All articles in Volume 12 Issue 8

What the Federal Budget could mean for NFPs and business

30 April quoteTreasurer Joe Hockey has put Australia on notice: no one is safe in next month’s federal budget as the government embarks on fiscal consolidation possibly on an unprecedented scale.

Professor David Gilchrist FAICD, a director of Curtin University’s Not-for-profit (NFP) Initiative, says the looming budget raises a number of questions for NFP directors. These include:

  • What will the funding levels be for services provided under the National Disability Insurance Scheme (NDIS), and what will its pricing look like?

  • If the NDIS is underfunded, will cuts be made in terms of the National Disability Insurance Agency and its administrative and assessment roles? “Such cuts are likely to affect service providers when it comes to vacancy filling and the time it takes for assessments to be undertaken,” says Gilchrist.

  • What will reductions and/or limits on eligibility for pensions do for organisations, such as aged care and disability accommodation providers, that rely on a portion of pensions to pay part of the costs associated with care services and accommodation?

  • How will the Australian Charities and Not-for-profits Commission (ACNC) be funded if the government cannot convince the Senate to repeal the ACNC Act 2012?

  • If the government does convince the Senate to repeal the ACNC Act, what resources will be made available for its successor organisations to ensure that progress made to date is not lost?

  • Will the removal of the ACNC mean that the government will no longer focus on red tape reduction initiatives, such as a one-stop-shop or report-once-use-often system?

  • For organisations providing services overseas, how will the government's overseas aid program be directed and funded in the context of the services that those agencies provide? “Clearly, the government's contribution in this regard is important for leveraging private contributions,” says Gilchrist.

He adds: “Any decrease in social security payments, due to changed eligibility requirements or in terms of quantum, will have an effect on increased demand for emergency accommodation and other emergency services while increased taxation is likely to have the effect of reducing donations as cash flow bites for mortgagees.”

When it comes to how other sectors of the economy will be affected by the federal budget, more details are likely to emerge after the government's Commission of Audit report is released tomorrow.

At present, it is believed that a $6 co-payment for “free” bulk billed GP visits, a tightening of income rules for family welfare, the raising of the pension age to 70 over time and a paid parental leave scheme to be introduced in 2015 could be on the cards. There are also heightened concerns the government may introduce a temporary income tax increase, targeted largely at higher-income earners, after Prime Minister Tony Abbott declined to rule this out.

What appears certain, however, are announcements of new infrastructure projects, with an emphasis on transport links such as the recently announced second airport for Sydney.

Exactly what Corporate Australia should be bracing for is unclear at this stage, although some economists have warned the government not to cut spending too deeply because the economy still faces many challenges and is stuck in low gear as the resources boom cools.

Come what may, Deloitte’s restructuring partner Martyn Strickland GAICD, says directors can ensure processes are put in place to help their organisations deal effectively with any changes that are announced.

He says: “It isn’t always obvious what the implications of any major announcement could be or how it could affect a business and its customer base. This is often hidden and could mean surprises further down the track.”

He recommends that directors get management to prepare a “budget response paper” that deals with all the announcements that could affect the organisation.

He adds: “Directors have responsibility not only for performance, but also strategy. Budget announcements are often out of cycle with the strategic planning process. Companies may plan to respond to them in the strategic planning process, but so often we see that this falls away or is forgotten six or nine months later. So we say don’t just prepare a ‘budget response paper’, but as a director, ask for it to be put on the agenda of the next two board meetings.”

When the changes are discussed, Strickland says directors should not only analyse how these affect the organisation, but also its customers and suppliers.

“The next questions to consider include: What risks do the announcement create for our organisation? And, what are the scenarios that might play out for us?”

Strickland says focusing on scenarios is vital. “Management is often very good at putting answers up to a board, but when this occurs, the board misses the opportunity to have a really good discussion around what might happen. Because the implications of a major announcement are often fuzzy, the board needs scenarios to create discussions. What is important is that the board talks about these issues.

“Given those scenarios, the board should ask how the organisation should respond or reset its business. It should also consider if it should still be competing in a market affected by the changes. Should it change the way it is organised? How should it refine its strategy? To avoid surprises, the board should also understand what the financial or performance implications might be. All of this could become good input into the strategic planning process.”

ACNC review reveals charities’ most concerning governance gaps

Good governance in newer charities has emerged as an area of concern in a recent review by the Australian Charities and Not-for-profits Commission (ACNC).

In examining its 15 most significant current compliance cases, the ACNC found that every case involved governance issues.  One-third of these cases involved charities less than five years old, all were charities of varying size and they occurred in every state of Australia, except the Northern Territory.

