NFPs Need to Be Aware of What Attracts ATO Attention

Not-for-profit organisations have to comply with a wide range of laws including tax laws and it is prudent to be aware of any red flag issues the Australian Tax Office may raise from time to time, writes Terry Hayes, senior tax analyst at Thomson Reuters, who offers his top ATO “alerts”.

Like many entities, not-for-profit organisations such as charities and other funds are required to comply with many laws, including tax and super laws. They may be entitled to tax concessions but of course there are conditions and rules attached to that.

It is important to note that, regardless of whether an organisation is eligible for tax concessions, it may still have tax obligations to comply with, for example, obligations for GST, FBT and PAYG withholding. If an NFP has an Australian business number (ABN), it can use that to register for GST and claim GST credits, register for pay as you go (PAYG) withholding, and apply to the ATO for endorsement as a deductible gift recipient or tax concession charity.

The ATO uses various sources of information and undertakes a range of compliance activities to detect and deal with NFP organisations that do not fulfil their tax and super obligations.

There are certain behaviours and activities that alert the ATO to possible abuse of the tax and super systems.

For private ancillary funds, these issues concern:

• late lodgement of annual return (this really is a “compliance 101” issue, but failing to lodge a return on time really gets an organisation offside with the regulators)
• related party transactions
• non-compliance with the regulatory guidelines.

For charities and deductible gift recipients (DGRs), issues to watch out for include:

• Not applying income and assets solely for the purpose for which the organisation is established, for example, private benefits to individual. There have been a number of cases on this issue over the years but, broadly, the purpose of an organisation is determined having regard to its constituent documents and activities in particular. Charitable purposes can include: advancing health, advancing social or public welfare, advancing education, advancing religion.
• Making incorrect claims for franking credit refunds. To be eligible for a refund of franking credits, a not-for-profit organisation must have an ABN, be a resident and be at least one of the following: a registered charity endorsed by the ATO to access income tax exemption, endorsed by the ATO as a DGR in its own right, or specifically named as a DGR in the Income Tax Assessment Act 1997.
• Incorrectly advertising that donations to an organisation are tax deductible when the organisation is not endorsed as a deductible gift recipient. Organisations apply to the ATO for this endorsement and there are specific rules in the law surrounding endorsement. Generally, a deductible gift recipient must be established and operated in Australia.

Business-like activities can be compatible with a charitable purpose. Charitable status can be maintained for example provided the organisation’s sole purpose is charitable and it carries on a business or commercial endeavour to give effect to that charitable purpose. In these circumstances, it does not matter that the commercial activities themselves are not intrinsically charitable. Of course, each case is different and clarification with the ATO should be sought if there is any doubt.

For self-assessing income tax exempt not-for-profit organisations that are not charities (eg community service organisations, health organisations, educational organisations, sporting organisations), the ATO has flagged issues such as:

• Incorrectly self-assessing income tax exempt status.
• Not meeting the requirements of an exempt category. The law here can get a little complex, but for a community service organisation to be exempt, it must be established for community service purposes (eg associations of playgroups, traditional service clubs such as Apex, Lions, Rotary and the like), not be a charity, and have a physical presence in Australia.

For taxable not-for-profit entities (eg social clubs), the ATO has concerns around incorrect classification of member and non-member income and expenses which may result in an understatement of assessable income.

On the FBT front generally, the ATO is on the lookout for incorrect claims for FBT rebates and exemptions that don’t meet the requirements of the law. Organisations that qualify for the FBT rebate include: charities that are institutions, certain scientific or public educational institutions, trade unions and employer associations, NFP organisations established to encourage music, art, literature or science.

The ATO properly notes that having good governance practices in place helps NFP organisations identify and manage their tax and superannuation compliance risks and other risks that may impact on their reputation and their work.

NFP organisations have to comply with a wide range of laws, and tax laws are only one of them. However, complying with the tax and superannuation laws is not always straightforward. Although the ATO regularly releases guidance to help NFPs with this, it is prudent to be aware of any red flag issues the ATO may raise from time to time.

About the author: Terry Hayes is a senior tax analyst and tax writer with the tax and accounting business of Thomson Reuters. He is also the technical editor of the Australian Financial Planning Handbook. Hayes worked in the Australian Taxation Office for 12 years, the last six in Canberra drafting tax legislation and explanatory materials. He holds a Bachelor of Business degree and is a fellow of CPA Australia.