In a significant shift set to reshape the landscape for not-for-profits (NFPs) in Australia, Government measures aimed at leveling the playing field for NFPs changing of income tax exemptions apply take effect this financial year. HelloLedger is at the forefront, guiding NFPs through this complex transition.
Announced in the May 2021 Commonwealth Budget by the former Coalition Government and subsequently retained by the Albanese Government, this move marks a pivotal change in how non-charitable not-for-profit entities will maintain their income tax exempt status.
Itâs important to note that these changes do not apply to charities registered with the Australian Charities and Not-for-profits Commission (ACNC), certain types of government entity or those already considered as taxable NFPs.
Previously, NFPs not registered with the ACNC could self-assess their eligibility for an income tax exemption. However, from 1 July 2023 new regulations require any NFP with an active Australian Business Number (ABN) that would self-assess its income tax exempt status must now adhere to a new annual reporting requirement to retain this exemption. HelloLedger is dedicated to ensuring that your NFP navigates these changes smoothly, offering expert advice and support every step of the way.
The Crucial Steps NFPs Need to Take
The introduction of an annual self-review return is the cornerstone of these new measures. NFPs must lodge their first self-review return between 1 July 2024 and 31 October 2024 for the 2023-24 income year to continue accessing income tax exemptions.
For NFPs, this means taking proactive steps to ensure compliance:
Review Your Status: First and foremost, NFPs must critically assess their current status and understand whether you meet the eligibility criteria for income tax exemption under the new framework.
Gather Relevant Information: Organisations should prepare by gathering necessary documentation and information demonstrating your eligibility. This preparation will be crucial for completing the annual self-review return. Locate and review your governing documents to ensure you are operating for a purpose and that the documents contain appropriate NFP clauses proving its not-for-profit character.
Understand the Lodgment Process: Start to familiarise yourself with the lodgment process on the Australian Taxation Office (ATO) website. The ATO has outlined detailed steps and guidelines on how to lodge the annual self-review return in this ATO guide. Note NFPs that have engaged a registered tax agent, your agent can also lodge on your behalf.
Stay Informed: Changes in legislation and requirements can happen. Staying informed about any updates or modifications to the reporting requirements is essential. The ATOâs website offers a wealth of information and should be regularly consulted for the latest news and guidelines. You can also subscribe to the ATO NFP newsletter to stay informed about the new reporting requirements.
Self-Assessment for Income Tax Exemption: A Detailed Overview
To ascertain if an NFP organisation is exempt from income tax, it's imperative to determine whether you qualify as a charity. Charities require endorsement from the ATO for tax exemption and are regulated by the ACNC. In contrast, non-charitable organisations must self-assess their tax-exempt status.
Steps for Self-Assessment:
Identify Your Organisation Type: Review the list of income tax exempt organisation types to see if your NFP falls within the specified categories, which include:
Ensure Compliance with Requirements: If your organisation aligns with a listed type, verify that it meets all specified conditions. This generally involves
the organisation being a not-for-profit - operating for its purpose and not for the profit or gain (either direct or indirect) of its individual members
passing one of three specific tests
¡adhering to its governing rules - must operate only in a manner consistent with the rules of core importance to its operation, including those related to its object and purpose and those relating to its NFP status, and
applying its income and assets solely to its established purpose.
Complete the Relevant Income Tax Exemption Checklist: Document your review using the ATOâs worksheets, either for sporting organisations or for other NFPs, as a record of your assessment. Or you can follow the new ATO guide for your organisation type.
Understand and Act on the Outcome: Based on the outcome, take the necessary steps to comply with tax obligations or maintain exemption status. Regular reviews are advised, especially when significant organisational changes occur.
Unsure if your organisation is eligible to self-assessÂ
If your not sure if your NFP can self-assessYou can:
Contact the ATO NFP Premium Advice Service on 1300âŻ130âŻ248 from 8.00am to 6.00pm Monday to Friday.
Apply to the ATO for a private ruling on the exemption of your NFP income. Refer to Application forms supporting documentation for private ruling
Seek assistance from your Registered Tax Agent.
What If Your Organisation Is Not Exempt?
Organisations that do not qualify for exemption must recognise their taxable status, may need to lodge income tax returns and pay tax. Note that special rules relating to the mutuality of income (you can't derive income from yourself) may apply to your NFP in working out its taxable income, lodging returns and special tax rates.
You could also consider applying for registration as a charity through the Australian Charities and Not-for-profits Commission (ACNC). However, be aware that this option, while exempting your organisation from the annual self-review requirement for income tax exemptions, comes with its own set of eligibility criteria, application processes, and additional administrative responsibilities.
To be eligible for charity registration, your organisation must demonstrate a charitable purpose that is for the public benefit. The application process involves providing detailed information about your organisation's operations, governance, and financial status.
Furthermore, once registered, charities must adhere to ongoing obligations, including maintaining a certain level of transparency, reporting annually to the ACNC, and complying with governance standards. These requirements aim to ensure that registered charities operate effectively and maintain public trust.
Therefore, while registration can offer benefits, including access to other tax concessions, it is important to carefully consider whether your organisation can meet and sustain these additional commitments.
Final Thoughts
In navigating the new reporting requirements for NFP entities, organisations are encouraged to take proactive steps towards compliance, reassessment of operations, and ensuring they meet the necessary standards for income tax exemption.
The task may appear daunting, but it presents an invaluable opportunity for NFPs to reaffirm their commitment to transparency and continue their essential work within the community with robust support from the tax system. HelloLedger remains committed to supporting NFPs through this transition, providing expert advice, and assisting with the complexities of the new tax reporting requirements.
For NFPs seeking further information or guidance, the Australian Taxation Office's website offers detailed insights into the legislation and updates relevant to the not-for-profit sector. Additionally, HelloLedger invites organisations to connect with our team for personalised assistance, ensuring your organisation navigates these changes effectively and continues to thrive.
Together, we can embrace these new requirements, bolstering the integrity and impact of the NFP sector across Australia.
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