Tax changes for NFPs creating confusion

An estimated 155,000 not-for-profits have been told they may have to lodge new returns with the Australian Taxation Office (ATO) to continue qualifying for income tax exemptions.

ATO assistant commissioner Jennifer Moltisanti said last week that it was the biggest change to the sector since the formation of the Australian Charities and Not-for-profits Commission (ACNC) in 2012 and estimated the changes would affect “70% of the [NFP] population”.

But the changes are proving rough going for organisations who aren’t sure how they apply.

Until now, many groups have been able to simply declare themselves income tax exempt.

The new rules – from July 1 – require not-for-profits with an Australian Business Number (ABN) to lodge an annual “self-review” return.

A group must now either be a registered charity or fall into one of eight special not-for-profit categories to keep the exemption. The tax office says the changes are aimed at ensuring only eligible NFPs access the exemption.

But there remains a great deal of confusion about what not-for-profits must do, including whether to seek charity status, whether they are otherwise exempt, what to do with ABNs, and even whether it’s better just to shut up shop.

Tax changes prompt charity registration rush

One of the simplest ways to guarantee the tax exemption is through charity status, which currently applies to nearly 60,000 organisations in Australia. Charities don’t need to lodge the new forms.

In response to the changes, many organisations have sought to win charity status through the ACNC in order to gain that automatic exemption.

The ACNC has been deluged with charity registrations applications since the changes were announced. According to the ACNC there were 1,115 applications in May, compared to 651 at the same time last year, leading to a three-month backlog and requiring the ACNC to employ extra staff, streamline registrations and conduct training to speed things up.

Last week, charity regulators converged for a virtual forum hosted by the ACNC. Ms Moltisanti briefed bureaucrats on the rollout, while the ACNC outlined how it was coping with the spike in registrations.

Ms Moltisanti told the hundreds of public servants and sector leaders on the line that the ATO had produced a raft of information to help organisations, partly because its research had found a significant proportion of tax-free groups had “charitable purposes”, which qualified them to be treated as charities.

“So there's quite a lot of information. In fact, there's a plethora of information, and it can be a little bit overwhelming. I'd ask everyone to systematically work through what your purpose is [and] what your activities are. Probably the best starting point is our website: www.ato.gov.au/nfptaxexempt,” Ms Moltisanti said.

The tax office has set up a self-review guide and a helpline (1300 130 248), she said.

Amid the confusion, groups have been given an extended deadline of March 2025 to comply with the changes.

The ATO is expected to continue targeted consultation on the changes throughout August with groups including not-for-profits, sector peak and advisory bodies, tax professionals, and the NFP Stewardship Group.

Two pathways for orgs to avoid paying income tax

Despite the extra time and reams of information provided, many organisations remain confused and fear losing their valued tax-free status.

Apart from charities, which don’t need to lodge the forms, there are eight categories of non-charity organisations that can win tax-free status but do need to lodge the forms.

These are community service, cultural, educational, health, employment, resource development, scientific and sporting groups, which are being asked to lodge the returns to confirm their eligibility for income tax exemption.

According to the self-review guide, groups that don’t need to fill out the forms are:

• government entities
• charities
• taxable NFPs, since they’ve already lodged returns
• a not-for-profit established (for GST reasons) as a branch or “sub-entity” of a parent organisation.

Fears that groups will wind up over tax changes

Among the groups grappling with the changes is the Landcare movement, which comprises 6000 affiliated community groups nationally, most of which have been affected.

Addressing the ACNC-hosted forum, Landcare Victoria’s Claire Hetzel said few of the groups had formal charity status and most were battling to come to terms with what was being asked of them.

“They historically have operated under an assumption that they are exempt from paying income tax, due to being a not-for-profit community-based organisation, and they really are struggling to understand what has changed and why they need to do something that hasn’t been asked of them before.

“We are hearing that there's confusion around what the definition of a charity is, with some groups thinking that it's about donations rather than the Charities Act. We've got groups who are having a really hard time with getting their ABN details corrected, particularly in the case where an ABN needs to be cancelled. We've got groups who are looking for advice around backdating their charity registration, and they've got real worries that the ATO might hold them liable for past mistakes if they don't get that right.”

And those groups were getting mixed messages from the ATO, she said.

“We've got groups who've got concerns that when they try and get information from ATO that they're getting different information, depending on the customer representative who answers that phone call.”

There was also confusion about what should be counted as assessable income. “Surely, in their mind, a government grant shouldn't be taxable,” she said.

“Sadly, we're also getting a lot of questions about how to wind up a group and not end up with a tax liability, which is a major concern when more than 50% of our groups are unincorporated entities, who understand that that liability might fall to an individual rather than to the entity to which it may be attached.”

Ms Hetzel told regulators that with most Landcare groups supported by volunteer committees and boards, “ultimately, they're coming to Landcare Victoria to try and navigate and understand what it is that they need to know to help the groups on the ground”.

“Landcare Victoria is tiny in the context of a peak body. It's important to understand that we're five staff members and that we run quite a few significant services for our membership, so this issue has required us to work overtime to catch up and support our membership.”

The organisation had also been pressed into providing guidance about the changes to other government agencies, catchment authorities, and others in its network, Ms Hetzel said.

She said her office remained “absolutely overwhelmed” about how volunteer groups would be able to navigate the changes, but it had been able to alert organisations about how they could win charity status, after many initially thought it would be simpler to use the ATO criteria, “which is clearly not the pathway if they are environmental organisations with charitable purposes”.

She said the ATO should be better coordinated in the way it communicated with organisations – including making the tax-exempt charity “path” clear, as “the first point of contact for many groups” on this issue.

The ACNC told the forum it had been working with Landcare and other groups to attempt to address concerns by conducting training, simplifying forms, allowing bulk applications and providing staff to work with some groups.

Opposition keeping tabs on tax reform rollout

The federal opposition’s charities spokesman, Dean Smith, told the Community Advocate this week that he had been fielding concerns about the rollout since April when he met with the ATO and the ACNC.

He said concerned groups unsure of their tax status included Lions Clubs and Landcare groups.

Senator Smith has lodged a notice of motion to ask the federal Parliament’s Economics References Committee to launch an inquiry into “the implications … for Australia’s not-for-profit community and the [ACNC]” and he was due to meet colleagues to discuss the matter on Monday this week.

Senator Smith said “the matter of the ATO implementation of the not-for-profit reporting requirement has been on my radar for a long time”, and he had repeatedly quizzed senior bureaucrats at both the ATO and the ACNC to seek answers.

More information

www.ato.gov.au/nfptaxexempt

Earlier coverage: Times up for NFPs to tackle changes | Taxing time for NFPs