In the 2008‐2009 year, some 200 not‐for‐profit entities are going to receive a letter from the Commissioner of Taxation asking them politely to explain why they should continue getting their present tax concessions.

Two hundred audits may not seem a lot in a sector covering some 700,000 organisations, but in Tax Office terms it’s quite significant. In 2006, for instance, they only did 1000 audits for the whole Small and Medium Business sector (covering organisations with turnover under S100 million).

The ATO reaped $356,000,000 in tax and penalties from those 1000 audits, too, or some $350,000 per head.

The ATO say that while

... non‐profit organisations tend to be highly compliant and seek to abide by the requirements of their special taxation status ... a small number of organisations ignore their responsibilities or deliberately attempt to abuse concessions, and we need to be fair but firm in those cases.

More specifically,

We monitor compliance through a range of activities including data matching, profiling and analysing third‐party information such as media reports. We identify discrepancies and when we find instances of non‐compliance or deliberate abuse, we undertake follow up action.

Next time you get a news item in the paper saying that some young man hopes to make $5 million for your organisation riding a Segway around Australia, read it over from the point of view of a Tax Office official wondering whether that income is going to be mentioned in your accounts. They’re watching! As they should be; because there is at the moment, of course, absolutely nobody and nothing else to keep track of possible financial abuse in the sector.

In Canada and in the UK specific not‐for‐profit regulators can descend on dodgy charities and shut them down; in Australia, not so much. And it would be naïve to assume that there are no abuses out there. For one thing, as the Tax Office notes, there’s this:

A recent review of a charitable fund found that the trustee of the fund:

• didn't make any distributions to charities for the period of the review
• made substantial loans to entities associated with the founder and the trustee, including borrowing funds which were on‐loaned to these entities
• didn't call on substantial amounts of unpaid trust distributions from trusts associated with the founder and the trustee
• didn't seek interest on these unpaid distributions.

The arrangement effectively provided a financial benefit to particular non‐charitable entities associated with the founder and the trustee. We decided that the fund had not been applied for the charitable purposes (for) it was established. We revoked the fund’s endorsement to access income tax exemption for the period under review – this was three years starting from the date of the notice of revocation.

The trustee of the charitable fund had to lodge income tax returns and pay income tax for these years.

In 2009–10, the Tax Office’s compliance work will focus on:

• deliberate misuse of tax concessions
• ensuring taxable non‐profit organisations understand and meet their obligations
• closely‐controlled organisations
• activities not consistent with any special exemption
• integrity of business systems, including record‐keeping and dealing with unusual or complex transactions intentional or inadvertent complicity with tax avoidance arrangements of others; for example, trusts distributing large amounts of tax law income or capital to charities but paying only nominal amounts (non‐profit entities, particularly charities, should take care that they are not named as a beneficiary of a trust as part of a tax avoidance arrangement and should consider repudiating their beneficiary status to protect the organisation’s status and reputation.)