The federal election on 3 May 2025 delivered the Albanese Government a stronger majority and with it, renewed licence to pursue revenue integrity as a pillar of fiscal repair. The Budget deficit is forecast to deepen, inflationary pressures linger and – as Treasury has made clear – every dollar of foregone revenue matters. Against that backdrop, the Australian Taxation Office (ATO) has been tasked with sharpening its enforcement tools and has been given an additional $999 million over four years to extend and expand tax compliance activities. Among the areas squarely in the ATO’s sights is the charities and not-for-profits (NFP) sector, including religious organisations, with the ATO working increasingly closely with the Australian Charities and Not-for-profits Commission (ACNC) to monitor the sector to ensure compliance with regulatory and reporting requirements and identify any instances of entities improperly claiming tax concessions.
Assistant Commissioner Jennifer Moltisanti’s Straight from the Source series has foreshadowed this trajectory for months. Her 7 May 2025 post, published days after the election result, could not be clearer: the key areas for the ATO include whether entities are operating for purpose and applying income and assets solely for that purpose, meeting reporting obligations and doing the right thing when they see emerging issues. What this is likely to mean, in practical terms, is continued close scrutiny of governance practices, fund flows, accumulation strategies, contractual arrangements and related-party and cross-border dealings.
Is your house in order?
Examination of recent ATO inquiries and the ATO’s consistent public messaging reveals several key themes, which every charity and NFP should examine in detail now, as part of a board-level ‘health check’, before the ATO (or the ACNC) knocks on the door.
Clarity of purpose, consistency in approach
Charitable entities must become registered charities with the ACNC and continue to meet the eligibility criteria to be registered charities in order to enjoy a range of tax concessions, including income tax exemption, FBT concessions, GST concessions, deductible gift recipient endorsement and refunds of franking credits. Charitable entities are not eligible to self-assess for income tax exemption – only certain types of non-charitable NFPs can do so and only if they meet certain criteria.
Under the Charities Act 2013 (Cth), a registered charity must (among other things) be a not-for-profit and must operate for charitable purposes, for the public benefit (both upon registration and on an ongoing basis to maintain eligibility for registration). The ATO’s companion requirement for endorsing registered charities for income tax exemption is that a charity complies with all the substantive requirements in its governing rules and applies its income and assets solely for that purpose for which it was established.
Similarly, non-charitable NFPs can only self-assess for income tax exemption if they are established for an eligible purpose, apply their income and assets solely for that eligible purpose and (where they are required to meet a governing rules condition) comply with all the substantive requirements in their governing rules.
If a registered charity or eligible non-charitable NFP experiences purpose creep or its activities, public messaging or other operations suggest a deviation from its purpose (including pursuit of a non-charitable purpose) then its ACNC registration and its ability to continue to enjoy tax concessions will be at risk.
Another area which can open an organisation to risk is through engaging in commercial activity. While the Unrelated Business Income Tax (UBIT) seems to be long buried and the Commissioner of Taxation v Word Investments case gives some guidance and comfort, organisations established to pursue not-for-profit or charitable purposes must nevertheless take care to ensure the money-making activities (particularly if they are unrelated to their purpose) do not become so significant as to be a purpose in their own right.
Along similar lines, a charity can accumulate funds but only within reason. Accumulating too much (particularly with no defined goal or strategic justification) can result in a breach of both the ACNC Governance Standards and the tax law provisions described above on the basis the funds are not being used to further the organisation’s purpose and are instead being used to amass more wealth.
The ATO’s investigations in this sector have focused on understanding, through a detailed interrogation of documents, systems and people, the full breadth of the entity’s activities, including its fundraising and accumulation activities, programs, partnerships, grants and investments. This aims to determine whether charitable entities have acted for purposes other than their stated purpose or otherwise in a way which is not truly charitable, for the public benefit; and whether non-charitable NFPs have acted for purposes other than an eligible purpose or in a manner which is inconsistent with the substantive requirements of their governing rules.
While the ATO will sometimes announce a specific focus in its investigations (such as its 2023-24 focus on the deductible gift recipient status of entities specifically listed in the tax law), its investigations will often be targeted in more subtle ways.
Similarly, the ACNC has consistently announced different focus areas for its reviews (including its current focus on the misuse of complex corporate structures). However, the ACNC’s secrecy provisions are well-known (and the current subject of potential reform) meaning it is extremely rare to have any public comment from the ACNC regarding specific investigations (with the Hillsong Church investigation being a rare example of ACNC disclosure).
Governance, record-keeping and reporting
The ACNC Governance Standards require responsible persons (including directors, committee members or trustees of charities) to act with care, manage financial affairs prudently and disclose conflicts. The ATO increasingly tests these standards when reviewing tax-exempt status. The ATO will treat as red flags practices such as inadequate member, officeholder and conflicts registers, inadequate record-keeping, non-compliance with reporting requirements (now including the new annual reporting requirements for self-assessing income tax exempt non-charitable NFPs, introduced in the 2023-24 income year), missing or inadequate board minutes, inadequate or poorly maintained governing documents, policy and procedural gaps and informal decision-making processes. Such matters may trigger further investigation and potential enforcement action.
