Recently, Assistant Commissioner Jennifer Moltisanti reflected on the ATO’s administration of not-for-profits and outlined behaviours that may attract unwanted attention in the not-for-profits space. The two most current and pressing concerns that the ATO has for the not-for-profits sector is the use of private not-for-profit foundations to avoid tax, and public benevolent institutions using schemes to avoid or reduce FBT.
The scheme to use not-for-profit foundations first surfaced and was popular in the 2015-16 income year. Its use declined after the ATO issued a Taxpayer Alert that same year, however, according to ATO intelligence, this scheme is now making a comeback. The basic premise of the scheme is that an advisor or promoter helps individuals to set up a “private foundation” which is then claimed to be exempt from all taxes.
This “private foundation” is then used by individuals to operate businesses or for income-producing activities. Unlike genuine not-for-profit foundations, individuals stream their untaxed employment, contractor, or business income through this sham foundation where they pay no tax on the income and use the funds for their own benefit. In some cases, a small portion of the income made may be paid to humanitarian or social causes, such as through charities which are used as justification for the foundation’s purported tax-free status.
According to the ATO, this sham arrangement has most of all of the following features:
- Articles of Association (Articles) or a similar document, often supplied by the advisor or promoter, typically describe the structure as a “non-profit private foundation”. The Articles typically state that participants, who are sometimes described as “principal participants”, are responsible for carrying on the activities of their foundations. The Articles often describe other individuals, who assist the participants in conducting the day-to-day affairs of the foundation, as “volunteers”.
- Bank accounts are opened in the name of the foundation with the participants as signatories. The advisor or promoter may sometimes facilitate the opening of the bank accounts.
- The foundation is not registered for a Tax File Number or an Australian Business Number.
- The foundation is not registered as a charity with the Australian Charities and Not-for-profits Commission, nor does it have “deductible gift recipient” status or otherwise meet the requirements for tax exemption under tax legislation.
- The foundation may notify the ATO that it is excused from withholding tax obligations on the basis that any payment from the foundation is exempt income. Participants often do not lodge income tax returns for themselves with some notifying the ATO that lodgement is not required, or that they have nil income to report. Some participants lodge income tax returns but omit from their assessable income those business or personal receipts that have been streamed through the foundation.
The ATO notes that it is taking this matter seriously and has already commenced investigations of potential promoters.
The other issue under the spotlight involves not-for-profit organisations operating registered public benevolent institutions (PBIs) and are endorsed by the ATO as eligible for an exemption from FBT, up to a capping threshold. The ATO is concerned with arrangements where employees of PBIs are used to undertake charitable or commercial activities of other entities that are not benevolent in nature.
Typically, these arrangements involve the provision of employment services by the PBI to another entity within the group which will include a charge-back or labour-hire agreement. Participants will then claim that the arrangement’s purpose is to provide funding to the PBI to achieve its benevolent purpose. Accordingly, the ATO will seek to review these arrangements to determine if any have the sole and dominant purpose of avoiding or reducing FBT.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.