ACNC Assistant Commissioner (General Counsel) Murray Baird says governance issues usually arose through a charity board’s inexperience or understanding of good governance. At times, it was clear a board had “fallen asleep at the wheel” or engaged in wilful and deliberate wrong doing.

Since it began operating as the national charity regulator 15 months ago, the ACNC has received 500 complaints, of which more than 240 have warranted an investigation or review by the ACNC’s 12-person compliance team.

ACNC director of compliance Stewart Donaldson says the ACNC’s most common source of reliable information was from the public, followed by former charity employees or board members, and referrals from other agencies.

“So far, we have already encountered a wide range of governance issues. The most common problem is when charities use funds inappropriately, in ways which do not comply with the charity’s not-for-profit (NFP) purposes, such as using charitable funds to purchase private assets for board members.

“We have also seen a number of cases where there is a lack of accountability to members. In some cases, charities have failed to convene meetings as required in their constitution or have failed to follow the appropriate process to amend constitutions.

“The third most common theme is where responsible persons fail in their duties.  This includes failing to declare conflicts of interest, not maintaining accurate records or operating while insolvent.

“Finally, at the extreme end, we have investigated charities where allegations have been made of criminal activity.”

However, Baird notes: “As the regulator, what has been pleasing is charities under investigation, for most part, have worked cooperatively with the ACNC to comply with requests for information and changes to governance practices.”

ACNC Acting Commissioner David Locke adds the best way to protect your charity from any failings is to review your processes and policies and ensure that your board members understand their roles and responsibilities.

“Issues with governance usually arise through a charity board’s inexperience or understanding of good governance.”

 The ACNC has a series of free governance guides available, including Governance for Good and Protecting your Charity from Fraud.

Nurturing the board’s team spirit

Team spirit is believed to be a vital ingredient in the mix that helps turn a collection of great individuals into a high-performing board. But how can it be achieved?

Human behaviour expert and author, Dr John Demartini, maintains that team spirit is not about discipline or assimilation; it arises naturally when team members are respected and acknowledged as individuals. 

“Team members want to be themselves as much as part of a team,” he explains.

According to Demartini, the trick to creating a cohesive team is to acknowledge what is most important to each individual member and link it to the team’s goals. 

“When individual team members can see how their team can help them fulfil what is most important to them, they become even more engaged,” he says.

However, he says a range of factors can undermine team spirit. These include any incongruence between the highest values of the chairman and the stated mission, vision and primary objectives of the company.  So too can inequity among board members or unwise personal bias, prejudice, unfairness and unfair assessment.

“Disrespectfully putting other board members on pedestals, not appreciating or respecting them as equally contributing individuals and not honouring their unique contributions can dilute the board’s governing capacities, member’s creativity and its essential leadership power,’’ says Demartini. 

He recommends doing the following to help nurture the board’s team spirit:

  • Having each board member list the top contributions that each of the other board members have made, or are making, as this will assist in levelling the playing field.
  • Having each board member identify his or her own equal contributions to the other board members and the organisation, as this will assist in bringing about equanimity.
  • Having each board member identify what each of the other board members do that they like or dislike and then considering whether they are presently doing or have done the same behaviours to the same degree in their own lives. This can assist in calming down any unfair judgements.

Demartini adds that the chairman could foster teamwork by:

  • Focusing more time on highest priority matters and not spending too much time on trivial concerns.
  • Reawakening the board’s energy by clarifying and focusing on the organisation’s mission, vision, primary objectives and values.
  • Encouraging directors to tell each other what inspires them to serve so as to continually inspire the team.
  • Reminding directors why they joined the board.
  • Conducting candid board member assessments.
  • Ensuring board members meet regularly.
  • Developing plans for the board’s development.
  • Ensuring board meetings have meaning and focus on priorities.
  • Avoiding one-way communications and autocratic leadership styles.
  • Appraising how board meetings have gone and how they can be more effective and efficient.
  • Discussing what the next meetings will cover.
  • Developing a synergistic board-CEO partnership.

ATO gains new powers to penalise non-compliant SMSF trustees

Self-managed superannuation fund (SMSF) trustees take note! From 1 July 2014 the Australian Taxation Office (ATO) will have new powers to impose penalties on superannuation trustees and will not be afraid to use them, warns Krishna Skandakumar, a lawyer at DBA Lawyers.

He says the recently passed Tax and Superannuation Laws Amendment (2014 Measures No.1) Act 2014 has given the ATO three new powers to allow it to more “effectively, flexibly and proportionately” address non-compliance issues with superannuation laws.

Skandakumar says the new powers, which apply to both the trustee of an SMSF or a director of a corporate trustee, aim to address the short-comings of the previous penalty regime. These included the ATO having a limited set of penalties it could use and that these were are on the “harsher” end of the spectrum.

