I have recently had the pleasure of advising a small not-for-profit organisation (a NFP) in relation to their tax status. Most people understand the term “not for profit” in the colloquial sense of being concerned with charitable activity.
The purpose of this article is to clear up any misunderstanding between the term Not-For-Profit and Charity.
In legislation Not-For-Profit is not defined, but both the ATO and the Australian Charities and Not-For-Profit’s Commission (ACNC) have taken a very practical approach to deciding whether an organisation qualifies.
Essentially, a NFP is an organisation that is not operating for the profit or the gain of its individual members either directly or indirectly, both while operating and also upon winding up.
It is essential that the governing documents and in particular the Constitution of an organisation clearly states that any surpluses made must go back into the organisation to carry out its objectives or purposes.
In the state legislation to incorporate an association, the objectives have to fall into a specific category to be acceptable for registration.
That is not to say that a business operating at a loss is a not-for-profit business.
There is no prohibition about making a profit and in fact it is good governance that a Committee of Management budgets carefully to ensure that the organisation makes a surplus, even if only a modest one. Any business that operates at a loss is ultimately doomed.
For centuries there was no statutory definition of the term charity. The list most relied upon comes from the Charitable Uses Act of 1601. The list has formed the foundation of the modern definition of activities that are acceptable for charitable purposes which has been developed through cases.
A leading authority is an 1891 decision called Pemsel’s case where Lord MacNaughten identified the four categories of charity which have become acceptable:
(A) The relief of poverty;
(B) The advancement of education;
(C) The advancement of religion; and
(D) Other purposes considered beneficial to the community
On 1 January 2014 the Federal Government passed the Charities Act 2013 defining the term charity for the purposes of Federal legislation.
As a subset of the overarching term Not-For-Profit, the definition of charity means an entity:
(a) that is a Not-For-Profit entity; and
(b) all of the purposes are:
(i) charitable purposes that are for the public benefit; or
(ii) purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i);
(c) none of the purposes are disqualifying; and
(d) is not an individual, a political party or a government entity.
How do non-charity NFP’s self-assess their income tax benefits?
Only the class of NFP’s which are charities are required to be registered with the a ACNC to obtain tax benefits. Other NFP’s can self-assess their income tax exempt status. They do not need any specific endorsement or confirmation of their income tax status from the ATO.
Some organisations where this applies include community service organisations, cultural organisations, educational organisations, employment organisations, health organisations, resource development organisations, scientific organisations and sporting organisations.
The test for NFP tax exemption
To meet the requirement for tax exempt status, the definitions of the organisations listed need to be satisfied but must also pass one of three tests;
The three tests are:
(A) Physical presence in Australia test;
(B) Deductible gift recipient test (DGR status);
(C) Prescribed by law test.
We recommend that any NFP who wish to self-assess read the Tax basics for non-profit organisations guide, published by the ATO for further information.
If your organisation is intending to self-assess, then satisfy yourself that it is income tax exempt before taking the decision not to pay income tax or lodge income tax returns, unless requested by the ATO.
If you are unsure then it is sensible to seek legal or taxation advice to eliminate the risk of non-compliance and possible fines for getting it wrong.
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