From 1 July 2023, NFPs with an active ABN that self-assess as eligible for income tax exemption (ITE) must lodge an annual self-review to continue to access the ITE.
Financial reporting for not-for-profit (NFP) entities continues to be an area of focus for the Australian Accounting Standards Board (AASB). We also continue to see developments in taxation law for NFPs. Changes to the financial reporting obligations of registered charities by the Australian Charities and Not-for-Profits Commission (ACNC) are also now effective, and we have been working closely with many of our NFP external audit clients through these changes in recent years.
This year, there is an additional requirement for non-charitable NFPs (e.g., sporting or agriculture organisations) that rely on a self-assessed ITE. The Australian Government announced in the 2021-2022 federal budget that these NFPs must lodge an annual self-review from 1 July 2023. In subsequent years, NFPs will confirm or amend the information provided to them on a pre-filled self-review return.
Failure to complete the self-review could render the entity ineligible for an ITE. Penalties may also apply under the penalty framework of the Australian Taxation Office (ATO). The measure is designed to enhance trust and confidence in the sector. It seeks to ensure only eligible NFPs access income tax exemptions and that NFP and for-profit entities operate on a level playing field.
While the new measures will add to annual reporting obligations, the ATO’s confirmation of exemption may comfort NFPs from a compliance perspective. This is particularly true regarding penalty concerns should your organisation be subject to an ATO audit. While details of the reporting have not yet been provided, we encourage applicable NFPs to be aware of this requirement to ensure they comply.
NFP entities affected by annual self-review requirements
The changes affect NFP entities that are not registered charities with the ACNC and self-assess as ITE. This will be approximately 125,000 NFPs, and many will report to the ATO for the first time.
When it comes to income tax, NFPs will generally fall into one of three categories:
1. Endorsed as income tax exempt
The ATO can endorse charities registered with the ACNC to be exempt from income tax. Indeed, eligibility for ITE is one of the appeals of having an NFP organisation registered as a charity.
2. Self-assess as income tax exempt
If an NFP organisation is not a registered charity, it may be eligible to self-assess as exempt from income tax. However, eligibility is subject to a range of considerations outlined in this article.
Importantly, if your organisation is registered as a charity it cannot self-assess as ITE, even where it might fall within the description for a type of entity that can self-assess.
Generally, ATO requires that an entity which can be registered as a charity with the ACNC, must be. Therefore, these entities are not entitled to self-assess as ITE. They must instead register with the ACNC as a charity to access ITE.
3. Required to pay income tax
NFPs that are not registered charities, and are not permitted to self-assess as income tax exempt, are subject to income tax.
The ITE categories
NFPs entitled to an ITE fall into eight categories, as described below:
1. Community service organisations
Including playgroup associations, community service clubs and senior citizens associations.
2. Cultural organisations
NFP organisations established for the encouragement of art, literature or music.
3. Public educational institutions
Institutions open to the public or a section of the public and whose sole purpose is providing education, including universities, grammar schools, primary and secondary schools and NFP business colleges.
4. Health organisations
Public hospitals or hospitals operated by NFP societies or associations, and NFP private health insurers.
5. Employment organisations
Employee associations, employer associations or trade unions.
Employee and employer associations must be registered or recognised under the Fair Work (Registered Organisations) Act 2009 or an Australian law relating to the settlement of industrial disputes.
6. Resource development organisations
NFP organisations established to promote the development of aviation, tourism or specific Australian resources (agricultural, aquacultural, fishing, horticultural, industrial, manufacturing, pastoral, viticultural and ICT resources), including promoting development through research, provision of facilities, training, marketing and facilitating cooperation.
7. Scientific organisations
Including scientific institutions, NFP entities established for the encouragement of science, and funds established to enable scientific research to be conducted by or with a public university or public hospital.
8. Sporting organisations
NFP entities established for the encouragement of a game, sport or animal racing.
ACNC short courses
To continue to support NFPs through various regulatory changes, the ACNC provides several free short courses covering topics such as:
- the duties of a board member
- the board’s role in reputation management
- fraud prevention
- safeguarding vulnerable people that organisations work with
- financial reporting within an organisation
- reporting obligations to the ACNC
- managing conflicts of interest
- effective complains management
- dealing with internal disputes
TCF Grassroots Community Governance
The Tasmanian Community Fund (TCF) has also put resources together in recognition that many NFPs are reliant on volunteers. These volunteers often take on committee or board positions, yet many do not have formal governance training.
To help address the gap, TCF is running state-wide workshops to strengthen the governance capability and confidence of volunteers working in community organisations.
Contact a Synectic adviser
A Synectic adviser can assist you with more information regarding self-assessing as ITE or understanding whether your organisation is eligible. We can also advise further on what the proposed changes mean for your entity.
Additionally, we provide advisory and consulting services to the NFP sector across a broad range of governance and risk management areas. Find out more about these services here: