The ATO has ramped up efforts to uncover sham NFPs that are set up for tax evasion purposes. Tighter controls will mean more ATO attention is paid to legitimate NFP activities, so take steps to keep your organisation in line.
Assistant Commissioner Jennifer Moltisanti from the ATO’s NFP centre wrote in a February 2023 blog, “We’ve received intelligence about the promotion of ‘private’ not-for-profit foundations created to avoid or evade tax.”
The Assistant Commissioner added that because NFPs provide an important service, “It is critically important that we remain vigilant to those who seek to undermine or take advantage of the available supports.”
The figure provided of around 144,000 NFPs in Australia self-assessing income tax exemption suggests that tax evasion issues could have a widespread impact. Here’s what the ATO are doing about scam practices, and steps for NFPs to ensure their house is in order as regulation of the sector tightens.
ATO investigations
The ATO announced that it is investigating potential scams that involve tax dodgers streaming their incomes through a sham foundation that pays no tax.
Also under ATO scrutiny are cases of registered Public Benevolent Institutions (PBIs), where the employees undertake charitable or commercial activities of other entities that are not benevolent in nature.
The Assistant Commissioner said, “These arrangements involve the provision of employment services by the PBI to another entity within the group and typically include a charge-back or labour-hire agreement.
“The arrangement is purportedly claimed with the purpose of providing funding to the PBI to achieve its benevolent purpose.”
The ATO can prosecute a range of summary offences or refer to serious cases of tax fraud. Actions taken against NFPs that fail to keep in line might include removing their income tax exemption or their Deductible Gift Recipient (DGR) status.
A broad view of the NFP sector
While bad practitioners are a grim prospect for the NFP sector, the racketeers and fakes do not represent the majority. CPA Australia’s spokesperson commented on the NFP investigations issue that “only a very small minority intentionally broke the rules” [source Pro Bono News].
Those NFPs and charities experiencing taxation difficulties reported that their problems sometimes arose from “a lack of expertise, complex and excessive regulatory requirements, and a shortage of resources,” added the CPA Australia spokesperson.
At Next Dimension Accounting our work with genuine NFPs overcoming any difficulties regarding taxation and superannuation obligations shows that a mix of outside expertise and internal rigour can enable your organisation to stay on the right side of the ATO.
Actions your NFP can take
To avoid areas of potential concern, a genuine NFP can take several steps:
- Acquire expertise – If your organisation lacks expertise in taxation and your staff numbers are limited, hire the expertise you need. An outsourced accountant who knows Australia’s NFP sector can be hired to work with you on a regular basis and ensure you are prepared properly for annual reporting or returns. A trusted outsourced accountant can also step in to help when you run special programs that are complex financially.
- Review practices – An external accountant can commence with a review of your bookkeeping and reporting. This will enable the accountant to analyse the effectiveness of the company’s current procedures and advise on better pathways and technology to help meet ATO requirements.
- Self-assess – The ATO has plans for all registered Australian NFPs to lodge an online Annual Self-Review Form for the 2023–2024 income year. In the following years, NFPs will confirm or amend their details using a pre-filled self-review ‘return’. No doubt the ATO will use this information to target their compliance resources accordingly. An accountant can help you work through your requirements to meet the ATO test.
- Raise awareness levels – All staff members should be aware of key ATO requirements that apply to their work. An experienced accountant can conduct in-house information sessions if there are major ATO reforms. And if you do come across misconduct anywhere in the sector, the ATO provides an avenue to report it.
To learn how we can support your NFP to meet taxation and superannuation obligations, contact the Next Dimension team.
