CharityPack (current to 19 June 2003)

Chapter 2 - Income tax - ITEC endorsement

This document has been archived. It is current only to 19 June 2003.

In this chapter we explain:

• how you can apply for endorsement as an income exempt charity (ITEC)
• the income tax consequences once you are endorsed as an ITEC, and
• your income tax obligations if you are not endorsed as an ITEC or if your endorsement is revoked.

Applying for ITEC endorsement

• To be endorsed as an ITEC you will need an Australian Business Number (ABN) and you must apply to the ATO using the standard application form.
• The ATO will notify you of your endorsement status.
• If the ATO refuses to endorse your charity, or takes too long processing your application, you can have the matter reviewed.
• If you want your donors to get income tax deductions for their gifts, you will need to apply for a separate endorsement as a deductible gift recipient (DGR).

Only charities with an ABN can seek ITEC endorsement. The ABN registration form will ask the applicant if it is a charitable institution or fund. Applicants who answer 'Yes' to this question will automatically be sent an Application for endorsement as an Income Tax Exempt Charity. Charities should apply for ITEC endorsement on this form using the accompanying instructions. If a charity is entitled, it should lodge the completed application with the ATO.

Charities that already have an ABN, and did not indicate their charity status on the ABN application, will need to contact the ATO for an application form for ITEC endorsement.

Organisations that have previously received written confirmation from the ATO that they are charities must still apply for ITEC endorsement.

The ITEC application and the accompanying instructions are available from the ATO by phoning 13 24 78 .

When does endorsement start?

The application will ask you for the date from which you want to be endorsed.

The earliest possible date is 1 July 2000. From that date you will only be exempt if you are endorsed.

A charitable institution has existed since 1 January 1991. It has met the physical presence test since 1997. Its ABN is effective from 1 July 2000. Its date of endorsement will be 1 July 2000.

The endorsement date can be retrospective. Income earned from the effective date of endorsement is exempt from income tax.

A charity lodges its application for endorsement in January 2001. As long as it has an ABN and met the conditions for entitlement from 1 July 2000, its endorsement can start from that date. Income earned from 1 July 2000 would then be exempt. A charity is established and operates from 2 October 2000. If it has an ABN and meets the conditions for entitlement from that time, its endorsement date can be 2 October 2000.

Notification

Once the ATO has processed your application, it will send you written confirmation that:

• you are endorsed as exempt from income tax, or
• endorsement has been refused.

If you are endorsed, you are exempt from income tax from the date the endorsement starts.

If there are delays in notifying

If you believe the ATO is too slow in notifying you about whether you are endorsed, you can have your application treated as if it had been refused. The deemed refusal will trigger formal review rights.

The earliest you can notify the ATO of your wish to have your application treated as if it had been refused is the later of:

• the end of the 60th day after you made the application, or
• the end of the 28th day after the last day on which you gave the ATO information or documentation that it had requested.

To have your application treated as if it had been refused, you must give the ATO written notice that you want it treated in that way. Your application will be deemed to be refused on the day you give such a notice.

You then have a right to lodge an objection to the deemed refusal and have the decision reviewed.

Review rights

If endorsement is refused, the ATO will provide you with a clear explanation of its decision. At your request, we will review any of our decisions or actions affecting you and try to resolve any problems quickly and informally. If you want us to do this, you should contact the person handling your case or the Tax Office where the decision was made or action was undertaken.

You also have the right under the law to ask the ATO for a review by lodging an objection against the refusal, or deemed refusal. Your objection must be in writing, addressed to the Tax Office that made the decision. Your letter should explain what you think is wrong and why. This will enable us to consider all the facts when conducting the review.

We will advise you in writing of our decision on your objection and provide reasons for the decision.

If you are dissatisfied with the ATO's decision in relation to your objection, you may have the right to a review by the Administrative Appeals Tribunal or you can appeal to the Federal Court. Our letter that accompanies the notice of decision on your objection will explain the steps you need to follow to exercise your rights of review or appeal.

Gift endorsement

ITEC endorsement does not entitle you to receive income tax deductible gifts. There is a separate endorsement process for deductible gift recipients (DGRs). Charities that have an ABN can get the application and instructions for DGR endorsement from the ATO by phoning 13 24 78 .

Income tax - if you are an ITEC

• ITECs are exempt from income tax.
• ITECs need to regularly review whether they are entitled to endorsement.
• An ITEC must tell the ATO if it ceases to be entitled to endorsement.
• The ATO can conduct its own review of your continued entitlement to endorsement.
• Endorsement can be revoked if an ITEC is no longer entitled to endorsement.

Being endorsed as an ITEC gives you important income tax concessions. An ITEC:

• does not pay income tax, and
• does not have to lodge income tax returns unless specifically requested to do so.

However, there is also an important obligation. If an ITEC ceases to be entitled to endorsement, it must tell the ATO in writing.

