Tax Ruling Tough on NFPs

Stephen O’Flynn, Tax Director at Moore Stephens Melbourne, says the new tax ruling indicates that the ATO has not rolled over on the Word Investments decision – a decision that means charities can operate businesses while staying tax-exempt, as long as the charitable purpose is the only motive for making profit.

The ATO has released TR 2005/22DA – Taxation Ruling Draft Addendum which includes an Education example and a Club example that O’Flynn says takes a pretty tough and unexpected view of the availability of the income tax exemption, considering the decision in Word Investments.  

O’Flynn says the examples are too simplistic and if anything, are weighted far too heavily in favour of protecting the revenue.

He says the ruling shows the ATO has not rolled over on Word Investments and has the taxation of subsidiary entities and in particular the Not-for-Profit Clubs clearly in its sights.

The Moore Stephens has obtained tax exempt charity concession status for a number of subsidiary entities since the Word Investment Case and believes the new tax ruling takes a tougher view.

O’Flynn says the sector was expecting the ruling to be a lot more concessional.

He says there may be some advantages in NFPs setting up separate entities to protect their assets from commercial risks and this is what a number of organisations currently do.  

He says the decision in Word Investments has made this a viable option for NFPs.  

The previous ATO view was forcing NFPs to carry out commercial activities in the same entity as the entity carrying out their altruistic purposes.  

As well O’Flynn says the 2011/12 Federal Budget heralded wide-sweeping changes to the Not for Profit sector, in particular, the tax changes may be the most significant to the NFP sector since the introduction of GST.  
Certain NFP entities can currently access tax concession including:

• income tax exemption;
• FBT exemption or rebate;
• GST concessions;
• refundable franking credits for charities and deductible gift recipients.

The main budget announcements were:

• Establishment of the Australian Charities and Not-for-Profits-Commission (ACNC).
• Better targeting of not-for-profit concessions (e.g. removing the income tax exemptions, FBT exemptions/rebates and GST concessions for the unrelated commercial activities of a NFP).
• Introduction of a Statutory Definition of Charity.

O’Flynn says the establishment of the ACNC is welcomed as it should stream line the reporting and regulatory process for NFPs.

However, he says as there has been no legislation released there is a lot of uncertainty at the moment regarding how “commercial activities” should be carried out in the NFP space going forward.  

On 27 May 2011 Treasury released a consultation paper on better targeting of NFP tax concessions.

O’Flynn says unfortunately there is little in the paper to please NFP entities, as it foreshadows a significantly increased compliance burden for NFPs that undertake commercial activities, and there is a potential tax burden.  

He says the paper is also disappointing for practitioners, as in many respects it seems to simply adopt the ATO’s positions (e.g. on activities which are ancillary to or incidental to an entity’s charitable purpose).  

He says this may suggest that the ATO is currently driving the reform agenda. It is hoped that going forward Treasury provides the sort of rigorous, independent policy analysis one would expect on such major reforms

To read a detailed opinion on the Budget announcements go to : http://moorestephensresources.com.au/articles/540/1/Not-for-Profit-changes-announced-in-201112-Federal-Budget/Page1.html