On Sunday 12 May, I’ll be participating in the Mother’s Day Classic Charity Event in Melbourne with my daughter and nieces, along with thousands of Australians in other capital cities. We've dedicated our donation to my sister’s memory, with the funds going to breast and ovarian cancer research.
The Mother’s Day Classic is truly inspirational and has led to the creation of a community tradition for thousands of families who want to mark Mother’s Day with an event that makes a difference. The founders of the event should be very proud of how it has evolved and grown, and more importantly the difference the foundation makes to the lives of so many Australians.
The growth of not-for-profits (NFPs), however, is not restricted to charities. There is a misunderstanding that all NFPs are charities, but this is not the case. The NFP sector is much bigger than the 60,000 charities registered with the Australian Charities and Not-for-profits Commission (ACNC). Registered charities represent only 26% of the ABN-registered NFP population, and a further 4% of NFPs are taxable.
In fact, the vast majority of NFPs are income tax exempt through self-assessment and represent about 70% of the NFP population. They're required to self-assess as income tax exempt by virtue of 8 categories outlined in the tax law. If an NFP doesn’t meet the criteria and specific requirements of one of the 8 categories, they're taxable unless they have only charitable purposes and are registered with the ACNC.
Did you know?
- An NFP must operate for the purposes for which it is established and not for the profit or gain of any of its members. This means any profit made, must be reinvested into the purpose of the organisation.
- NFPs are also required to have governing rules outlining their purpose, and a clause requiring any surpluses to be transferred to another NFP in the event of a wind up.
- Although many NFPs are small volunteer-based organisations, there are also large, sophisticated organisations that employ thousands of staff.
- While NFPs play an important role in our community, they also have a responsibility to meet their tax and super obligations.
What you need to know this tax time
With fewer than 60 days until Tax Time 2024, the new reporting requirement that’s garnering attention is an opportunity to reset. Starting this tax time, non-charitable NFPs with an ABN are required to lodge an NFP self-review return to notify their eligibility to confirm their income tax exemption.
While the return is not financial in nature and relatively straightforward to complete, it will be an annual obligation. The return asks NFPs to confirm details they should already be complying with if they're self-assessing correctly. The only difference is that NFPs will need to lodge a return to the ATO declaring they're operating as a not-for-profit and eligible to self-assess an income tax exemption.
In previous articles, I’ve mentioned that the new annual NFP self-review return is not driven by revenue. This is still the case, as NFPs eligible to self-assess an income tax exemption don't pay income tax. The new return is about integrity and transparency in a sector that's expected to grow significantly in the coming decades.
I understand the new reporting requirements represent a fundamental change for the sector and it may take time for smaller organisations to review and reset. Indeed, some may need to consider if they need to register as a charity or meet obligations as a taxable NFP.
Many NFPs may have gotten it wrong over the years and are now worried about potential consequences. I’d like to assure you that the ATO is taking a practical approach to compliance, which means we’re focused on helping NFPs get it right going forward.
If you’ve made a mistake, and it wasn’t intentional in that it wasn’t driven by evasion or fraud, you can expect us to support you in meeting your obligations in future.
Look for updates
We have lots of practical guidance available on our website, which we continue to refine based on feedback from the sector. Last month we updated ato.gov.au/NFPtaxexempt to provide additional details on:
- due dates for NFPs with an approved substituted accounting period
- who doesn’t need to lodge – including non-profit sub-entities for GST purposes
- interim lodgment arrangements – which will be available for NFPs that have difficulty lodging using our Online services.
We also have additional updates planned – so be sure to keep an eye out for messages in NFP news, social media and the NFP newsroom.
It's great to see many intermediaries hosting events, webinars and podcasts to share these messages and talk with you about the changes. We also continue to engage with the sector widely, with many associations contacting us to present at your local forums and events – we hope to see you at one soon!
Watch our webinars for steps on what to do!
The first of our three-part webinar series is available now at New reporting requirements for not-for-profitsExternal Link. The webinar has practical information and ‘how to’ tips on:
- who is required to lodge the NFP self-review return
- how to update your organisation’s ABN registration and associate details
- how to complete the NFP self-review return in Online Services for business.
Our second webinar 'What to do if you are a charitable NFP' will be available this month. Remember to connect with me on LinkedIn, as I’ll let you know when the webinar is available! You’ll hear ACNC General Counsel Natasha Sekulic and chartered accountant, Nunzio Giunta talk with me about how to self-assess for charitable purposes, requirements for charity registration and common registration errors.
This webinar also touches on what to do if you’re unsure if your NFP is a charity.
- Firstly, you should check if your organisation is a charity by considering the ACNC’s guidance and the types of entities that can be registered as a charity at acnc.gov.au/selfassessingExternal Link.
- However, note that our key focus is to provide you with education and support to work through the transition where you need it. What this means is that for the 2023-24 income year, we're taking a practical compliance approach to allow NFPs time to consider if they're a charity or need to register as a charity.
- In practical terms, when submitting the NFP self-review return you can advise us that your NFP has charitable purposes or you're unsure if it has charitable purposes. After the return is lodged, we may contact you to provide more tailored guidance around determining the NFP’s charitable status.
It’s important to note that a charitable NFP can also choose not to register with the ACNC as a charity, however they are not eligible for income tax exemption. They will be taxable and may be required to lodge an annual income tax return, or notify us of a return not necessary (RNN).
Also, coming soon is our third webinar 'The NFP self-review return and what to do if you have a taxable outcome'. Tim Stokes, partner at H W L Ebsworth, will join me to describe a taxable NFP, if they need to lodge an income tax return or an RNN, how to apply mutuality and available transitional arrangements for the 2023-24 income year. We’ll also take questions from our live audience so register nowExternal Link!
Now is the time to get ready
Don’t wait until the last minute:
- Associates – update ABR details with the ATO and get digital ready
- Volunteers – download the ATO’s guide on how to prepare an NFP self-review return
- Boards – schedule time to review your purpose and governing documents
- If you have charitable purposes, refer to examples at acnc.gov.au/selfassessingExternal Link on the ACNC website
- If you don’t meet the eligibility criteria to self-assess as income tax exempt and you think you may be taxable – don’t panic. The majority of taxable NFPs are required to lodge a tax return if their taxable income is $416 or more. If the taxable income is less than $416, taxable NFPs will need to lodge an RNN so they don’t receive a 'reminder to lodge' letter.
Now's the time to confirm your purposes, review obligations and set in motion a plan befitting good organisational hygiene. One of our NFP Stewardship Group members phrased it nicely in a recent CPA Australia podcast hosted by Ram Subramanian:
‘This is something that will be there moving forward. So, getting it right now, and having in place a regular schedule to review your income tax exempt status and doing this on a regular basis is important.’
Growth is inevitable
Growth drives innovation and inspires improvement. Like the Mother’s Day Classic, the NFP sector is growing. To enhance integrity, it’s important that only eligible NFPs access significant tax concessions entrusted to them for the delivery of key services for, and on behalf of, the Australian community.
Take care and stay safe.
Jennifer