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:
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:
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.