The ramifications of poor governance are regularly evidenced in the public domain and can lead to a loss of public trust and confidence and in extreme situations threaten the viability of an organisation.
Every non-profit (NFP) organisation benefits from good governance and its contribution to an organisation gaining and retaining the confidence and trust of members, employees, the community, Government and other stakeholders. An organisation’s corporate governance framework should also support and ensure that it is meeting obligations/entitlements with relevant regulatory bodies such as the Australian Charities Not-for-profit Commission (ACNC), Australian Taxation Office (ATO) and State and Territory Revenue Office’s.
This article explores the tax concessions available at the Federal level, related key tax and superannuation compliance risks (‘tax risks’) and how good governance practices can help identify and manage those risks. In particular, we look at various publicly available tools that may form part of the governance process.
Entitlement to tax concessions
There are a range of Federal tax concessions that a NFP organisation may be entitled to access: income tax exemption, GST concessions, FBT exemption, FBT rebate and refunds of franking credits.
All charities are required to be registered with the ACNC before they can apply for income tax exemption with the ATO. If endorsed by the ATO a charity does not have to pay income and may also be eligible to receive refund of franking credits for franked dividends received. Registered charities can also apply for GST charity concessions and FBT rebate. Certain registered charities (such as public benevolent institutions and health promotion charities subtypes) can apply for FBT exemption. If a registered charity is also endorsed as a deductible gift recipient (DGR), donors may claim a tax deduction for certain gifts made to the organisation.
In order to be endorsed for charity tax concessions, a charity must generally meet certain tests and rules:
- it must be registered with the ACNC;
- apply its income and assets solely for the purpose or purposes of which it is established; and
- it must maintain physical presence in Australia and incurs its expenditure and pursues its objective principally in Australia
(note – other conditions apply for certain charities).
Other NFP income tax exempt organisations
NFP organisations that are not charities are not required to be registered with the ACNC nor be endorsed by the ATO to access available tax concessions. NFP organisations that fall within one of the categories of income tax exempt organisations can self-assess their income tax status.
Many of the income tax exempt categories also require the NFP organisation to be ‘non-profit’, complies with all the substantive requirements of its governing rules, satisfy the income and asset test (as noted above) and meet physical presence in Australia test.
Certain types of NFP organisations that are exempt from income tax can self-assess their entitlement to GST concessions as well as FBT concessions.
Deductible gift recipient (DGR)
All DGRs are required to be endorsed by the ATO, unless they are named specifically in the income tax law. DGRs must (generally) meet the above in Australia test.
Why the need for good governance?
The continued entitlement to income tax exemption/concession status, registration and endorsement are not necessarily permanent. Entitlement is ‘temporary’ and based on, inter alia, an organisation’s purpose and operations at the time (from year to year). Things that can affect an organisation’s continued entitlement include changes to its purpose and operations, changes to its physical presence in Australia, failure to comply or meets its obligations to the ACNC etc. Example of situations where continued entitlement to income tax exemption, registration or endorsement may be put at risks include funds and assets of an organisation not being applied solely for the furtherance of its charitable purpose, breaching its not-for-profit clause by benefiting particular people, oversight of its overseas activities such that it is no longer pursuing its objectives and incurs its expenditure principally (i.e., less than 50%) in Australia and so on.
For charities, the ramifications of ceasing to be registered with the ACNC means ATO endorsement for access to relevant tax concessions will also cease. The ACNC may backdate revocation of registration to the date that the charity ceased to be eligible to register and this in turn could create a myriad of retrospective taxation liabilities.
Accordingly, it is important to have a good corporate governance framework and undertake formal and regular self-review to ensure ongoing entitlement to ACNC/ATO registration and tax concessions (including State tax concessions).
One approach to doing this is to use publicly available tools as part of your organisation’s governance process. Available tools include:
- ATO self-governance checklist for non-profit organisations
- ATO endorsement review worksheet for income tax exempt charities ,
- ACNC Self-evaluation tool,
- ATO review of a DGR endorsed as a whole worksheet,
- ATO review of a DGR endorsed for the operation of a fund, authority, institution worksheet,
- ATO Income tax status review worksheet for self-assessing NFPs.
The use of these checklists is not mandatory. Nonetheless they will assist with meeting an organisation’s obligations and help identify issues that may prevent it from doing so. The checklists would also provide useful documentary evidence of an organisation’s on-going entitlement to income tax exemption status, registration and endorsement.
The checklists should form part of a tax risk governance process but need to be supplemented by other information and checking processes. For example, case law, legislative and Tax Rulings needs to be monitored for any developments that impact on the scope of the exemptions/concessions claimed. Further, simple matters such as ensuring lodgement of all relevant tax returns also needs to be established.
Irrespective of whether a NFP organisation is exempt from income tax, it may have obligations for other taxes. NFP organisations often depend on volunteers to provide and maintain services. One of key risks area is the legal distinction between types of workers that a NFP engages (i.e., employees, independent contractors or volunteers). This distinction and the tax treatment of transactions that commonly occur between NFP organisations and volunteers was discussed in this recent article.
The legal distinction between types of workers may also have a flow on impact on an organisation’s PAYG withholding and superannuation guarantee obligations. Changes made to the director penalty provisions over the years mean that the cost of non-compliance can be extremely steep and could expose former, existing or new directors or responsible persons of NFP organisations to being personally liable for their organisation’s unpaid PAYG withholding, super guarantee charge as well as GST. Hence the importance of good governance and need for processes like formal annual self-review has become increasingly more important.
As noted previously, ongoing eligibility to State/Territory tax concessions (e.g. payroll tax/land tax) should also be reviewed. It is noted there continues to be many changes to these taxes that may impact eligibility.
As noted above, there are a range of Federal tax concessions that a NFP organisation is able to access if certain conditions are met. A formal and regular self-assessment process to show that an organisation continues to be eligible for concessions is an important aspect of good governance to manage this risk. Publicly available tools (such as the ones noted in this article) are useful and can assist organisations to identity issues around tax risk.