Look back to move forward – this was the theme for our recent Senior Executive Leadership Conference. Led by our Commissioner, Rob Heferen, and a range of speakers, the key focus areas that resonated for me included the emerging megatrends that will significantly shift the geopolitical landscape, technological adaptations that will drive consumer expectations and influence alternative financial systems, the role of the ATO as regulator and administrator, and my role as a public servant.
This has given me lots to think about over the weekend, especially given the critical role we have in Australia and the influence we exert internationally in the many forums we’re part of. I refer to the ATO's role because recently I’ve received lots of feedback about the new reporting requirements for non-charitable NFPs that have an ABN. The feedback has ranged from 'Jennifer, you couldn’t have put more information out there if you tried … and anyone that wanted to get ahead has had ample information to do so' to ‘I am a small charitable organisation, and I don’t understand why I’m not automatically tax exempt' or 'I’m not eligible for income tax exemption, but because I’m small, the law shouldn’t apply to me'. We even had one organisation tell us they disregarded official ATO correspondence, although I think this latter action may be an anomaly. I’m confident in calling this out as an anomaly because while many NFPs may have thought they were automatically exempt from income tax, I’ve worked with lots of groups and associations who are responsibly reviewing their tax status with a view to meet their obligations.
I deliver many speaking engagements, both in-person and virtually, and I’m always heartened by the warm welcome I receive from organisations who want to do the right thing. I also take on board all feedback about how we can better administer the tax system because ultimately, we all aspire to a vibrant and sustainable NFP sector. As a former NFP volunteer in the past, I empathise with all volunteers who may be questioning whether it’s all worth it. Yes! Yes, it is worth it, and my advice is don’t get caught in the rhetoric. It’s not that hard and we’re here to help.
The role of the ATO
The ATO is Australia’s major revenue collection agency.
As the administrator of all NFPs, including charitable organisations, our role fundamentally supports NFPs to deliver the important services they provide for the community by helping them meet their tax and super obligations. Additionally, an integral part of our role is to ensure only those entitled to tax concessions are accessing them.
The law was designed to ensure integrity and fairness in the system, and our role is to administer the law effectively and efficiently. For this reason, the new NFP self-review return has been simplified to 3 key requirements: organisational details, the income tax exemption category and the declaration. In response to a recent question in an interview about scope to further simplify the return, I noted the return is basic in nature and takes a few minutes to complete… there’s not much more we can simplify.
Moving from confusion to clarity
I’ve heard rumblings of ‘pockets of confusion’ which are exacerbated by misunderstandings… so let me try and clarify. The NFP self-review return is an informational income tax return. It may look different, but it is a tax return.
Income tax exemption for NFPs is not an automatic entitlement and not all NFPs qualify for this concession. In fact, there are generally only 2 pathways through which a NFP can be income tax exempt:
- pathway 1 is that the NFP is a registered charity with the Australian Charities and Not-for-profits Commission (ACNC) and is endorsed by us as income tax exempt
- pathway 2 is that the NFP meets the requirements of one of the 8 categories in the tax law to self-asses as income tax exempt (Division 50 of the Income Tax Assessment Act 1997).
If an NFP organisation doesn't meet one of these 2 pathways, it is a taxable NFP and may be required to lodge an income tax return depending on its taxable income.
Eligibility for tax exemption hasn’t changed. What’s changed is that NFPs who self-assess as income tax exempt through pathway 2 are now required to notify us of their eligibility for an income tax exemption each year. This new requirement to notify applies regardless of the size of the NFP.
Read on for more detail about pathway 1 (registered charities), pathway 2 (the 8 categories who can self-assess), and finally the taxable NFPs who aren't eligible for either pathway.
Tips for charitable NFPs
NFPs that are registered as a charity with the ACNC, or those required to be registered with the ACNC to access income tax concessions, are not impacted by the new reporting requirements.
Since 2012, NFPs with only charitable purposes that meet the legal definition of a charity, have been required to register with the ACNC and be endorsed by us to be income tax exempt. An NFP with charitable purposes can choose not to register as a charity, however they’re not eligible to self-assess as income tax exempt and need to report to us as a taxable NFP.
We’ve worked closely with the ACNC to ensure charitable NFPs are appropriately supported. Our website guidance has been updated, and we’ve recorded a joint webinar with the ACNC, What do I do if I am charitable?External Link, to provide you with additional support.
NFPs that are unsure of their charitable purposes can still complete the NFP self-review return by answering ‘yes’ or ‘unsure’ to question 5 on the return. We’ll work with these NFPs to get their tax status and reporting obligations right going forward.
Charitable NFPs can find out more at: acnc.gov.au/selfassessingExternal Link
Tips for NFPs that self-assess as income tax exempt
There are approximately 155,000 non-charitable NFPs with an active ABN that are required to complete a NFP self-review return to notify us of their eligibility to self-assess as income tax exempt. These NFPs have always been expected to review their entitlement on an annual basis, or where there has been a significant change to their purposes or activities.
