What makes a non profit organisation tax exempt?

For a Not-for-Profit organisation to be exempt from paying income tax, it must either be:

1. A registered charity, or
2. An organisation that is not a charity, that falls within one of the exempt categories set out in the Income Tax Assessment Act 1997.

Not-for-Profit organisations that do not fall within one of the tax exempt categories must pay tax on the income they earn over the threshold amount.

Registered charities

A charity that is registered with the Australian Charities and Not-for-profits Commission (ACNC) will usually be exempt from paying income tax. If your organisation qualifies as a charity, it must be registered to claim the tax exemption.

Not all Not-for-Profit organisations will qualify as charities. Under the Charities Act 2013, for an organisation to qualify as a charity, the organisation must carry on its activities for a “charitable purpose”. Charitable purposes include:

• advancing health
• advancing education
• advancing social or public welfare
• advancing religion
• advancing culture
• promoting or protecting human rights
• preventing or relieving the suffering of animals
• advancing the natural environment

The organisation must also carry on its activities for the benefit of the general public, or a sufficient section of the general public. This means a charity cannot operate only for the good of its own members.

Non-government schools, churches, welfare organisations and environmental organisations are common types of organisations that qualify as charities.

When you apply to register your Not-for-Profit organisation with the ACNC, you should also apply to be endorsed for charity tax concessions. The ACNC will then forward your application to the ATO for consideration and endorsement. Once the ATO endorses your organisation, your organisation will be exempt from paying income tax.

Other Not-for-Profit organisations, associations and clubs

There is a considerable amount of law governing which Not-for-Profit organisations qualify to be exempt from income tax, and which do not. In addition to the Charities Act 2013 and the Income Tax Assessment Act 1997, there are also many court cases that give guidance on the kind of organisations and sorts of activities that fall within the exemptions.

Organisations other than charities that can be exempt from paying income tax include:

• Sporting clubs
• Cultural associations
• Music associations
• Community service organisations such as senior citizens associations
• Registered employer associations and trade unions
• Organisations that promote tourism

The ATO provides helpful guidance on what kinds of organisations will be exempt here.

Do you need legal advice?

There is a considerable amount of law governing which Not-for-Profit organisations qualify to be exempt from income tax, and which do not. In addition to the Charities Act 2013 and the Income Tax Assessment Act 1997, there are also many court cases that give guidance on the kind of organisations and sorts of activities that fall within the exemptions.

If you are setting up a Not-for-Profit organisation, now is the time to consider whether your organisation can be exempt from paying income tax.

If you have an existing Not-for-Profit organisation, it is also important to assess whether your organisation has the correct tax status. This is particularly so if your organisation’s activities have changed recently. Charities have an obligation to report changes that might affect their charitable status to the ACNC. Self-assessing organisations will need to decide on their tax status for each financial year.

The following table provides a checklist:

How can we help?

At Sharrock Pitman Legal, we have extensive experience assisting Not-for-Profit organisations comply with their obligations to the ATO and the ACNC. Please contact us, and we can advise whether your organisation is entitled to be exempt from paying income tax. We can also assist with registering your organisation as a charity with the ACNC.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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