Recently the ATO reminded not-for profits about the new reporting requirements that came into effect from 1 July 2023 where non-charitable not-for-profit entities with an active ABN will be required to lodge an annual self-review return to access income tax exemption.
It’s a commonly held myth that not-for-profits are automatically exempt from income tax. This is incorrect. Income tax exemption for not-for-profits is not an automatic entitlement and not all not-for-profits qualify.
Income-tax exempt entities are often altruistic in nature with their purposes benefiting the broader community, rather than primarily the interests of their members. The types of income tax exempt entities are outlined in Division 50 of the Income Tax Assessment Act 1997. If an organisation has a charitable purpose, it must meet the Australian Charities and Not-for-profits Commission registration criteria and be endorsed by the ATO to be income tax exempt.
A not-for-profit may qualify for income tax exemption if it’s established and operating on a not-for-profit basis and has purposes that meet the requirements of exempt entities outlined in tax law. A not-for-profit that is not exempt from income tax, is taxable. This means they may need to pay tax on taxable income.
Not-for-profits that self-assess income tax exemption must meet the following requirements, tests and conditions:
- General requirements
- Is established and operating on a not-for-profit basis.
- Operates for public benefit, rather than primarily the interests of its members.
- Does not have a charitable purpose.
- Has purposes that fall within a type of income tax exempt entity – outlined in Division 50 of Income Tax Assessment Act 1997.
- Meet at least one of 3 tests
- Operates in Australia.
- Is a deductible gift recipient.
- Is an entity prescribed in tax law.
- Special conditions must be met
- Comply with all substantive requirements in its governing rules.
- Apply income and assets solely for the purpose for which it is established.
The new reporting requirements provide a timely opportunity to review purpose and activities to ensure entities are in compliance with the relevant income tax laws.
Written By Paul Marini