Are your non-charitable NFP clients really tax exempt?

This article was current at the time of publication.

From 1 July 2024, non-charitable not-for-profits (NFPs) with an active Australian business number (ABN) are now required to lodge an annual self-review return to the Australian Tax Office (ATO) to confirm their income tax-exemption status. 

The deadline for lodgement is 15 May 2025, providing a grace period for organisations to get their documentation in order.

The new regulation is expected to apply to about 150,000 not-for-profits, who are currently self-assessing as income tax-exempt, says Nunzio Giunta FCPA, managing partner and founder of Giuntabell, a specialist not-for-profit accounting firm and chair of CPA Australia’s Not-For-Profit Committee in Queensland.

“There's a significant group of NFPs that operate outside the governance framework of the Australian Charities and Not-for-profits Commission (ACNC), meaning the ATO has limited visibility into their activities since they are not required to lodge income tax returns," Giunta explains.

"Organisations registered with the ACNC are officially recognised by the ATO as income tax-exempt, so this new requirement does not apply to them. It specifically targets NFPs that are not ACNC-registered but have either conducted a self-review or consider themselves to be not-for-profit organisations."

According to ATO requirements, these organisations are already required to do a self-assessment each year to review their constitution and governing rules to make sure that they fit within the guidelines of being a non-profit organisation. This new requirement means they now must lodge that with the ATO.

“This measure is designed to improve transparency and ensure compliance by tightening the process, preventing any potential misuse. The key change is that organisations now need to formally lodge what they should have already been reviewing – confirming their income tax-exempt status," Giunta says. 

How it works

Giunta advises that the NFPs affected by this change operate across a wide range of sectors, including community service, cultural, educational, employment, and government sub-entities. 

These also encompass health organisations, such as hospitals and private health insurers, as well as those involved in resource development, scientific research, and sporting activities.

These organisations are typically structured to reinvest any surpluses back into their operations, with the primary focus on advancing their mission rather than generating profits for members.

The self-review must be lodged by 15 May 2025. It is a straightforward process that guides NFPs to consider the organisation's purpose and activities against specific requirements. Giunta notes that, while the lodgement process is straightforward, the real challenge lies in ensuring the right representatives within these organisations complete it. Many NFPs are run by volunteers who may not be familiar with tax requirements, which can complicate the process, he says. 

“The real challenge for many organisations will be identifying the right individuals who have the authority to communicate with the ATO and lodge the review on behalf of the NFP,” says Giunta. 

“Many of these organisations are run by volunteers, and their governance documents may not have been updated for years — in some cases, they may never have undertaken a formal self-review process.”

Giunta emphasises that accountants, particularly registered tax agents, are well positioned to offer the necessary support. 

“It’s not just about lodging a return; it’s about ensuring that organisations follow the self-review process, guiding the final lodgement. I recommend accountants help their clients by checking if they serve as directors of a club and making sure they are aware of the new requirements,” he says.

The ATO is taking a pragmatic approach, notes Giunta.  “This isn’t a revenue grab; it’s an opportunity for organisations that may not have been fully compliant to reset and start doing the right thing moving forward,” he says.

Registering with ACNC

While many organisations affected by this change will simply have to lodge the self-review, there may also be some that should in fact be registered. While it is not a prevalent issue, it does sometimes occur, says Giunta.

If an organisation has a charitable purpose – i.e. it exists to benefit the public or a specific section of the community, such as the needs of the aged or sick, promoting or protecting human rights, providing social and public welfare services, advancing health or environmental sustainability or promoting animal welfare, it must be registered with the ACNC.

“I've come across a number of organisations where I've identified that they should have been registered with the ACNC [but they] were simply not aware. 

“I anticipate this process will lead to a surge of NFPs realising that they are, in fact, operating for a charitable purpose. While they will still be income tax-exempt, they will need to formally register that status," says Giunta.