NFP: Tax Endorsements, ATO Endorsement Reviews & Audits, Reporting and Compliance Guidance

We aim to deliver Just, Redemptive Outcomes®

A copy of the power point slides from a presentation given by Andrew Lind (Director) at the CPA Australia annual Not for Profit Conference in Brisbane in May 2010.

Overview

  • Compliance and eligibility
  • Maintaining eligibility
  • Annual self audit
  • Future of exempt FBT
  • Reporting changes for NFPs
  • Questions

What are we trying to achieve in an audit of tax concessions status?

  • To verify eligibility for tax concessions currently utilised i.e. do we have compliance issues?
  • To explore tax concession entitlements not currently utilised i.e. are we using resources prudently?
  • Risk management and governance issues

What the ATO is looking for

In 2009-2010 our compliance work will focus on:

  • Misuse of concessions
  • Meeting tax obligations
  • Closely controlled organisations
  • FBT
  • Mutuality
  • Record Keeping
  • Responsibilities to workers
  • Complicity in Tax avoidance schemes

Misuse of Concessions

  • What is your status?
  • What concessions are available?
  • Are you applying them properly?

Framework for tax concessions

  • Not-for-Profit  (“NFP”) – not operating for gain of its individual members
  • Tax Exempt Entity (“ITEE”) – entitled to exemption from income tax (e.g. clubs, societies, associations and non charitable religious and educational institutions etc)
  • Tax Concession Charity (“TCC”) – institutions or funds for the purposes of Religion, Education, Welfare, Other which are charitable
  • Deductible Gift Recipient (“DGR”) – donors get a tax deductible receipt. A Public Benevolent Institution (“PBI”) is one type of DGR.
framework

Hierarchy of tax concessions

TypeRequirementsBenefits
NFPNot for Profit clause in ConstitutionA condition for exemptions – but not an entitlement
ITEE
(Self Assessed)
Meets the requirements of division 50Income tax exemption
TCC
(Endorsement required)
  • Charitable purpose
  • Not for profit
  • Public benefit
  • In Australia
Income tax exemption
GST concessions
Rebateable FBT for institutions
DGR…plus fit a DGR category…plus tax deductible contributions
PBI, Health Promotion Charity…direct assistance to those in pitiable circumstances, requisite health role…plus FBT exemption

Meaning of “Charity”?

The courts and the government are still wresting with this.

  • Relief of poverty
  • Advancement of education
  • Advancement of religion
  • Other purposes beneficial to the community

Lord Macnaghten  – Pemsels Case 1891

Where to draw the “Charity” line?

charity

The Courts – test cases

cases

Is the main purpose of entity or fund “charitable”? – on a wholistic view of …

  • The Objects / Purposes in the Constitution of the entity / fund (including circumstances of formation)
  • The actual Activities (not intended activities)

Aid-Watch …

  • “… independent monitor of Australia’s aid and trade”
  • 2006 – ATO advised Aid/Watch that its TCC endorsements had been revoked
  • 2007 – Aid-Watch applies successfully to the ATT to review that decision
  • 2009 – Full Court of the Federal Court finds for the ATO on the basis that the main purpose of Aid/Watch was political (not charitable)
  • 2010 – Leave to appeal to the HC granted 15 March 2010
  • 2010 – HC … Watch this space …

The Reviews, Reports & Political agenda – “Competitive Neutrality”

  •  Productivity Commission Research Report into the Contribution of the Not-for-Profit Sector (January 2010)
  • Statutory definition of Charity
  • Widen the DGR scope to all TCC’s
  • Income tax exemptions are unlikely to violate competitive neutrality
  • Input tax exemptions (FBT, GST, payroll tax, land tax etc) pose concerns for competitive neutrality
  •  Henry Tax Review (released May 2010)
  • Permit NFP’s to undertake commercial activities with their concessions (Word)
  • Reconfigure [phase out] FBT concessions to improve competitive neutrality [and replace with direct government grants]

Mr Rudd’s reply to Dr Henry’s report … 2 May 2010

We will not implement these recommendations: …

Any changes that harm the not for profit sector, including removing tax concessions – (Rec 9e, 13, 41, 43 & 44)

Note: Mr Rudd omits Recommendation 42 – NFPs should be permitted to apply their income tax concessions to their commercial activities. Oversight or intentional?

