Reporting changes coming for the Not-for-Profits sector

A significant change is coming in terms of administration of the not-for-profits sector, in that for the 2023-24 income year and onwards, non-charitable NFPs that self-assess as income tax exempt will be required to lodge an annual return with the ATO. According to the ATO, this will be the most substantial change to the sector since the introduction of the Australian Charities and Not-for-profits Commission (ACNC).

The ATO estimates that around 70% of not-for-profits with an active ABN self-assess as income tax exempt, as do a percentage of entities, although the minority are incorrectly self-assessing exemptions. Some common mistakes for incorrect self-assessment include not being aware that that the income tax exemption is only available for entities that operate on a not-for-profit basis and not regularly reviewing eligibility.

To ensure that NFP entities are correctly assessing their income tax concessions, the ATO is introducing annual return for those entities, which will consist of a self-review using existing online platforms. It is currently engaged in ongoing consultation and user testing on the format and content of the annual review, although it is expected to contain around 10-15 primarily yes/no style questions with linked information available.

According to the ATO, it is aiming to publish the final questions on its website in October 2023 so entities will have almost 12 months to review their status, adjust their governance and make important decisions or changes. The first return will likely be due between 1 July 2024 and 31 October 2024 and while the lodgment itself will fall within traditional Tax Time, the annual return is not an income tax return.

Going forward, by completing the annual return each year, NFP entities will be able to determine whether the entity is eligible for the income tax exemption where the requirements of one of the 8 types of entities in Div 50 of the Income Tax Assessment Act 1997 are met. If the entity doesn’t meet any of the requirements, it will be a non-charitable and taxable NFP. Taxable non-charitable NFPs will need to work out their taxable income, and where it is greater than $416, a tax return will need to be lodged for that income year.

Entities completing the annual return questions may also find that they are a charity, in which case registration with the ACNC will need to be considered before applying to the ATO for endorsement as an income tax exempt charity. Those that decide to register with the ACNC as a charity need to be aware that there will be ongoing obligations which will need to be met including lodgment of an annual information statement and complying with governance standards. Charities that decide not to register with the ACNC will be treated as taxable NFPs.

To prepare for the change, the ATO recommends that NFPs keep their contact details up to date so they don’t miss any important information or updates. NFPs should also complete the current ATO worksheets to review their eligibility for the income tax exemption, and revisit the requirements for taxable NFPs if necessary.

This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.

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