The Australian Tax Office (ATO) is changing how non-charitable not-for-profits (NFPs) report income at the end of each financial year.
About 70% of NFPs with an active Australian Business Number currently self-assess their income tax exemption each year. From the 2023-24 income year, those NFPs must lodge an annual return with the ATO providing their self-assessment for review.
While the ATO acknowledges that most NFPs report accurately, it knows that some organisations report incorrectly for various reasons.
Some common misunderstandings that can cause organisations to report incorrectly are:
- Believing an exemption is automatic for entities that operate on an NFP basis.
- They are unaware of the need to self-assess income tax exemptions or that their purpose and activities must align with the requirements.
- Never formally self-reviewing eligibility for income tax exemption or not regularly reviewing their status.
With regular reporting, the ATO will have access to reliable data that can be used to reassure the wider tax community that only those NFPs entitled to tax exemptions and concessions are accessing them.
The ATO states the new reporting obligations have been introduced to:
- Improve visibility throughout the NFP sector.
- Maintain system integrity.
- Support a level playing field.
How will NFPs self-review
From 1 July 2024 and at the end of each financial year thereafter, NFPs will be required to complete a self-review consisting of 10-15 questions. Those questions will primarily be yes or no style questions with linked information available for NFPs to easily consider their positions.
The first review will be due by 31 October 2024 for the financial year ending 30 June 2024.
From the review, NFPs can expect one of three likely outcomes:
- The ATO determines the income tax exemption remains, as the organisation fits within one of the eight types of entities in Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997), and meets all of the requirements to be income tax exempt. These NFPs will need to continue to complete a self-review each year to self-assess their entitlement to income tax exemption remains.
- The ATO determines the NFP is a “taxable not-for-profit” as it does not meet the requirements of one of the eight types of entities, nor are they ‘charitable’. For that year the NFP will need to prepare an income tax return to assess their taxable income. The NFP should then be able to re-assess in the next tax year if they are income tax exempt, otherwise, another income tax return will be required to be lodged.
- The self-assessment indicates the NFP should reclassify as a charity and therefore need to consider registration with the Australian Charities Not-for-profits Commission. This will need to be completed before applying to the ATO for endorsement as an income tax-exempt charity.
As these are the most significant changes introduced to the industry since 2012, the ATO is currently consulting with the NFP community and plans to confirm changes by as early as October 2023.
If your NFP needs assistance with these new income tax reporting requirements or preparing for the upcoming changes, get in touch today.