Chapter 1 - Introduction

Chapter 1Introduction

1.1On 18 September 2024, the Senate referred an inquiry into not-for-profit entities—tax assessments to the Senate Economics References Committee, with a reporting date of 31 October 2024.[1]

1.2The inquiry was established to inquire into the implementation by the Australian Taxation Office of the requirement that certain non-charitable not-for-profit entities that self-assess as income tax exempt must lodge an annual not-for-profit self-review return to confirm their eligibility to self-assess as income tax exempt from 1 July 2023, with particular reference to:

(a)the implications of this requirement for Australia’s not-for-profit community and the Australian Charities and Not-for-profits Commission; and

(b)any other related matter.

Background

1.3On 11 May 2021, as part of the 2021-22 Budget, reforms were announced to the administration of not-for-profit (NFP) entities that self-assess as income tax exempt. From 1 July 2023, the changes require non-charitable NFPs with an active Australian Business Number (ABN) to lodge an annual self-review return to access an income tax exemption.[2]

1.4In general, there are two ways an NFP can be income tax exempt. The first is if an NFP is a registered charity. Charities registered with the Australian Charities and Not-for-profits Commission (ACNC) are not subject to the new requirements and can be endorsed by the Australian Tax Office (ATO) to access an income tax exemption.[3]

1.5The second path to exemption is if an NFP meets the requirements of one of the eightother categories recognised by the ATO as eligible for income tax exemptions. The eight categories include:

Community organisations

Cultural organisations

Educational organisations

Employment organisations

Health organisations

Resource development organisations

Scientific organisations

Sporting organisations.[4]

1.6Some organisations that fall under these categories may also be eligible to register as a recognised charity with the ACNC. According to the ACNC, ‘if an organisation is eligible for charity registration, it will be ineligible to self-assess income tax exemption, and will instead need to register with the ACNC and be endorsed by the ATO to be income tax exempt.’[5]

1.7If an organisation does not meet the requirements of one of these pathways, it then qualifies as taxable and may be required to lodge an income tax return depending on its taxable income. Ms Jennifer Moltisanti, Assistant Commissioner, ATO, noted that eligibility for tax exemption has not changed. Rather, the change requires NFPs who self-assess as income tax exempt through one of the eight categories above to notify the ATO of their eligibility for an income tax exemption each year.[6] The changes are designed to enhance trust and confidence in the sector by ensuring only eligible NFPs have access to income tax exemptions.[7]

1.8The ATO reports that there are over 220 000 ABN registered NFPs in Australia. Of these, around 155 000 are currently self-assessing as income tax exempt and are now required to lodge the new annual self-review return. The remaining ABN registered NFPs are either registered as charities with the ACNC or are taxable. Neither of these groups is required to lodge the new annual self-review return.[8]

1.9The first annual self-review return is required for the 2023-24 financial year. Questions on the return ask NFPs to consider their purpose and activities against specific eligibility requirements of an income tax exempt entity. These activities are not financial and only one question relates to estimating income range in order to indicate the size of the NFP. After submitting the first annual self-review return, NFPs can annually confirm or update information on a pre-populated form. If a self-review return is not lodged each financial year, NFPs may become ineligible for an income tax exemption.[9]

1.10On 8 July 2024, the ATO announced that the time to lodge would be extended from 31 October 2024 to 31 March 2025 in order to give organisations additional time to navigate the new requirements.[10]

1.11Writing on the ATO’s website in September 2024, Ms Moltisanti described the changes as ‘the most significant change to the sector since the introduction of the ACNC in 2012.’[11] Ms Moltisanti said that, prior to the changes, about 70 per cent of NFPs with an active ABN self-assessed tax exempt status. Most NFPs correctly self-assess their status. However, some NFPs inaccurately assess tax exemption for a range of reasons, including: the belief that exemption is automatic for entities that operate on a not-for-profit basis; not being aware of the existing need to self-assess income tax exemption; not being aware of the need to align to certain requirements; or never formally self-reviewing eligibility for income tax exemption. According to Ms Moltisanti, regular reporting will ‘provide reliable data and confidence that only those entitled to tax exemptions and concessions are accessing them’. The changes, Ms Moltisanti wrote, will improve visibility of the sector, maintain system integrity, and support a level playing field.[12]

1.12The ATO has stated that it is ‘taking a user-centred approach in designing and implementing the new reporting requirement’.[13] The ATO has also commenced a consultation process to ‘understand the impacts that the government announced reform will have on self-assessing income tax exempt not-for-profits (NFPs) and co-design the lodgement process’. The consultation process has involved NFP entities, advisory associations, peak bodies, tax professionals, tax professional associations, the NFP Stewardship Group, and members of the Tax Practitioner Stewardship Group.[14]

