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The Productivity Commission has recommended private school building funds lose their tax exemptions – but Labor has ruled out the reform, even before the report was released. By Mike Seccombe.
Labor rejects advice to ditch tax break for private school donors
Thousands of charitable funds that benefit private schools and their wealthy donors should be stripped of their tax-deductible status, a major report by the Productivity Commission has recommended.
It found the building funds set up by non-government schools to pay for capital works did not meet the appropriate criteria for charitable activity that should be accorded deductible gift recipient (DGR) status, which allows donors to claim a tax break of up to 47 cents on the dollar.
The final report of the “Future Foundations for Giving” inquiry, commissioned by the government in February 2023 to review the whole architecture of Australia’s charity sector, was delivered in May but only tabled on Thursday. It recommended sweeping changes to the DGR regime.
Before its release, Assistant Minister for Competition, Charities and Treasury Andrew Leigh told The Saturday Paper the government was “open to” considering all the report’s recommendations – bar one.
“The one recommendation we have said that we won’t pursue is the recommendation around school building funds,” he said.
“That was in the interim report. We consulted widely on it and have opted not to pursue that.”
The government’s response is testament to the influence of the private school sector and its affluent backers. When the draft report was released last November, the non-government lobby came out in furious opposition. And little wonder.
Donations to school building funds totalled almost $230 million in 2020/21, providing a tax break to donors of about $100 million.
Although the PC report noted “donations to school building funds ... used in non-government primary and secondary schools are relatively small compared with the total annual revenue of these schools”, it’s a fair chunk of change.
Given enrolments in non-government school are growing about 2.5 per cent a year – eight times the rate of state schools – donations now are likely to be roughly a quarter of a billion dollars.
Meanwhile, other more needy charitable endeavours miss out under the existing DGR regime. Of about 60,000 charities in Australia, only about 40 per cent have tax-deductible status.
As the report notes: “The DGR system is not fit for purpose as a mechanism for determining which entities should be eligible to receive indirect government support through tax-deductible donations.
“There is no coherent policy rationale for why certain entities are eligible for DGR status and others miss out. The complexity of the system continues to increase as new DGR endorsement categories are added in a piecemeal manner. The DGR system creates inefficient, inconsistent and unfair outcomes for donors, charities and the community.”
The nation’s 5000-odd school building funds serve as a case study of the randomness and incoherence of the current system.
The decision to allow a tax deduction for donating to building funds for non-government schools was taken in 1954, when such schools were far fewer in number, much less well-funded and education was the responsibility of the states. That decision, notes the PC report, “occurred against a backdrop of ... opposition to government funding of non-government schools and uncertainty about the constitutional basis for Australian government involvement in education.”
The federal government did subsequently get involved, however. A decade later, the Commonwealth began providing capital funding for non-government as well as government schools, but the tax break advantaging private schools continued. In 1970 the Commonwealth began giving recurrent funding to non-government schools – four years before it provided it to state schools. Still, donors to non-government schools got a tax deduction.
Now Australia has a peculiar situation whereby more than 90 per cent of state and territory funding for education goes to government schools and more than 60 per cent of the corresponding federal funding goes to non-government schools.
This year, recurrent funding from the federal government for schools totalled about $29 billion. Just a little more than a third of that – $11.3 billion – went to government schools, which educate almost two thirds of students. Catholic schools got almost $10 billion and other non-government schools just over $8 billion.
The tax deduction for contributions to private school building funds continues despite the fact the circumstances that pertained 70 years ago no longer apply. Those who kick into the funds can claim up to 45 cents on the dollar back from the government.
With recurrent Commonwealth funding on top of substantial student fees, many non-government schools have what can only be described as opulent facilities.
The stories of their extravagance are legion. Of perennial news interest in Sydney over the past six years, for example, is the saga of The Scots College in Bellevue Hill, which set out to replace a perfectly serviceable library with a new structure designed to resemble a Scottish castle, costed in 2019 at $29 million and supposed to open in 2021. It is still under construction due to various delays, reportedly including difficulties acquiring sandstone and slate from Scotland, and the cost has blown out to about $80 million.
It has become media sport to mock Scots’ folly, but it’s really not funny. As the Australian Education Union, which represents public school, early childhood and TAFE teachers and staff, pointed out in a recent report, elsewhere in New South Wales state school students are taking lessons in 5093 demountable classrooms.
