CANBERRA: Some of Australia’s most senior religious leaders have joined forces to warn the Albanese government that its planned 30 per cent minimum taxes on trusts and capital gains will wipe out a potential $3 billion in donations to not-for-profits.

Nineteen religious leaders from Christian, Catholic, Muslim and Hindu organisations have jointly written to Treasurer Jim Chalmers warning that a planned new tax on discretionary trusts could have substantial implications for philanthropic giving.

The letter, spearheaded by the Anglican Bishop of South Sydney, Michael Stead, warned Chalmers that the proposed tax on trust distributions could also jeopardise Labor’s goal to double philanthropic giving by 2030, unless the government agreed to carve out donations to charitable and not-for-profit entities.

“The proposal to impose taxation on a discretionary trust at a rate of 30 per cent prior to distribution to beneficiaries will reduce the financial capacity for distributions to charitable and philanthropic recipients,” the religious leaders said.

Other signatories to the letter include the Anglican Archbishop of Sydney, Kanishka Raffel, the Catholic Archbishop of Sydney, Anthony Fisher, the president of the Australian National Imams Council, Imam Shadi Alsuleiman, the president of the Presbyterian Church, the Reverend David Burke, and the Archbishop of the Assyrian Church of the East Archdiocese of Australia, Mar Meelis Zaia.

Many discretionary trusts operated by business owners and wealthy families distribute some of their earnings to charities and other not-for-profits such as churches and local sports clubs.

Chalmers was pressed by the opposition in question time this week about the potential adverse effect of the controversial budget measures on 70,000 local sporting organisations. He said charities were exempt from income tax, but tax experts said that missed the point.

Mark Fowler, a lawyer who advises the charity and not-for-profit sector, said discretionary trusts making donations were not exempt from tax and could need to withhold the new 30 per cent tax, reducing the amount they can donate to charities.

“Charities are tax-exempt, but the point is the entity that will be taxed at 30 per cent is the discretionary trust,” said Fowler. “The first time charities will know of this impact is when those regular income streams decrease by 30 per cent.”

Under Labor’s flagged 30 per cent tax on trust distributions, Fowler estimates the charity and not-for-profit sectors stand to lose $2.98 billion over five years, based on donations by businesses and discretionary trusts.

The 30 per cent minimum tax on discretionary trust distributions was announced in the May 12 budget, and consultation on the measure is due to occur before the planned commencement on July 1, 2028.

Treasury forecasts the trusts measure will deliver the government an extra $4.4 billion a year in tax revenue.
‘It’s not thought through … or it’s deliberate’

Separately and more immediately, tax experts and philanthropy advisers have been shocked to discover this week that the capital gains tax legislation rushed into parliament this week will inadvertently hit not-for-profit groups, such as The Salvation Army, Foodbank Australia and St Vincent de Paul Society.

Wealthy philanthropists sometimes donate proceeds from large capital gains to deductible gift recipients (DGR) such as charities, religious groups, medical organisations and educational entities.

The donated capital gain is in effect tax-free and eligible for a tax deduction.

One strategy is to use the existing 50 per cent discount on capital gains, by paying personal tax at 23.5 per cent on half of the gain and giving the other half of the gain to a DGR.

But under the legislation passed by Labor in the House of Representatives on Thursday, a real capital gain will be subject to a minimum 30 per cent tax, including gains donated to DGRs.

Clint Harding, a tax lawyer at Arnold Bloch Leibler, said the government was unwinding tax deductions for charitable gifts by “stealth”.

“This is going to have a major impact on charities, foundations and the NFP sector,” Harding said. “There has been a lack of consultation in the weird way the government has gone about doing this.

“Either it’s not thought through properly, or it’s deliberate.”
Unintended consequences

The taxation of capital gains donated to charities is due to the way a net capital gain is calculated under a formula in the government’s legislation.

When asked about the CGT and trust issues relating to charities and not-for-profits, a spokesman for Chalmers said: “There are a range of details on these policies that will be subject to further consultation and finalised in subsequent legislation.

“That includes consultation with the charities sector and other social and not-for-profit stakeholders which is ongoing.”

Philanthropy Australia wrote to Chalmers this week, raising the alarm about both the tax measures.

“We are concerned about possible unintended consequences from two of the proposed changes announced in the federal budget, namely the introduction of a minimum rate of tax on capital gains, and a minimum tax on discretionary trusts,” Philanthropy Australia chief executive Maree Sidey said in the letter, provided to AFR Weekend.

“As currently proposed, we believe that these changes could have a detrimental impact on the flow of support for Australian charities, and we are seeking targeted changes to address this risk.”

Despite Chalmers declaring the budget tax package was “the most significant in more than a quarter of a century”, the government is allowing a Senate inquiry of just two days the week after next.

It then wants the legislation passed through the Senate before July 2, when parliament rises for the five-week winter break.

However, the CGT and negative gearing changes do not start until July 1, 2027, and the Coalition says a two-day inquiry is woefully inadequate, especially as no case was made for the measures before the budget, and that a longer inquiry is warranted.

The Greens and the Coalition are in negotiations about potentially extending the inquiry, but Labor is trying to avoid a longer review by offering the Greens an extension of an inquiry into cuts to the $56 billion National Disability Insurance Scheme.

“Many of these entities rely on discretionary trust distributions as an important source of funding.”

— Alison Bradford, a partner at Mission Tax and Business Advisory

Big charities are usually registered with the Australian Charities and Not-for-profits Commission, but smaller non-for-profits are not always registered with the Australian Taxation Office as DGRs.

Donations to DGRs, such as World Vision and Red Cross, are tax-deductible.

Charities and not-for-profits that do not have official DGR status cannot offer tax deductions to donors, such as schools, sporting foundations and local churches.

However, families and businesses can use discretionary trusts to donate income, in effect tax-free, to non-DGR charities and community groups.

Alison Bradford, a partner at Mission Tax and Business Advisory, which advises clients on giving and philanthropy, said the proposed trust changes would have significant unintended consequences for community organisations.

“Income tax-exempt entities that are not deductible gift recipients form a critical part of Australia’s social and community landscape,” she said.

“This includes charities, churches, religious organisations, schools, and not-for-profit organisations delivering services across the country.

“Many of these entities rely on discretionary trust distributions as an important source of funding. Under the proposed changes, that funding would be directly affected.”