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The office has been tipped off that “private foundations” are being created to take advantage of charitable concessions.
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ATO pursues sham not-for-profits set up to dodge tax
03 February 2023
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The ATO has been tipped off that sham not-for-profit organisations are being set up to avoid tax and has begun an investigation with its sights set on promoters of the schemes.
It is also warning NFPs operating public benevolent institutions to play by the tax rules or face the consequences, with some using dodgy arrangements to evade FBT.
Assistant Commissioner Jennifer Moltisanti said the fake NFPs were a resurgence of scams that came to light eight years ago.
“Recently we’ve seen some behaviours that aren’t consistent with our expectations,” she said. “We’ve received intelligence about the promotion of ‘private’ not-for-profit foundations created to avoid or evade tax. We also saw this kind of activity a few years ago in 2015-16.”
She said typical arrangements involved an adviser or promoter helping to set up a supposedly private foundation, which then claimed to be tax exempt.
“The promoter tells participants that, by operating their business or income producing activities through such a foundation, they are able to ‘opt out’ of the tax system.”
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“Unlike genuine NFP foundations, participants stream their untaxed employment, contractor or business income through the sham foundation, where they pay no tax on the income and use the funds for their own benefit.
“We’re taking this matter seriously and have already commenced investigations of potential promoters.”
She said another issue involved NFPs operating registered public benevolent institutions (PBIs) that were given exemption from FBT.
“We are concerned with arrangements where employees of PBIs are used to undertake charitable or commercial activities of other entities that are not benevolent in nature,” Ms Moltisanti 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.”
She said the ATO would examine any arrangements with the “sole and dominant purpose of avoiding or reducing FBT” following a case in 2013 (Commissioner of Taxation v The Hunger Project Australia).
She also warned other NFPs that they could lose their concessions – including income tax exemption and deductible gift recipient status – if they failed to play by the rules.
“Where we form a view that individuals or entities are not acting in accordance with their obligations, we will take appropriate action. That may include a review or audit,” said Ms Moltisanti.
“The government is very supportive of not-for-profits and generous policy settings reflect the value they place on the important services not-for-profits provide.
“For this reason, it is critically important we remain vigilant to those who seek to undermine or take advantage of the available supports.”
CPA Australia, which has urged the government to increase support for NFPs in its budget submission, said only a very small minority intentionally broke the rules and other regulators had a role in policing the sector, including ASIC, state authorities and the Australian Charities and Not-for-profits Commission.
Spokesperson Jane Rennie said a few NFPs were unintentionally getting it wrong.
“Our members tell us NFPs and charities can occasionally run into trouble due to a lack of expertise, complex and excessive regulatory requirements, and a shortage of resources,” she said.
“We want streamlined regulation for the NFP sector to make it easier for them to operate and comply with their obligations. We want extra resources provided to encourage NFPs to seek professional advice, including from accountants.”
“Next year, the ATO is intending to get all 207,000 NFPs registered with the tax office to self-assess whether they still meet the test for being an NFP. We expect some will fall off the list.”
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