Preparing a Not-for-Profit Organisation for an ATO Endorsement Review or Audit

We aim to deliver Just, Redemptive Outcomes®

A copy of the powerpoint presentation is set out below

We’re Endorsed – we’re safe … or not …

  • Endorsement ≠ entitled to it
  • Endorsement focus 1 July 2000 – Mid 2007 = getting everyone on the register
  • Generally => Application = Endorsement (during that period)
  • Applications were not robustly examined by the ATO

Self Assessment trumps Endorsement

  • Tax system = Self assessment system
  • Voluntary Compliance
  • Being translated = Out-sourcing the cost of compliance
  • Even if we’ve endorsed you, its up to you to be satisfied that we have got that right
  • Condition of endorsement = regular self audit => are we still entitled to our endorsement?

Regular / Annual Self-audit or self-review

  • ATO recommends annually
  • What are your current Endorsements? Business Entry Point
  • ATO provides self-audit tools
  • Worksheets Income tax guide for non-profit organisations (NAT7967)
  • Worksheet 1 – working out your organisation’s income tax status – do you have the correct endorsement?
  • Worksheet 2 – reviewing your organisation’s endorsement as an income tax exempt charity – if the correct endorsement – are you still entitled to it?
  • An online self-assessment tool to help work out if your organisation is still entitled to endorsement as an income tax exempt charity (better to use Worksheet 2)
  • Records of self-assessment must be kept as they will be called for as part of a review or an audit

Getting your house in order
Tip # 1 = Annual Self Audit / Review

  • Worksheets should be tabled annually to the Board of your NFP organisation
  • The conclusion of the Worksheets should be noted in the minutes
  • Advice should be sought if any areas of uncertainty
  • The date for the next self-audit should be noted and the process repeated at that time

An example of an incorrect Endorsement

  • Local Church – TCC Charitable Institution
  • Trustee Property Company ≠ TCC Charitable Institution
  • Usually the Trust should be endorsed as a Charitable Fund

Why audit the NFP sector?

ATO:

“Some members of the community are questioning how broad the concept of a charity is and the extent to which they can engage in non-charitable activity and still be regarded as solely charitable. As a result, we are seeing an increase in litigation and are looking for guidance from the courts on this point.” (August 2008)

How will an ATO audit start and what will it look like?

  • Endorsement Review
  • The ATO will write to you seeking certain information
  • If that information is promptly provided and the ATO is satisfied that you have the correct endorsement and are entitled to it, generally nothing further happens
  • Is an annual self-audit still required then? Yes
  • If you fail the Endorsement Review – a full audit will usually follow

ATO Endorsement Review – what will the ATO ask for?

  • Constitutant documents (Constitution)
  • Detailed Statement of Activities
  • Accounts (to be consistent with the Statement of Activities)
  • Bank Account details (and statements)
  • Group Structure Summary
  • Summary of how funds move within the Group (esp. in relation to DGR funds)
  • Copies of your annual self-audit Worksheet

Getting your house in order
Tip # 2 = Have Endorsement review info ready to go

  • Does your Constitution reflect how you are operating?
  • Do the “objects” in your Constitution adequately describe your purposes?
  • Do you have a Group Structure Summary?
  • Do you have a policy about the movement of funds within the group? (esp. DGR funds)

Areas of ATO focus (for NFP’s)

  • “… [A]rrangements that seek to abuse the concessional status of charities and DGR’s, including arrangements that seek to manipulate access to the GST concessions.” (e.g. use of charities for private benefit)
  • “… [C]omplaints by employees and contractors concerning insufficient superannuation guarantee contributions or not being offered a choice of superannuation fund.”
  • School or College Building Funds (TR 96/8)
  • Changes in activities after endorsement. “In 2008-9 we expect to review 145 targeted cases to determine if the organisations remain eligible for [Endorsement] ….”
  • Commercial Activities (post Word Investments)
  • Institutional test

Getting your house in order
Tip # 3 = Have and follow DGR fund rules

  • Esp. regarding School or College Building Funds
  • Maintaining the Gift Fund & limits on use (for purposes of gift fund only)
  • Separate bank account
  • Record keeping
  • Receipts
  • Responsible committee
  • Winding up
  • If there are internal group payments (e.g. rent) – make sure they are on commercial terms

Commercial activities – post Word Investments

  • ATO – Decision Impact Statement (26 May 2009)
  • An entity can be a charitable institution even if it does not directly carry on the charitable activities, but careful analysis of objects is required
  • Activities in Australia? Amending legislation is coming.
  • Watch this space – “The Government intends to await the outcome of the Henry Review into Australia’s future tax system and the Productivity Commission’s inquiry into the contribution of the not-for-profit sector before responding further to the Courts decision.” (Assistant Treasurer, 12 May 2009)

Getting your house in order
Tip # 4 = Take advice if commercial activities are in a separate entity

  • Consider objects
  • Consider connection with Australia
  • Consider consolidation (re-adoption of orphaned activities)
  • Institutional test – for smaller organisations / ministries
  • Factors to determine if an “organisation” is an “institution”:
    • The legal structure, including the constitution clothes it with the character of either an unincorporated association or a corporation.
    • Even incorporation, on its own, is not enough for an organisation to be an institution.
    • Its governance and legal control is sufficiently broad-based to provide a notion of public accountability.
    • An organisation established, controlled or operated by family members and friends would never normally be an Institution.
    • A broader membership group with some from of legal accountability by its Board of Governance would be involved.
    • An analysis of the activities of the organisation including the way in which expenditure is authorised and general control in decision making is exercised.

Getting your house in order
Tip # 5 = if small, take advice on how to get more squarely in the “institution” space

  • Broaden board outside family and close friends / associates
  • Broaden membership outside family and close friends / associates
  • Rule of thumb = principal promoter has to lose control
  • Develop and follow policies for the Executive to follow in the authorisation of expenditure

Getting your house in order
Tips

  1. Annual Self Audit
  2. Have Endorsement review info ready to go
  3. Have and follow DGR fund rules
  4. Take advice if commercial activities are in a separate entity
  5. if small, take advice on how to get more squarely in the “institution” space

Do you still have questions about ATO endorsement review or audits? Contact us

Call our Business Development Officers to book an appointment with one of our Brisbane not for profit lawyers. Call (07) 3252 0011 today.

A paper presented by Andrew Lind to the June 2009 annual Christian Management Australia Conference.