Not-for-profit (NFP) entities that are not registered charities are now required to lodge an annual self-review return, reaffirming their eligibility to self-assess as income tax exempt.
Completing the return itself might be relatively straightforward for many NFPs. However, before you can do that, you must first set up your return access. The set-up process is fraught with possible complications, as it requires working through and connecting four different interactive platforms across two different government bodies in the correct order.
Part 1 of this article outlines which NFPs are required to lodge a self-review return and which are not. Part 2 then walks you through the set-up process and completing the return.
NFP vs charity
The first step in determining who is required to complete this new self-review return is understanding the distinction between a NFP and a charity. There is confusion sometimes between NFPs and charities and when they are required to register with the Australian Charities and Not-for-profits Commission (ACNC). Here, we have included a summary:
Not-for-profits
- A NFP entity operates on a not-for-profit basis, meaning it does not operate with the purpose of making a profit, and all revenues are applied to achieving its stated objectives. A NFP’s governing document typically sets out its objectives and includes a clause prohibiting any distribution of profits or assets to members.
Although it is recommended that a NFP’s governing document include such a clause, the Australian Taxation Office (ATO) will accept that an entity is a NFP if it is clear from its objectives, policies, history, activities and proposed future directions that there will be no distributions to members.
- Even where there might not be a strict legal requirement for a particular NFP to obtain an Australian Business Number (ABN), it is usually a practical necessity for commercial, banking, or other purposes.
- Where a NFP is not a charity (see below), it is not required to register with the ACNC. Thus, the “Not-for-profits” part of the ACNC’s name can be slightly misleading, as they are interested only in NFPs that are charities.
- A NFP with no charitable activities can self-assess that it falls into one of eight categories – community service, cultural, educational, health, employment, resource development, scientific, and sporting. In doing so, the NFP self-assesses as being exempt from income tax.
Having an ABN also means having a Tax File Number (TFN), and a NFP that has self-assessed as tax exempt typically notifies the ATO that lodging tax returns is not required. Until now, a NFP might have had no further interaction with the ATO.
The concern has been that some NFPs might have drifted or progressed from their original objectives, whose origins might stretch back years or even decades. Accordingly, it might no longer fall wholly within the bounds of one of those eight abovementioned self-assessing categories. Or perhaps the NFP commenced engaging in charitable activities somewhere along the way, which would mean it is no longer eligible to self-assess as income tax exempt.
Thus, this new self-review return requires NFPs that self-assess as falling into one of the above eight categories and thus self-assess as income tax exempt to reexamine their objectives, activities, and governing documents and reaffirm that they continue to be eligible to self-assess as income tax exempt.
Charity
- A charity is an entity that operates as a NFP (as per above) but also satisfies the definition of a charity, which requires meeting additional conditions.
- A charity must register with the ACNC. In addition, it cannot self-assess as income tax exempt. After first registering with the ACNC, a charity must then obtain ATO endorsement as income tax exempt.
- A registered charity might then qualify for other concessions (e.g., ATO endorsement as a Deductible Gift Recipient, concessional FBT treatment).
A charity registered with the ACNC is subject to the ACNC’s oversight and reporting obligations and does not self-assess as income tax exempt. Accordingly, they are not required to lodge this new self-review return.
Taxable NFPs
NFPs that seek to advance the common interest of their members and do not benefit the broader community will generally not fall into one of the above eight NFP categories that are eligible to self-assess as income tax exempt. These typically include organisations like social clubs and professional associations, which are required to lodge tax returns disclosing the non-exempt part of their activities.
Taxable NFPs are not required to lodge the self-review return.
Income tax-exempt NFPs: Self-review return
From working through the above, we can distil down to the following NFPs being required to lodge this new self-review return with the ATO:
- The NFP is not an ACNC-registered charity; and
- It has an active ABN; and
- It falls into one of those eight categories, thus being eligible to self-assess as income tax exempt.
The 2023-24 income year is the first year for which the above NFPs must lodge a self-review return, which you can do from 1 July 2024 and is due by 31 October 2024.
Part 2 – Set-up process
Having determined that your NFP is required to lodge a self-review return, Part 2 of this article will take you through the step-by-step process to set up your access to the return, preparation, and lodgement. The set-up process requires working through and connecting four different interactive platforms across two different government bodies and in the correct order. The key message will be to get started on that as soon as possible.
Next steps
Speak with your local trusted Nexia advisor to discuss whether your NFP is required to lodge this new self-review return.
