For those involved in the administration and governance of not-for-profit (NFP) organisations, it is essential to remain informed about legislative changes and compliance obligations. Of particular importance are the conditions that apply to NFPs that self-assess as income tax-exempt. Recent changes introduced by the Australian Taxation Office (ATO) impose new annual reporting requirements that must be adhered to in order to retain this tax-exempt status.
Introduction of the Annual NFP Self-Review Return
Commencing with the 2023–24 income year, non-charitable NFPs possessing an active Australian Business Number (ABN) are now required to lodge an annual NFP self-review return with the ATO. This return serves to confirm the organisation’s ongoing eligibility to self-assess as exempt from income tax.
The self-review return comprises three core components:
- Organisation Details – This section captures standard information relating to the NFP, including its ABN, name, and contact details.
- Income Tax Self-Assessment – Here, the organisation provides confirmation that it meets all relevant criteria to remain income tax-exempt.
- Summary and Declaration – A formal declaration acknowledging the accuracy and completeness of the information submitted.
A critical aspect of this process is the requirement for organisations to answer a specific compliance question: Does the organisation have and follow clauses in its governing documents that prohibit the distribution of income or assets to members while it is operating and on winding up? A positive response to this question is mandatory to maintain income tax-exempt status through self-assessment.
Transitional Arrangements and Deadlines
Should an organisation’s governing documents currently lack these required non-distribution clauses, it may still self-assess as income tax-exempt for the 2024 income year, provided it has not in practice distributed any income or assets to members. However, as part of a transitional concession, the ATO has set a compliance deadline: governing documents must be amended to include the required clauses by 30 June 2025. Failure to meet this deadline will render the organisation ineligible to self-assess as tax-exempt from the 2025 income year, and it may consequently be required to lodge a tax return and potentially pay income tax.
Mandatory Clauses in Governing Documents
Governing documents are the legal instruments that define an organisation’s purpose, character, decision-making procedures, operational rules, and dissolution process. In order to self-assess as income tax-exempt, these documents must include:
- A clause that prohibits the distribution of income or assets to members, both during the organisation’s operations and in the event of winding up.
- A clause that stipulates that any surplus assets on winding up must be transferred to another NFP with similar objectives.
In addition to incorporating these clauses, NFPs should implement appropriate governance controls to ensure that members do not receive any financial benefits or property that belongs to the organisation, except where such payments constitute reasonable remuneration for services rendered or reimbursement of legitimate organisational expenses.
It is recommended that governing documents be reviewed annually, or when there is a significant change in the organisation’s structure or operations. Conducting this review during the annual general meeting can be an efficient and practical approach.
Taking proactive steps to comply with these new ATO requirements will safeguard your organisation’s tax-exempt status and reinforce its commitment to sound governance and transparency.
Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Chartered Accountants Australia and New Zealand (CA ANZ), membership certification of the Australian Society of Certified Practising Accountants (CPA), Registered Australia Tax Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.
This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Angela Abejo @ Pitt Martin Tax
