With the Budget fast approaching, I’m reminded about the significant role not-for-profits have in supporting our citizens.
This budget is particularly important because it will inevitably outline the government’s plan to balance the books in what is currently a very challenging economic environment. Cost of living pressures, increased inflation and world instability are causing concern and driving more demand for government and not-for-profit services.
In a world of finite resources, however, careful consideration must be given to how precious resources are allocated. It’s a good idea to review what, why, where, who and how things are done to reinforce purpose, streamline efficiencies and identify opportunities.
Reinforcing purpose
It’s all about purpose for not-for-profits!
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. Put simply, 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 that come into effect from 1 July 2023 provide a timely opportunity to review purpose and activities. 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.
We're currently designing the return that will need to be lodged, from 1 July 2024, for the 2023–24 income year. You can nominate for an early trial of the new form as part of the iterative form-testing we expect to hold later this year; email NFPmeasures@ato.gov.au
Streamlining efficiencies
Validating purpose provides an opportunity to create efficiencies. Being clear about your purpose enables streamlining. I run a very lean and modest branch in the ATO, with finite resources, so can appreciate the circumstances in which many not-for-profits operate.
The NFP Centre’s purpose is to confirm the integrity of not-for-profit administration, by:
- Providing clients with timely and tailored advice that helps them understand and meet all their tax and super obligations.
- Ensuring clients are operating for purpose and accessing concessions appropriately, justifying the trust placed in them by the Australian community.
- Supporting clients to deliver important services for the Australian community, especially in times of need such as disaster and crisis.
- Influencing the shape of the tax and superannuation system.
My challenge is to ensure we can respond to our commitments without exhausting our dedicated staff. This has been difficult even in an organisation as big as the ATO. We do this, however, by reducing complexity and red tape which has the added benefit of being passed on to the sector. An example of this is our work to implement the upcoming reform that will transfer the administration of 4 unique DGR categories to the ATO. Once legislated, the ATO will administer:
- environmental organisations
- harm prevention charities
- cultural organisations
- overseas aid organisations.
This change will make all DGR categories consistent in administration, reduce red tape and simplify the application process for organisations seeking DGR status.
Identifying opportunities
At the recent Associations Forum National Conference, we heard from a diverse mix of associations who had questions about the new reporting requirements. One of the most topical of these was about incorrect classification of income; i.e. ‘I’m a taxable not-for-profit but haven’t kept records'. This was an excellent opportunity for us to consider our public advice and guidance.
All interactions provide an opportunity to obtain perspective and think creatively about how we can achieve our mutual purposes effectively and efficiently.
Our commitment
For those who have attended my sessions, you’ve heard me say ‘at the ATO we’re not in the business of putting business out of business!’ Our role is to help business thrive. We do this by focusing on our purpose.
Join us in ensuring the not-for-profit sector continues to deliver important services for our citizens by making sure you’re operating for purpose.
Take care, stay safe and enjoy Autumn.
Jennifer
Assistant Commissioner Jennifer Moltisanti discusses purpose for not-for-profits