Income tax - exemption by self-assessment

While registered and endorsed charities are exempt from the requirement to pay income tax, many non-charitable not-for-profit organisations are not so fortunate.

Australian income tax laws, for those interested Division 50 of the Income Tax Assessment Act 1997 (Cth), allows certain not-for-profit organisations to self-assess as exempt from income tax.

As the phrase 'self-assess' indicates, this means that it is left up to the organization itself to decide whether it should be paying income tax ... or not.

Sounds cool right?

Well, maybe. Don't get too excited yet. Not just any old organization can simply make up its mind to not pay tax.

Important note: if your organization is a charity it is not allowed to self-assess as exempt from income tax. Instead, it must be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and endorsed by the Australian Taxation Office (ATO) to receive this tax concession. You can read more about registering as a charity and accessing charity tax concessions here in our article (coming soon!).

If you are not permitted to self-assess and are not endorsed by the ATO, your organization is required to lodge tax returns and will be subject to income tax.

Yep, even not-for-profit organisations.

Of course, just because you have to obey the income tax laws doesn't mean that you will end up with any income tax to pay. Please be sure to engage a suitably qualified tax and accounting professional to get expert guidance specific to your organization.

The laws and requirements relating to income tax exemption have been discussed and explored by the courts and in a number of the ATO's Taxation Rulings. As a consequence, this area of law is rather technical and in some cases complicated. We can't possibly cover it all. This article is, therefore, by necessity, a summary only. If you would like to learn more, check out the links in the suggested reading section at the end of this article.

The following types of organisation are eligible to self-assess as income tax exempt, so long as they also meet the other eligibility requirements and, just as a reminder, so long as they are not charitable:

  • Community service organisations – not-for-profit societies, associations and clubs established for community service purposes
  • Certain scientific institutions and funds – as well as societies, associations and clubs established for the encouragement of science
  • Certain government bodies
  • Cultural organisations – not-for-profit societies, associations and clubs established for the encouragement of art, literature or music;
  • Public educational institutions;
  • Employment organisations – trade unions or employee / employer-based associations registered under an Australian law and that relates to the settlement of industrial disputes;
  • Certain health organisations - public hospitals, hospitals carried on by a not-for-profit society or association and private health insurers within the meaning of the Private Health Insurance (Prudential Supervision) Act 2015 (Cth) that is not carried on for the profit or gain of its individual members;
  • Resource development organisations – not-for-profit societies and associations established for the purpose of promoting the development of Australian agricultural, aquacultural, fishing, horticultural, industrial, manufacturing, pastoral, viticultural or information or communications technologies resources, or for the promotion or development of aviation or tourism;
  • Sporting organisations – not-for-profit societies, associations and clubs established for the encouragement of animal racing or for the encouragement of a game or sport.

But wait, there's more ...

There are additional requirements that you must meet to self-assess as income tax exempt. You didn't think it would be that easy did you?

While there are some exceptions and exemptions (aren't there always!), in very general terms an organization must also:

  • operate in Australia and spend its money in Australia;
  • comply with all the substantive requirements in its governing rules; and
  • apply its income and assets solely for the purpose for which it is established.

So, if your organization does not slot into one of the types listed above, or doesn't meet the other 3 requirements we have summarized, we are sorry to say that you probably cannot 'self-assess' as income tax exempt.

If you are, or intend to, self-assess as income tax exempt then you will not lodge income tax returns. Not lodging income tax returns can raise red flags with the ATO which in turn can result in it making enquiries. For this reason it is very important that you can defend your decision to self-assess should you ever be challenged by the ATO.

If you are unsure about whether you are eligible to self-assess for income tax exemption, then feel free to [get in touch] and one of our clever tax experts will respond.

For more details and examples of the types of entities listed above, and to learn more about the additional tests required to be eligible to self-assess as income exempt, please refer to the ATO's Income Tax Guide for Non-profit Organisations which can be viewed and downloaded from the ATO website. Included with this guide is a worksheet to assist with the self-assessment process.

And here ends our little self-managed intro to self-assessment.

Author: Darren Fittler
Darren Fittler is one of Australia's leading lawyers specialising in serving charity and not-for-profit organisations for more than 15 years.

You can find out more about Darren Fittler here.