Introduction
On 11 May 2021, as a component of the 2021-22 federal budget, the Australian Government announced reforms to the management of not-for-profit (NFP) entities which self-assess their eligibility for an income tax exemption. This reform aims to promote trust and confidence in the sector by ensuring only eligible NFPs avail themselves of tax exemptions and “operate on a level playing field”.
These reforms only apply to NFP entities not registered as charities with the Australian Charities and Not-For-Profits Commission (ACNC). Organisations already registered as charities with the ACNC are not captured by these new reporting requirements.
KEY TAKEAWAYS
- The new regime applies to non-charitable NFPs with an active Australian Business Number (ABN) from 1 July 2023. NFPs who self-asses as exempt from income tax will need to lodge annual self-review returns to access an income tax exemption.
- There are 8 categories of NFPs who may be exempt from income tax.
- These entities are required to lodge a return for the 2023-24 financial year between 1 July and 31 October 2024 using the existing ATO online platforms titled “Online Services for Business” (OSB) and “Online Services for Agents” (OSA).
- Non-charitable NFPs who fail to lodge the self-review return each year risk becoming ineligible for an income tax exemption in addition to penalties which may apply under the ATO’s penalty framework.
- NFPs should now start preparing for the first annual self-review lodgement.
NOT-FOR-PROFITS REQUIRED TO LODGE SELF-REVIEW RETURNS
NFPs who are not registered as a charity with the ACNC, and are not entitled to register as a charity, can self-assess whether they are entitled to an income tax exemption. Under Division 50 of the Income Tax Assessment Act 1997 (Cth) there are 8 categories of entities who are capable of self-assessing their eligibility for an income tax exemption. These are:
- Community service organisations.
- Sporting organisations.
- Cultural organisations.
- Educational organisations.
- Employment organisations.
- Health organisations.
- Resource development organisations.
- Scientific organisations.
From 1 July 2023 all non-charitable NFPs who self-assess as tax exempt will need to lodge annual self-review returns to access the tax exemption, with the first annual lodgement due by 31 October 2024. When completing their annual self-review returns, NFP organisations will need to consider their purposes and activities against the specific criteria and conditions of above categories.
NFPs registered with the ACNC and endorsed by the ATO as tax exempt are not required to lodge annual self-review returns.
HOW THE NEW SELF-REVIEW WILL WORK
The self-review return will include questions similar to those provided in current self-review worksheets. These worksheets can be completed now and will assist NFPs in determining their eligibility before the first 2023-24 self-review return is due. Currently, there are two worksheets: one for sporting clubs and one for all other NFPs.
Once the first annual self-review return is lodged, NFPs will subsequently be notified with a summarisation of their self-assessed eligibility for exemption.
After the first annual lodgement, NFPs will be able to confirm or update details for each subsequent lodgement on a pre-populated self-review return.
WHAT CAN YOU DO TO PREPARE?
To prepare for the first annual lodgement due 2024, NFPs should:
- Locate and review governing documents (e.g organisation constitutions or rules) to review the entity’s purpose and to ensure that these documents contain appropriate “NFP clauses”.
- Use the ATO’s worksheets to review their income tax exemption eligibility.
- Ensure company details such as ABNs are up to date.
- Ensure that they have set up their myGovID and Relationship Authorisation Manager for the OSB or OSA.
- If handing over tax affairs to a new administrator, download the “Handover checklist for not-for-profit administrators”.
NECESSARY ACTION
All non-charitable NFPs with an ABN who self-assess their eligibility for income tax exemption are required to lodge an annual self-review return in order to continue to access income tax exemptions. The first return will need to be lodged between 1 July and 31 October 2024, and then yearly thereafter. Although certain practical aspects of the reforms are still in the targeted consultation stage, we encourage all non-charitable NFPs to prepare for the change prior to 1 July 2024.
To discuss these changes in detail, or how we can assist you in preparing for the new self-assessment regime, please contact us on the details provided below.
This Alert is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.
