Opinion & Commentary
In a civil society, it should always pay to be generous
Following the financial crisis and stalling economy there has been a round of finger pointing. Some have blamed the market. Some have blamed the government. The only clearly innocent sector is civil society—the non-government, non-market part of society where people voluntarily get together to help others.
Civil society plays a vital and underappreciated role in Australia. As the recent fundraising for the victims of the Victorian fires has shown, there is a generous heart at the core of this country. In 2008 Australians donated about $13 billion to welfare, health, education, foreign aid, and other philanthropic sectors.
Unfortunately, the government is suggesting new regulations that will limit the flexibility of charitable funds and decrease the quality and quantity of philanthropy. This would be bad policy at any time, but given the current economic situation it is especially important that we protect civil society.
The suggested policy changes affect Prescribed Private Funds (PPFs). The purpose of a PPF is to allow donors to give tax-free money into a fund, which can then distribute that money later to approved deductible gift recipients. Since 2001, more than 800 PPFs have been registered, with a total value of about $1.3 billion.
The great virtue of PPFs is that they allow donors to distribute their money at the most appropriate time. For example, donors might contribute a regular amount towards their PPF over a number of years and then give this money to a charity in a time of special need. Alternatively, they might give a large initial amount of money in one year, and then distribute that money regularly over a number of years.
An important benefit of time flexibility is that it allows donors to adjust to the changing circumstances over time. Not all charitable acts are equal. In some years there will be many deserving charities looking for funds, and able to produce good outcomes. At other times there will be fewer good projects. For civil society to be most efficient and effective, the money needs to be able to be shifted to the times when there is the greatest need—such as during an economic recession or a natural disaster.
PPFs also allow donors to build a ‘philanthropic brand,’ which increases the incentives to donate money and to ensure that the money is used most effectively.
In their discussion paper on PPFs, the government raised the prospect of new regulations which reduce the flexibility of PPFs by requiring that they distribute a minimum percent of their value (perhaps 15 percent) every year.
The suggested regulations would harm PPFs in two ways. First, some PPFs would have to be closed as they would be forced to pay out more money than they would receive each year. Potential new PPFs may not be started as prospective donors realise that they will not be able to sustain their ‘philanthropic brand’ into the future.
Second, reducing the time flexibility of PPFs undermines their primary benefit, which is that they allow the effective shifting of philanthropy between years. This is likely to result in lower quality and quantity of philanthropy and consequently harm civil society.
There are various other problems with the government’s suggested changes.
Given that more than 800 PPFs have been formed on the understanding that donors would maintain significant control over the timing of their distributions, the new regulations represent a breach of trust.
Further, the government has raised the prospect of making PPF contact details publicly available. There is a concern that the removal of donor privacy will result in increased unsolicited requests for funds, which will increase administration costs and deter donors from establishing funds.
Finally, there is a disturbing assumption in the government’s discussion paper that a PPF that does not distribute enough money to charity in any one year is not really philanthropic. The paper goes on to suggest that it would be better to tax this ‘non-philanthropic’ money and introduce a new political spending project. This is unlikely. For every $1 of charity prevented the government will only have about $0.30 to $0.40, while about $0.50 will be spent in the market. The other $0.10 to $0.20 will be lost as the efficiency cost of tax.
While there is an important role for the government and for the market, this should not come at the expense of civil society. The government is right to keep an eye on PPFs to ensure there is no fraud. But unnecessary restrictions on the flexibility of PPFs will only undermine charities in Australia.
John Humphreys is a Research Fellow at The Centre for Independent Studies. His paper In Defence of Civil Society was released by the CIS in February 2009.
