Change of eligibility for Tax Exempt Status for all Not for Profit (NFP) organisations.
Introduction by Stuart Smith.
As someone involved with NFP associations both privately and professionally, I suggest that following article will affect many of you that are doing great work in the community through NFP organisations.
As a member of The Tax Institute of Australia, I am providing this article from the Tax Institute newsletter regarding the change in Tax Office reporting that will affect all Not-For-Profit organisations.
All organisation should seek professional advice when considering their tax exempt position. This article is not advice from Vebiz, however it demonstrates the need to be aware of the tax implications for any organisation.
Chair of The Tax Institute’s National Not-For-Profit Technical Committee, discusses the upcoming reporting changes for self-assessing income tax-exempt entities.
Which entities are impacted by the changes?
The world of not-for-profit (NFP) organisations can be a confusing landscape, with a range of classifications that may apply to any given organisation.
As of June 2023, the estimated population of NFP entities with a registered ABN was approximately 225,000 entities. Of these, just over 25% were charities endorsed by the Australian Charities and Not-for-Profit Commission (ACNC) and endorsed by the Australian Taxation Office (ATO) as tax concession charities. Just under 4% were so-called taxable NFPs, including organisations that apply the principle of mutuality in determining their taxable income each year.
This leaves more than 150,000 organisations that are registered as NFPs, but which do not currently prepare income tax returns. These organisations constitute the ranks of income tax-exempt organisations, which self-assess an exemption under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997). Given there is a wide range of organisations, fulfilling a vast array of purposes, it is very hard at this point to accurately dissect that population.
The broad categories of organisation to which self-assessment applies are:
- Community service organisations
- Cultural organisations
- Educational organisations
- Employment organisations
- Health organisations
- Resource development organisations
- Scientific organisations
- Sporting organisations
Each category has set eligibility criteria and tests to be satisfied in order for an entity to qualify for an income tax exemption. Ongoing governance requirements to review eligibility, at least annually, apply to ensure the exemption remains appropriate.
As part of the Federal Budget 2021–22, the Government announced reforms that will require these entities to lodge an annual return with the ATO from 1 July 2023, with the first report due to be lodged in the period from 1 July 2024 to 31 October 2024. The aim of this reform is to enhance trust and confidence in the sector and ensure that only entities that are eligible for tax concessions are able to access them.
It is important to note there has been no change to any of the tests or eligibility requirements, and the new reporting is aimed at formalising the existing self-review process and reporting to the ATO. This will, among other outcomes, give a much-improved picture of the scale and scope of the NFP sector as a whole.
While the final format of the final return has not yet been released, the ATO has widely consulted across the sector to develop an online return. The questions will be tailored depending on the responses recorded so that each organisation should have to answer only those questions that are relevant to its circumstances. The questions will not collect detailed financial data from organisations.
It is anticipated there may be two key groups for whom this reporting may flag a potential change in their status.
Entities with only charitable objects
The first category will be those entities that are currently self-assessing as income tax-exempt, but the objects of which are purely charitable.
Section 50-47 of the ITAA 1997includes a special condition for all entities that are exempt from income tax under Division 50. Under section 50-47, where an entity meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (Cth), that entity must be registered with the ACNC to be income tax-exempt.
In other words, if the organisation would be eligible to be a registered charity rather than a self-assessing entity, they must seek endorsement as a charity, and may not instead choose to self-assess. Looking at the categories of organisation that are eligible to self-assess, it can be seen that, with the exception of sporting organisations, there is a significant potential for overlap with the charitable purposes enshrined in section 12 of the Charities Act 2013 (Cth).
Where entities identify that their purposes all align with the statutory definition of charity, and they otherwise appear to meet the registration requirements, they will therefore need to engage with the ACNC to seek endorsement. This will take time to work through, particularly if there is an increase in applications for endorsement arising out of this new self-assessment reporting process.
Ideally, organisations should start to review their status now to allow as much time as possible to progress any applications that are needed.
Entities that fail other eligibility requirements
The other category of organisations that may have to reassess their classification are those entities that discover, on stepping through the review process, that they do not meet the specific requirements for their organisation type.
Some examples might include organisations that have more than one purpose, and not all the purposes meet the requirements to be tax-exempt. An organisation that potentially could find itself in this situation might be a sports club that also carries out social or recreational activities and those social or recreational activities are more substantial than being incidental to the promotion of the sport. Alternatively, an organisation may identify that they have members who are deriving certain benefits from the organisation, which may prevent the entity from assessing an exemption.
Any entities that conclude through this process that they are not eligible tax-exempt entities will have to commence submitting income tax returns and paying tax on any assessable income. For some of these entities, this may also involve applying the principle of mutuality in determining the assessable income value.
While this may cause initial concern, it is important that organisations understand that this may not mean that the organisation will end up with a tax liability. However, where the organisation is in receipt of assessable income, an annual lodgment obligation will need to be addressed. If the organisation does not meet the eligibility criteria to self-assess but does not receive any assessable income (for example a mutual organisation receiving only member income), then it could be as simple as an annual declaration that no return is needed.
Obviously, for entities that have historically understood they are income tax-exempt, and which now identify as having a different status, it will be important to identify this change as soon as possible so they can prepare to commence reporting.
The ATO has existing resources to help organisations review their eligibility. It is recommended that any organisation that is unsure about its eligibility, or perhaps has not recently performed a detailed review of its eligibility, should work through the worksheets as soon as possible in order to identify potential issues at an early stage.
Preparing for reporting
Further steps that entities that currently self-assess as income tax-exempt should take now include:
- ensuring they have applied for an ABN if required;
- reviewing their ABN registration details and contact information to ensure that applicable notifications, advice, and guidance come through to the organisation;
- checking if there is a requirement to apply for a myGovID and set up RAM authorisations to allow access to the ATO’s online services.
Often these organisations are run solely by volunteers who may or may not have kept the organisation’s information current, depending on their level of knowledge and experience. As tax professionals, it is worth remembering that many of these NFP organisations are run by people who have a deep connection to the purpose, but who may not have a detailed knowledge of tax reporting and governance.
The overriding message for entities that will be required to complete this reporting is to be prepared early. The ATO has a dedicated webpage, which is regularly updated, to assist entities in understanding and preparing for the reforms.
As always, we welcome your views and thoughts, which you can provide here.
Morag Ingham, CTA