In the 2021-22 Federal Budget, the Australian Government announced new reforms aimed at enhancing transparency of income tax exemptions claimed by not-for-profit entities (NFPs), including many clubs, societies, and other associations.
In particular, the reforms contemplated a new regulatory requirement to be imposed on all non-charitable NFPs with an active Australian Business Number (ABN) to lodge an annual self-review return (Self-Review Return).
Completion and lodgement of the Self-Review Return would then operate as an ongoing condition to access income tax exemption for those entities.
The ATO maintains the purpose of the reforms is to ensure that only eligible NFPs access income tax exemption and that NFPs operate on a level playing field.
The ATO recently consulted on the draft legislative instrument implementing the Self-Review Return requirements. In our response, QLS raised concerns the Self-Review Return is not a proportionate response to the tax risk.
The QLS recommendation is for an alternative policy approach under which large NFPs (which are not charities registered with the Australian Charities and Not-for-profits Commission – ACNC) with a revenue of over $5 million must register with the ACNC in order to access tax concessions.
As an interim measure, QLS recommended setting a gross income threshold for filing the self-review return, with a staged implementation across years, to reduce the burden on smaller NFP organisations. However, at this stage, it is anticipated the reforms are proceeding and relevant organisations need to prepare for these new obligations.
However, at this stage, it is anticipated the reforms are proceeding and relevant organisations need to prepare for these new obligations.
Reforms now in place
The initial 2023-24 Self-Review Return will need to be lodged between 1 July 2024 and 31 October 2024.
ACNC-registered charities not impacted by reforms
For clarity, these new reforms do not extend to charities that are registered with the Australian Charities and Not-for-profits Commission (ACNC) because ACNC-registered charities are already endorsed for income tax exemption. ACNC registered charities are required to lodge an Annual Information Statement to the ACNC.
Online lodgement for self-assessing NFPs
The relevant NFPs will be required to lodge online using the Online Services for Business and Online Services for Agents.
The ATO has announced that questions will guide clients to consider their purpose and activities against specific eligibility requirements relevant to the income tax exempt NFP.
Helpfully, the ATO has also proposed that after the first annual Self-Review Return has been submitted, NFPs will only need to confirm or amend information provided on a ‘pre-populated’ Self-Review Return for each subsequent reporting year. Applicable NFPs will therefore need to carefully monitor and consider their purposes and activities and record any material changes from the prior year to ensure compliance.
The ATO has announced that the Self-Review Return will have about 10-15 questions on average – and will primarily be yes/no style questions. At this stage, it is understood that only one question will relate to estimating an income range to indicate the size of the NFP.
Preparing in advance
There are some sensible steps that relevant NFPs can take in advance to prepare, including (for example):
- review the types of NFP organisations that may self-assess;
- review any existing governing documents (e.g. constitution, rules, etc.) to ensure they are operating in accordance with their express purpose and that the documents contain the appropriate and necessary NFP rules;
- refer to any worksheets or other material published by the ATO to help in considering ongoing eligibility for income tax exemption;
- ensure records are maintained and kept in an accessible form; and
- check all details are up to date, including authorised associates, contacts and that addresses are current.
A useful resource for NFPs affected by the changes is this 45-minute webinar produced by the ATO.
Conclusion
Since income tax exemption helps enable NFPs to pursue and realise their purposes, it is essential each organisation maintains compliance to ensure its exemption is preserved.
Legal practitioners, relevant executives, and board members of relevant self-assessing NFPs should familiarise themselves with the new regulatory obligations involving the Self-Review Return and take the necessary steps ahead of the initial reporting period.
This article appears courtesy of the Queensland Law Society Not for Profit Law Committee. Richard Hundt is Principal Lawyer at Hundt Law and a member of the committee.
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