Are you a charity or PBI? Received a letter from the ATO?

The ATO is recognising that a number of not-for-profit organisations have an ABN, are registered for GST, are paying GST and claiming GST input tax credits, yet the organisation has not lodged an income tax return.

Because income tax returns haven’t been lodged and the organisation has purportedly self-assessed itself to be exempt from income tax, the ATO is now enquiring under which provision in the income tax law the organisation is exempt from tax. In addition, these organisations are usually not registered with the Australian Charities and Not-for-profits Commission (ACNC).

In order to be exempt from income tax as a charity or public benevolent institution (PBI), the income tax law requires that the organisation must be endorsed by the Commissioner of Taxation. One of the requirements to be endorsed by the Commissioner is that the organisation must be registered with the ACNC as a charity or PBI. The Commissioner has stated he will accept the charity or PBI status of an organisation if registered with the ACNC.

What does this mean for your organisation?

Any entity that is self-assessing itself to be a tax exempt charity or PBI without ACNC registration and not lodging income tax returns will be targeted by the ATO.

To be registered as a charity or PBI, you must fit within one of the 12 charitable purposes listed in the Charities Act 2013. Examples of some of the eligible charitable purposes are advancing health, advancing education, advancing social or public welfare and advancing religion. PBI’s are a type of charitable institution whose main purpose is to relieve suffering that is serious enough as to arouse a feeling of compassion from members of the community. PBI status can be more difficult to achieve for an organisation.

Aside from not complying with the tax law, not being registered with the ACNC as an income tax exempt charity or PBI can have serious tax and cash flow consequences for organisations. That is, if the organisation is unable to obtain ACNC registration, income tax returns may be required by the Australian Taxation Office (ATO) from the time the organisation commenced operations.  The consequent tax liability may be so great that the organisation ceases operations and potentially falls into bankruptcy or liquidation.

When an organisation claiming to be a charity or PBI receives a query letter from the ATO, I do not recommend simply completing the ATO’s fact finder questionnaire.  The response to the ATO must be carefully prepared by supplying full and relevant facts and appropriately analysing the relevant ACNC and tax laws and public rulings issued by the ACNC and the ATO.  By not doing so, ACNC registration is likely to be denied.  After denial of registration, reapplying can be complex.

Please contact Michael Bannon or Ingrid Sevil on 02 6279 5400 for further advice.

Ingrid Sevil

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