NFPs – Urgent action required now – ATO reporting deadline fast approaching.

Time is running out for NFPs to assess their tax status.

From 30 June 2024 onwards, not-for-profit (NFP) entities that are not registered charities are required to lodge an annual self-review return with the Australian Taxation Office (ATO). The return is due to be lodged by 31 October 2024. Not-for-profits will be required to assess and report the basis on which the entity is exempt from income tax.

Saward Dawson has been helping many not-for-profits determine if they are eligible for tax concessions and the appropriate basis. The ATO is expecting many of the NFPs that are currently self-assessing to not meet the limited number of exemption categories.

We have issued a number of articles on this topic that you may wish to review.

• New tax lodgement rules for NFPs
• Annual self review for NFPs
• Productivity commission’s draft philanthropy report

In this article we explore one of the common outcomes expected for member based NFP organisations that do not meet the exemption criteria, being the principle of mutuality.

Understanding your tax status – NFP Entities and the Principle of Mutuality

Not all NFP entities are tax exempt. Entities that are not registered charities and do not fit within the limited NFP exemption categories are required to lodge income tax returns and pay income tax.

However, member-based entities may be able to utilise the mutuality principle in calculating their taxable income.

Under the mutuality principle, which has been established under common law, an organisation cannot derive income from itself and any surplus arising from the common fund created and controlled by group of people for a common purpose it not considered as income.

The characteristics of organisations that can access mutuality typically include:

• The organisation Is carried on for the benefits of its members collectively and for the common purpose of the members.
• There is a common fund that provides for its common purpose and all members contribute to it.
• Different classes of membership may exist with varying rights and entitlements.
• Members control and own the common fund.

For the purpose of mutuality, a member is a person who has applied for membership, been accepted by the organisation and paid the appropriate membership subscription. They are bound by the constitution or rules of the organisaton. While they are not required to have a voting right, those who do not must be eligible for other rights and privileges.

As a result of the mutuality principle:

• Receipts from mutual dealings with members are not assessable income
• Expenses incurred to derive mutual receipts are not deductible
• Any revenue and expenses relating to both member and non member income are apportionable.

This means that membership subscriptions and receipts from other mutual dealings with members are exempt from income tax and expenses incurred in deriving those income will not be deductible. Apportionment calculations will need to be undertaken for income and expenses relating to both members and non-members. Not-for-profit organisations that may benefit from this mutuality principle include clubs, professional associations, peak bodies and friendly societies.

How we can assist

Saward Dawson has extensive knowledge in dealing with NFP entities. We can assist you in determining whether your NFP entity is exempt from income tax and preparing the ATO’s NFP self-review return.

If your organisation is not income tax exempt, we can prepare income tax returns applying the mutuality principle if applicable.