New reforms have been announced by the Commonwealth Government which will require not-for-profit entities with an active Australian Business Number (ABN) who currently self-assess as income tax exempt (Self-Assessing NFPs) to take extra measures annually to confirm eligibility for that entitlement.

From 1 July 2023, Self-Assessing NFPs must submit an online annual self-review form with the Australian Taxation Office (ATO), outlining the information they ordinarily use to self-assess their eligibility for an income tax exemption. The ATO will use these annual lodgements as a means to review Self-Assessing NFPs’ eligibility to income tax exempt status. If Self-Assessing NFPs are found to have incorrectly claimed income tax exempt status, they may have current and historical income tax liabilities, with penalties and interest also being imposed.

many not for profits are incorrectly self-assessing

Self-Assessing NFPs are entitled to an income tax exemption under specific provisions of the income tax legislation, notwithstanding that they are not charitable at law (or registered as a charity with the Australian Charities and Not-for-profits Commission). The categories of self-assessing income tax exempt entities are broad, capturing sporting and social clubs, many industry bodies (promoting development of certain Australian resources) and other community or member-based organisations. However, not all not-for-profit organisations are entitled to an income tax exemption (a common misconception held by many not-for-profits). As a result, the new measures will have a significant impact on those organisations that are incorrectly self-assessing as income tax exempt.

ato spotlight on income tax exemptions

The new reporting requirements are a significant shift away from the current light touch self-assessment regime enjoyed by Self-Assessing NFPs, who are not required to formally submit the outcome of their annual reviews (nor to even confirm a review has been carried out). The changes are, however, in line with a recent shift towards compliance action in this area by the ATO.

A number of our clients who are Self-Assessing NFPs have recently been selected for review and/or audit, many of whom, were unaware of the historical basis on which they have enjoyed income tax exempt status and had not undertaken annual reviews as to their continuing eligibility. This lack of awareness of the basis for their tax exempt status is not surprising given that the income tax exemption categories and requirements have changed multiple times over the years. Additionally, many not-for-profit organisations may have evolved beyond their original purpose of establishment (with shifting economic and cultural priorities in the Australian community).

the time to review your entitlement to self-asses is now

Self-Assessing NFPs should take serious note of the impending changes and the fact that any identified error in self-assessing an income tax exemption may result in retrospective tax and penalty consequences (the Commissioner’s ability to assess income tax liabilities retrospectively varies depending on whether the entity has demonstrated a lack of reasonable care or a wilful disregard of its obligations). Accordingly, we recommend that Self-Assessing NFPs immediately take steps to review their ongoing entitlement to an income tax exemption, rather than wait until 2023 or the imposition of an ATO audit.

Early action will allow time for any identified entitlement issues to be addressed prior to specific reporting obligations commencing in 2023. Self-Assessing NFPs should consider whether voluntary disclosure of any historical errors identified should be made (to avoid imposition of penalties) and/or provide time for income tax consequences to be budgeted for by the organisation.

We are currently working with many NFPs who are taking pre-emptive steps to evaluate their continuing income tax exemption entitlement, guiding any corrective steps that might be necessary and providing assurance to board members and executive staff regarding the organisation’s current tax compliance.