Currently, non-charitable not-for-profits (NFPs) can self-assess their eligibility for income tax exemptions and do not have to report to, or otherwise be endorsed as income tax exempt by the ATO. The type of organisations falling within this group include sports clubs and community service organisations.
2021–22 Federal Budget announcement
As part of the 2021–22 Federal Budget, the Government has announced that it will enhance the transparency of income tax exemptions claimed by NFPs. It will do this by providing $1.9 million in capital funding to the ATO in the 2022–23 income year to build an online system to enhance the transparency of income tax exemptions claimed by NFPs.
From 1 July 2023, income tax exempt NFPs with an active ABN will be required to submit online annual self-review forms reporting information they ordinarily use to self-assess their eligibility for the exemption.
So what is the change?
This is a fundamental change to the historical self-assessment basis applicable to many income tax exemption grounds.
The requirement to upload information will require resources to be directed to conducting an annual review of entitlement to income tax exemption and complying with the yet to be determined notification procedures.
For many organisations a self-review of ongoing entitlement to income tax exemption is already undertaken (although not necessarily on an annual basis). The new regime however is likely to require governing bodies to ensure both a more formal review is undertaken and that it is undertaken annually.
NFP’s will need to be sufficiently aware of both the nuances of the specific income exemption on which they rely and how it applies in the facts of their case (considering matters such as their constitution, objects and activities) .
As a matter of good governance it might be expected the governing body will sign off on both the review and accuracy of information to be supplied to the ATO.
We will continue to monitor this development with a view to providing further guidance to TaxEd members and the broader NFP community as to how to best undertake and document the required self-assessment (once further details are available).
Inevitably for some NFPs, the review may reveal issues with an organisation’s entitlement to income tax exemption.
We have previously covered the importance of a robust approach to ensuring ongoing entitlement to income tax exemption, members are referred to our September 2020 TaxEd Update article dealing with issue (click here to revisit).
This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.