Expert offers tips on the ATO's new not-for-profit reporting requirements

The ATO’s new not-for-profit reporting requirement started this tax time, leaving some businesses uncertain of their obligations.

Created to grant the ATO oversight on the eligibility of non-charitable not-for-profits with an ABN for tax exemption, it requires these organisations to lodge a “not-for-profit self-review return” to notify their eligibility to self-assess as income tax exempt.

RSM in Canberra’s Rhys Kyburz says the reporting mechanism has been created to address a “gaping black hole” in the tax system that has left the ATO with substantial blind spots.

“Historically in Australia you could self-assess your not-for-profit status, claim you were income tax exempt and then have no further obligation to interact with the ATO. The ATO had no oversight or measure as to why any of these organisations were NFPs, what criteria they met and why they were exempt,” he says.

“This mechanism is the government getting their finger on the pulse, establishing a way to monitor your operations and ensure they’re consistent with what you’re telling them.”

Organisations have a one-year grace period to ensure they’re compliant. However, Rhys says not all “non-charitable not-for-profits with an ABN” need worry.

“The not-for-profit reporting requirement is a reporting mechanism used in lieu of a tax return, not in addition to. It is for organisations that aren’t already in the tax system. If you’re already lodging a tax return, you don’t need to comply,” he says.

“This might apply to certain club-based organisations because if you follow the principle of mutuality – where an organisation is owned by its members, rather than by shareholders – you still prepare a tax return. Most clubs follow that principle.”

If you are required to lodge a not-for-profit self-review return, the task need not be onerous. If it is, it might indicate an issue you should resolve sooner rather than later, according to Rhys.

He says the return asks only for information that organisations should already have at hand to substantiate their eligibility for an income tax exemption based on their purpose and activities.

“In theory it shouldn’t be that difficult – it’s just a good housekeeping piece to ensure you’re actually exempt,” he says.

The return includes three sections – organisational details, including one question about estimating the gross revenue range as small, medium or large organisation, five questions to test eligibility and a summary and declaration.

Several key criteria confirm an organisation’s eligibility, including that its members cannot make a profit from its operations. Organisations are also expected to have a wind-up clause in their constitution to confirm any profits or assets would go to like-minded organisations in the event of the dissolution.

As this is information not-for-profits should have at the ready, lodging the return itself should only take about 10 minutes. But Rhys cautions organisations against assuming this is all that’s required to comply.

“The 10 minutes it takes you to complete the return is the quick bit. Even if you are exempt, the key thing is for organisations to actually go through and properly check that what they’ve declared is true and consistent,” he says.

“Just because you did something last year, doesn’t mean you can assume it’s the same year after year. It is natural for organisations to morph over time, and not all of them will update their documentation accordingly.

“The ATO is smart. You can tell them the purpose of your organisation and often you’ll submit financial statements, but the ATO checks those against the purpose stated in your constitution. It’s on you to ensure it all matches up across the board.

“This is a time of year for checks and balances. Take the time to understand what type of organisation you are in this moment, then review what your constitution says, what your website says, what your financials say. They should all tie back and if they don’t, take the opportunity to see what changes you need to make to ensure you are compliant.”

The ATO has guidance material, including a factsheet and frequently asked questions, which are available here. If in doubt, seek professional advice from RSM in Canberra.