New Tax Lodgement Rules for Not-for-Profits
From the 2024 financial year, non-charitable NFPs that have an active ABN and who are self-assessing they are income tax exempt must lodge an annual online self-review form with the ATO detailing. This form will detail why the organisation believes it is income tax exempt.
The ATO expects that a number of NFPs will realise they are not entitled to self-assess their income tax exemption.
New Tax Reporting Obligations for NFPs
Many thousands of NFP entities have been able to self-assess their entitlement to income tax exemption without any reporting to the Australian Taxation Office (ATO). From 1 July 2023, NFPs that are seeking to maintain their income tax-exempt status will need to lodge an annual self-review form with the ATO.
NFPs need to consider whether they are entitled to income tax exemption. The ATO expects that a number of these NFPs will find they have been incorrectly self-assessing.
It is important for NFPs to consider whether they are actually entitled to income tax exemption.
Can your Organisation Self-Assess its Income Tax Exemption?
To be eligible to self-assess its income tax-exempt status, a NFP must meet all of the following:
- Not be a charity
- Not be carried on for the purpose of profit or gain of its individual members
- Have a physical presence in Australia and incur its expenditure and pursue its objectives principally in Australia
- Apply its income and assets solely for the purposes for which it is established
- Meet the eligibility requirements for one of the self-assessment categories
Is Your Organisation a Charity?
If your NFP organization is a charity, it cannot self-assess its entitlement to income tax exemption. To be income tax exempt, a charity must register with the Australian Charities and Not-for-profits Commission (ACNC) and be specifically endorsed as income tax exempt by the ATO. The ATO believes numerous NFP entities are currently self-assessing their income tax exemption but are actually charities.
To be a charity, the organisation must be a NFP entity and its purposes must be charitable for the public benefit. There are eleven categories of charitable purposes listed in the Act, including advancing health, education, social or public welfare, culture, religion and the natural environment.
Does your organisation fit within one of the self-assessment categories?
The categories for self-assessing income tax exemption are surprisingly limited. They are primarily:
- Sporting clubs
- Animal racing clubs and associations
- Cultural associations
- Music, literature and art associations
- Community service organisations
- Registered employer and employee associations and trade unions
- Societies or associations for promoting the development of aviation, tourism and Australian information and communications technology resources
- Societies or associations for promoting the development of agricultural, horticultural, industrial, manufacturing, pastoral, viticultural, aquacultural or fishing resources
Some categories have additional requirements that must be met.
Many NFPs that do fit within one of these self-assessment categories will find though, that they also fit within the definition of charity. Therefore, they cannot self-assess.
Some categories, such as the development of industrial resources, have been quite narrowly defined by the courts and NFPs may find they do not meet the requirements.
What if your organisation does not fit within one of the self-assessment categories?
If your organisation is not a charity and does not fit within the self-assessment categories, it should be lodging annual income tax returns.
In preparing the return, the organisation may be able to apply the principle of mutuality to reduce the amount of assessable income as certain income, such as membership fees, is not assessable. Expenses relating to mutual income are not deductible.
How we can assist
Saward Dawson assists many NFP organisations by providing tax lodgements, tax advice, business advisory, audit and consulting services. We can help you determine the tax status of your organisation and advise you on whether you fit within one of the income tax exemption categories. If your entity is a charity, we can prepare your registration application to the ACNC. Finally, if you are not income tax exempt, we can prepare your income tax returns taking into account the principle of mutuality.
- Please contact us to discuss the tax position of your organisation.
If your organisation is not a charity and does not fit within the self-assessment categories, it should be lodging annual income tax returns.
