New tax changes for NFPs: what you need to know

Garreth Hanley:
This is With Interest, a business, finance and accounting news podcast brought to you by CPA Australia.

Ram Subramanian:
Hello. Welcome to With Interest. I'm Ram Subramanian and, today, we are talking about the upcoming requirement for not-for-profits to start lodging a tax return with the Australian Taxation Office. Joining us today is Nunzio Giunta, FCPA. Nunzio is the managing partner and founder of Giuntabell, a specialist not-for-profit accounting firm. Nunzio is also the chair of the CPA Australia Not-For-Profit Committee in Queensland, and he's a member of the Australian Tax Office's Not-for-Profit Stewardship Group and also sits on the Australian Accounting Standards Board Not-for-profit Advisory panel. In 2020, Nunzio won a Sage Finance Futurist Award for Driving Innovation and Leadership, and he also won the Accountants Daily Not-for-Profit Accountant of the Year Award in 2021. Welcome to With Interest, Nunzio.

Nunzio Giunta FCPA:
Hi, Ram. Thanks for inviting me to participate in the podcast today. It is always a pleasure to discuss the issues that impact our NFP community.

Ram Subramanian:
Thank you. From 1st of July 2024, not-for-profits that are not registered charities, which also have an active ABN, will be required to lodge an annual self-review return to the ATO to confirm their income tax-exemption status. This is expected to apply to around 150,000 not-for-profits, who are currently self-assessing as income tax-exempt. Nunzio, can you give us an overview of this new ATO requirement and what it means for not-for-profits?

Nunzio Giunta FCPA:
Yeah. Thanks, Ram. Before I give an overview of the new requirement, it's probably really good to understand the NFP and income tax-exempt landscape in Australia. So typically, the income tax-exemption falls under sort of two main categories or two main types of organisations.

So you've got those organisations that are ACNC-registered organisations. They've applied formally to the ACNC, they've been accepted, they are a registered charity and, by default, then get income tax-exempt status through that process.

Then you've got those other organisations that have self-assessed that they are a not-for-profit organisation and self-assessed that they are indeed income tax-exempt.

And so what you have is you have a situation whereby the ATO has visibility on the ACNC-registered organisation that got income tax-exempt status, but doesn't have full visibility on those organisations that are doing a self-assessment of that income tax-exemption process.

Now the new measures aren't about changing any legislation around that self-review process. However, with one change, and that is now that organisations that are doing a self-review process, annually will need to lodge a self-review return with the ATO.

And that's really important because that then formalises the process with the ATO and the ATO will have visibility on those organisations that are classifying themselves as being income tax-exempt.

Now in terms of the process, what they'll need to do is from the 1st of July 2024, they will need to make a formal lodgement with the ATO. And that lodgement they can actually make themselves as an organisation, or they can engage a registered tax agent to undertake the lodgement on their behalf.

And as I said, it doesn't fundamentally change the self-review process. It just changes that the fact that they actually need to make a formal lodgement with the ATO to then be recognised as part of their income tax-exempt status.

In terms of the lodgement, really the key areas that the ATO is looking at focusing on is ensuring that organisations have the proper governance documents in place that allows them to have that income tax-exempt status, ensuring that their activities align with their purpose and, really importantly, that in their governance documents that they're stipulating that any distribution of profits cannot go to members, that ensuring that they indeed are a not-for-profit organisation and income tax-exempt.

Ram Subramanian:
So you mentioned there that the return can be lodged either by the entity itself, so that's a not-for-profit, or a registered tax agent. So does that mean only registered tax agents can do it on behalf of a not-for-profit, or can other types of agents also be able to do the lodgement?

Nunzio Giunta FCPA:
At this stage, because it is a income tax return, it's registered tax agents that only have the ability to lodge. There has been some discussions around BAS agents potentially, but right at this stage, or up until a couple of weeks ago, my understanding is that it is registered tax agents, but it is... Look, watch your space. I believe there may be some movement in terms of getting BAS agents also be involved in this process.

Ram Subramanian:
And also earlier when I made the introduction, I said about 150,000 not-for-profits who currently self-assess might be affected. That's a large number of entities that we are looking at here. In your experience, given that you're a specialist in the not-for-profit space, do you believe that across Australia, these 150,000 not-for-profits are ready for this change at this point in time?

