This popular misunderstanding holds great sway in the corridors of power in Canberra and among the journalistic fraternity.

But case law also makes it clear that there are characteristics and activities that could disqualify an organisation that otherwise pursued a charitable purpose. One such activity is distributing annual profits or net assets on winding up to members or others. Charities must be nonprofit organisations. Another characteristic that would exclude an entity, even a nonprofit, from charitable status is control by government. A further characteristic that prohibits an organisation from being a charity, is being engaged in political lobbying as its primary activity.

The current interpretation by the Australian Taxation Office of judicial interpretation over the centuries says that an organisation cannot be a charity “if its dominant purpose is advocating a political party or cause, attempting to change the law or government policy or promoting a particular point of view.” If, however, “an organisation’s purpose is charitable, the presence of political lobbying or promotional activity that is incidental to the charitable aims will not prevent it being a charity”.

In other common law countries this aspect of the definition of a charity had captured more administrative attention than in Australia. In the United States and Canada it has been codified so that a charity can spend no more than a certain part of its annual expenditure on lobbying activity. In Australia, it has attracted less attention because less rides on it. Until the GST the only advantage an organisation received from being a charity was tax exemption. Many other nonprofits were also tax exempt for other reasons. Given that most nonprofits made relatively little profit, little was lost to the revenue by a liberal interpretation of charity. In other jurisdictions, to be a charity means being able to give to donors a tax deduction of some kind. In Australia the tax treatment of nonprofit organisations has grown in such a confusing and unprincipled manner that while many charities can give a tax deduction to donors (they are Deductible Gift Recipients or DGRs), most cannot while many non-charities can. Since the introduction of the GST, a little more hinges on being a charity, as certain GST concessions are available to charities.

From time to time the ATO has stripped a nonprofit organisation of its charity status on the ground that it transgressed the lobbying prohibition. These occasions are few and attract no attention. Those stripped of their status believe that the ATO was acting at the behest of a minister and that the prohibition was not applied consistently or fairly. No doubt, some within the bureaucracy and ministry would view the vague prohibition on political lobbying as a useful weapon of bureaucratic discretion, provided it is used sparingly and not against a high profile charity.

The Inquiry proposed legislating to make it clear that only two purposes could exclude an organisation that was in other ways charitable from being a charity: that it promoted, or undertook activities to promote, a political party or a candidate for political office. Clearly, someone within the government thought this went to far in removing a weapon they could wield against certain organisations, but it is far from clear that this was done because they had any particular organisation or group of organisations in mind.

Few who read the proposed clause and responded with claims that the government was proposing to strip charities of their voice were familiar with the background. Some claimed that charities that lobbied the government would lose their DGR status, unaware that many do not have this status and that being a DGR is not a consequence of being a charity but of meeting one of a range of equally confusing tests or as an act of government patronage. One journalist even seemed to believe that only charities could receive government grants. Those who defended the clause were equally wide of the mark, implying that only those organisations that helped the poor were charities.

Then, in the midst of the flurry, the press carried two stories of events that had occurred a little time before but had never been publicised. One was that Howard was proposing to fund a nonprofit council for charities and other nonprofits. Those already suspicious of the government’s motives interpreted this as an attempt to divide the “welfare sector” and isolate the Australian Council of Social Service.

The other event, revealed three weeks later, was that the Howard government had funded the right wing think tank, the Institute of Public Affairs (IPA) to review the “scope, nature and framework” of relationships between governments and “NGOs” and to audit charities and other nonprofits to determine if they were legitimate representatives of the groups they claimed to represent. The actual proposal was to develop a protocol to guide government departments in managing their relationships with “NGOs”, especially “advocacy NGOs”. These, it seemed, “competed” with citizens in seeking access to government. It was vaguely worded but seemed to be about defining the kind of information that “NGOs” should make publicly available for their status to be judged.

The IPA was already well known as a strident critic of many of the better-known nonprofits (such as Greenpeace, Oxfam, Amnesty and World Wide Fund for Nature). It had, earlier that year, worked with a well-known US conservative think tank to convene a conference, well attended by Bush advisors, to discuss a campaign to delegitimise those international “NGOs” that were having such an influence in their attempts to persuade business to move beyond the dominant shareholder model of corporate responsibility. Again, this information helped fuel conspiracy theories within the nonprofit sector and on the left of politics. As with the charity legislation, no journalist chose to dig out the full story.

