Self-review tax return changing NFP landscape: ATO

The preliminary figure released by the Australian Taxation Office (ATO) is far short of the more than 100,000 organisations estimated to be affected by the controversial tax changes.

Under a new system introduced last year, non-charities with an Australian Business Number (ABN) must lodge the annual return or face losing their tax-exempt status.

In an update on its website in April, the ATO said it had suspended issuing any penalties for late lodgement of the 2023–24 NFP self-review return in a bid to help the sector transition to the new system.

However, the ATO said it would take a harder line on NFPs that ignored or overlooked their obligation to lodge a self-review return if they had not done so by July.

“We're committed to supporting NFPs who try to do the right thing,” the ATO said at the time.

“We will take firmer action with NFPs who are intentionally ignoring their NFP self-review return obligation and who are unwilling to comply.”

In her latest Straight from the Source newsletter column, ATO assistant commissioner Jennifer Moltisanti said 4,000 NFPs had registered as charities with the Australian Charities and Not-for-profits Commission (ACNC) after they realised they were ineligible to self-assess as income tax exempt.

“The NFP self-review return was introduced to enhance transparency and integrity across the NFP population who self-assess as income tax exempt,” she said.

“As anticipated, with the first year of lodgement now behind us we’ve seen some shifts in the NFP population, with some NFP organisations identifying their correct taxable status at law.”

Moltisanti said almost 1,000 NFPs have submitted a non-lodgement advice (NLA) with the ATO to indicate that they have taxable income of less than $416.

At the other end of the scale about 600 NFPs have lodged income tax returns disclosing combined total income in the millions.

Moltisanti said many NFPs have cancelled their ABN because they no longer exist, which is a legislative requirement of holding an ABN.

“We expect a continued shift in the NFP population as organisations continue to review their purpose, activities and identify their correct taxable status.”

Regulator's response to charity surge

In a Community Advocate podcast interview published this week, ACNC commissioner Sue Woodward confirmed the ATO measure had been the main contributor to a boost in charity numbers.

“That’s really reflected by the number of organisations that had thought they could self-report for income tax assessment purposes but have now realised that they’re eligible to be a charity. And if they want to retain that tax concession, they’re now registering with us. So that’s really the main driver of that increase,” Woodward said.

Asked whether the ACNC expected another spike in applications amid a possible Australian Taxation Office (ATO) crackdown, Woodward said communication from the tax department “will prompt more people to think, what are our options here, and one option might be to register as a charity. And we’re trying to make it as easy as possible, if that’s the case.”

The ACNC’s online eligibility assessment tool enables organisations to quickly assess their status.

Sector advocates, including the Community Council for Australia, have argued that the ACNC would be a more effective administrator of the self-review return than the ATO, with its record of much higher compliance rates for reporting.

Asked whether the ACNC would be “ready, willing and able” to take on that role, Woodward was diplomatic: “Our role is determined by our legislation and if our legislation, were to change to mean that that was part of my job as commissioner, then of course we would do it. And obviously we'd need to be resourced to do it.”

Woodward said the regulator had introduced “a range of measures” to enable it to respond to any further increase in demand by organisations seeking to register as charities. These had reduced application wait times to one month.

Asked how the ACNC’s commitment to reducing red tape squared with the ATO self-review measure, Woodward noted that the measure was “a taxation measure”, but that organisations that became registered charities would not need to lodge those reports, “which I suppose is streamlining it (since) you don’t have to do that separate reporting”.

Since July 1, 2024, NFPs that have an active ABN and self-assess as income tax exempt have been required to lodge an annual NFP self-review return.

The self-review return is due between July 1 and October 31 each year, but the ATO has extended the deadline several times.

The ATO said NFPs that haven’t submitted their first self-review return are required to lodge their 2023–24 return as soon as possible.

Once that return is lodged, the tax office said, it can prepopulate future returns to make compliance easier.

The ATO has repeatedly defended the self-review changes, saying it has consulted the sector extensively, and the changes are easy to navigate.

However, the rollout has been criticised by sector advocates and former shadow charities minister Senator Dean Smith, who instigated a Senate inquiry into the process.

That inquiry heard complaints about poor communication, a complex process, unnecessary red tape and higher costs for organisations seeking accounting and legal advice.

More information

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These bureaucrats are way too taxing for not-for-profits