Tax Exemption Ruling Finalised – Finally
Tuesday, 3rd March 2015 at 10:18 am
The Australian Tax Office has issued a final ruling on two new conditions for Not for Profit organisations to meet for continued tax exemption. Professor Myles McGregor-Lowndes from Queensland’s Centre for Philanthropy and Nonprofit Studies at QUT explains.
On one of the very busy last days of the Senate under the Rudd Government, an amendment to the tax exemption of Not for Profit organisations was passed. The amendments apply to a wide range of tax exempt organisations, not just charities registered with the ACNC.
The list includes employee and employer associations; trade unions; scientific institutions; public education institutions; public hospitals; hospitals carried on by a society or association; funds established to enable scientific research by, or in conjunction with a public university or hospital; organisations established for the encouragement of science, community service purposes, animal racing, art, a game or sport, literature, or music; and certain funds.
The enactment was under the radar of most commentators, practitioners and NFP organisations, having been drawn from the abandoned ‘in Australia’ tax proposals and buried in a schedule. The ineffectual consultation on the original specific terms of the provisions has resulted in a less than optimal situation for all concerned.
New conditions for tax exemption
A Not for Profit organisation falling within the amendments has two new conditions to meet for continued tax exemption. It has to comply with all the substantive requirements in its governing rules and apply its income and assets solely for the purposes for which it was established.
The final ruling has adopted many suggestions from the sector in relation to ascertaining an entity’s governing rules, and how to determine those which are substantive, particularly where the organisation is unincorporated, has unwritten rules or has multiple rule sources.
The ATO has given some ground on the definition of what is a purpose to which income and assets can be applied. One-off misapplications of funds, immaterial amounts, and accumulation of income are acceptable in some circumstances; however there remains a contentious issue in terms of assets and income being applied ‘solely’ for the entity’s purposes – what constitutes ‘solely’? In paragraph 174 the Commissioner flags ‘a strict standard of compliance’ under the test of ‘solely’.
Dealing with breaches
Many responses to the draft ruling raised the issue of inadvertent breaches. The Commissioner does not have the power to exempt or excuse breaches and paragraph 38 makes clear that a breach of the special conditions will result in a loss of income tax exemption for the tax period in question.
This can be a harsh outcome that in some cases might result in those in need being penalised through closure or reduction of services, due to the fault of well-meaning but errant governance. Unlike the ACNC, the ATO does not have a range of intermediate sanctions such as effectively putting an organisation on a good behaviour bond, thereby mitigating potential harm to the organisation’s clients.
The ATO has tried to craft a ‘work around’ in Appendix 3 of the ruling, enabling the Commissioner to ‘consider whether or not to allocate resources to take compliance action in respect of an entity’ where the Commissioner is notified and satisfactory corrective action has been taken. If the ATO were given power to impose intermediate sanctions, as occurs in other jurisdictions, such ad hoc measures would not be necessary.
The ACNC must already consider similar governance issues under its Act (section 25-5(3)). The tax ruling (paragraph 198) recognises this overlap as it applies to registered charities, and will defer to the ACNC if it has already made a ruling on particular issues. This significant overlap could be a worthy candidate for red tape reduction.
About the author: Professor Myles McGregor-Lowndes heads up the Australian Centre for Philanthropy and Nonprofit Studies, QUT. He is a founding member of the ATO Charities Consultative Committee, and a founding member of the ACNC Advisory Board, as well as having worked for the Productivity Commission, Commonwealth Treasury, ATO and as a legal adviser to, or board member of a number of large and small charities and nonprofit organisations.