From 1 July 2023, non-charitable not for profit organisations (NFPs) that seek an income tax exemption will be required to lodge an annual return with the Australian Taxation Office (ATO).

Currently, approximately 70 per cent of NFPs holding an active Australian Business Number (ABN) evaluate their own eligibility for income tax exemption.

However, some organisations mistakenly assume that operating on an NFP basis automatically grants them exemption, while others are unaware of the requirement for self-assessment or fail to regularly review their eligibility.

To ensure accurate access to income tax concessions, the ATO is introducing these new reporting obligations. Regular reporting will enhance transparency, uphold system integrity and guarantee fair access to tax exemptions and concessions.

The ATO’s self-review process aims to be straightforward and automated. NFPs will be required to complete an annual return consisting of approximately between ten and 15 questions, most of which can be answered with a simple yes or no. The first return will be due between 1 July 2024 and 31 October 2024.

Upon completion of the return, one of the following outcomes will be determined:

  • Eligibility for income tax exemption: If an organisation’s objectives align with any of the eight entity types specified in Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997) and meets all necessary requirements, it can self-assess as eligible for income tax exemption. Such organisations will need to conduct a self-review on an annual basis.
  • Taxable NFP status: Organisations that do not meet the requirements of the eight entity types or are not considered charitable will be categorised as taxable NFPs. They will need to determine their taxable income annually. If the taxable income amounts to $416 or less, no tax return will be required. However, if the income exceeds $416, a tax return must be lodged.
  • Charitable status: If an organisation discovers it qualifies as a charity, it should consider registering with the Australian Charities and Not-for-profits Commission (ACNC) before applying to the ATO for endorsement as an income tax exempt charity. Registered charities must fulfill ongoing obligations with the ACNC, including submitting an annual information statement and complying with governance standards. Should an organisation opt not to register as a charity, it will be treated as a taxable NFP.

These changes will promote accurate reporting and aid the ATO in verifying that only eligible organisations have access to tax exemptions and concessions. The reporting requirements enhance transparency and ensure fairness within the sector. NFPs will need to allocate resources to review their status, ensure compliance with eligibility criteria and complete the annual returns. This may involve adjusting governance practices and making decisions based on their tax status.

The ATO is actively engaging with NFPs, tax professionals, legal advisors, and representative bodies to design and implement these changes. The objective is to create a user-friendly process and provide ample time for organisations to adapt and make any necessary adjustments before the first return is due.

This article was published in Financial Times – Spring 2023 issue.