Charity status

1.13The changes to NFP tax assessments do not apply to entities registered as charities with the ACNC. The ACNC lists the following criteria for an entity to be eligible for charity registration:

be not-for-profit;

have only charitable purposes that are for the public benefit;

not engaging in or promoting activities that are unlawful or contrary to public policy;

not promoting or opposing a political party or candidate for political office;

not be an individual, a political party or a government entity;

comply with the ACNC Governance Standards;

comply with the ACNC External Conduct Standards (if operating overseas); and

have an ABN with the right entity type.[15]

1.14Since 2012, NFPs with only charitable purposes have been required to register with the ACNC and be endorsed by the ATO to be income tax exempt. An NFP with charitable purposes can choose not to register as a charity. However, they are then no longer eligible to self-assess as income tax exempt and need to report to the ATO as a taxable NFP. The ATO is working closely with the ACNC to assist NFPs who choose to register as a charity as a result of the new annual self-review return process.[16]

1.15NFPs who find that they are neither eligible to register as a charity or meet the criteria for income tax exemption may not necessarily be liable to pay income tax. A taxable NFP is not assessed on income gained from dealings with members of the organisation. Some taxable NFP companies may be able to amend their governing documents and operations to fall within an exemption eligibility category.[17]

1.16In response to the changes, the ACNC has reportedly received a large influx of organisations seeking charity registration. For the 2023-24 year, the ACNC received 6 286 applications for charity registration, an increase of 14 per cent over the previous year and the highest amount received since the agency was established in 2012. In March 2024, the ACNC began asking applicants to indicate whether their application was a result of the changes to NFP reporting requirements. From April to June 2024, around 44 per cent of all applicants self-designated as being a result of these changes.[18] The ACNC projects that the number of registered charities could increase from 60 000 to 75 000 as a result of the changes with the majority of those to remain small, volunteer run organisations.[19]

1.17To manage the increase in applications, the ACNC has temporarily engaged approximately 25 new staff. These positions are funded by the ATO and ACNC.[20]

1.18The changes do not affect the tax-exempt status of individual entities; rather, they change the way in which organisations are required to report. No NFPs that previously qualified as tax-exempt will now be taxable. Under the existing system, many NFPs were self-assessing, or had simply assumed, that they were exempt, even though they were not actually eligible. The ATO has stated that it will be ‘applying a practical compliance approach to assist thousands of NFPs who mistakenly assumed an entitlement and incorrectly self-assessed as exempt, in some cases for many years.’ The ATO is focusing its efforts on assisting these NFPs to correct their tax status and meet their reporting obligations in future.[21]

1.19Mr Peter Ball submitted that many small-scale NFPs have developed an assumption that they are tax exempt and not required to be involved with the ATO. This can be attributed to loss of institutional knowledge as volunteers step down and are replaced, lack of education about the requirements expected of small organisations, and lack of audits and promotional guidance by the ATO to indicate this fact. By ignoring this, Mr Ball believes the ATO has allowed the belief that small-scale NFPs are tax exempt to grow. Even in groups that have provided self-assessments, many have mistakenly assessed themselves as exempt when in fact their governing documents are out-dated, and they no longer qualify for an exemption. These changes require groups to self-assess their tax-exempt status regularly, thereby increasing transparency and accountability.[22]

Australian Charities and Not-for-profits Commission Legislation Review

1.20On 20 December 2017, the Hon Michael Sukkar MP, then Assistant Minister to the Treasurer, commissioned the Review of Australian Charities and Not-for-profits Commission legislation, chaired by Mr Patrick McClure AO. The review was designed to inquire into, and make recommendations on, appropriate reforms to ensure that the ‘ACNC Acts continues to remain contemporary, that the ACNC Acts deliver on their policy objectives and that the ACNC Acts do not impair the work of the ACNC Commissioner to deliver against the objects of the principal Act’. The Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislation Review (ACNC Review) report was tabled on 22August 2018.[23]

1.21The ACNC Review made 30 recommendations on objects, functions and powers; regulatory framework; red tape reduction; and additional amendments. Of particular note for this inquiry was Recommendation 24:

The ACNC Act be amended to provide that certain not-for-profits with annual revenue of $5 million or more must be registered under the ACNC Act to be exempt from income tax and access Commonwealth tax concessions.[24]

1.22In making this recommendation, the panel considered there to be merit ‘in migrating large income tax exempt not-for-profits to the ACNC rather than transferring all not-for-profits to the ACNC’s regulatory framework at one time’. The Panel chose a threshold of $5 million or more in annual revenue as the benchmark for entities to be included:

The Panel has taken the view that revenue size should be the basis upon which not-for-profits should be migrated to the ACNC. Based on information provided by the ATO, the Panel considers the entities to transition first could be the income tax exempt entities … with revenue of $5 million or more per annum. As it is estimated that there are approximately 580 such entities, this should not create an unreasonable burden on the ACNC.[25]

1.23In its response tabled on 6 March 2020, the government did not support this recommendation. The government considered ‘that eligibility for income tax exemptions and other tax concessions for non-charitable not-for-profits is best regulated by the ATO’. Instead, the government indicated that it would consider ‘options for tightening the ATO’s existing regulatory framework for not-for-profits and consider any implications for the regulatory scope of the ACNC’.[26]

