Recently, Assistant Commissioner Jennifer Moltisanti reflected on the ATO’s administration of not-for-profits and outlined behaviours which 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. Learn more about this topic below with this article from Alexander Bright – trusted accountants in Melbourne.
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 or all of the following features:
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 other issue that’s currently under the spotlight involves not-for-profit organisations that are 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 be seeking to review these arrangements to determine if any have the sole and dominant purpose of avoiding or reducing FBT.
If you’d like to find out more about ATO’s current compliance activities in all sectors, our accounting firm has the expertise to help you stay one step ahead and avoid any compliance issues. We can also help you stay informed of any future compliance areas which may be of concern, as well as offering a range of income tax services. Contact us today to find out how we can help you.
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