In 2023, the Australian Taxation Office (ATO) announced it would change how non-charitable not-for-profits (NFPs) report income at the end of each financial year.
From 1 July 2024 onwards, non-charitable NFPs with an active ABN are required to lodge a new annual self-review return with the ATO to confirm their income tax exemption status. The introduction of this process aims to improve visibility, maintain system integrity and support a level playing field across the NFP sector. These changes will apply to around 150,000 NFPs that currently self-assess as income tax exempt.
Some misunderstandings that have already been encountered surrounding the new requirement including assuming an exemption is automatically given for entities that operate on an NFP basis. However, unless the entity has been given a formal income tax exemption from the ATO, it will need to bring in a formal review process to assess their status and self-review against the eligibility criteria for an income tax exemption at least once a year every year going forward.
Conducting NFP self-reviews from 1 July 2024
NFPs will be required to complete a self-review consisting of 10-15 questions, with primarily yes or no answers, for the ATO. The first review will be due by 31 October 2024 for the financial year ending 30 June 2024. Resulting from these reviews, NFPs can expect one of three likely outcomes:
- The ATO will determine that the tax exemption remains in place if the NFP fits into one of the eight types of entities in the Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997) and meets all the requirements for an income tax exemption.
- The ATO determines the NFP does not fit into one of the eight types of entities nor is it ‘charitable’. This defines the NFP as a “taxable not-for-profit” organisation, and they will be required to prepare an income tax return for that year to assess the taxable income. These eight types of entities include:
- Community service
- Sporting
- Cultural
- Educational
- Health
- Employment
- Scientific
- Research development
- The self-assessment indicates the NFP should be reclassified as a charity and therefore need to consider registration with the Australian Charities Not-for-profits Commission. Registration is required to be done prior to applying to the ATO for endorsement as an income tax-exempt charity.
If your NFP needs assistance with these new income tax reporting requirements or preparing for the upcoming changes, get in touch with Nexis today.