This new reporting requirement isn’t changing existing eligibility requirements set out in tax law. So, get on board and lodge your NFP self-review return now. Over 6,000 NFPs have already lodged, and we expect many more lodgments over the next 2 months.
The NFP self-review return can be lodged in Online services for business. Alternatively, a registered tax agent can lodge in Online services for agents on behalf of an NFP. You can also lodge using our self-help phone service on 13 72 26.
Our How to access and lodge the NFP self-review return outlines the steps your NFP needs to take to get ready to lodge.
Tips for taxable NFPs
I’ve previously referred to what NFPs can do if they’re a taxable NFP but have been incorrectly self-assessing.
Taxable NFPs have 2 options:
Option 1: They can progress with completing the NFP self-review return and when they get to Q2 that asks them to ‘Choose a category that best reflects the main purpose of the organisation’, they will need to select ‘None of the above’, which will take them to Step 3: Summary and declaration – Taxable.
After selecting this option and lodging the self-review return, taxable NFPs will receive an automated letter outlining their next steps. The taxable outcome letter contains a link to ato.gov.au/taxableNFPs to provide further guidance on which organisations should lodge a non-lodgment advice (where they have less than $416 taxable income) OR lodge an income tax return by 15 May 2025.
Information about this option can be found in the NFP Self-review return guide. We’re currently reviewing our web content to see how we can make this clearer.
Option 2: Alternatively, taxable NFPs can submit an income tax return or non-lodgment advice. This will notify us that you're a taxable NFP and your tax status will be updated in our systems. For further guidance please refer to ato.gov.au/taxableNFPs.
Tips for timely lodgment of the NFP self-review return
I encourage NFPs to lodge their NFP self-review return using Online services for business, or through a registered tax agent, by 31 October 2024. We’ve put in place the following transitional support to help NFPs meet this timeframe:
- an alternative lodgment channel is available for NFPs through the self-help phone service on 13 72 26
- taxable NFPs who've been incorrectly self-assessing as income tax exempt can lodge the return by selecting ‘none of the above’ at question 2 and we'll contact them
- charitable NFPs who've previously self-assessed as income tax exempt and are now considering whether they need to register as a charity can lodge their return by selecting ‘yes’ or ‘unsure’ at question 5. We'll work with them to establish their tax status.
Finally, we’ve provided NFPs with additional time, where required, to lodge the NFP self-review return up to 31 March 2025, without seeking a lodgment deferral from us.
Tips to speed up your endorsement applications
While 'self-assessing as income tax exempt' enquiries are dominating our time, we're balancing this with our other regulatory role with regards to charity tax concessions and Deductible Gift Recipient (DGR) endorsements.
We’re experiencing an increased workload, as there are several factors impacting our service window, including the DGR reforms, the new NFP self-review return and an uptick in calls to our advice service.
This has led to a processing delay of tax charity concession applications and DGR endorsements. Ordinarily, we've been able to process these applications within a week or two, it’s now taking us longer. I’m aware there are applications that exceed our 28-day service window, especially where the information provided to us is incorrect or needs to be verified. Notwithstanding, we remain committed to improving our process.
Charities can have confidence in the fact that even though we may be experiencing processing delays, the date of effect of their endorsement is generally backdated to align with their charity registration. This means they can operate with a certain level of confidence. However, not all charities are eligible for DGR endorsement and charities applying for DGR status shouldn't accept tax deductible gifts until their DGR endorsement is approved by us.
To process your application more efficiently, I recommend you consider the following tips:
- Make sure you're eligible for the concession you’re applying for, as different tax concessions apply to different charity subtypes. For example, only registered public benevolent institutions and Health Promotion Charities are eligible for fringe benefits tax exemption. Learn more at Tax concessions for not-for-profits.
- When applying for DGR status, check that you meet all eligibility requirements for the category you’re applying for. If you’re unsure, call us on 1300 130 248 rather than lodging an application. You can always lodge a DGR application directly with us after your charity registration is processed. You can find more information about the DGR categories at DGR table – Deductible Gift Recipient categories.
- Given there are 52 DGR categories, each with distinct eligibility criteria, some DGR categories require the lodgment of a schedule that asks for specific information we need to determine eligibility. You need to attach a completed schedule with your ACNC application. Not providing this information, where required, will delay processing of your application. The schedules are available at DGR schedules.
As I continue to reflect on the ATO’s role as Australia’s major revenue collection agency, I note that during our Senior Executive Leadership Conference, it was an NFP key speaker that remarked ‘the tax system has to be intrinsically fair and that we should talk about it as a national asset’.
Looking back to move forward is not a new concept. For me, it’s about harnessing our collaborative excellence and insights to ensure we have a vibrant and contemporary NFP sector that is fit for purpose.
The NFP self-review return provides appropriate transparency and integrity of the sector; a sector I’m very proud to be a part of and I hope you are too.
On this note I leave you with my final 3 tips:
- lodge now – don’t wait!
- if you’ve made a mistake – don’t panic; we’ll work it out with you
- keep informed.
Take care, stay safe and enjoy spring.
Jennifer