Fund management, accumulation and investment
Holding substantial reserves, issuing loans or making private equity-style investments is not inherently problematic – but only if the entity can show the activity is consistent with the entity’s purpose, objectives and strategy, its risk appetite, accumulation and investment policies and (critically for charities) the requirement to apply funds for charitable purposes (and to do so within a reasonable timeframe).
Charities and NFPs which focus on building an endowment must take care to properly align the endowment with the entity’s purposes and ensure it is managed strictly in accordance with a coherent plan and policy framework directed to achieving those purposes. Failure to do so leaves the door open to ATO and ACNC challenge.
Contractual arrangements, related-party transactions and overseas dealings
The ATO and the ACNC are increasingly attentive to intra-group loans, service arrangements and grants within organisational or religious networks, as well as cross-border activities and funding.
The ATO and ACNC will continue to be on the lookout for potential signs of non-compliance in these areas, such as contractual arrangements which do not obviously demonstrate a public benefit; grants or below-market loans to related or associated entities or individuals without a rigorous, arm’s-length assessment; inappropriate remuneration paid to key management personnel and other staff; limited partner vetting and due diligence; non or inadequate reporting on use of funds; inadequate, incomplete or missing AML and CTF checks; or non-compliance with the ACNC’s External Conduct Standards.
New Parliament; new dawn…raid?
The ATO and the ACNC work closely together to administer and support the NFP sector. They frequently conduct monitoring activities and investigations in parallel and in doing so can share information and provide positive assistance to each other (as well as other law enforcement agencies), pursuant to various memoranda of understanding. As the recent Hillsong Church example demonstrates, just because the ACNC and ATO are not publicly announcing investigations into certain entities does not mean they are not actively pursuing potential non-compliance.
The ATO has extensive powers to compel the production of information and documents and to compel individuals to attend and give evidence before the Commissioner or a person authorised by the Commissioner, for the purpose of the administration or operation of a tax law. The ATO also has the power at all reasonable times, without a warrant, to enter and remain on any land, premises or place, including business premises and residential premises, and to have full and free access at all reasonable times to any documents, goods or other property, for the purposes of a tax law. The ATO exercises these powers frequently and several charities and NFPs have been the subject of ATO raids in recent years.
The ACNC also has powers to compel the production of information and documents and to compel individuals to attend to give evidence. These powers may be exercised to determine whether a registered entity is complying with the Australian Charities and Not-for-profits Commission Act 2012 (Cth) and other relevant laws or to verify the accuracy of information provided in compliance or purported compliance with those laws. ACNC officers may also enter premises to exercise its monitoring powers with a court warrant or if the occupier consents.
While the possibility of ACNC or ATO investigation may seem unlikely, it is a reality which should feature on risk registers and boards should ensure a clear protocol is in place for personnel to follow in the event the ATO or the ACNC (or another regulator or law enforcement agency) exercises information gathering powers or powers of entry. This ensures personnel understand their rights, comply with their immediate obligations, know the appropriate escalation points to management and the board and who to contact for urgent and appropriate legal representation and support.
Be alert to avoid being alarmed
None of the above should surprise seasoned charity and NFP directors, yet recent compliance reviews show how easy it is for well-intentioned organisations to fall short. As assets grow, structures and contractual arrangements proliferate and decision-making processes evolve, it can be easy for purpose creep to occur. It can also be easy for commercial drivers and a focus on impact over purpose to subtly infiltrate decision-making processes to the extent clear compliance becomes harder to demonstrate.
The ATO now has fresh political impetus and a clear mandate to act. We expect to see:
more ATO and ACNC investigations
increased use of information-gathering powers and powers of entry
potential revocations of entitlements to tax concessions, including deductible gift recipient endorsement and income tax exemption (including historical revocations)
enforcement action against entities and other persons involved in contraventions.
Registered charities and NFPs should undertake regular health checks as part of good governance, to help ensure they maintain their registration and tax status and comply with regulatory and reporting requirements. ACNC and ATO compliance should move beyond set and forget to a regular item in board workplans, with opportunities to test management on compliance activities and elevate consideration of issues to the board level. Boards which move early to test their arrangements against the four themes outlined above will be better placed to demonstrate compliance and, if necessary, justify their operational choices to regulators.
How can we help?
Gilbert + Tobin’s Charities and social sector, Disputes and Investigations and Tax teams frequently work together to assist clients to run “readiness reviews”, refresh governance frameworks and engage with the ATO and the ACNC where issues have been self-identified or in response to investigations and enforcement actions. Should you wish to discuss how the ATO’s renewed focus may affect your organisation – and practical steps to stay ahead of the curve – please contact the authors or your usual G+T adviser.
This alert provides general information only and is not legal advice. Specific legal advice should be sought before acting on any matter discussed.