What’s so special about not for profit accounting?
Fundamentally, accounting is accounting… whether your business is BHP or the local community centre. But when it comes to not for profit (NFP) organisations, there are some unique aspects that a commercial accountant might not be familiar with.
There are specific accounting standards that NFPs must adhere to, and a range of different taxation concessions.
Plus, an NFP income stream is quite different to that of a for-profit corporation.
It is important to understand what makes an NFP different and how to manage the distinct elements of both the technical accounting and strategic financial management. This is where an NFP accounting specialist like Accounting For Good can help.
Not for profits and tax
Most NFP organisations are eligible for several tax exemptions and concessions. Kirsten Forrester, Accounting For Good CEO, discusses some of these.
“Firstly, they may be entitled to receive an income tax exemption. Commercial businesses pay the corporate tax rate of 27.5%-30%… but this is not applicable for most NFPs.
ACNC-registered charities are exempt from income tax by virtue of being endorsed as part of the ACNC registration process. NFPs that are not a charity may be able to self-assess their eligibility for exemption from income tax.
Next, it is common for NFPs to receive a GST concession. This includes a higher threshold for GST registration. Non-profit organisations register for GST at the revenue threshold of $150,000 rather than the standard $75,000.
They can also choose whether they report their GST on a cash or accrual basis, regardless of their turnover. This is different for commercial… if their turnover is above the threshold of $10 million, they must report on an accrual basis.
Charities are a subset of the not for profit sector. And some charities are eligible for deductible gift recipient status. This status allows a charity donor to claim a tax deduction for the funds they donate. A simple example of this is when you give more than $2 to Médecins Sans Frontières or the Heart Foundation… you can claim a tax deduction when you submit your personal tax return. This applies to donations from individuals and businesses.”
“In addition to the deductible gift recipient status, a charity could also be eligible for fringe benefit tax concessions. These concessions enable them to offer tax-effective salary sacrificing to their staff of up to around $16,000 per FBT year. Because the amount is ‘sacrificed’ from the pre-tax salary, the tax for the employee is reduced. This concession is mostly seen as an incentive in that it can boost the take-home pay for NFP employees.”
NFP law has a range of helpful resources and of course the ATO always has the last word when it comes to tax matters.
Most of the big tax concessions are set at the federal level, but there are also some state government benefits such as exemption on stamp duty and state payroll tax. It is worthwhile reviewing what is offered in your state.
Not for profit income sources
There are some specific types of income in the not for profit sector that you don’t often find in the private sector. Kirsten continues,
“One of the primary sources of income for NFPs is through grants. These can come from the government, either federal or state, local councils or from philanthropic funds, trusts or foundations.
Grants may come with specific guidelines around the use of funds and the NFP would have contractual obligations to fulfil.
Another common income source is fundraising. Non-profits often turn to the public to raise money.
They might run a media campaign… a door knock… a street appeal… a mail out… an online campaign… or a specific event. There are many different methods of fundraising.
Some NFPs hold gala dinners. They seek corporate sponsors. They sell tickets to the event, run raffles or silent auctions… where all the proceeds help fund the work of the organisation.
A lot of not for profits are membership based organisations. Unlike a membership to a gym where you pay to utilise their equipment or go to a class… an NFP membership is more about you giving support to and aligning with the organisation rather than receiving a specific service from them.”
Securing a stable income stream is important for all not for profit organisations. Most NFPs are governed by a board or a management committee that has governance oversight of the organisation and is charged with setting strategic direction.
With that comes a level of financial responsibility for each of the directors. They have an individual and a collective responsibility to understand the financial position of the organisation: to know they can meet their debts when they fall due, to be able to make good business decisions for the organisation and to ensure it doesn’t trade insolvent.
Not for profit accounting specialists
The team at Accounting For Good has been working with non-profit organisations for over 20 years. They understand the challenges faced by NFPs and can navigate the nuances of the special accounting obligations. Kirsten says,
“Our clients are ‘for purpose’… rather than ‘for profit’… understanding this distinction makes it clearer around why these entities should receive the concessions that they do.We know it’s tempting to run at nil-profit, but a nil-profit can easily become a deficit because you are running things so tightly.
Unlike a commercial enterprise focused on profit targets and shareholder dividends, our clients are concerned about spending their funds in accordance with the agreement that they received them under… they need to make sure they do what they are contracted to or what their constituents expect… to be able to account for the funds properly.
Part of our service is making sure that our clients meet their legal obligations… whether it’s to the tax office or the charities fundraising body in their state or territory or the ACNC, whoever they have the obligation towards.
We help by setting up the accounting system properly so you can hold the accounts correctly and extract the information you need to fulfil your obligations. It’s in the best interest of the organisation to be able to demonstrate and be seen to be doing the right thing. This way they can clearly communicate with people that they are achieving their goals.”
Contact us today if you would like more information about our services.