If you are involved in running a not-for-profit (NFP) organisation, it is essential to be aware of the key obligations and requirements that govern your organisation. In particular, if the NFP qualifies as a tax-exempt entity, there are specific conditions that must be satisfied and a relatively new ATO reporting obligation that needs to be fulfilled to maintain its income tax-exempt status.
Annual NFP self-review return
From the 2023–24 income year, non-charitable NFPs with an active Australian Business Number (ABN) are required to lodge an annual NFP self-review return with the ATO. This return notifies the ATO of the organisation’s eligibility to self-assess as income tax exempt.
The return has three sections:
- Organisation details: standard information on the NFP.
- Income tax self-assessment: confirmation of the organisation’s income tax exempt status.
- Summary and declaration: Acknowledgement of the information provided.
When the return is being completed, the NFP must answer ‘yes’ or ‘no’ to the 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 winding up?’ This requirement must be met for the NFP to self-assess its position as a tax-exempt entity.
If a NFP’s governing documents don’t include these clauses, it can still self-assess as income tax-exempt for the 2024 income year, as long as no income or assets have been distributed to its members. As a transitional arrangement, the ATO is allowing NFPs until 30 June 2025 to update their governing documents. Failing to do this will mean that the organisation cannot self-assess as income tax exempt from 1 July 2024 for the 2025 income year, which would result in the organisation being treated as a taxable entity and potentially requiring it to lodge a tax return.
Mandatory clauses in governing documents
Governing documents are the formal documents that outline the purpose of the organisation, its character and the rules and requirements for how decisions are made, how it operates and how long it operates for.
As noted above, NFPs must include specific clauses in their governing documents to self-assess as income tax-exempt. These clauses must:
- Prohibit the distribution of income or assets to members during the organisation’s operation and on winding up.
- Ensure that any surplus assets are transferred to another nonprofit organisation (NFP) with similar purposes upon dissolution.
NFPs should also ensure that there are sufficient controls in place to prevent members from receiving income, property, or assets that belong to the organisation, except where they are receiving remuneration for work performed on behalf of the entity or reimbursement of expenses incurred on behalf of the organisation.
The advice is that NFP governing documents should be reviewed at least annually, or whenever there is a significant change to the organisation’s structure or activities. An annual general meeting is an ideal opportunity to review governing documents.
Taking a proactive approach helps identify any issues and reinforces your organisation’s commitment to good governance.
If you have any concerns or questions regarding this matter, please do not hesitate to contact us. We are here to help.
