Is your organisation ready?
In her most recent publication of ‘Straight from the Source’, ATO Assistant Commissioner Jennifer Moltisanti reported that from December 2023, the ATO will begin a broad review of the Deductible Gift Recipient (DGR) status of those entities that are specifically listed in the tax law.
Accordingly, it is important that impacted DGRs are prepared to respond to the ATO when their review letter arrives – including by reviewing constituent documents, the nature and scope of current operations, the use of funds in respect of the objects of the entity and by reviewing tax governance practices and frameworks.
We set out below the scope of the ATO’s review, what you can do to prepare, key points to consider in responding, and how to proactively manage your tax governance affairs both now and in the future.
HWL Ebsworth’s tax and charity law experts stand ready to assist affected DGRs at all stages.
What is a ‘specifically listed’ DGR?
Generally, the pathway for an entity to achieve DGR endorsement is to first seek that the Australian Charities and Not-for-profits Commission (ACNC) endorses the entity as charitable. Then, assuming the entity fits into an appropriate category of charity, the next step is to seek DGR endorsement from the ATO.
However, in Division 30 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97), there are some 234 organisations that are specifically ‘listed’ as holding DGR status. That is, because these entities are specifically named in a particular section of the ITAA 97, they hold DGR status (ie in section 30-50 concerning Defence entities, there are currently five organisations listed as holding DGR status).
These ‘listed’ entities generally approach the Assistant Treasurer of the Treasurer with a submission as to why they should be eligible to hold DGR status and if the relevant minister is persuaded, amending legislation is then introduced into the parliament to that effect. Organisations may seek this path to DGR endorsement if they don’t come within the usual categories for DGR entities, but are, however, still considered to make a valuable contribution to the Australian community in a particular way.
As these entities fall outside of the usual endorsement and review processes of the ACNC and ATO, historically they may not have been subject to the same level of review as other DGR entities. However, given the large number of specifically listed entities and the potential impact on taxation revenue that these entities may have, the ATO has understandably taken a renewed interest in reviewing the objects, scope, governance, and operations of these entities.
Scope of the review
The ATO has indicated it will use its powers, set out in section 353-20 of Schedule 1 of the Taxation Administration Act 1953 (Cth), to review the DGR status of the specifically listed organisations. In broad terms, this section empowers the ATO to request information from, and undertake a review of, a specifically listed DGR in the same way it would in respect of any other DGR entity, with the possibility at the end of the review that the ATO may recommend to the relevant minister that a particular entity should no longer hold DGR status (and that the ITAA 97 should be amended accordingly).
In particular, and using this review power, the ATO will seek evidence and assurance in respect of the following aspects of each specifically listed DGR:
- that the funds of the entity are being used solely for its principal purposes;
- that the entity continues to pursue only the principal purpose(s) for which it was originally specifically listed; and
- that the entity is otherwise complying with any conditions attached to its listing in the ITAA 97.
The priority of the ATO’s review of all 234 listed entities will be as follows:
- DGR listed organisations that are not registered with the ACNC;
- ACNC registered charities that have not reported their donations; and
- the remainder of the specifically listed DGR population.
Assuming the ATO is satisfied after a particular review, it will issue a notification to the entity concerned to that effect. However, to the extent that the outcome of a review is unfavourable, potentially the entity may be required to take remedial action or in the most extreme cases, the ATO may recommend the entity has its specific listing removed (and accordingly, is stripped of its DGR status).
How to prepare and respond
It is crucial that specifically listed DGRs are aware of the review letter that is coming and prepare ahead of time, given the potentially significant adverse outcomes that could arise from a review process that is not handled appropriately.
In particular, before the review letter arrives, affected DGRs should:
- review their constitution, articles or similar to clearly identify and understand the principal objects and purposes of the entity;
- consider the tax governance aspects of the entity, including identifying who the directors are, key management personnel and policies and procedures concerning the tax compliance and governance of the entity;
- understand and review the activities of the entity in light of is principal purposes and objects, and identify any material departures from those purposes and objects; and
- analyse the recent financials of the entity to ensure that the funds of the entity are being used for its principal purposes (or alternatively, identify any departures).
When the review letter arrives and a response is required, affected entities should:
- review the information that may potentially be provided to ensure information that is subject to Legal Professional Privilege, the ATO Accountant’s Concession or the ATO’s Board Concession is not inadvertently disclosed;
- carefully prepare responses that directly address the specific queries raised by the ATO;
- consider making a voluntary disclosure of any matters that have been identified that would be a departure from the core purposes of the entity, and in the course of doing so suggest how these would be addressed and remediated; and
- correspond proactively with the ATO and meet the required timeframe or, if that would cause difficulty, seek an extension from the ATO ahead of time (which will usually be granted where communication is timely and open).
Being prepared and responding appropriately will help to ensure each entity is able to move through the review as quickly and efficiently as possible, whilst managing and protecting the DGR status of the entity to the greatest extent possible.
How HWL Ebsworth can assist
Our tax and charity law experts have considerable experience advising in the not-for-profit and charities sectors, and ensuring organisations of all types are ATO review ready.
We can support DGRs in reviewing their current constituent documents, activities, financials and governance frameworks to best prepare for the review.
We can then assist in drafting a response that protects your interests.
We look forward to working with affected DGRs to ensure they both move through the review smoothly, and are positioned for stability and success well into the future.
This article was written by Timothy Stokes, Partner, and Mallory Papps, Law Clerk.