This section helps you to work out whether you are still entitled to income tax exemption after endorsement. It also explains:

• your obligations if the ATO decides to carry out its own review of your entitlement to endorsement, and
• the revoking of endorsement, and the rights to have a revocation reviewed.

Self-review - am I still entitled to endorsement?

Because you must tell the ATO if you cease to be entitled to endorsement, you will need to carry out regular reviews of your status.

The law does not require any particular intervals between self-reviews, but the ATO recommends a yearly review. There should also be a review when there is a major change in your structure or operations.

To help you carry out a self-review, we have provided a worksheet at the back of this guide. It will take you through the essential points. If you go through the worksheet and find you are not entitled to endorsement, you must tell the ATO. You must do this before entitlement ceases or as soon as practicable afterwards. If you find you are entitled, then you do not have to contact the ATO and your status continues unchanged. ITECs are exempt from income tax.

A log has also been included at the back of this guide to give you a snapshot of the reviews you have carried out over the years. It will help future office-bearers of your organisation and will also help if the ATO conducts a review of your status.

ATO review

As part of its general administration of taxation laws, the ATO will carry out reviews of ITECs. The reviews will help establish if ITECs are in fact entitled to endorsement.

The ATO may request that you provide information and documents that are relevant to your entitlement to endorsement. While you must comply with this request, you will be given at least 28 days to provide the required information and documents. Failure to comply can lead to endorsement being revoked, and to prosecution.

Revoking endorsement

The ATO can revoke an ITEC's endorsement if:

• it is not entitled to be endorsed, or
• it has not provided information or documents within the specified time after a request by the ATO.

The ATO will provide written notice of the revocation. The revocation has effect from a day specified by the ATO. The date may be retrospective.

A training organisation changes its governing documents to remove the non-profit clause and provide for dividends to members. It began to operate on a for-profit basis from 1 September 2000. The organisation is no longer a charity as it operates for the profit of its owners. The ATO will revoke its endorsement with effect from 1 September 2000.

The consequences of having ITEC endorsement revoked are outlined Taxable income.

Review of revocation

If an entity is dissatisfied with the revocation of its ITEC endorsement, it can lodge an objection against the revocation. It does this in writing to the ATO, giving the grounds for the objection.

What ITEC endorsement doesn't mean

ITEC endorsement does not entitle you to receive income tax deductible gifts. There is a separate endorsement process for deductible gift recipients (DGRs). ITECs can get the application and instructions for DGR endorsement and the GiftPack information guide from the ATO by phoning 13 24 78.

Charities do not need ITEC endorsement to receive fringe benefits tax (FBT) concessions.

In relation to the goods and services tax (GST), charities do not need ITEC endorsement to register for the GST, nor is it required for their non-commercial supplies to be GST- free .

Tax avoidance schemes

Although ITECs are exempt from income tax, they will be subject to tax under the Income Tax (Diverted Income) Act if they are used for diverting income as part of a tax avoidance scheme.

Income tax - if you are not an ITEC

• Taxable charities must lodge income tax returns.
• If ITEC endorsement is revoked, income tax returns must be lodged.

From 1 July 2000 a charity that is not endorsed as an ITEC is subject to income tax if it is a:

• charitable institution
• charitable fund established by will before 1 July 1997 or the 'new trust' part of such a fund
• charitable fund established in Australia by will on or after 1 July 1997, or
• charitable fund established in Australia by instrument of trust.

If they are not endorsed as ITECs, these charities would need to lodge income tax returns.

Charitable institutions that are listed by name in the income tax regulations as prescribed institutions are exempt from income tax if they meet the special requirements that apply to them. These institutions will not be required to seek endorsement and tax returns do not need to be lodged.

Charitable funds cannot be endorsed as ITECs if they are:

• charitable funds established by will from 1 July 1997 which are not established in Australia, and
• charitable funds established by instrument of trust which are not established in Australia.

These charitable funds will only be exempt from income tax if they fall in some other income tax exempt category and meet the special conditions for it. Most are likely to be taxable and so must lodge income tax returns.

Income tax returns

There are different returns for different types of taxpayers, including Form C for companies and Form T for trusts. The instructions for the different types of returns explain their requirements.

A taxable charity should use the appropriate form which is available, with instructions, from the ATO by phoning 13 28 61 .

Taxable income

If an ITEC's endorsement is revoked, it is taxable from the date the endorsement ceases. That date may be earlier than when the revocation is notified. If this occurs during an income tax year, a tax return should be lodged for the period from that date to 30 June.

The income tax law makes special provision for entities that cease to be exempt and become taxable. Income, outgoings, gains and losses are attributed to the periods before and after the loss of exemption.

If the 'new trust' part of a charitable fund is not endorsed but the 'old trust' part is, the charitable fund must lodge an income tax return. The part of the fund's income that is attributable to the 'old trust' will not be taxable. Only amounts attributable to the 'new trust' need to be included.

Need more information?

If you have any queries after reading this guide, or if you need more information, please contact the information sources listed on the back cover of this guide.

ATO references:
NO NAT 3131