Order for production of documents

1.24On 20 August 2024, Senator Dean Smith moved the following motion for the production of documents relating to the tax assessments changes:

That there be laid on the table by the Minister representing the Treasurer, by no later than midday on 10 September 2024, all written or digital correspondence, briefing notes, file notes, meeting notes, meeting agendas or minutes, or other records of interaction since 1 January 2024 between:

(a)the Australian Taxation Office and the Assistant Minister for Competition, Charities and Treasury;

(b)the Australian Taxation Office and the Australian Charities and Not-for-profits Commission;

(c)the Treasurer and the Assistant Minister for Competition, Charities and Treasury; and

(d)the Australian Charities and Not-for-profits Commission and the Assistant Minister for Competition, Charities and Treasury;

in relation to:

(e)the implementation by the Australian Taxation Office of the requirement that certain non-charitable not-for-profit entities self-assessing as income tax exempt must lodge an annual NFP self-review return to confirm their eligibility to self-assess as income tax exempt from 1 July 2023; and

(f)the implications of this requirement for Australia’s not-for-profit community and the Australian Charities and Not-for-profits Commission.[27]

1.25On 10 September 2024, a letter from the Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities and Treasury, was tabled in the Senate in response to the order for the production of documents.[28] The letter indicated that Treasury was coordinating searches across the ATO and ACNC for the documents but that the search was not yet complete. The letter noted that the expected date for the return of documents was mid-October 2024.[29] The documents were tabled on 1 November 2024, immediately prior to the presentation of this report on the same day. As a result of the late compliance with the OPD, the committee did not have an opportunity to consider the documents in the course of this inquiry.

Conduct of the inquiry

1.26The committee called for submissions by 11 October 2024, and wrote to a range of individuals and organisations drawing their attention to the inquiry and inviting written submissions. A total of 18 submissions were accepted and are available on the committee's website.

1.27The committee held a public hearing in Canberra and via videoconference on 22October 2024. A list of submitters and witnesses is provided at Appendix 1.

Acknowledgements

1.28The committee thanks the individuals and organisations who made written submissions and gave evidence at public hearings. The opportunity to hear directly from affected people and organisations greatly enhanced the committee's understanding of the changes.

Footnotes

[1]Senate Journals No. 134—18 September 2024, p. 4061.

[2]Australian Taxation Office (ATO), Not-for-profits – enhancing the transparency of income tax exemptions, 10 August 2023 (accessed 1 October 2024).

[3]Australian Taxation Office (ATO), Not-for-profits – enhancing the transparency of income tax exemptions, 10 August 2023 (accessed 1 October 2024).

[4]Australian Charities and Not-for-profits Commission (ACNC), Organisations That Have Been Self-Assessing as Income Tax Exempt, (accessed 1 October 2024).

[5]ACNC, Organisations That Have Been Self-Assessing as Income Tax Exempt, (accessed 1 October 2024).

[6]ATO, Straight from the Source – September 2024, 6 September 2024 (accessed 18 October 2024).

[7]Australian Taxation Office (ATO), Not-for-profits – enhancing the transparency of income tax exemptions, 10 August 2023 (accessed 1 October 2024).

[8]ATO, Submission 15, p. 4.

[9]ATO, Not-for-profits – enhancing the transparency of income tax exemptions, 10 August 2023 (accessed 1 October 2024).

[10]ATO, Straight from the Source – July 2024, 10 July 2024 (accessed 25 October 2024).

[11]ATO, Straight from the Source - June 2023, 5 June 2023 (accessed 1 October 2024).

[12]ATO, Straight from the Source - June 2023, 5 June 2023 (accessed 18 October 2024).

[13]ATO, Straight from the Source - June 2023, 5 June 2023 (accessed 25 October 2024).

[14]ATO, Matters under consultation - Self-assessed income tax exempt not-for-profits, 5 September 2024 (accessed 1 October 2024). At the time of writing (October 2024), the ATO’s website listed the consultation as being underway (‘targeted consultation is underway’), despite an expected completion date of September 2024.

[15]ACNC, Organisations That Have Been Self-Assessing as Income Tax Exempt, (accessed 1 October 2024).

[16]ATO, Submission 15, p. 5.

[17]ATO, Submission 15, p. 5.

[18]ACNC, Submission 13, p. 3.

[19]ACNC, Submission 13, p. 4. The ACNC defines small organisations as having annual revenue of under $500,000.

[20]ACNC, Submission 13, p. 4.

[21]ATO, Submission 15, pp. 3–4.

[22]Mr Peter Ball, Submission 18, pp. 1–2.

[25]The Treasury, Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislation Review, August 2018, p. 91.

[27]Senate Journals No. 125—20 August 2024, p. 3796.

[28]Senate Journals No. 129—10 September 2024, p. 3956.

[29]The Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities and Treasury, Correspondence updating the Senate on Senate Order for the Production of Documents No. 572, September 2024, (tabled 10 September 2024).