Do Tax Incentives Make a Difference?

11 January 2004

This article was first published in Alliance, Volume 8, No 4, December 2003. For more information, visit the Alliance web site.

Do tax incentives make a difference?
Elizabeth Cham

It is often said that philanthropy barely exists in Australia; that unlike in the US (with which the comparison is usually made), there is no real philanthropic culture. The truth is that Australian philanthropy is vibrantly alive and undoubtedly growing. Although still largely invisible to the broader community, it has finally come to the attention of the Australian government, which has introduced a range of new tax incentives. It has long been a vexed question as to whether or not tax incentives are important to the growth of philanthropy. Australian experience so far suggests that they certainly help.

Extraordinary figures are often quoted to emphasize the difference between Australia and the US. The capital base of the Harvard University Foundation, for instance, is more than our Federal Government spends on education annually. A single gift from the Bill and Melinda Gates Foundation ($1 billion for the world child immunization programme) is more than all Australian philanthropic foundations distribute annually.

But these dazzling figures shouldn’t blind us to what is happening in Australia. The Felton Bequest, for example, due to celebrate its centenary in 2004, has provided one third of the entire collection of the National Gallery of Victoria, and is as generous an arts benefactor as the Andrew Mellon Trust in the US. The Myer Foundation, well known for its support of many arts and community activities, has also been working to establish vitally important cultural links with Asia. The internationally recognized environmental programme ‘Land Care’ was initiated by The Ian Potter Foundation. A good many of our renowned medical research institutes have been seeded with philanthropic money.

Recent tax changes in Australia

Research1 shows that the total amount donated and claimed as deductions by individual Australian taxpayers between 1998/99 and 1999/2000 increased by 11 per cent, the largest percentage increase in the 1990s. The average increase in previous years was 6.27 per cent.

A range of tax changes to encourage philanthropy were introduced in 1999. Although it is too early to prove a direct correlation between these two events (because administrative arrangements were finalized after the legislative changes and figures for years since 2000 have yet to be analysed), the role of the Federal Parliament in acknowledging the importance of philanthropy and supporting its growth is undoubtedly extremely significant.

Background to the tax changes
Historically, the home of Australian philanthropy has been the state of Victoria. The largest number of family and private foundations were established and still exist in Victoria, mostly in the capital city of Melbourne. While a number of factors may have contributed to this – including the wealth created by the gold rushes of the 1850s and the charitable ethic of the Presbyterian Church, which was dominant in this part of the country – the Victorian probate laws are perhaps the most relevant. People have traditionally preferred to choose how to give away their money, rather than pay it to the government as tax.

Australian philanthropy today, like in the years after the Victorian gold rushes, rides a wave of new wealth. The long bull market of the 1980s and 1990s created new fortunes, especially from technology, financial services, and the privatization of many public utilities and infrastructure. Over the next 10–15 years, it is estimated that the transfer of wealth from one generation to the next will amount to some AUD60–70 billion.

Stimulating increased philanthropy
It was with this situation in mind that a group of foundation trustees first approached the office of the Australian Prime Minister in the late 1990s to seek support for a strategy to harness a greater portion of the nation’s private wealth. Meetings were arranged in three cities around the country to demonstrate to the Federal Government the extent of private, family and corporate giving that already existed.

The Prime Minister, John Howard, personally convened a round table discussion with representatives of the community, business and philanthropic sectors. This consultative group became known as the Prime Minister’s Community Business Partnership (PMCBP), which continues to advise the Prime Minister and government on ways to encourage and enhance partnerships between the corporate and community sectors. Growing philanthropy is just one of these strategies.

A taxation subcommittee of the PMCBP, chaired by prominent Australian businessman David Gonski, presented a series of recommendations to the Prime Minister for removing disincentives and adding some incentives to giving through taxation laws.

Arising from this process, the Federal Government developed a suite of taxation measures to facilitate greater philanthropy. With broad political support, the changes were accepted by Parliament between 1999 and 2002, and are now incorporated into national taxation law.

These measures include:

  • deductions for fundraising events;
  • immediate tax benefits for workplace giving, allowing employees to make donations to charity through their salary;
  • deductions for cash donations, which can now be spread over a period of up to five years;
  • tax deductions (spread over a period of up to five years) for individuals and businesses donating property over AUD5,000 in value, encouraging property donations for activities such as health, medical research and education, or to cultural, environmental and heritage bodies;
  • Prescribed Private Funds (PPFs) – a new form of private charitable trust enjoying tax deductibility for donations made to it. Such funds will not be required to seek donations from the public. Trust income must be disbursed annually.
  • A new form of charitable trust

The last measure is perhaps the most exciting, with the potential to create the greatest impetus to the growth of Australian philanthropy. PPFs are intended to provide businesses, families and individuals with greater flexibility to start their own philanthropic trusts. Since the introduction of this new category of private fund in March 2001, 131 PPFs have been approved by the taxation office.

There is a new generation of commercially successful people in Australia who are interested in giving back to their communities, but want to do so in their own lifetimes and while they are still active and engaged in their professional lives. To set up a viable stand-alone foundation requires large amounts of cash, which may simply not be available or tied up in assets. PPFs, however, can be built up slowly over time. They offer philanthropists a range of flexibility, control and privacy. While the Australian Taxation Office audits PPFs annually, their details remain private and confidential. All that is publicly gazetted is the funds’ names and the postcodes at which they receive correspondence.

While such privacy is important to many existing and potential donors, the debate about transparency and accountability of untaxed philanthropic dollars is yet to be fully developed in Australia. Annual reports and other transparency mechanisms used by foundations are still entirely a matter of choice, and beyond the new PPFs, we don’t even know exactly how many charitable foundations exist in this country.

Philanthropy and government
It will be some years before we can assess the direct impact of the new taxation measures on the growth of philanthropy. In any case, the factors that contribute to national benevolence are always more complex than sets of figures can reflect.

The debate about the value of philanthropy in Australia has certainly resulted in some positive acknowledgement, and some very practical and important legislative changes. Such changes could never have come about without a political vehicle, and the personal involvement of the Prime Minister in this process has, to understate it, made a real difference.

While government support for philanthropy is of great value, it is also important that philanthropy maintains its independence and separateness from government. Philanthropy cannot pay for infrastructure in health, education or welfare. It should never, nor could it ever, take over the functions of the state. The role of philanthropy is to champion unfashionable causes, such as the welfare of refugees, asylum seekers, the homeless and the addicted; seed-fund programmes at the edge; and help pilot new and innovative ideas in the pursuit of lasting social change. In short, philanthropy can do what governments can’t or won’t.

Government recognition and support for the work of philanthropy is therefore important, but government should not be motivated by the search for an alternative to its own coffers. The revenue forgone through tax concessions cannot be seen as a private source of funds for public services. Rather, philanthropy should be a process of adding value to public money.

While tax incentives are vitally important and the partnership between the philanthropic, community, business and government sectors in achieving such legislative change has been a most welcome development, ultimately our goal is to achieve a more equitable, more cohesive and healthier society for all. Whether this is best achieved through greater philanthropy (as a result of forgone taxes) or other methods is something we must continue to debate.

1 By Dr Myles McGregor-Lowndes of the Centre for Philanthropy and Nonprofit Studies at Queensland University of Technology.

Elizabeth Cham is National Director, Philanthropy Australia. She can be contacted at E.Cham@philanthropy.org.au

See www.philanthropy.org.au