Hill Rogers - Tax Risks and Opportunities in the NFP Sector
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Winson Liew, Tax Manager at Hill Rogers presented at 2019's CEO & Chair Symposium
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Hill Rogers - Tax Risks and Opportunities in the NFP Sector
- 1. Tax risks and opportunities in the Not-for-profit sector Winson Liew | 31 January 2019 CEO & Chair Symposium 2019 - Melbourne
- 2. Not-for-profit Taxation Why is a surplus or profit important? 2 Less: Direct Costs, Overheads & Operational Costs Membership fees, courses, sponsorships & grants Net profit / surplus (before tax) Revenue Expenses
- 3. Not-for-profit Taxation • Income tax exemption • GST concessions • FBT concessions (rebate or exempt) • DGR (not strictly a tax concession) • Principle of mutuality (not strictly a tax concession) • Payroll tax concessions • Stamp duty concessions • Land tax • Local government concessions (e.g. rates) Tax concessions for NFPs 3
- 4. Not-for-profit Taxation • Access to concessions are not automatic • Some exemptions require self-assessment and others require endorsement by the ACNC and/or ATO • Regularly review access to tax concessions • Undertake a tax health check (there are many concessions being forgone) 4 Key messages:
- 5. Is Your Organisation Charitable? 1) Advancing health 2) Advancing education 3) Advancing social or public welfare 4) Advancing religion 5) Advancing culture 6) Promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia 7) Promoting or protecting human rights 5 The Charities Act 2013 (Cth) lists twelve charitable purposes: 8) Advancing the security or safety of Australia or the Australian public 9) Preventing or relieving the suffering of animals 10) Advancing the natural environment 11) Promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a state, a territory or another country, (where that change furthers or opposes one or more of the purposes above) 12) Other similar purposes ‘beneficial to the general public’ (a general category)
- 6. Responsibilities, Risks and Opportunities (within TAX) • Income tax status should be reviewed annually or when structure or activities change (charities and non-charities) • Don’t forget refund of franking credits • ACNC and ATO reporting (e.g. Annual Information Statements, Activity Statements) What to do if your organisation is picked for an ATO review? 6
- 7. Tax Compliance Approach for NFPs What attracts attention? • Private ancillary funds - Late lodgement of annual returns, Related party transactions • Charities and DGRs – Not applying income and assets solely for purpose, incorrect claims for franking credit refunds, incorrectly advertising that deductible donations can be received. • Self-assessing income tax exempt not-for-profits – incorrect self assessing, not meeting the requirements • FBT – incorrectly claiming rebates and exemptions • Mutuality – incorrectly classifying member and non-member income and expenses How the ATO detects and deals with organisations that don’t do the right thing 7
- 8. Practical Application of Mutuality Principal The mutuality principal is a common law concept 8 It is based on the proposition that an organisation cannot derive income from itself
- 9. Tax Compliance Approach for NFPs • Step 1: Review organisation’s objects and activities • Step 2: Review charity status and compliance with ACNC • Step 3: If not a charity, determine eligibility to self-assess as income tax exempt • Step 4: If not exempt, estimate potential tax liability/exposure for prior years (apply mutuality principle) Suggested approach 9 • Step 5: Consider extent of prior year tax returns that may need to be lodged/amended • Step 6: Consider other NFP tax concessions (eg. FBT concessions, State tax exemptions, Small business CGT concessions) • Step 7: If not a registered charity, consider application for charity and DGR status
- 10. What Resources are there? Income tax • Income tax guide for non-profit organisations: http://law.ato.gov.au/atolaw/view.htm?DocID=SAV/ITGNPO/00001 • Income tax status for self-assessors should be regularly reviewed (non-charities): https://www.ato.gov.au/assets/0/104/1909/2003/bba2a60f-db06-4d61-9fef-ec6ea0f0cea2.pdf • Income tax status of charities should be regularly reviewed (charities): https://www.ato.gov.au/assets/0/104/1909/2003/c054cc42-f72b-40b2-8937-f5d915538cfc.pdf GST • https://www.ato.gov.au/Non-profit/Your-organisation/GST/GST-concessions/ FBT guide for employers • https://www.ato.gov.au/law/view/document?DocNum=0210000053&PiT=99991231235958&Full Document=true 10
