Not all not-for-profits (NFPs) are exempt from income tax.
Some organisations do not meet the requirements for income tax exemption including, for example:
- social clubs and fraternal organisations for the benefit of members
- some business and professional associations for the benefit of members
- clubs whose main purpose is providing hospitality services for members
- political parties.
These organisations, after applying the law of mutuality, must pay tax on taxable income.
Some NFPs (which are not charities) which fall into one of the following 8 broad categories may be income tax exempt, namely community service, sport, cultural, educational, health, employment, scientific and resource development. These organisations must comply with criteria set out in the tax legislation for ongoing entitlement to income tax exemption.
Until now these self- assessing income tax exempt entities have not had to lodge any form of report or return with the ATO. This has now changed. An NFP with an Australian Business Number (ABN) which is a self-assessing income tax exempt entity (but not an ACNC registered charity) must lodge a self-review income tax return for the 2023–24 income year and each subsequent income year. This is mandatory and late lodgement may incur a penalty.
The ATO Commissioner’s powers will include the power to, amongst other things,
- require lodgement of the return,
- seek further information including financial information and evidence that the organisation is pursuing its purpose, using its assets and income solely for its qualifying purpose,
- determine an organisation is not income tax exempt,
- assess tax and
- impose penalties.
Some suspected outcomes of this new system will be:
- some NFPs currently claiming income tax exemption have been wrongly doing so and do not in fact qualify as an income tax exempt entity and are liable to tax;
- some NFPs are charities and are self-assessing as income tax exempt when they should be registered as a charity by the ACNC to qualify as income tax exempt;
- some NFPs will be determined as taxable and assessed as owing income tax;
- some NFPs will be subject to scrutiny and audit;
- some NFPS will be found to have engaged in tax evasion and may face retrospective assessments and penalties;
The call to action is:
- Check whether the contact information for your organisation on the ABN is correct to ensure you receive messages from ATO.
- Check your organisation’s ongoing entitlement to claim income tax exemption. It is a yearly assessment – your organisation may have become non-compliant for some reason.
- Review your organisation’s purpose and that the activities undertaken further that purpose.
- Review your organisation’s governance documents.
For further information see
https://www.acnc.gov.au/organisations-have-been-self-assessing-income-tax-exempt