Nunzio Giunta FCPA:
No, I don't think they are. I really don't think they are. It's one of those areas that and if you think about the 150,000, lots of those are very small organisations, and they're organisations made up of volunteers where they may not have updated their governance documents for years. They may actually not even undertaking a self-review process. They've been a not-for-profit organisation for many years and because that they're volunteers really haven't gone through that process. And also the other thing is that in many cases, because these organisations have changed from a governance perspective, in some cases they're changing on a yearly basis, the ATO has lost connection with these organisations. So the ATO is spending a lot of time reaching out and trying to inform this cohort. They may not actually have the necessary right contact to actually inform these organisations.

Ram Subramanian:
Understand. And, of course, 150,000 is a really large number we are looking at here, I expect you'd say that if a not-for-profit is not sure what to do with these new requirements, they should really go and speak to their local CPA accountant.

Nunzio Giunta FCPA:
Oh, absolutely. They definitely should be reaching out to their accountant or an accountant, in particular a registered tax agent, to then get the support in terms of what they need to do. Because it's just not about lodging a return. It's also about making sure they're adhering to the self-review process that will then inform that final lodgement. So it's really important to get that advice.

Ram Subramanian:
Understood. Earlier you mentioned that there were two types of entities here. One was the group of registered charities, and the other was income tax-exempt not-for-profits, which are registered directly with the ATO. So with the registered charities, those that are registered with the Australian Charities and Not-For-Profits Commission, they are not affected by this change, are they?

Nunzio Giunta FCPA:
Absolutely, you're right. They're not affected because those organisations that have registered with the ACNC, the ATO recognises them as income tax-exempt and they have that official status. And if you go to the ABR Register, you actually see them as being income tax-exempt. So this is only relevant to those organisations that are not registered with the ACNC and have conducted a self-review or believe themselves to be a not-for-profit organisation and to have that income tax-exempt status.

Ram Subramanian:
And, of course, these registered charities have fairly detailed reporting requirements directly to the ACNC, and I'm assuming that will cover them off in terms of any reporting that may be arising around this new requirement.

Nunzio Giunta FCPA:
Oh, Ram, that's a really good point. The ACNC-registered organisation have got very rigorous reporting requirements with the ACNC regulator. So they have to lodge their annual information statement, and they may need to make sure they comply with the government standards that are in place with the ACNC. So those, they've got very rigorous requirements in terms of making sure they maintain their charity status, which, by default, then maintains their income tax-exempt status.

Jacqueline Blondell:
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Ram Subramanian:
Okay. And now if you circle back to those 150,000-odd not-for-profits, presumably there may be some in there that have a charitable purpose, but are not currently registered as a charity with the ACNC, but are, of course, benefiting from income tax-exemption with the ATO because they're registered as such with the ATO. What about those entities? What do they have to do?

Nunzio Giunta FCPA:
Yeah, Ram, this is probably the most interesting part of this whole process, and also I think where the biggest risk lies for a number of these organisations.

So pretty much in terms of the self-review process and the legislation around being income tax-exempt is that if you are actually a charity organisation and you have a charitable purpose, then you actually have a requirement to register with the ACNC to get income tax-exempt status.

Now what that means is that for those organisation that actually have a charitable purpose and they have actually not registered for the ACNC, but have actually gone down the path of self-review to maintain that income tax-exempt status, they're not allowed to do that. So by law, they actually need to register with the ACNC.

And really what that means is that these organisations that actually have a charitable purpose have been self-reviewing as income tax-exempt, they actually are not income tax-exempt, and they are technically taxable organisation and need to pay income tax.

And so you're going to have a lot of these organisations that will start to go through this process. And as when they lodge the return, there's a series of questions and some of those questions are about identifying if this organisation indeed has a charitable purpose. And what they'll identify through that process that they do have a charitable purpose, and it will actually then inform them that they have an issue, and they actually need to rectify that by registering with the ACNC.

So it's definitely a high-risk area and it's the area, I think, that's going to create a number of issues for these organisations that think they've been doing the right thing, but ultimately have not.

Ram Subramanian:
So in your experience with these types of entities, which may have a charitable purpose, obviously they'll have to give some consideration to the Charities Act, which sets out the principles of what constitutes a charity and what constitutes charitable activities. Do you think that entities that may have a charitable purpose have the capacity, amongst those 150,000-odd non-for-profits, do you think many of these entities will have the capacity to make their assessment themselves?