- 11. About me – Winson Liew • Has worked within leading taxation advisory teams • Has deep experience in taxation advisory matters with a particular focus and interest in NFPs with their taxation affairs • Also provides tax advice in connection with business purchase and sales transactions, undertaking tax due diligence assignments, structuring inbound and outbound investments and general tax planning • Bachelor of Commerce • Chartered Tax Advisor • Chartered Accountant • Winson.Liew@hillrogers.com.au │m: 0421 213 685 11
- 12. t +61 2 9232 5111 f +61 2 92337950 www.hillrogers.com.au | info@hillrogers.com.au Level 5, 1 Chifley Square, Sydney NSW 2000 Australia GPO Box 7066, Sydney NSW2001 H.R.P.HPty Limited practising as Hill Rogers | ABN 12 003 718 518 Member of KS International, an associationof global independent accounting firms. Liability limited by a scheme approved under Professional Standards Legislation. Disclaimer: Hill Rogers Advisory Pty Ltd The material contained in this publication is general commentary only for distribution to clients of Hill Rogers. None of the material is, or should be regarded as personal or financial product advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from Hill Rogers. Every effort has been made to ensure that the content is accurate, however it is not intended to be a complete description of the matters described. Hill Rogers, its Principals and agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. H.R.P.H Pty Limited practising as Hill Rogers|ABN 12 003 718 518 Member of Morison KSi, an association of global independent accounting firms. Liability limited by a scheme approved under Professional Standards Legislation.
Editor's Notes
- Be a bit relaxed | Light hearted | Imagine you are among friends| Good afternoon everybody, tail end of the day and I’ll be talking about tax… so I’ll try my best not to put you to sleep. (Pause) Those of you who have had exposure with the Tax Office or the ACNC know it is not always a pleasant experience. Although your organisations provide many different benefits to the greater community, you as CEOs and Chairs of Associations and Not for Profits have similar compliance and tax obligations as a corporation making millions in profits. So, I’d like to begin with what drives an NFP organisation; Before I go further I’d just like to mention that if you have any questions, please do note them down and I’ll be happy to address them at the end of the presentation. Click On >
- As CEO’s and Chairs of organisations you would be familiar with this formula. Essentially, Revenue less Cost of Sales & Overheads results in the NET Profit or surplus for your organisation. Despite the name “Not-for-profit” (which just means an organisation which cannot distribute income or assets to its members), a NFP organisation needs to make a profit so that you have the funds to pursue your objectives, to hire the best people and invest in future programs. So where does tax come in to the equation? Well, taxes are ultimately another cost that erodes profits, so its important to minimise your tax costs where possible. To bring value here, I’d like to discuss with you the possible opportunities where you can save on your tax costs. So, let me take you through a few options; Click on >
- As you can see from this list, (pause) there are a number of tax concessions potentially available to NFPs. For today’s session, I will focus on the most popular ones (which I’ve bolded); Firstly, income tax exemption is one of the main concessions available if your NFP meets certain conditions. I will discuss some of the key requirements for income tax exemption in more detail in later slides. Some NFPs may also be eligible for FBT (or Fringe Benefits Tax) rebate or exemption. Just a bit of background, FBT is a tax employers pay on certain benefits you provide to your employees (other than in the form of salary and wages). Fringe benefits may be provided in addition to, or part of, an employees’ total remuneration package. For any organisation to be successful you need to have capable high performing teams to carry out the vision. A not-for-profit might not have the financial capacity to provide the same level of salary as a large corporate but may have some flexibility with the way an employee’s salary is packaged. That’s where the Fringe Benefits Tax Rebate or exemption can be quite valuable in attracting and retaining key team members. As you can appreciate, each type of concession needs to be worked out on its own merit as they are governed by different laws and regulatory bodies which could be federal or state-based. Ultimately, its about reducing your tax costs within the available parameters allowed by the relevant tax laws. Click through >
