Commencing from the 2023/2024 financial year, not-for-profit entities (NFPs) who self-assess as income tax exempt under Division 50 of the Income Tax Assessment Act 1997 (Tax Act) and have an Australian Business Number (ABN) will need to lodge returns with the Australian Taxation Office (ATO). The first lodgments of returns for NFPs (for the income tax year ending 30 June 2024) will be due for lodgment by 31 October 2024.
Being “not-for-profit” does not result in an automatic income tax exemption – there are certain requirements which must be satisfied to qualify.
NFPs which have charitable purposes must register with the Australian Charities and Not-for-profits Commission (ACNC) to continue to receive income tax exemptions.
Action should be taken now to make sure your NFP can satisfy its upcoming lodgment obligations and meets the requirements to self-assess as income tax exempt. Failure to correctly self-assess could result in ATO audit activity, a potential risk to your organisation’s status and penalties and interest being applied to any underpaid tax liability.
What are the requirements?
Division 50 of the Tax Act allows for certain categories of NFP entities to self-assess as income tax exempt. There are 8 categories of income tax exempt entities:
- Community service – societies, associations or clubs established for community purposes (except political or lobbying purposes)
- Sporting – societies, associations or clubs supporting a game, sport or animal racing
- Cultural – societies, associations or clubs established for the encouragement of art, literature or music
- Educational – public educational institutions including, universities or colleges managed by public bodies, grammar schools, primary and secondary schools run by religious bodies
- Health organisations – public hospitals, hospitals operated by NFP society or association, non-profit organisation that is a private health insurer
- Employment – employee associations, employer associations and trade unions
- Scientific – scientific institutions, associations and research funds
- Resource development – to promote the development of aviation, tourism or various Australian resources)
A NFP must satisfy the specific criteria and conditions contained in these categories to be eligible. Where there is uncertainty as to whether the organisation meets the requirements, boards should seek independent advice or request a private binding ruling from the ATO.
Should the NFP be registered as a charity?
Where the purposes and activities of an NFP fall within the definition of charitable activities under the Charities Act 2013 (Cth), an NFP is required to register as a charity with the ACNC to continue to receive the benefit of the income tax exemption.
If an NFP is eligible for ACNC registration and does not do so, it will be required to pay income tax and lodge a tax return with the ATO.
Do I need to lodge?
NFPs with an ABN will be required to lodge a tax return with the ATO if their taxable income is more than $416 in the relevant income year.
Some NFPs may be able to apply the mutuality principle to reduce their taxable income (if applicable). The mutuality principle may apply to certain dealings between an organisation and its members.
As a result of the mutuality principle:
- receipts from mutual dealings with members are not accessible income (mutual receipts); and
- expenses incurred to get mutual receipts are not deductible,
however, it does not apply to dealings between an organisation and a member which goes beyond a mutual arrangement, or which are in the nature of trade.
If an NFPs taxable income is less than $416, it will not be required to lodge a tax return but will need to advise the ATO (lodging a return is not necessary).
Certain NFPs are not required to lodge, including:
- NFPs which are registered as a charity and have reporting obligations to the ACNC;
- Government entities exempt under sections 50-25 of the Tax Act, such as:
- municipal corporations;
- local governing bodies;
- public authorities constituted under Australian law; and
- constitutionally protected funds,
- State or Territory bodies exempt under the Income Tax Assessment Act 1936 (Cth), such as:
- companies where shares are held beneficially by one or more government entities; or
- bodies established by State or Territory legislation (not companies) where:
- all profits and net assets on winding up are distributed to one or more government entities; or
- the legislation gives the power to appoint or dismiss the governing person or body to one or more government entities; or
- the legislation gives one or more government bodies power to direct the governing person or body as to the conduct of its affairs.
Next steps
Good governance is important for all NFP and charitable organisations, especially when there is fierce competition for grants and public support. It is considered critical to protect the reputation of the sector.
Members of boards and management committees should be mindful of their duties to act in the best interests of the organisation and make sure it complies with all regulatory and financial reporting requirements. Hamilton Locke can assist NFPs and charities in meeting their legal and tax obligations.
Some of the issues we are currently seeing for NFPs which self-assess as income tax exempt are:
- out of date governing documents not containing appropriate not-for-profit or winding up clauses (or not containing these clauses at all);
- NFPs self-assessing when they:
- are not eligible to do so (not meeting Division 50 category criteria); or
- have not received advice as to whether they properly fall within a specific category (for example, a club providing a social forum for expatriates from a country self-assessing as a community service organisation),
- self-assessing when the purposes and activities of the NFP have dramatically changed over time (i.e. no longer having a not-for-profit purpose).
As the deadline for the first round of tax lodgments is fast approaching, now is the time for boards of NFPs to undertake a review of their governance documents and purposes to ensure they fall within one of the not-for-profit categories in Division 50 of the ITAA 1997 to continue to self-assess as income tax exempt.
How we can assist
Hamilton Locke has significant experience and can assist organisations:
- uncertain as to whether they satisfy the requirements in Division 50;
- which have had changes in their purposes or activities;
- reviewing and updating governing documents which are no longer fit for purpose (generally, more than 3 years old); or
- are required to be registered as a charity with the ACNC as their objects and activities are charitable.
If you require advice or assistance with any of the topics raised, please contact Catherine Nufer from Hamilton Locke’s Tax team to discuss your NFP or Charity’s needs.
