There are around 600,000 not-for-profit organisations in Australia and make-up nearly 10% of the Australian workforce. They are the largest provider of community services and thus are eligible for various tax concessions. Read on to find out whether not-for-profit organisations have to pay tax and the types there are.
Not-for-Profit Organisation
A not-for-profit organisation is an organisation that is not operating for any direct or indirect profits of its members. Hence, any profits made will be used to carry out the purpose of the organisation. To classify as a not-for-profit, the governing documents of the organisation should include a non-profit clause that prevents it from distributing any assets or profits to its members – during operation and when it winds up.
For example, the governing documents should contain clauses similar to the following examples:
Non-profit clause
‘‘The assets, income and profits of the organisation shall only be applied in the furtherance of its objectives as mentioned above, and no portion shall be distributed directly or indirectly to the members of the organisation. However, members can be compensated for the services rendered or expenses incurred on behalf of the organisation.”
Dissolution clause
‘‘In the event, the organisation is being dissolved, any assets and income remaining after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purpose which is not carried on for the profit of its members.”
If you are wondering how to start a Not-for-Profit organisation, check out our detailed guide.
Types of Not-for-Profit Organisations
Generally, Non-for-profit companies fall under two broad categories:
Charities
Charities include public benevolent institutions (PBIs) and health promotion charities (HPCs). Firstly, organisations must register on ACNC Charity Register to access tax concessions extended to charities. Secondly, to access income tax exemption, GST concessions and FBT concessions, the ATO must endorse these charitable organisations.
Other non-for-profit organisations
This category includes any not-for-profit organisations that do not operate as a charity. This includes PBIs and HPCs. For example sports clubs, community service clubs and recreational clubs.
Tax Concessions Available
There is a range of concessions available, meaning some not-for-profit organisations won’t have to pay tax. However, However, it is essential to note that not all tax concessions apply to all not-for-profit companies. Concessions include:
Income Tax Exemption
- Certain not-for-profit organisations are eligible for income tax exemptions, in particular, registered charities, community organisations, cultural organisations, health organisations, resource development organisations, scientific organisations and sporting organisations.
- The ATO must register and endorse charitable organisations for these organisations to access income tax exemption.
- Other not-for-profit organisations can self-assess their entitlement to income tax exemption.
Fringe Benefits Tax (FBT) Concession
- Fringe benefits are payments to employees in a non-monetary form. Fringe Benefit Tax is a tax payable by employers who provide these benefits to their employees.
- FBT can apply to not-for-profit organisations if they provide non-monetary rewards to employees in place of wages and salaries.
- Charitable organisations must register with the ACNC to access FBT concessions. The current threshold for registered charities (including PBIs and HPCs) is $30,000 per employee.
- Public ambulance services, public and non-profit hospitals are also eligible for exemption with a capped threshold of $17,000 per employee.
- If an organisation is a PBI and a hospital, the lesser FBT exemption applies ($17,000 per employee in this case). The organisation cannot opt for the PBI exemption cap of $30,000.
- In addition, certain organisations are eligible for the FBT rebate which grants the organisation a discount equal to 48% of the gross FBT payable by the organisation. This is subject to the capping threshold.
- However, these rebates are not available to charities that are categorised as funds, established by the Australian government, registered PBIs and registered HPCs which are eligible for FBT exemption.
GST Concessions
- GST concessions are available to all registered charities, government schools and Deductible Gift Recipients.
- Your not-for-profit organisation must register for GST if the GST turnover is $150,000 or more.
Deductible gift recipients (DGR)
- Deductible Gift Recipients are organisations that are eligible to receive income tax-deductible gifts and tax-deductible contributions.
- The ATO should endorse the organisation as DGR or the name of the organisation must be on record under the Income Tax Assessment Act 1997 (Cth) to access these entitlements.
Refund of franking credits
- A franking credit is a type of tax credit which gives shareholders rebates for taxes paid on profits by the company through dividends.
- The organisation might be able to seek endorsement from the ATO or register as a Deductible Gift Recipient to obtain these tax concessions.
Therefore, it is important you understand the type of non-profit organisation your company is before seeking tax concessions. In short, yes, some not-for-profit organisations have to pay tax. However, it depends on the structure and exemptions that may be available.
If you have further questions or wish to seek advice about specific tax concessions available for your organisation, one of our Not-for-Profit lawyers can assist.
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