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Pursuant to an announcement made as part of the 2021-22 Federal Budget, and to enhance transparency and integrity in the tax system by ensuring only eligible not-for-profits (NFP) are afforded income tax exempt status, the Australian Taxation Office (ATO) now requires non-charitable NFPs with an active Australian Business Number (ABN) to lodge an annual ‘self-review return’ that discloses the self-assessment of their income tax exempt status.
Relevantly, there have been no legislative amendments to effect this new requirement. Rather, the Commissioner of Taxation (Commissioner) has used his powers under section 162 of the Income Tax Assessment Act 1936 to require the provision of this document.
Impact
The new requirement applies to income years commencing on or after 1 July 2023 to the following eight categories of NFPs who are entitled under Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997) to self-assess their income tax exemption eligibility:
- Community service;
- Sporting;
- Cultural;
- Educational;
- Health;
- Employment;
- Scientific; and
- Resource development.
Each of the foregoing NFP categories are defined under Division 50 of the ITAA 1997.
Self-Review Return
The ‘self-review return’ is an online form that can be completed either by the NFP, or by its tax agent. It will be released on 1 July 2024 and must be lodged by 31 October of each year unless a substituted accounting period (SAP) applies. The due dates for NFPs with a SAP, including ‘early balancers’, are available on the ATO website.
The ‘self-review return’ essentially requires in-scope NFPs to disclose the self-assessment of their income tax exempt status by reference to legislatively-prescribed conditions. For most in-scope NFPs, this involves confirming that the NFP:
- Is not carried on for the purpose of profit or gain of its individual members;
- Satisfies at least one of the following three sub-conditions:
- the NFP has a physical presence and incurs its expenditure and pursues its objectives principally in Australia;
- the NFP is endorsed by the Commissioner as a deductible gift recipient (DGR) or specifically identified as a DGR in the ITAA 1997; or
- the NFP is located outside Australia, exempt from income tax in the country in which it is resident, and prescribed by the Income Tax Regulations 1936.
- Complies with substantive requirements in its governing rules; and
- Applies its income and assets solely for the purpose for which it was established.
The specific questions in the ‘self-review return’ represent an expansion of those contained in the self-review worksheets available on the ATO website, and their purpose is to guide NFPs in their self-assessment of their purpose and activities vis-à -vis relevant legislative requirements.
Once an NFP has lodged its first ‘self-review return’, it will thereafter receive from the ATO, annually, a pre-populated ‘self-review return’ for its confirmation or revision. The pre-populated ‘self-review return’ will reflect the information disclosed in the NFP’s first ‘self-review return’.
Non-lodgment of a ‘self-review return’ could potentially affect an NFP’s eligibility for income tax exemption and expose the NFP to material financial penalties.
Take-Away
The obligation to lodge annual ‘self-review returns’ represents an extension of the annual self-assessment procedures that in-scope NFPs should be executing. Notwithstanding the incremental administrative burden that it presents, the obligation may prove invaluable to in-scope NFPs with evolving activities and will support the efficacy of their governance processes. Additionally, the intelligence received will assist the ATO in maintaining the integrity of the tax system through the detection of ineligible income exempt status claims.
FOR MORE INFORMATION
For further information in relation to the ‘self-review return’ requirements that in-scope NFPs now face, please contact David Rumble or Liam Telford.