- So, if it’s about reducing your tax, this means less tax revenue going to the Government, so of course the regulatory bodies like the ACNC and ATO need to be vigilant in ensuring these tax concessions are not being abused by organisations who don’t meet the strict conditions and requirements. The key message here is that they are not automatic. Also, over time there may develop a gap between your original Vision for the organisation and where you are today; As your organisations and the tax laws are constantly evolving it is important to do a regular tax review (or tax health check) as, in our experience, many concessions are often overlooked. If you’re like me, you like to save money wherever you can and may not think its worth paying for professional advice. I’d like to share a story to highlight why I think it’s important to connect with experienced advisors. STORY: A couple of years ago, we took on a community services association as a client that was only recently registered as a charity with ACNC. They had already been operating for around 6 years and their previous accountant had not advised them to register as a charity from day 1 so they had been lodging tax returns and paying tax since incorporation. They asked us if there was any way for them to get back the tax they had paid in those previous years. When we reviewed their original constitution, we identified that it had many deficiencies, such as no clear objects, no NFP clause or a winding up clause. However, we were able to successfully argue to the ACNC that they had in substance satisfied the requirements for retrospective charity registration. The ACNC approved and we were able to lodge amended tax returns for the past 5 years and obtain tax refunds of over $20k for the client. It might not sound like a lot but for a small NFP it can make a world of difference. (Pause) Raise the right hand when say the following comment; Can I have a show of hands how many manage charities registered with the ACNC? <If not many, comment that its good to have a general understanding of what it means to be a charity because charities make up a good proportion of the NFP sector > The simplest (but usually more difficult) pathway to tax concessions is if you are a registered charity with the ACNC as charities are exempt from INCOME TAX and generally eligible for many other tax concessions. Otherwise your organisation will need to satisfy a raft of separate criteria. Let me take you through the list of charitable purposes that would make the ACNC recognise your organisation as a charity. Click On >
- To be recognised as a charity by the ACNC the organisation’s core purpose needs to fit within one or more of these 12 charitable purposes as set out in the Charities Act. From December 2012, one of the key requirements to be a charity is that the organisation must apply its income and assets solely for the purpose for which it was established. Because of this requirement, it is definitely more difficult for a membership based association (for example) to qualify as a charity because they usually have an object to promote the interest of their members. I also note that these 12 charitable purposes can be quite broad in their interpretation, but ultimately your organisation must be able to demonstrate to the ACNC that your objects, Constitution and activities reflect your charitable purpose. If you are in the process of establishing a new charity it is best to seek professional advice based on your planned activities. Next I’d like to share with you some of the responsibilities, risks and opportunities within tax you have as CEO’s & Chairs. Click on >
- Irrespective of if you are a charity or non charity we recommend that you review your income tax status annually, or at the very least when your structure or activities change. This is particularly important for entities that are self assessing their income tax exemption status. Getting this wrong could mean that your organisation may have an unexpected tax liability. Secondly, some of you might have invested your surplus funds in shares and other investments. Certain NFPs can qualify for refunds of franking credits on franked dividend income. Charities need to ensure that you comply with the Annual ACNC Reporting Obligations, which include lodging annual information statements and, depending on your size, lodging financial statements with ACNC. For all organisations it’s important to lodge your regular Activity Statements on time. The NFP sector is an area we have seen increasing compliance activity from the ATO. So the next question is, what do you do if you receive a request for review from the ATO or ACNC? PAUSE ! The first step is not to panic. In some cases, it could just be a simple request for information. But where the questions may be more difficult to answer then seek professional assistance! In my experience, a proactive approach is always preferred so let’s discuss some of the things that could attract their attention!
