ATO warns on charity tax scam

The Australian Taxation Office has given taxpayers until the end of January 2011 to come clean on their involvement in a charity tax scheme that allows participants to claim tax deductions of up to $20,000 for supposed donations of $2,000.

In a warning issued yesterday, the ATO said it is in the process of contacting 100 people involved in the scam. However, it has given anyone who has participated up until January 31, 2011, to come forward and be eligible for reduced penalties.

The schemes work like this. An Australian taxpayer provides a cash deposit to an overseas vendor, which promises to buy pharmaceuticals from a low-cost, offshore supplier and pass the drugs onto a charity.

The cash deposit is for a long-term (up to 50 years) loan that is typically on what the ATO describes as “non-commercial” terms. The loan and the deposit are then supposedly used to buy the drugs, with the taxpayer receiving a receipt for the entire amount apparently spent – a sum that can be up to 10 times higher than the cash deposit.

“We have concerns about the value of the pharmaceuticals and when they are actually received by the charity. Although the taxpayer gets a receipt for the donation, the value of the pharmaceuticals is set by the vendor, not the charity,” Tax Commissioner Michael D’Ascenzo said in a statement.

In the worst instances, some taxpayers have claimed $20,000 in deduction for a donation of $2,000.

“We are of the view that these arrangements are not legitimate, and that those involved may face a large tax debt, substantial penalties or even prosecution,” D’Ascenzo said.

The ATO says some of the schemes appear to have been marketed as having received a private ruling from the ATO, but this is not the case.

On top of a hefty tax debt, D’Ascenzo says people found to have become involved in the schemes face penalties of up to $550,000.

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