By Valentyna Jurkiw, Special Counsel and Michael Zhang, Law Graduate

In the 2021-2022 Budget, Treasury announced reforms to the administration of how some not-for-profit organisations (NFPs) self-assess as income tax exempt. These reforms take effect from the 2023-24 income year and affect NFPs which:

• have an active ABN;
• are not registered charities; and
• self-assess as income tax exempt.

Currently, NFPs that are not charities can self-assess their income tax status, and are not required to be endorsed or receive confirmation of their income tax status from the ATO. Approximately 70% of NFPs with an ABN conduct self-assessments.

The new obligations will require these NFPs to lodge an annual self-review return with the ATO using information they ordinarily use to self-assess their eligibility for an income tax exemption. The first return will be due between 1 July 2024 and 31 October 2024. Where an NFP does not meet the requirements for an exemption, and has a taxable income greater than $416, it will be required to lodge a tax return.

This additional compliance obligation has been designed with the aim of improving transparency in the NFP sector, ensuring that only those organisations entitled to tax exemptions and concessions are able to access them.

New Self-Review Return Process

The ATO has expressed that it will design the self-review return as a quick and easy process involving 10-15 questions. The return will comprise a majority of yes-no questions aimed at determining an NFP’s eligibility for an income tax exemption in a given year. Consultation by the ATO is still ongoing in relation to this new reporting requirement, and draft questions for the return are currently being user tested.

Preparing for These Changes

The ATO intends to publish the questions for the self-review return on its website by October 2023, so NFPs which are currently self-assessing as income tax exempt will have almost 12 months to prepare for their first return, which will be due on 31 October 2024.

Affected NFPs should prepare for these changes by:

• Updating their contact details with the ATO to ensure that they are receiving the latest details about tax obligations. Keeping contact details up to date is also a requirement of having a registered ABN.
• Working through the ATO’s worksheets on self-assessment to review their eligibility for an income tax exemption.
• Reviewing ATO guidance on income tax exemptions for taxable NFPs, including “Does my not-for-profit need to pay income tax”, and staying up to date with any new ATO guidance as it becomes released.

NFPs could also consider their eligibility for registering as a charity. If an NFP meets the criteria for charity registration, it may decide to register with the ACNC and apply to the ATO for endorsement for an exemption from income tax (among other available tax concessions). If registered, it will need to meet charity obligations, including lodgement of an annual information statement with the ACNC.