Looking at total capital works expenditure in Australian schools, the AEU reported that in 2021, the amount spent by just five elite private schools to the benefit of their combined 10,294 students was greater than the total from 3372 public schools, on 842,120 kids. That is, 82 times as much per student.
In its proposal for a comprehensive overhaul of the DGR system, the PC determined three basic criteria should be applied “to determine if a class of charitable activity is within the scope of the DGR system”.
First, that a charity must provide some public benefit “that would otherwise likely be undersupplied”. Second, that giving tax-deductible status for donations is the best way of providing that additional public benefit, as opposed to other government funding mechanisms, such as grants. Third, that there should be no opportunity for the donor and the recipient to be connected, such that a private benefit results.
The continuation of tax breaks for non-government schools does not stand up well to any of these. In relation to the first, it seems unlikely the benefits of education would be undersupplied if they were removed, given the continued drift of students to private schools, even in the face of rapidly rising fees.
In relation to the second, some advocates for the non-government sector argued that many schools charged low fees and catered for low-income families. While that is a good argument for more funding through other avenues such as government grants, it is not a strong case for continuing DGR for building funds.
As the report says, “because donations from people in higher marginal tax brackets receive a larger tax deduction”, more money flows to “schools servicing communities with a greater capacity to donate”.
As for the third criterion, the current system opens up the opportunity for private gain, because donations are tax deductible whereas school fees are not. Thus higher donations could result in lower fees.
“Many participants argued that parents and students do not gain a private benefit from donations to school building funds because fees are not reduced in an explicit quid pro quo…” says the report.
“However, there is little doubt that substitution – broadly defined – between donations and fees does occur. Indeed, many participants responded to the draft report by stating that withdrawal of DGR status for school building funds would create upwards pressure on costs for parents.”
As things stand now, donors to non-government schools, overwhelmingly wealthy parents, are benefiting to the tune of about $100 million a year at the expense of government revenue – which ultimately means at the expense of other taxpayers, most of whom could never afford to send their children to elite schools.
The PC did not, however, advocate removing all forms of tax deductibility for donations to schools – just those that skew towards the privileged. There are other categories of the DGR system under which they might still be made. Schools catering to poorer communities, particularly Indigenous communities, might still be funded as public benevolent institutions.
There is a broader reality, too, reflected in the “Future Foundations for Giving” report: that Australians are becoming less likely to give their money or time to charitable causes.
Donations amounted to more than $13 billion in 2021, an increase of 26 per cent in real terms since 2017, and the PC projects that to more than double by the end of the decade. However, almost half of all tax-deductible donations are made by people in the top 1 per cent of income-earners.
The fact that total charitable giving is going up, but the number of donors isn’t, says Leigh, speaks to economic inequality and declining community engagement. He refers to the book he wrote with Nick Terrell a couple of years ago, Reconnected.
“We documented this trend and talked about the way in which philanthropy had become less of a mass participation activity and more of an elite sport,” he tells The Saturday Paper.
Elites are ever less trusted and, the PC report notes, nor does the current regime for charities inspire trust.
“Donors (as well as regulators) are largely unable to observe whether charities use donations for their intended purposes,” it says.
To that end, it recommended increased transparency on the part of charities and greater powers for the regulator, the Australian Charities and Not-for-profits Commission.
Equally pertinent, it noted submissions highlighting that the philanthropic space was “an exclusive ‘club’ that makes it difficult for people without the right connections or right backgrounds to enter”, particularly for Indigenous people.
It recommended the Australian government provide funding to support the establishment of a new organisation, provisionally called Indigenous Philanthropy Connections, to help Aboriginal and Torres Strait Islander people join these networks.
More broadly, it proposed extending DGR funding to a further 10,000-20,000 small charities, many run solely by volunteers, that are also shut out of the current system.
The PC reckoned this could be done at relatively small cost to government revenue. The report estimated about $70 million, although it conceded “substantial uncertainty” about that figure.
That is not a lot, by federal government standards. And it would be even easier if the government heeded the commission’s report and clawed back the $100 million a year it shells out to wealthy donors to private school building funds.
But that’s not going to happen. The education elite is too powerful.
This article was first published in the print edition of The Saturday Paper on July 20, 2024 as "Alms mater".
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