Is your tax exempt not-for-profit (NFP) ready for the new income tax reporting requirement?

Non-charitable NFPs with an active Australian business number (ABN) that self-assess as income tax exempt are now required to lodge an annual self-review return with the Australian Taxation Office (ATO).  This requirement came into effect on 1 July 2023. For NFPs with a financial year ending 30 June 2024, the first self-review return must be lodged between 1 July and 31 October 2024.

Previously, NFPs that are required to self-assess as income tax exempt have not been required to inform the ATO of their self-assessed exempt status or provide an annual return.  

The ATO has been sending correspondence about the changes to NFPs with an ABN in March, April and May and will send a follow-up letter in July when the online return is available.

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Will my NFP be affected by this change?

The change does not alter the self-review exemption categories or their eligibility conditions or affect the responsibility of NFPs to self-review their entitlement to the exemption on an ongoing basis. The change adds a requirement to confirm annually to the ATO as to compliance with the requirements for those categories and conditions.

The new requirement to lodge an annual NFP self-review return does not apply to NFPs that:

-      are registered as charities with the Australian Charities and Not-For-Profits Commission (ACNC)

-      are a deductible gift recipient (DGR) in their own right or for a fund, authority or institution that they

        operate

-      are not eligible for exemption from income tax

-      are certain types of tax exempt government entities, or

-      do not have an active ABN.

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What NFP categories are eligible for self-assessed income tax exemption?

ACNC-registered charities and DGRs are not eligible to self-assess their income tax exemption and must be endorsed by the ATO for income tax exemption, in addition to any DGR endorsement.

Not all non-charitable NFPs are exempt from income tax. To be exempt, the NFP must fall within one of the exemption categories in Division 50 of the Income Tax Assessment Act 1997(Cth) (ITAA 97). The ATO does not issue exemption endorsements for those NFP exemption categories so they must self-assess their exemption entitlement.

Self-assessment exemption categories include:

-      community service organisations, such as Rotary and Lions clubs, playgroups and senior citizens

        associations

-      sporting organisations

-      cultural organisations

-      employment organisations such as employer associations and trade unions, and

-      resource development organisations.

NFPs that would otherwise fit into one of the exemption categories but are an ACNC type of charity are not entitled to self-assess their exemption.

 NFPs that are not tax exempt

Examples of NFPs that are not eligible for income tax exemption because they do not fit into one of the exemption categories are:

-      clubs for recreational activities (other than sporting and cultural activities)

-      social clubs and newcomer clubs

-      public speaking and debating clubs

-      organisations that conduct significant political, lobbying or promotional activities, and

-      professional associations.

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Conditions for eligibility for self-assessment

NFPs that self-assess must meet the relevant definition and special conditions that apply to their relevant exemption category on an ongoing basis. All categories have a special condition that the entity must not be carried on for the purpose of profit or gain of its individual members.  Other special conditions applicable to some categories include that the entity must:

-      comply with all the substantive requirements in its governing rules

-      apply its income and assets solely for the purpose for which the entity is established

-      have a physical presence in Australia and, to that extent, incur its expenditure and pursue its objectives

        principally in Australia.

The questions in the annual self-review return will address compliance with each of the special conditions applicable to the entity’s relevant exemption category.

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Requirement for NFP clause in governing rules

There is currently no requirement in ITAA 97 for a not-for-profit clause to be included in the self-assessing exempt NFP’s governing rules. However, ATO commentary states that NFPs that do not have not-for-profit clauses in their governing documents can continue to self-assess but must update their governing documents by 30 June 2025 and failure to do so will mean loss of income tax exemption back-dated to 1 July 2024.

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Requirement for an ABN

Only self-assessing exempt NFPs with an active ABN are being required to lodge an annual self-review return.  An NFP is only required to have an ABN if it has an annual turnover of $150,000 or more which means it must register for GST, and must have an ABN to do this. However, even if its turnover is below that threshold, an entity is entitled to an ABN if it carries on an enterprise in Australia. The concept of an enterprise includes the activities of charities and other NFPs that are repeated or systematic, organised and carried on in a business-like way. An NFP that is not required to register for the GST may register voluntarily.

An NFP that does not have an ABN is not necessarily exempt from income tax. If an NFP does not fall within one of the exemption categories, it will be required to have a tax file number (TFN) and lodge a tax return if its annual taxable income is more than $416, or advise the ATO that a return is not necessary in a particular year.

NFPs that fall into one of the exemption categories but do not have an active ABN are not affected by the change. However, they must continue to self-review their entitlement to the exemption on an ongoing basis.

