ATO Investigates PPF Compliance

The Australian Tax Office is investigating the compliance practices of Australia’s growing number of private foundations known as Prescribed Private Funds or PPFs after it was found that in 2007 up to $9.2 million was distributed to ineligible organisations or persons.

The revelation comes in a review of the Tax Office figures by QUTs Australian Centre for Philanthropy and Nonprofit Studies (CPNS)

In 2007-08 the ATO reported that it completed 45 reviews of PPF endorsements resulting in 21 cases receiving written advice to implement changes to ensure future compliance with tax obligations.

The ATO intends to complete at least 50 reviews in 2008-09 examining, in particular, general adherence to the prescription of the fund, use of offshore investments to gain benefits, inappropriate access to fund property, excessive expenses and benefits by trustees or founders and distributions to non-eligible recipients.

The QUT Review says that in 2007 it appears that up to $9.2m was distributed to ineligible organisations or persons. (1.8% of the total amount distributed in 2007)

The Head of QUTs CPNS, Professor Myles McGregor-Lowndes says there appears to be substantial leakage from the PPFs but he says there must be shared blame by both the ATO and the Funds.

McGregor-Lowndes says the online ‘look-up’ listings on the ATO website do not specify what class of Deductible Gift Recipient an organisation is, making it difficult for PPFs to make an informed decision on who to donate their funds to.

He says the Government should make it easier for PPFs to be more diligent.

The sole purpose of a PPF must be to provide money, property or benefits to eligible funds, authorities or institutions, which are deductible gift recipients (DGRs). A PPF is approved by the Assistant Treasurer and usually takes the form of a company limited by guarantee as a trustee of a charitable trust fund.

As at 1 July 2008 there were 769 PPFs approved. For the year ending 30 June 2007, a total of $471.7m was donated to PPFs, an increase of 73.8% over the previous year. The value of PPFs was $1.2B at that time.

Given that 170 new PPFs have been formed since that date, CPNS says it is probable that there is currently over $1.5B in PPF funds.

In 2007, a total of $117m was distributed to DGRs. This is an increase of 58% over the previous year.

The welfare category which has the largest number of endorsed DGRs (49.4%) has received the most grants from PPFs, being $96.47m since 2002. This was followed by cultural organisations receiving $52.8m since 2002.

In 2007 the cultural organisations category had significant growth over 2006 ($33.8M), as well as welfare which grew by $7.3M.

In 2007 the DGR sub categories which rose significantly over the previous year were:
– Public Art Galleries up 4,570% to $31.7m
– Charitable institutions to promote prevention or the control of disease in human beings up 184% to $1.9m
– Public Libraries up 182% to $1.9m
– Necessitous circumstance funds up by 103% to $0.7m
– Public universities up 50% to $4.9m
– Public Benevolent Institutions up 26% to $29m
– International Aid up 23% to $5.9m
– Environmental organisations up by 14% to $6.6m

Before the recent Federal Election, Treasury was considering issuing new administrative arrangements with respect to PPFs which included a new explanatory administrative guide and new model trust deeds. In the 2008-09 Budget, the Government announced it would introduce laws to improve the integrity of PPFs, to take effect from 1 July 2009.

Professor Myles-McGregor has made a submission to the Senate Inquiry into the regulatory environment of Australia’s Not for Profit organisations. Go to: https://wiki.qut.edu.au/display/CPNS/Ten+matters+to+consider+when+designing+improved+nonprofit+regulation+for+Australia