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Tax exempt organisations required to lodge returns with the ATO


In case you might have forgotten, following an announcement in the 2021 Federal Budget, organisations that used to have the option of self-assessing their income tax exemption status will soon be required to submit an annual self-review report (a return) to the ATO.

Impacted organisations will include non-charitable entities – those not endorsed by the Australian Charities and Not-for-profits Commission (ACNC) – that fall into the following eight categories:

  • community services;
  • sporting;
  • cultural;
  • educational;
  • health;
  • employment;
  • scientific; and
  • resource development (eg agricultural, horticultural, industrial, manufacturing, etc).
What are the new rules?

The new rules were announced in the May 2021 Federal Budget and come into effect from the 2023–2024 income year. For June year-ends, the first year affected is therefore the year ending 30 June 2024. The requirement for self-assessing income tax exempt entities with an ABN to lodge a return will be established by the annual instrument made by the Commissioner of Taxation setting out the general requirement to lodge tax and other returns.

Typically, organisations with December year-ends are “early balancers” and therefore will first need to lodge a return for the year ending 31 December 2023. The return forms will become available from 1 July 2024 and will need to be lodged by 31 October 2024.

There is no change for not-for-profits that are subject to income tax, such as some membership organisations that mainly provide benefits to members, and are already required to lodge income tax returns.

Lodgment will be via an online form that can be completed by either the entity themselves, or their tax agent. The organisation will then receive a summary notification confirming its receipt. Once an organisation has lodged its first return, the ATO will produce a pre-populated form for future years. In future, organisations will need to either simply lodge their pre-filled annual confirmation or update the return with any new information before lodging.

Where entities don't lodge the required form, they face possible consequences, including being ineligible for income tax exemption, as well as financial penalties.
The ATO has indicated that the questions included in the return form are designed to guide organisations in the consideration of their purpose and activities. These questions are expected to resemble the ones currently found in their self-review worksheets available on the ATO website, including separate worksheets tailored for sporting clubs and other organisations. We note that the questions on the current self-review worksheets are very high level, with the main one being simply whether the organisation meets all the requirements for exemption, and the form then provides a link to further information.

The following typical requirements must be fulfilled (although it's important to acknowledge that these vary slightly depending on which category is relevant):

  • the entity must be not-for-profit – this should be evidenced in its constituent documents;
  • the entity must pass one of three tests, being: 
    • the physical presence in Australia test, which requires the entity to pursue its objectives and incur its expenditure principally in Australia;
    • the deductible gift recipient (DGR) test, which requires endorsement as a DGR with the ATO, or being specifically listed as a DGR in the income tax legislation; or
    • the prescribed by law test, which requires being specifically named in the income tax legislation as income tax exempt; and
  • the entity must comply with the substantive requirements in its own governing rules; and
  • the entity must apply its income and assets solely for the purpose for which the organisation was established.

For many organisations, these requirements will be a minor extension of their regular self-review procedure, which they may already be conducting. For others, this may be very new, and perhaps an escalation in terms of the organisation’s governance practices.