- As you can see (pause), most of these revolve around incorrect self assessment, incorrect claims, and late or non lodgement of compliance documents. For charities and DGRs, you need to notify ACNC and/or ATO if your Constitution, objects or activities change. Failure to comply could in the worst case scenario lead to removal of your organisation’s charity and DGR status. For NFP’s who incorrectly self-assess as income tax exempt, this could result in unexpected tax liabilities and penalties being imposed by the Tax Office. I just want to touch on the mutuality principle as it can be applied to work out taxable income for taxable NFP organisations. That is, NFPs who don’t qualify for income tax exemption. Click on>
- Broadly, the concept of mutuality refers to the principle that NFP organisations cannot derive income from themselves. Under this principle, contributions from members (eg. Member fees) are treated as mutual income and is not assessable for tax purposes. In the same token, expenses relating to generating that mutual income is not deductible. If the mutuality principle applies to your organisation, you need to undertake an exercise each year to classify income and expenses between three categories: mutual, non-mutual and apportionable. The overall result of this calculation is your organisation’s taxable income or loss for the year. This slide shows a very simple example of this process but it can get more complicated depending on the size and scale of your organisation’s activities. TIPS: Just a few tips when doing your tax calculations under the mutuality principle: People often don’t know that certain costs such as superannuation and tax agent fees are fully deductible. So I am sure you must all be dying to hear from me, as an accountant, what my top 7 steps are on how NFP organisations should approach their tax affairs?
- A good starting point is to review the organisation’s objects and activities and consider: Are they still appropriate and relevant? A lot of organisations were established many years ago and over time, their vision and activities may have diverged from their original purpose. If your activities aren’t consistent with or go beyond your objects then this could potentially jeopardise your organisation’s eligibility for income tax exemption, among other tax concessions. The rest of the suggested steps are fairly self-explanatory, but important, especially if you are considering a change to your structure or activities. I’d just like to share with you a piece of work I completed last year with an association to illustrate this approach; This was a Not-for-profit organisation not registered as a charity with ACNC. They received an ATO notice requesting them to confirm their eligibility to self-assess as income tax exempt and provide evidence to support that position. Step 1: We reviewed their Constitution, objects and activities. Step 2: We knew they weren’t registered as a charity with ACNC. Step 3: Following our review, we concluded that they did not fit within any of the Division 50 income tax exemption categories. As a result, they were not eligible to self-assess as an income tax exempt entity and therefore needed to lodge annual tax returns with the ATO. Step 4: In this instance we undertook a high level calculation of the potential tax exposure for the past 4 years and, after applying the mutuality principle, it resulted in an overall tax loss position for the association. Step 5: Using our workings we were able to assist with lodging their outstanding tax returns and get their tax affairs up to date. The tax losses could be carried forward to offset against future capital gains or investment income. I’d like to point out that reviewing your tax status is not always about saving or reducing tax. It can also be about providing peace of mind and reducing risk as CEOs and Chairs. In this case, we were able to provide the Association’s Board with certainty and comfort that they didn’t have a potential tax bill and were compliant with their tax obligations. Click on >
- I know we’ve covered a lot of information, but if you’re like me, you like to do your own reading and research. There is quite a lot of good information available online but here is a list of general tax guides from the ATO website that you can refer to. However, if you’d like me to share a copy of this slide deck, please send me an email and one of my team will get back to you. Click on >
- I hope you got some value from this session. One last thought I’d like to leave with you is that if you receive a Review request from ACNC or the ATO, first thing is have a cup of tea (pause) (or something stronger like a scotch!) and please don’t panic. But engage with a professional who has experience in not for profit tax matters. Done Click on > I think I might be able to take one or two questions, does anyone have any questions? Two Q’s done. If question difficult to answer, suggest discussing off-line. Drop by our booth outside for a chat when you have a chance.