There is sometimes a misconception that not-for-profit organisations are not-required to pay income tax. Whilst this is true for some not-for-profits, it is not always the case.

When it comes to income tax, not-for-profits will generally fall into one of three categories:

• Endorsed as income tax exempt: One of the appeals of having a not-for-profit organisation registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) is that it becomes eligible for income tax exemption. Charities registered with the ACNC can be endorsed by the Australian Taxation Office (ATO) to be exempt from income tax.
• Self-assess as income tax exempt: If a not-for-profit organisation is not a registered charity, it may be eligible to self-assess as exempt from income tax. The requirements for self-assessment are considered in this article. Importantly, if your organisation is registered as a charity it is not permitted to self-assess as exempt from income tax. This is the case, even where it might fall within the description for a type of entity that can self-assess. Instead, it must meet the charity registration requirements and be endorsed by the ATO to be income tax exempt.
• Required to pay income tax: Not-for-profits that are not registered charities and are not permitted to self-assess as income tax exempt are subject to income tax.

This article sets out a high level summary of the requirements an organisation must satisfy in order to self-assess as income tax exempt. 

Types of organisations

There are various broad groups of organisation that may be eligible to self-assess as income tax exempt. These are:

• community service organisations: a not-for-profit society, association or club established for community service purposes (except political or lobbying purposes);
• cultural organisations: a not-for-profit society, association or club established for the encouragement of art, literature, music, or for musical purposes;
• educational organisations: a public educational institution, being an institution that is available or open to the public or a section of the public and whose sole purpose is providing education;
• employment organisations: an employee association, employer association or trade union;
• health organisations: a public hospital, or hospital operated by a not-for-profit society or association or a not-for-profit health insurer within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015 (Cth);
• resource development organisations: a not-for-profit association established to promote the development of aviation, tourism or various Australian resources;
• scientific organisations: a scientific institution, science association or scientific research fund;
• sporting organisations: a not-for-profit society, association or club established for the encouragement of a game, sport or animal racing.

The ATO provides further detail regarding each of these categories, including the key requirements and examples of eligible entities. However, beyond falling into one of these categories, there are additional requirements that a not-for-profit organisation must satisfy in order to be able to self-assess as income tax exempt.

Additional requirements

Organisations that fall within one of the abovementioned categories must also generally be a not-for-profit and satisfy the following requirements:

• pass one of three tests, being the:
  • physical presence in Australia test (i.e. the organisation has a physical presence in Australia and, to the extent your organisation has a physical presence in Australia, it pursues its objectives and incurs its expenditure principally in Australia);
  • deductible gift recipient (DGR) test (i.e. the organisation satisfies the requirements of a general DGR category and is endorsed as such by the ATO or is listed by name in the Income Tax Assessment Act 1997 (Cth) (ITAA)); and
  • prescribed by law test (i.e. the organisation is prescribed by name in the ITAA regulations, it is located outside Australia and is exempt from income tax in its country of residence).
• comply with all the substantive requirements in its governing rules; and
• apply its income and assets solely for the purpose it was established for.

The ATO provides further information regarding the additional requirements, including an explanation of the three tests.

Outcome

If your organisation is income tax exempt it:

• does not need to pay income tax or lodge income tax returns, unless specifically required by the ATO to do so;
• does not need to get confirmation of its exemption from the ATO;
• should carry out a yearly review to check if it is still exempt, as well as when there are major changes to your organisation's structure or activities.

Note: On 11 May 2021, as part of the 2021–22 federal Budget, the Australian Government announced reforms to the administration of not-for-profit organisations that self-assess as income tax exempt. As a result, from 1 July 2023, not-for-profit organisations with an active Australian business number (ABN) will be required to lodge an annual self-review return in order to access an income tax exemption. In subsequent years, the intention is that such organisations will confirm or amend information provided to them on a pre-filled self-review return. If a return is not lodged, they may become ineligible for an income tax exemption and penalties may apply under the ATO’s penalty framework. Further information is available on the ATO website.

If your organisation is not income tax exempt it:

• is taxable and may have to lodge income tax returns and pay tax;
• may have the benefit of special rules for working out its taxable income, lodging income tax returns and special rates of tax, including mutuality.

If your organisation is unsure about whether or not it is income tax exempt, it should seek professional advice or contact the ATO directly.

How we can help

For more information regarding self-assessing as income tax exempt, or to understand whether your organisation is eligible for self-assessment, please get in touch with our specialist Charities + Social Sector lawyers.