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The Australian Tax Office's (ATO) new not-for-profit reporting requirement has been implemented for this tax season, creating some uncertainty among organizations regarding their responsibilities. This measure aims to enhance the ATO's oversight of non-charitable not-for-profits with an ABN and their eligibility for tax exemption. Under this requirement, these organizations must submit a "not-for-profit self-review return" to confirm their eligibility for self-assessment as income tax-exempt.
This new reporting mechanism addresses a major gap in the tax system that previously left the ATO with significant blind spots. Historically, organizations in Australia could self-assess their not-for-profit status, claim income tax exemption, and then have no further obligation to interact with the ATO. There was no oversight to ensure these organizations met the criteria for not-for-profit classification or the reasons for their tax exemption.
Who Must Submit a Self-Review Return?
The new requirement applies exclusively to non-charitable not-for-profits. Charitable organizations are automatically exempt from income tax if registered with the Australian Charities and Not-for-profits Commission (ACNC). Registration with ACNC is the sole method for charitable organizations to secure income tax exemption, as they cannot self-assess as tax-exempt.
Charitable organizations that are not yet registered with ACNC should urgently seek registration.
The self-review return requirement applies to non-charitable not-for-profits across eight categories of tax-exempt entities:
Community service
Sporting
Cultural
Educational
Health
Employment
Scientific
Resource development
This new requirement provides organizations with an opportunity to review their governance practices and ensure they are aligned with what they report to the ATO.
What is the Deadline for Registration?
The requirement to submit an annual NFP self-review return applies from the year ending 30 June 2024 onwards, with the first return due by 31 October 2024. Organizations have been given a one-year grace period to meet the new requirements.
Not all non-charitable NFPs with an ABN need to comply. The self-review return serves as a substitute for a tax return, rather than an additional obligation, and is intended for organizations not already part of the tax system. Organizations that are already lodging a tax return do not need to comply with this new requirement. This may include certain member-based clubs that follow the principle of mutuality, where the organization is owned by its members rather than shareholders. These clubs must still prepare a tax return.
What Information Does the New Return Require?
For those required to submit a not-for-profit self-review return, the process should not be overly burdensome. If it is, this may indicate an underlying issue that should be addressed promptly. The return requests information that organizations should already possess to substantiate their eligibility for an income tax exemption based on their purpose and activities. It should be a straightforward task—a good opportunity to ensure continued compliance.
The return includes three sections:
1. Organizational details: including an estimate of gross revenue as small, medium, or large.
2. Eligibility questions:
Does the organization operate on a not-for-profit basis?
Is the organization structured and operated solely for community or charitable purposes, with surplus funds reinvested into its activities rather than distributed to members or stakeholders?
Does the organization have an active Australian Business Number (ABN)?
Is the organization self-assessing as income tax exempt?
What is the main purpose of the organization?
Are the organization's activities consistent with its stated purpose?
3. Summary and declaration: Key criteria for eligibility include ensuring members cannot profit from the organization’s operations. Additionally, organizations must have a wind-up clause in their constitution, ensuring that any assets or profits are transferred to similar organizations in the event of dissolution. While completing the return should only take about 10 minutes, it is crucial to ensure the information declared is accurate and up to date. Organizations should not assume that last year’s data remains valid. As organizations evolve, their documentation may need updating to reflect their current situation.
In summary, the ATO's new reporting requirement for non-charitable not-for-profits aims to close significant gaps in oversight and ensure compliance with tax exemption criteria. Organizations affected by this requirement should act promptly to meet the deadlines and maintain good governance practices. For ongoing updates and further information on this topic, please follow our accounting firm's official social media platforms. We are committed to providing timely updates and insights to help you navigate these changes effectively.