Taxing time for NFPs 

From July 1, more than 150,000 non-charitable NFPs that self-assess as income tax exempt must comply with strict new reporting regulations. 

The Australian Tax Office last year flagged changes requiring NFPs that have an ABN and are not registered with the ACNC to complete an annual self-review in order to access their income tax exemption. 

The changes have been presented as a fait accompli, and organisations that are affected must comply or face penalties. 

However, an avenue that provides organisations and individuals with the opportunity to give feedback on the proposed changes has received little publicity.

The draft Taxation Laws (Requirement to Lodge a Return for the 2024 Year) Instrument 2024 was opened for consultation on March 12. 

Despite talking at length about the changes in her most recent “Straight from the source” column in the monthly Not-for-profit News newsletter two days later, ATO assistant commissioner Jennifer Moltisanti failed to reference the option to provide feedback. 

There was no link provided for readers to click through to the consultation page. 

The news comes as the ATO has been slammed after admitting to hanging up on people in need of help or advice to improve statistics on call wait times.

In the June 2023 edition of the ATO blog, Ms Moltisanti left no doubt in readers’ minds about the gravity of the NFP tax changes. 

“This is the most significant change to the sector since the introduction of the Australian Charities and Not-for-profits Commission (ACNC) in 2012,” she said. 

Each year, the ATO publishes legislative instruments that set out the requirement for all taxpayers to lodge returns.

Consultation on the draft legislative instruments is a requirement under subsection 17(1) of the Legislation Act 2003, and this year it is open until April 9.

A spokesperson for the ATO did not directly address why the consultation process was not mentioned in the ATO’s most recent newsletter but said the office had made extensive efforts to communicate the changes and steps NFPs needed to take ahead of the tax changes. 

“The new reporting requirement, which was announced in the 2021–22 federal Budget, aims to enhance transparency and integrity in the tax, super and registry system by ensuring only eligible non-charitable NFPs access the relevant income tax exemption,” the spokesperson said.

“The ATO has consulted extensively on the design and implementation of the new return, working closely with key stakeholders representing the not-for-profit sector.” 

However, Emeritus Professor Myles McGregor-Lowndes of the Australian Centre for Philanthropy and Nonprofit Studies (ACPNS) said that as the self-assessment return does not need formal legislation to pass Parliament but is merely a regulation, the policy has not been subject to any serious scrutiny until now.

 “This consultation is the first time that targeted not-for-profits and volunteer office bearers have been able to formally respond to the policy, although there have been limited opportunities for peak bodies and others to have some input into implementation of the measure,” he said.

 “It would have been beneficial for all concerned if the policy debate had occurred at the time of the 2021–22 budget rather than just weeks before the self-assessment return was proposed to be implemented.”

Professor McGregor Lowndes questioned the rationale for the changes, amid concerns in some quarters it could ensnare small, volunteer-run, under-resourced community groups in red tape.

“The 2021–22 federal Budget by the Coalition Government announced that it had provided funding for the ATO to build an online system to enhance the transparency of income tax exemptions claimed by exempt not-for-profit entities,” he said.

“This may have been a response to the 2018 ACNC Review, which recommended that large not-for-profit organisations (over $5 million) should register with the ACNC and provide an annual return.”

Professor McGregor Lowndes said the ACNC Review did not consider the option of having the ATO collect annual statements, even from larger charities.

“On a policy basis, neither the government nor the Treasury have offered any reasons why the ATO is the more appropriate agency to undertake this transparency measure rather than the ACNC, or the requirement that all should file regardless of their annual turnover rather than just those over the proposed threshold of $5 million.”

The ATO said it is committed to helping NFPs to adopt the new reporting requirements and is focusing its efforts on education and support.

“A letter with information about the reporting change and the steps a NFP needs to take will be sent to impacted organisations during April and May.

“In addition, we have published guidance on the reporting requirements and provided regular updates through a dedicated not-for-profit newsletter. Informational webinars will also be available shortly.”

In her most recent newsletter column, Ms Moltisanti said the new reporting requirements were being introduced to increase transparency and to ensure that only those entitled to the exemption accessed significant tax concessions. 

“As we approach Tax Time 2024, many NFPs are realising they need to renew their purpose against eligibility, check governing documents, update authorised contracts and arrange to register for online services for business so they can lodge their NFP self-review return,” she said.

“For others, the path is more complex; particularly if they don’t meet the eligibility criteria in one of the eight categories of NFPs that can self-assess as income tax exempt, or if they need to register as a charity to access income tax concessions.” 

Those eight categories are community service, sporting, cultural, educational, health, employment, scientific and resource development. 

Previously, NFPs not registered with the ACNC that hold an ABN and self-assess as income-tax-exempt have not had to lodge an annual self-review return. 

According to guidance published by chartered accountants AFS & Associates, NFPs that complete the new self-review return must: 

• respond to questions similar to those provided in the current self-review worksheets 
• consider their purpose and activities against specific eligibility requirements of an income tax-exempt entity 
• estimate their income range. 

Ms Moltisanti said navigating the new reporting requirements required the sector to be “present, proactive, persistent and passionate.” 

She also outlined the hard work her team had put in over the past 12 months to communicate the changes to NFPs. 

“My role is to help NFPs transition to the new requirements; however, I can’t do this alone with my team – it requires us all to work together.”   

In its most recent update, the ACNC Advisory Board said that of the 225,300 NFPs registered with an ABN, more than 157,100 (70%) are self-assessed income-tax-exempt NFPs. 

ACNC Advisory Board chair Sarah Davies said these organisations are self-assessed under the eight categories that allow income tax exemption and are not registered charities. 

“It’s this group of NFPs which are affected by the change in reporting, and if a return is not lodged, the NFP may be ineligible for an income tax exemption.” 

The Australian Charities and Not-for-profits Commission said there had been 3,619 applications from such organisations seeking registration between 1 July 2023 and 28 February 2024 – a seven per cent increase on the previous year.

The regulator has published guidance for organisations that have been self-assessing as income-tax-exempt. 

“The ACNC is anticipating a significant influx of applications from the recent reforms that introduce new requirements for self-assessing income tax exempt entities,” the guidance says. 

“We have added a question to our registration form asking applicants whether their application is due to the ATO’s new requirements. 

“This will help us to process applications as efficiently as possible, monitor trends and identify any additional support needs for these organisations.” 

The regulator is also developing an interactive online tool to help organisations to self-assess their eligibility to become registered charities and to prepare their applications. 

In an opinion piece published in the Community Advocate in September 2023, ACNC Commissioner Sue Woodward noted a surge in registration applications and provided detailed advice about the ACNC registration process and eligibility.