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ACNC type of entity

An important special condition applicable to all NFP self-assessment categories is that an entity that is eligible to be registered as a charity by the ACNC (called an ACNC type of entity) is not permitted to self-assess as income tax exempt and will not be exempt from income tax unless it is registered as a charity by the ACNC.

An ACNC type of entity is one that has only charitable purposes. An NFP that has one or more charitable purposes but also other non-charitable purposes is not an ACNC type of entity and may be eligible to self-assess for exemption.

There are self-assessment exemption categories for scientific institutions, organisations and research funds, public hospitals and public educational institutions. However, as the advancement of science, health and education are charitable purposes, many organisations and institutions which have such purposes and no other non-charitable purposes are likely to be an ACNC type of entity.

Other charitable purposes include the advancement of culture and of social or public welfare and the promotion of industry. A number of the NFP self-assessment categories such as cultural organisations, community service organisations and resource development organisations which have such purposes and no other non-charitable purposes may be an ACNC type of entity.

The self-review return gives the NFP the option to answer “Yes” or “Unsure” in response to the question whether it has any charitable purposes. In that case, the ATO may contact the NFP to provide guidance to help determine its charitable status. The ACNC has also provided guidance for organisations that self-assess about eligibility to be registered as a charity - Organisations that have been self-assessing as income tax exempt.

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What does the NFP self-review return look like?

The self-review return will be lodged online. The online return will not be available until1 July 2024 but the ATO has already published a guide to completing the self-review return - How to prepare a NFP self-review return.

The return requires the NFP to designate the exemption category applicable to it. The subsequent questions address compliance with each of the special conditions applicable to the selected exemption category. No explanation of the activities of the NFP or other substantiation of eligibility for the relevant exemption category is required.

NFPs will be required to report on their size based on annual gross revenue for the relevant year:

-      small - $0 to $150,000

-      medium – Over $150,000 to $3 million

-      large – over $3 million.

Other than that, the return does not require any financial or operational details about the NFP.

Upon lodgement, the ATO will respond with a statement either that:

-      the NFP has met its self-review return obligation and must lodge an NFP annual self-review return in

        future years unless its circumstances change so it is no longer income tax exempt, or

-      the organisation is ineligible for income tax exemption.

The ATO estimates the return will take about 10 minutes to complete.

While the NFP self-review return has been designed to be lodged online, the ATO is implementing, as an interim measure, a telephone lodgement channel for NFPs that can’t use the online services. The telephone channel will not be available to NFPs that already report for GST and Pay as You Go Withholding (PAYGW).

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What if my NFP does not have a financial year ending 30 June?

If an NFP’s financial year is not 1 July to 30 June, the NFP will have to apply to the ATO for approval of a substituted accounting period (SAP), if it does not already have approval (see ATO guidance - Substituted accounting periods). Having a SAP will change the lodgement deadline date for the self-review return. NFPs with a SAP ending before 30 June 2024 (such as a year ending 31 December 2023) will have to wait until after 1 July 2024 to lodge the self-review return (see ATO guidance - When the first self-review return is due).

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Consequences for failure to lodge

It is an offence not to give a return when and as required under a taxation law and a penalty may also apply. However, the ATO has stated that it is taking a practical compliance approach to the self-review return with a focus on 2023-24 onwards. Transitional support arrangements will be available including:

-      lodgement deferrals

-      payment plans for organisations that identify they are a taxable NFP for the 2023–24 income year, and

-      remission of general interest charges and other penalties that may apply to taxable NFPs.

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What steps should my NFP take to prepare for this change?

To prepare for the first annual self-review return, NFPs should start now to:

-      review the ATO’s guidance for more information - Reporting requirements to self-assess income tax exemption

-      review activities and operations to check entitlement to self-assess -see the ATO’s self-assessment

        worksheets for sporting organisations (Income tax assessment and sporting clubs) and other NFPs

        (Income tax status review worksheet for self-assessing non-profit organisations)

-      review their governing document to ensure it contains the necessary not-for-profit clauses and that the

        stated purposes are appropriate to what it actually does

-      review the ATO’s guide to completing the self-review return - How to prepare a NFP self-review return

-      set up online access to the ATO or ensure that online contacts are up to date – the NFP will need a

        myGov ID and Relationship Authorisation Manager (RAM) authorisations for its contact person/s  

-      estimate annual gross revenue for the year

-      if the NFP is an ACNC type of entity, consider the regulatory compliance obligations of ACNC-registered

        charities and whether to apply for registration with the ACNC to enable ongoing income tax exemption,

        or alternatively set up systems for the organisation to become a taxpayer.

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NFP Lawyers is here to help. We can provide guidance on what the change means for your organisation and work with you to determine whether your organisation is entitled to self-assess as income tax exempt or could apply for registration as a charity, and guide you through that process.

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