ATO concession for NFPs with a problematic winding up clause

The ATO rollout of the new annual reporting regime for certain ‘self assessing’ income tax exempt organisations has included extensive marketing supported by the release of detailed explanatory material. The rollout should ensure impacted organisations can readily comply with the 31 October 2024 reporting deadline.

One important (and welcome) ATO concession included in the rollout is for organisations with a winding up clause that does not meet ATO requirements.

Potentially this means the organisation is not eligible to self-assess as income tax exempt. This possibility gives rise to issues not only for the reporting obligation for the 2023/24 tax year but also for earlier years.

However, an ATO concession (explained below) provides an important window of opportunity to amend a winding up clause so as to bring it within the ATO requirements.

Prohibiting the distribution of income or assets to members

Question 3: 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?

Select Yes or No.

Where the organisation selects No, the following message appears:

‘The organisation can still self-assess as income tax exempt if it doesn’t have these types of clauses in its governing documents, provided it has not distributed any assets or income to members. However, it has until 30 June 2025 to update its governing documents. Failure to do so will mean that it cannot self-assess as income tax exempt from 1 July 2024.’

Source: https://www.ato.gov.au/businesses-and-organisations/not-for-profit-organisations/statements-and-returns/how-to-prepare-a-nfp-self-review-return#Prohibitthedistributionofincomeorassets

For an organisation with a problematic winding up clause, the window of opportunity allows for corrective action. Where corrective action is taken by 30 June 2025, the ATO will not dispute an organisation’s entitlement to income tax exemption.

A practical approach indeed by the ATO.

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