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 and review

  • What are your current Endorsements? Business Entry Point
  • ATO provides self-audit / self-review tools
  • Worksheets Income tax guide for non-profit organisations (NAT 7967)
  • 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

Evidence

  • 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

Housekeeping

  • Ensure that your web site and/or blog are consistent with your objects and tax endorsements
  • Around the Board table, assess all proposals: is this in line with our statement of purpose?  Why are we doing this?
  • Lever Arch folder for each year – essentially as a dossier of what the NFP has done that year. E.g.:
    • Event information – publicity information and photographs
    • Attendance records
    • Courses conducted
    • Committee Reports
    • Annual Report

How will an NFP 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 & 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 Reviews – what will the ATO ask for?

  • Constituent documents (Constitution, By-laws and Rules)
  • 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 Worksheets

Have Endorsement review info ready to go

  •  Does your Constitution / By-Laws / Rules 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)

What to do if you get a review or audit letter from the ATO?

  •  Don’t panic
  •  Seek advice
  •  Proceed with caution if changing your constitution

Dr. Henry on the future of exempt FBT

The FBT concessions should be removed and replaced with direct government funding.


Mr Rudd replies …

We will not implement these recommendations: …

Any changes that harm the not for profit sector, including removing tax concessions – – (Rec. 9e, 13, 41, 43 & 44)

Note: Rec. 43 relates to reconfiguration of FBT concessions.

Reporting Changes for Companies limited by guarantee

  • The Federal Government Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP released draft reforms in relation to Australia’s corporate reporting framework on 4 December 2009
  • Draft – Corporations Amendment (Corporate Reporting Reform) Bill 2010.
  • These draft reforms have significant implications for Not for Profit organisations which are structured as Companies limited by guarantee under the Corporations Act 2000.
  • [This Bill was introduced to the House of Representatives on 26 May 2010]

Public … but not listed …

  • Companies limited by guarantee are public Companies and are currently required to comply with the same reporting obligations as large listed Companies.
  • The reforms propose a three tier reporting system for Companies limited by guarantee.

Proposed three tier system

The first tier – Companies limited by guarantee with annual revenue under $250,000.00 and no DGR status

  • The first tier Companies would be exempt from:
  • Preparing the currently required annual financial report and director’s report;
  • Auditing obligations.

Second tier – Companies limited by guarantee with annual revenue of less than $250,000.00 that are a DGR  OR with an annual revenue of between $250,000.00 and $1,000,000.00 (whether or not they are DGR)

These Companies would:

  • Prepare a financial report;
  • Could elect to have their financial report “reviewed” rather than audited;
  • Prepare a “streamlined director’s report” rather than a full director’s report; and
  • Be able to adopt a streamlined process for distributing the annual report to Members

Third tier – Companies limited by guarantee with an annual revenue of $1,000,000.00 or more (irrespective of whether they are a DGR)

These Companies would:

  • Continue to prepare a financial report and have it audited;
  • Prepare a “streamlined director’s report” rather than a full director’s report; and
  • Be able to adopt the streamlined process for distributing the annual report to Members.

Review v Audit

The explanatory material highlights the difference between a review and audit at paragraph 1.23 as follows:

“ A review, in contrast to an audit, is not designed to obtain reasonable assurance that the financial information reported by the Company is free from material misstatement.  A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review may bring significant matters effecting the financial information to the assurance practitioner’s attention, but does not provide all of the evidence that would be required in an audit.”

The review in contrast to an audit, may be conducted by a Chartered Accountant (CA) or Certified Practising Accountant (CPA) who is not a registered Company auditor.

Accountants and Directors will need to consider the scope of what would be included in a “review” and clearly disclose

Streamlined director’s report

The simplified director’s report would contain the following disclosures:

  • A description of the short and long term objectives of the entity;
  • The entity’s strategy for achieving those objectives;
  • The entity’s principled activities during the year;
  • How those activities assisted in achieving the entity’s objectives;
  • How the entity measures its performance, including any key performance indicators used by the entity;
  • The name of each person who has been a director of the Company at any time during or since the end of the year and the period for which that person was a director;
  • Each director’s qualifications, experience and special responsibilities;
  • The number of meetings of the board of directors held during the year and each director’s attendance at those meetings;
  • For each class of membership in the Company the amount which a member of that class is liable to contribute to the Company if the Company is wound up; and
  • The total amount that members of the Company are liable to contribute to the Company is wound up.

Note: This paper was co-authored with Moores Legal who are presenting this paper in Melbourne and Sydney.

Still have questions regarding this tax endorsement review guidance? Contact us

Contact our Business Development Officers for an appointment with our Brisbane not for profit & charity lawyers.  Call (07) 3252 0011.