WHO SHOULD READ THIS
- Board members and managers of not-for-profit organisations that self-assess for income tax purposes
THINGS YOU NEED TO KNOW
- You must ensure that your organisation falls within the correct category for income tax exemption
WHAT YOU NEED TO DO
- Review the legal basis for your existing income tax exemption, rectify if necessary, and ensure a robust regulatory and tax governance framework going forward
There are multiple categories that may entitle a not-for-profit (NFP) organisation to operate on an income tax exempt basis. For example, an NFP that is a registered charity with the Australian Charities and Not-for-profits Commission (ACNC) will be endorsed as income tax exempt from the date of its registration.
Another example is where an NFP is of a certain character and is able to 'self-assess' instead of relying on a clear endorsement from the Australia Taxation Office (ATO).
ATO increasingly assessing and reviewing for
non-compliance
It has recently come to the ATO's attention that many NFPs,
which are actually charitable at law, have been incorrectly
self-assessing their right to income tax exemption and the ATO is
increasingly reviewing these NFPs to assess their compliance.
Ensuring the correct entitlement for income tax
exemption
If an NFP organisation is not a charity, it can self-assess its
income tax status provided that certain conditions are met.
'Self-assess' means to decide for itself whether it fits
within the criteria for income tax exemption. Organisations that
can self-assess their income tax status do not need to be endorsed
by the ATO nor do they need to seek confirmation of their income
tax status from the ATO.
There is a potential risk of non-compliance when self-assessing given the absence of a definitive existing endorsement, so advice should always be sought.
Click here for more information on the types of organisations which can claim income tax exemption.
Charities must be registered with the ACNC to receive
income tax exemption
However, if an organisation is a charity, it must be registered
with the ACNC and endorsed by the ATO to be exempt from income tax.
Such an entity cannot self-assess as income tax exempt, even where
it falls within the description of a type of entity that can
self-assess. For example, an organisation may be self-assessing as
income tax exempt under Division 50 of the Income Tax
Assessment Act 1997 (Cth) (ITAA) under the
head of 'an association which is providing a community
service'.
If this organisation is in fact a charity at law (and it is not registered with the ACNC) it is not eligible to claim income tax exemption. In that instance, there is a risk of being caught in the current ATO review for tax compliance and assessed to be liable to pay income tax (including retrospectively).
Establishing a robust tax governance
framework
An NFP organisation which is self-assessing and has charitable
purposes and/or charitable activities should carefully review
whether it is compliant with the requirements for income tax
exemption under the ITAA and ensure a robust tax governance
framework going forward.