Both of these proposals had first surfaced in the Prime Ministers Business/Community Partnership, a gathering of some business people and nonprofit leaders (mostly from larger charities). That they surfaced there at all, and that they were funded provide a nice example of what some are calling the “cronyism” of the present prime minister and his ministers. The IPA proposal was brought to the table late in 2002 by Senator Vanstone who is the deputy chair of the Partnership (the public servants who service the Partnership are in her department). Some in the Partnership opposed it as they had still not agreed on a policy for funding research and they could not see how the proposed research fitted the remit of the Partnership (which is to encourage relationships between government and business). The minister testily said that if they did not fund it she would find the money elsewhere. They agreed to provide the funds.

The proposal for a nonprofit council was brought forward by one of the businessmen on the Business/Community Partnership. It had had a long gestation. It had originally been proposed by the businessman (who was also on several nonprofit boards) and one of the better-known nonprofit leaders early in 2001. A good deal of work was done during 2001 by two business consulting firms. The proposal was for a body that would address issues faced by large national charities. It would in this way play the role the Business Council of Australia played in the business sector. One of the consultants had been instrumental in forming the business council twenty years before. In some formulations the council aspired to represent all nonprofits, but the final report was vague about how. The businessman, in the tradition of old-style Australian business, would not move without government support and in 2001 had obtained a promise from the executive of the Partnership for funding for one of the consultancies. The then staff of the Partnership were unhappy about the manner of the promise and the bureaucracy sat on it till the Partnership and its staffing were re-organised in 2002. The funds flowed at the end of 2002. Early in 2003, the businessman proposed that the government fund the proposed council to the tune of several million dollars. At that meeting the Prime Minister agreed that an initial sum of $50 000 might be committed to help the council establish. He also offered to talk with and encourage the larger charities to join. He further committed to try and persuade those peaks that had recently formed a National Nonprofits Roundtable to join the government-approved council.

The significance of these projects lies more in the way they indicate an absence of due process in the way the government operates than in anything of substance that they are likely to bring forth. It is hard to tell just what the IPA project will produce. Their earlier work has focused on overseas aid, human rights and environment organisations. It is difficult to give a great deal of credibility to their critique, as it is relies more on polemic than reliable research. And the nonprofits council proposal seems to have been fatally wounded by its intimate association with government and business. As one nonprofit leader remarked: “it would be difficult to see the business sector flocking to join a peak body that had been initiated by the nonprofit sector and government”.

Its response to the events, however, shows a charity sector that is easily spooked by government bluster, and put into a defensive mode. Charities, nonprofits and the wider social economy face a great challenge. The legitimacy of many leading charities has been weakened by their failure or the failure of their sponsoring churches to respond adequately to past child abuse scandals. Others have been criticised for misleading the public in their fundraising campaigns. As well, at the international level, the legitimacy of some advocacy organisations has been questioned by other activists as well as the right wing warriors.

The IPA criticises the nonprofit sector for being insufficiently accountable. To a certain extent, they are correct. Many of the things that a potential donor or joiner of a nonprofit might wish to learn are not evident from publicly available documents. The IPA is as guilty as any. But much of the responsibility for that failure lies with governments. Governments and courts insist on treating nonprofit companies and associations as just another form of investor owned firm. The legal and accounting rules that govern the way they report are perhaps suitable for investor owned firms, but are next to useless for revealing what interested parties might wish to know about nonprofits.

At its next meeting, the National Roundtable of Nonprofit Organisations will consider whether to call on government to undertake a serious review of the confusing and contradictory legislative environment occupied by Australia’s nonprofits today. They are likely to call for an equivalent to the reforms of business law and regulation, the so-called CLERP reforms, for the nonprofit sector. The much lauded CLERP reforms have been a notable achievement of the current Treasurer. If Peter Costello is serious about wanting to strengthen the nonprofit sector and thereby build social capital, it is a call he should heed. Perhaps the IPA will offer its support as well. But don’t hold your breath.

Mark Lyons
Professor of Social Economy
University of Technology, Sydney
Author of Third Sector: The Contribution of Nonprofit and Community Enterprises in Australia (Allen and Unwin, 2001)