Nunzio Giunta FCPA:
Look, the thing is that the questionnaire in terms of the return has been crafted in a way that it's actually quite straightforward for someone to go through the process. And what it'll actually ask is a series of questions around the purpose of the organisation and, through that return, that return will then provide almost a recommendation back to where it's filling out the form indicating that this organisation is possible operating for a charitable purpose and, therefore, it should be a registered charity.

And so, therefore, once that organisation has got that information, that's really when they should go down the path of seeking legal advice and in terms of what they need to do next to make sure they retain that charity status, in fact, if they want to go down that path.

Ram Subramanian:
What about not-for-profits that may have inadvertently breached the rules for income tax-exemption previously? How will the ATO address these not-for-profits when they lodge their first return and, of course, going forward?

Nunzio Giunta FCPA:
As part of my role with the Not-For-Profit Stewardship Group, the ATO engaged with the NFP community really asking questions around how do we roll out this measure. And one of the things that the ATO clearly communicated from day one that this was not about a penalising organisation. This was not about trying to recover more income tax. It was not a revenue-driving initiative.

Really what it was is, is it was about is 150,000 organisations where they didn't have visibility in terms of the activities of the organisation and ensuring that they actually were complying to be income tax-exempt. And so this measure was about the ATO embarking on bringing these organisations into the banner of knowing more about them, understanding who they are, having a profile of them and really, more importantly, supporting them to make sure that they were actually doing the right thing to maintain their income tax-exempt status.

So when we consulted back with the ATO, we raised this issue of potentially non-compliance and the fact that if an organisation had not complied for the last 20 years, they technically would've had to then lodge income tax returns for a number of years back and potentially remit any unpaid income tax. And we saw that as a huge risk, and really the ATO has taken the approach that these organisations that when they lodge for the first time, that if, in fact, they don't have the right clauses in the governance documents or they, in fact, should be a registered charity organisation, that the ATO is prepared to work with them to help them and give them time to get things in order.

And what they're looking at is not asking these organisation to remit past income taxes. What they're saying is, we want you to get back in line, we want to make sure you get things right and this be the starting point of complying with the legislation moving forward. And so I suppose it's a really great opportunity for the NFP community to get things in order and make sure they're complying and then, moving forward, be in a position to meet the requirements ongoing. So it is actually a great opportunity.

Ram Subramanian:
We are always, of course, supportive of transparency because that's an important aspect of the not-for-profit sector. And I think based on what you're saying, the ATO is taking a balanced approach to it, which is good to hear. We'll wait and see how that settles over the coming months and years. Do you have any final comments for our listeners on what not-for-profits should be doing to prepare for this major upcoming change?

Nunzio Giunta FCPA:
Yeah, absolutely. Now this is an opportunity, and I know that many organisations, when they receive a notice from the ATO that they need to do something, that can raise concerns, or some organisations will go, "Oh, this is too hard to deal with," and not address it.

This is an opportunity, and the ATO is really proactive about supporting these organisations to comply and to ensure that they actually maintain their income tax-exempt status if they're able to do so.

And so look at it from a lens of that the ATO is actually here to help in relation to these organisations comply with the income tax-exempt requirements. So just something when you see that notice for the first time to actually look at it as an opportunity to get things back in order.

The other one is around, if you're not sure, get advice. These organisations are filled with volunteers, and this can be quite daunting. And so engaging with CPAs and registered tax agents to get advice on how to move forward and traverse this whole complex income tax-exempt status requirements, I think, is really important to do that as quickly as possible.

Now, as I said, the returns is due from the 1st of July, however, there's lots of material out there now that's going to almost, you are able to pre-fill some of this information or go through that journey of completing the questions. So, therefore, you know now if you've got a potential issue and actually address the issues now before you've actually have to start to do the lodgements. And I think that's also something to consider.

And then also around planning for that ongoing compliance. This is something that will be there moving forward. So getting it right now, but then also having in place a regular schedule to review your income tax-exempt status and then be able to do that on a regular basis.

Ram Subramanian:
Thank you so much for joining us today and providing a very good overview of the topic and also explaining some of the nuances around what's coming on this very important topic. Thank you once again, Nunzio.

Nunzio Giunta FCPA:
Oh, no. Thanks, Ram. It's been a pleasure.

Ram Subramanian:
For more information about today's topic, don't forget to check the show notes for this episode. With Interest is a regular podcast. If you like today's show, you can subscribe on your favourite podcast app by searching for CPA Australia's With Interest podcast. And until next time, thanks for listening.

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