Background

About 51% of Australians belong to associations such as heritage organisations, ethnic clubs or hobby groups according to the last ABS survey in 2015.[1]  Chances are that you or your family belong to at least one of these organisations and September heralds the beginning of the annual reporting season.

When you, as a diligent member, look over the financial statements, pay particular attention to whether there is an express indication that the organisation is either claiming a tax exemption or filing a tax return with the Australian Taxation Office ( ATO). If you are a committee member, you should be comfortable with the organisation’s tax status as recorded in its annual report and ask some clarifying questions of the treasurer and auditor to be certain.

It is common knowledge that charities are registered with the ACNC, which opens the way to ATO tax exemption. Chances are that your licensed machine gaming club, union, strata title body and professional or trade association have got their ducks in a row with the ATO because of engagement with the GST provisions.

It is an urban myth that any non-profit organisation is exempt from income tax and you just get on with doing what you do without any thought of the ATO and your tax status.

While it is true that charities and some select non-profits are exempt from taxation, many non-profits are subject to income tax, or at least have an obligation to file a tax return.

The bottom line is that non-charities ought to self-assess their tax status each year as to whether they still fall within an exempt category or are required to file a tax return.

Cutting to the chase, you can find out how to do a self assessment review of your tax status from the ATO website.

Why does it matter this year?

Here is the explanation if you can’t find out from your club or society’s annual return why things might be different on the tax front for you. It is best that you be prepared rather than coming as a shock next year.

This is because if your club or society (not a charity) has an Australian Business Number (ABN):

  • It will have to file, after 1 July 2024, a self-assessment return of the organisation’  income tax exemption; or
  • file an income tax return,

and some planning for record keeping of 2023-24 transactions will be very beneficial.

The story so far…

As part of the 2021-22 federal budget, the government announced that it had provided $1.9 million in capital funding in 2022-23 for the ATO to build an online system to enhance the transparency of income tax exemptions claimed by exempt non-profit entities.

The ATO will require not-for-profits with an active ABN who self-assess as income tax exempt to submit a digital self-review return each year. The first return will need to be lodged for the 2023–24 income year from 1 July 2024.  It will be an online annual self-review form with the information ordinarily used to self-assess eligibility for the exemption.  If your club or society has not been doing this, then you need to start preparing to collect the information so the return can be properly completed.

Under the Income Tax Assessment Act 1997 (ITAA 1997), each individual and company, some other entities (such as superannuation funds) and, in some cases, a trustee of a trust, are liable to pay income tax.

A non-profit entity that is either an incorporated body or an unincorporated body, such as an association or club, will be a ‘company’ for tax purposes.

A non-profit entity that is a trust would be taxed under Div. 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).

Some non-profit entities will qualify for an exemption from income tax and, at the Commissioner’s discretion, are also exempt from filing income tax returns.

Non-profit entities that are eligible for exemptions can be divided into 2 types; namely:

  • non-profit entities that are registered with the ACNC as charities and have been endorsed by the ATO for income tax exemption; and
  • non-profit entities that self-assess their own eligibility under specific heads set out in Div. 50 ITAA 1997 (non-charities).

Those entities that are charities can voluntarily register with the ACNC and the ATO will then consider endorsing the charity as exempt from income tax.

The ATO website now hosts examples of self-assessment worksheets:

  • income tax status review worksheet for self‑assessing non-profit organisations (NAT 74141);[2] and
  • income tax status review worksheet for self‑assessing sporting societies, associations and clubs (NAT 73773).[3]

What happens if our club or society is not exempt!

Chances are that your organisation should be filing an income tax return if you don’t fit within one of the exempt categories.

ATO annual statistics records for 2020-21 reveal that about 1,300 non-profit companies filed company tax returns, but only 319 were assessed to pay income tax, of some $8m in total. Some 17 non-profit companies with an income between $10-$250m do not pay any tax.  How can this happen?

Where a membership non-profit organisation does not qualify for a statutory exemption, such as a social club, the common law principle of mutuality might result in no income being taxable, but a tax return may still be required.

The principle of mutuality applies to membership organisations and is based on the proposition that an entity cannot derive income from itself. When members contribute money to a fund for their mutual benefit and that common fund is applied for their benefit, according to common law, there has been no derivation of income.

This can include payments for services such as food and alcohol. Similarly, where any surplus is distributed to members, they do not receive income, but rather, they are viewed as getting their money back.

By contrast, where monies are received from or on behalf of non-members, the receipt will be income.

Receipts that will usually be assessable income include:

  • bank interest;
  • fees received for advertising in the organisation’s magazine;
  • proceeds from fundraising drives to the public (for example, the sale of lamingtons, cakes or chocolates);
  • food and drinks sold to non-members visiting the organisation;
  • fees received for hiring out the organisation’s hall, facilities or equipment to the
  • public;
  • non-member proceeds from a raffle; and
  • proceeds from selling souvenirs to non-members.[4]

The ATO usually requires such entities to apportion their receipts based on the number of members and the number of guests or non-members.

You should, at this point, be realising that records that might not be usually kept by your club or society need to be kept. How many non-members attended the dinner dance or car rally or rare pot plant sale and what did they buy or pay in entrance fees?

In 2024, will you be able to have the records needed to complete a tax return for the 2022-23 year?

The principle of mutuality is commonly used by licensed and registered clubs, professional associations, strata title bodies corporate and friendly societies, but will also apply to member hobby clubs and societies.

You can find out more about the concept of mutuality by referring to this ninety-page guide prepared by the ATO – Mutuality and taxable income for not-for-profits.

A non-profit entity that is either an incorporated body or an unincorporated body without an exemption, such as an association or club, will be a ‘company’ for tax purposes. It may be required to file an annual tax return and be assessed to pay income tax.

The effect of section 23(6) of the Income Tax Rates Act 1986 (Cth), introduced into tax legislation in 1986, is to exempt the first $416 of taxable income. However, if a non-profit company derives income in excess of that amount, the exemption is lost.  That is, a non-profit company does not pay tax on the first $416 of taxable income, but tax is then shaded in at a rate of 55% of the excess over $416 until the tax on taxable income effectively equals the company tax rate.

The questions to ask

If your organisation is a charity registered with the ACNC, no questions about income tax are necessary, the organisation will probably be income tax exempt.

If, as a member, your organisation does not disclose whether it is tax exempt in its annual report and financial statement, then ask what its tax status actually is.

As a director or committee member:

  • Consider inquiring about whether the organisation prepares a self-assessment of its taxation status annually and whether is it presented to the board or committee.

OR

  • Is a tax return prepared and filed with the ATO in due course?

For further information refer the ATO web site Not-for-profits – enhancing the transparency of income tax exemptions

https://www.ato.gov.au/General/New-legislation/In-detail/Other-topics/Not-for-profit/Enhancing-the-Transparency-and-Integrity-of-Not-for-Profits/

[1] ABS, General Social Survey, Summary Results, Australia, 2014, Cat. No. 4159.0, 2015 Table 1.1 as quoted in Reconnected, Andrew Leigh and Nick Terrell, La Trobe University Press, 2020.

[2] https://www.ato.gov.au/assets/0/104/1909/2003/46dc4b54-5d30-4076-bf35-09f160c58205.pdf

[3] https://www.ato.gov.au/assets/0/104/1909/2003/64bc4849-3910-46c9-bcc6-d0f03c5cf6de.pdf

[4] Taken from the ATO’s Guide, Mutuality and taxable income for not-for-profits p21-22, https://www.ato.gov.au/misc/downloads/pdf/qc23099.pdf

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