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What is the new income tax exemption self-assessment process for NFPs?

Hand holding piece of jigsaw puzzle with word INCOME TAX.

Historically, NFPs have been able to self-assess their income tax exemption status without reporting it.

However, the ATO has announced a new self-assessment process for non-charity NFPs, which will require them to meet more rigorous requirements. This is a significant update NFPs need to be across to correctly self-assess their income tax exemption in this financial year.

Let’s explore these updates, including what’s changed and what you need to do.

Note that the requirement to self-assess does not extend to ACNC-registered charities.

Businessman showing concept of taxes paid by individuals and corporations

ATO seeking transparency and oversight on income tax exemptions

The previous self-assessment process meant that not-for-profit organisations didn’t have to confirm with the ATO whether they were exempt from paying income tax or not.

The ATO also didn’t have a mechanism in place to monitor and check the accuracy of these self-assessment reports, which fostered a distinct lack of transparency.

Plus, many NFPs experienced uncertainty or unawareness around their tax status, even if they were attempting to self-assess correctly.

With all these issues and challenges, the Federal Government announced a reform of this process in 2021 and the changes came into effect as of 1 July 2023.

Turned wooden cubes changed concept words Old policy to New policy

What's changed for NFPs that want to claim income tax exemption?

The updated process now aims to provide more fairness and equality in the NFP sector, with new requirements for NFP organisations to address the issues and difficulties and encourage further transparency.

If your NFP organisation self-assesses its income tax exemption status, you must lodge a self-review with the ATO each year. Your first lodgement will be due on the 1st of July 2024.

Any NFPs that the ATO finds are ineligible for income tax exemption will need to pay income tax and lodge tax returns on an annual basis.

Income tax return form in laptop

How can NFPs self-assess their income tax exemption?

NFPs that need to self-assess to establish their income tax exemption status must meet the following requirements. The NFP must:

  • be a non-charitable NFP with an active ABN
  • lodge an annual self-review form with the ATO
  • comply with the requirements in its governing rules
  • operate for the benefit of the public
  • have an established physical presence in Australia
  • apply all income and assets solely for its established purpose.

The ATO might also consider additional factors when assessing self-assessment eligibility for NFPs, such as:

– The activities and operations
– The overall financial position
Governance arrangements
– The history of compliance

The ATO will issue you with a self-assessment income tax exemption determination if you meet the requirements for self-assessment. This confirms your exemption from income tax and will also provide you with the conditions required to maintain the exemption.

If and when you receive an exemption, the ATO will still retain the power to review this documentation at any time and can revoke your exemption if it believes your not-for-profit no longer meets the requirements.

And even if you’ve received an exemption from income tax, you may still have additional obligations that require payment, such as GST, PAYG withholding and superannuation guarantee commitments.

Woman filling form of Individual Income Tax Return,

Recommendations from the ATO

The ATO has provided recommendations for NFP organisations to adequately prepare for this new process, including:

– Updating your contact details with the ATO
– Reviewing your tax status using ATO worksheets
– Preparing your myGovID to ensure easy updates next year
– Estimating your NFP’s income range

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