“The ATO recognised that many trustees of SMSFs avoid sanctions simply by rectifying the conduct as the remedy available is considered disproportionately high to the non-compliance issue,” says Skandakumar.

“However, the new penalty powers include ‘graduated’ penalties that will allow the ATO to provide a measured response to a contravention of superannuation law.”

Broadly, the ATO will have three additional new powers at its disposal from 1 July. These are:

1. Rectification directions:

These will require the trustee of an SMSF to undertake a specific action to rectify a contravention within a specific timeframe. Non-compliance will attract a financial penalty (of $1,700).

“In determining whether to issue a rectification direction, the ATO must first consider the financial detriment that might be suffered by the fund as a result of compliance with the direction, the nature and seriousness of the person’s contravention and any other relevant circumstances,” says Skandakumar.

“Unlike other penalties, a rectification direction cannot be given where the ATO has already accepted an enforceable undertaking in relation to a particular 

2. Education directions:

These will require the trustee of an SMSF to undertake a specific course of education within a specified timeframe. If this is not completed within the specified timeframe, a financial penalty will apply (again $1,700). And, the trustee cannot pay for, or reimburse, any costs associated with the course from the assets of the SMSF.

3. Administrative penalties:

These, the most significant addition to the ATO’s powers, apply to specific contraventions and will result in the trustee of an SMSF being personally liable to pay a financial penalty ranging from $850 to $10,200, depending on which provision of the Superannuation Industry (Supervision) Act 1993 is contravened. Importantly, all costs of an administrative penalty cannot be paid for, or reimbursed from, the assets of the SMSF.

Skandakumar observes: “How the new scheme of penalties will be applied in practice remains largely unknown. However, the Explanatory Memorandum to the Act suggests that the ATO has sought a wider range of penalties that are not as severe as making an SMSF non-complying or disqualifying a trustee, and so on. Accordingly, it seems that these penalties may just be the ‘teeth’ that the ATO was after.”

The ATO says the penalties will apply to contraventions made prior to 1 July 2014 and continue after that date. For example, if your fund has lent money to a member or relative and the loan still exists on or after 1 July 2014, you, and each individual trustee, will be personally liable a penalty of $10,200.

“The loan should immediately be repaid to the fund with appropriate commercial interest,” the ATO advises.

How to boost the tech start-up ecosystem 

Australia currently lacks a number of crucial requirements for a successful tech start-up ecosystem, according to a new report from StartupAUS, a not-for-profit that fosters local technology entrepreneurship.

According to the Crossroads report, there are currently 1,000 start-ups in Australia, 1500 founders, and 15 incubators and accelerators, as well as seven student incubator programs. But despite some success stories, the report notes: “Australia has not kept pace, and has under-invested in catalysing and supporting its high-tech industries, as evidenced by the fact that we now have one of the lowest rates of start-up formation in the world, and one of the lowest rates of venture capital investment.

“According to a recent World Economic Forum report, Australia’s start-up ecosystem is lagging behind those of many other developed nations due to a lack of emphasis on entrepreneurship education, limited engagement with universities and poor cultural support for entrepreneurs.”

The report also cites the ability to access capital and regulatory environments as factors hampering tech start-ups.

It suggests a range of actions to address these deficiencies. Most are not new and have been successfully implemented in other countries which experienced similar shortcomings.

Short-term steps include creating an entrepreneur visa, relaxing 457 visa restrictions for new businesses, changing the regulations around employee share programs and implementing a national visiting entrepreneurs program.

Medium-term steps include creating young entrepreneur scholarships, implementing a national learn-to-code promotion program, establishing a seed co-investment fund and creating a capital gains exemption or tax deduction for angel investments.

In the long-term, the report recommends a national program of entrepreneurial education, a digital technologies curriculum and a national program to raise awareness about tech start-ups.

These measures make good economic sense given that start-ups are recognised worldwide as important drivers of economic growth.

According to Enrico Moretti, Professor of Economics at the University of California in Berkeley, technology-based jobs have a larger multiplier effect than jobs in any other sector. Moretti found that for each new technology-based job, five additional jobs are created in other sectors.  He notes that this multiplier effect is three times larger in the technology sector than in extractive industries or traditional manufacturing.

The report suggests that developing Australia’s start-up ecosystem could also play a vital role in diversifying the Australian economy, which is dominated by service-based businesses and has exports heavily skewed towards the resources sector.

It notes that PWC’s recent Startup Economy study forecast that high-growth tech companies could make up four per cent of the Australia’s GDP by 2033, compared to just 0.2 per cent today and that this would add 540,000 jobs to the economy – but only if action is taken to address the sector’s current areas of market failure. 

Cyber attacks

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