Is your NFP correctly self-assessing for income tax exemption?

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.

If you seek any assistance to review your organisation’s entitlement to claim income tax exemption or to make an application to the ACNC for registration as a charity, please contact us.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.