The absurd tax laws holding Australian charities back

What do preparing for climate disasters, preventing cruelty to animals, and building social connection have in common? Charities engaged in these activities are often locked out of receiving tax deductible donations and philanthropy.

Charities in Australia are facing unprecedented demand as inequality deepens and the climate crisis accelerates. At the same time, their own increasing costs are risking the services and supports they provide to our community.

Donations and philanthropic funding are a key source of income for most charities. But the donations playing field is not equal or fair.

Data from the Australian Charities and Not-for-profits Commission shows that in 2023 40% of donations and bequests went to just 30 of the more than 60,000 charities registered in Australia. Smaller charities tend to rely more heavily on donations than larger charities, yet receive a smaller share.

One of the reasons is the unfair and overly complex Deductible Gift Recipient (DGR) system. DGR status allows select charities to access tax deductible donations and acts as the gatekeeper to philanthropic funding. Yet around half of all Australian charities have DGR status.

In a recent report on philanthropy, the Productivity Commission described the DGR system as not fit for purpose, saying it is:

“poorly designed, overly complex and has no coherent policy rationale. This creates inefficient, inconsistent and unfair outcomes for charities, donors and the community.”

Here are a few glaring examples that demonstrate the absurdity of the current system

Neighbourhood Houses and Centres provide a range of services and support to 400,000 people every week, from food relief to social connection programs and adult education. But it is the very diversity of their programs that prevent them accessing DGR.

This is because DGR categories are narrowly defined and exclusive. For example, providing food relief to disadvantaged members of society may fit one DGR category, and social connection programs may fit another. But if your charity does both or more, you may be ineligible.

Some charities are being forced to choose between cutting services for their community or giving up on accessing DGR status and the potential philanthropic support and donations that comes with it.

Embedded in the DGR system is the Dickensian approach to charity, which prioritises relief over prevention.

For example, a charity dedicated to preventing injuries to children could struggle to access DGR. Caring for injured animals can attract DGR, but working to prevent harm to animals in the first place doesn’t.

A charity that seeks to help communities build resilience and preparedness in the face of the climate crisis is locked out of DGR, with the system favouring those involved in the clean up after fires or floods have already wreaked havoc.

At a time when increasing social divisions are tearing at our social fabric, the DGR system is failing to support the majority of charities engaging in this work. The Productivity Commission found that in the charitable subtypes of ‘promoting reconciliation, mutual respect and tolerance’ and ‘promoting human rights’ there was proportionally a very low number of charities with DGR status.

The reality is that the existing system no longer meets contemporary understandings of how to address the challenges of our times.

The Productivity Commission has given the government a simple solution to this mess. It has recommended cutting through the complexity and unfairness with a principles-based approach that would see most charities registered with the Australian Charities and Not-for-profit Commission (ACNC) access DGR status automatically.

Such a change would allow many more charities to access the around $11 billion currently in tax deductible philanthropic funds in Australia. The Labor Government is keen on lifting philanthropic support in Australia, aiming to double philanthropy by 2030. That simply isn’t going to happen without unlocking the DGR system.

There are a lot of unfair tax concessions and subsidies worthy of being abolished or curtailed, many of which are driving inequality and the climate crisis.

The DGR tax concession is one where there are compelling arguments for simplification and expansion. Unlocking DGR would deliver significant community-wide benefits by enabling charities to more effectively support communities in addressing today’s challenges.

Clare Ozich is the campaign manager at Justice Connect.