• Federal Budget 2021

    Specific Measure for NFPs

Specific Measure for NFPs

Not-for-profit entities – Income tax exemption status transparency

The Government has announced proposed changes to enhance transparency of income tax exemptions for certain not-for-profit entities (NFPs).

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Not-for-profit entities – Income tax exemption status transparency

The Government has announced proposed changes to enhance transparency of income tax exemptions for certain not-for-profit entities (NFPs).

Currently non-charitable NFPs can self-assess their eligibility for income tax exemptions, without an obligation to report to the Australian Taxation Office (ATO). 'Self-assess' means an organisation can work out for itself whether it is income tax exempt or taxable. Organisations that can self-assess their income tax status do not currently need to be endorsed by the ATO or obtain confirmation of their income tax status from the ATO. There is a worksheet available on the ATO website that NFPs, that are not charities, can use to self-assess their income tax status.

It is proposed the ability to ‘self-assess’ will change, such that the ATO will require income tax exempt NFPs with an active Australian Business Number (ABN) to submit online self-review forms annually. These forms will utilise the information they ordinarily use to self-assess their eligibility for the exemption. It is proposed this measure commence from 1 July 2023.

The Government believes this measure will ensure that only eligible NFPs are accessing income tax exemptions.

BDO Comment

This proposed measure is likely to increase the number of income tax returns being lodged in this sector. There is no spotlight on these ‘self-assessed’ entities currently allowing the ATO to review eligibility for income tax exemption status. This measure will ensure such entities will have to report the basis for why the entity is relying on an income tax exemption and, if this is not in order, then the entity will become a tax paying entity and be required to lodge an income tax return.

The issue of ‘self assessment’ has been around since 2009 when increased accountability and reporting in this sector was raised by the Henry Review. 

In recent years the ATO has appointed an Assistant Commissioner in the area of Not-for-Profit Centre and Government Relations. This has allowed the ATO to focus further on the sector and the eligibility of entities for income tax exemption status.

We recommend non-charitable NFPs be more cautious and review their governance procedures, so they are confident when conducting their activities that they maintain their income tax exemption.