ATO targeting private not-for-profit schemes

As a part of its ever-tightening compliance net, the ATO has recently announced it is targeting specific tax avoidance behaviour in the not-for-profits sector. The first is private foundations used to operate businesses or income-producing activities on which no tax is paid. In some cases, a small portion of the income made may be paid to humanitarian or social causes, such as through charities, which is used as justification for the foundation’s purported tax-free status. The second is public benevolent institutions using schemes to avoid or reduce FBT.

This type of scheme using not-for-profit foundations first surfaced and was popular in the 2015–2016 income year. Its use declined after the ATO issued a taxpayer alert that same year; however, according to ATO intelligence, the scheme is now making a comeback. The basic premise of the scheme is that an adviser 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 their sham foundations, 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 is used as justification for the foundation’s purported tax-free status. 

According to the ATO, this type of sham arrangement has most or all of the following features: 

• Articles of Association (Articles) or a similar document, often supplied by the adviser 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 adviser or promoter may sometimes facilitate the opening of the bank accounts.
• The foundation is not registered for a tax file number (TFN) or an Australian business number (ABN).
• The foundation is not registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC), nor does it have deductible gift recipient (DGR) status or otherwise meet the requirements for tax exemption under the tax law.
• 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 the 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 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 themselves 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.

Source: www.ato.gov.au/Non-profit/Newsroom/General/Straight-from-the-Source---February-2023/?page=1#_Private__not_for_profit_foundations 
www.ato.gov.au/law/view/document?DocID=TPA/TA20165/NAT/ATO/00001&PiT=99991231235958