New ATO Requirements For Not-For-Profits
If you are involved with running a not for profit (NFP) organisation, it is important to be aware of key obligations and requirements.
In particular, if the NFP qualifies as a tax exempt entity, there are some specific conditions that need to be satisfied. There is also a relatively new ATO reporting obligation which needs to be undertaken to maintain that status.
Annual Not For Profit Self-Review Return
From the 2023–24 income year, non-charitable NFPs with an active Australian Business Number (ABN) are required to lodge an annual NFP self-review return with the ATO. This return notifies the ATO of the organisation’s eligibility to self-assess as income tax exempt.
The return has three sections:
- Organisation details: standard information on the NFP.
- Income tax self-assessment: confirmation of the organisation’s income tax exempt status.
- Summary and declaration: acknowledgement of the information provided.
When the return is being completed, the NFP must answer ‘yes’ or ‘no’ to the question:
- ‘Does the organisation have and follow clauses in its governing documents that prohibit the distribution of income or assets to members while it is operating and winding up?’
This requirement needs to be satisfied in order for the NFP to self-assess its position as a tax exempt entity.
If a NFPs governing documents don’t have these clauses then it can still self-assess as income tax exempt for the 2024 income year as long as no income or assets have been distributed to members.
As a transitional arrangement, the ATO is allowing NFPs until 30 June 2025 to update their governing documents. Failing to do this will mean that the organisation cannot self-assess as income tax exempt from 1 July 2024 for the 2025 income year. This could lead to the organisation being treated as a taxable entity that might then need to lodge a tax return.
Mandatory clauses in governing documents
Governing documents are the formal documents which set out:
- the purpose of the organisation,
- its character, and
- the rules and requirements for how decisions are made, how it operates and how long it operates for.
As noted above, NFPs must include specific clauses in their governing documents to self-assess as income tax exempt. These clauses must:
- Prohibit the distribution of income or assets to members during the organisation’s operation and on winding up.
- Ensure that any surplus assets are transferred to another NFP with similar purposes upon dissolution.
NFPs should have strong controls to prevent members from receiving any income, property, or assets belonging to the organisation. Exceptions apply only when members are being paid for work performed or reimbursed for expenses incurred on the organisation’s behalf.
Not for profit governing documents should be reviewed at least annually or whenever there is a major change to the structure or activities of the organisation. An annual general meeting is a good time to review governing documents.
Taking a proactive approach helps identify any issues and reinforces your organisation’s commitment to good governance.
For individual advice on your tax position as a not for profit organisation, please contact our accounting team.
This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.
