Understandability and Transparency of the Financial Statements of ...

Also the idea of members „taking over‟ a charity for their own purposes is still a risk for
incorporated societies. However, the concern is that the transition cost of moving all
registered charities to a single legal entity, as recommended in Australia, would be
significant and thus the costs would outweigh the benefit (Productivity Commission,
2009). This is particularly so, if the general public trusts the Charities Commission to
„tighten up‟ the rules of companies and incorporated societies to ensure charitable intent
and no personal gain. Next, the issue of the need to be accountable for tax forgone is
examined.
7.2.3 Accountability for tax forgone
Governments forgo taxation revenues by granting charities donee status where donors
can claim a rebate (Inland Revenue Department, 2009) and income tax exemption
(Inland Revenue Department, 2005). However, Cullen, Swain and Wright (2001, p. 34)
point out that these subsidies are not subject to the direct control of government and “No
such accountability is required for the charitable tax exemption to be accessed”. This
view was supported by a 2002 Working Party, which commented that successive
governments have “expressed concern about the degree to which [the] tax exemption for
charities can be used for tax avoidance” (Working Party on Registration Reporting and
Monitoring of Charities, 2002a, p. 3).
The need for justifying taxation forgone has been highlighted in Australia where the
Senate Standing Committee on Economics (2008, p. 130) said:
Accountability is an important operational issue for all … [we] are entitled to,
information about the finances and operations of [charities] in return for their
donations, voluntary activities and taxation exemptions and concessions. It is
argued that it is in the public interest for [charitable] organisations to be more
transparent and accountable, as they attract significant public funds through tax
concessions.
Eisenberg (2005, p. 171) also considered that there was an obligation on people
establishing charities, especially private philanthropic trusts, to justify the tax forgone,
as noted by the following American example:
Harry Weinberg could have kept or given away his money without creating a
foundation, in which case he would have had to pay taxes to the federal
government. But he chose not to, preferring to create a foundation, thereby
avoiding substantial tax payments. In exchange for those tax benefits, he made a
compact with the American people to meet urgent public needs in a publicly
accountable way.
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