Tax landscape

On this page

• Introduction
• What would an income tax exemption mean for your community organisation?
• Does your organisation fit into one of the categories to self-assess for an income tax exemption?
• Are there additional ATO requirements to be eligible for the exemption?
• What if your organisation doesn't qualify for an income tax exemption?

Introduction

Under the tax law in Australia, a not-for-profit organisation must pay tax on its 'taxable income', unless it qualifies for an exemption.

Your organisation may not be required to pay income tax if:

• your organisation is a registered charity with the Australian Charities and Not-for-Profits Commission (ACNC) and endorsed by the Australian Taxation Office (ATO) as income tax exempt
• your organisation is not eligible to register as a charity, but falls into a self-assessment category specified in the tax law and therefore ‘self-assesses’ as income tax exempt, or
• your organisation’s annual income falls under the taxable income threshold (currently $417)

Charities

Charities (including public benevolent institutions and health promotion charities) must be registered with the ACNC, and then endorsed by the ATO to access the income tax exemption.

An organisation may meet the statutory definition of ‘charity’ but choose not to register as a charity with the ACNC. If an organisation meets the statutory definition of ‘charity’ but has not registered as a charity with the ACNC, it is not entitled to access income tax exemption.

If an organisation is applying to be registered as a charity with the ACNC for the first time, it can also apply for other tax concessions at the same time. The ACNC will pass most applications for charity tax concessions (including the income tax exemption) on to the ATO.

If an organisation is already registered with the ACNC, it can apply for charity tax concessions directly to the ATO by using the relevant forms available on the ATO's website. 

What would an income tax exemption mean for your community organisation?

If your organisation qualifies for and obtains an income tax exemption (either through endorsement by the ATO or the self-assessment process), it will not have to: 

• pay any income tax, or 
• lodge tax returns (note, however, in some limited cases the ATO may specifically request that your organisation lodge tax returns) 

The income tax exemption available for not-for-profit organisations does not apply to the income tax payable by any employees of the organisation. 

If your organisation has employees, it will still have legal obligations (under separate provisions of tax law) to:

• collect 'pay as you go' (PAYG) withholding amounts from certain payments (for example, payments of salaries and wages)
• comply with any fringe benefits tax (FBT) obligations (although an endorsement for the FBT rebate or exemption may be available in addition to an income tax exemption for certain organisations), and
• comply with superannuation guarantee obligations

A not-for-profit organisation which has been endorsed by the ATO for an income tax exemption or an organisation that self-assesses as income tax exempt may also have GST obligations as GST is not an income tax.

Does your organisation fit into one of the categories to self-assess for an income tax exemption?

If your organisation is not a charity and is not entitled to register as a charity, you may be able to self-assess whether it falls into one of the categories set out in the tax law that is entitled to an income tax exemption, such as a community service organisation.

There are eight non-charitable not-for-profit categories that can access an income tax exemption, and additional ATO requirements must be met to be eligible for the exemption. Information on these eight categories and the additional ATO requirements is set out below.

Are there additional ATO requirements to be eligible for the exemption?

To access an income tax exemption, both registered charities and organisations that fall into an ATO non-charitable not-for-profits category, must also pass one of three ATO ‘tests’:

• the organisation must have a physical presence in Australia
• the organisation must be endorsed as a deductible gift recipient, or
• the organisation must be prescribed by name in the income tax regulations, located outside Australia, and exempt from income tax in its country of residence

Details of these three tests can be found on the ATO's webpage on the explanation of the tests.

The 'in Australia' condition

An organisation may have a physical presence in Australia if it has an office and employees or volunteers in Australia. This includes organisations that have a division, branch or sub-division operating in Australia.

An organisation pursues its objectives and incurs its expenditure principally in Australia if more than 50% of its objectives are pursued and more than 50% of its expenditure is incurred in Australia.

If your organisation has a physical presence in Australia as well as overseas, its objectives and expenditure need only amount to more than 50% of the proportion of the organisation’s Australian operations. (So even if your organisation, when viewed as a whole, does not principally pursue its purposes and incur its expenditure in Australia, it may still meet the 'in Australia' test.)

When working out where the organisation pursues its objectives and incurs its expenditure, certain amounts are disregarded. This includes monies received by an organisation as gifts (including gifts made under a will), proceeds from raffles, dinner, auctions, jumble sales and similar fundraising activities, and government grants.

In addition to passing one of these three tests, organisations that fall into an ATO non-charitable not-for-profits category must also:

• comply with all the substantive requirements in its governing rules, and
• apply its income and assets solely for the purpose for which it is established

The substantive requirements of your organisation's governing rules include rules which set out your organisation's object and purpose, not-for-profit status, power and duties of the directors and officers, winding up requirements, obligation to prepare financial statements, and obligation to maintain a register of members.

To be eligible for an income tax exemption, your organisation should not be spending time, money or resources on activities that are not in furtherance of your mission or purpose. For example, if your purpose is to provide relief to people experiencing homelessness, you should not be undertaking activities for other purposes (like environmental or cultural activities) even though these are worthy purposes.

To determine whether your organisation meets this condition, consider the objects or purposes of your organisation as set out in its governing rules, and whether your organisation has applied its income and assets solely for these purposes.

If you are unsure whether your organisation meets these requirements, speak to a professional tax or legal advisor or the ATO. 

Caution - when self-assessing for income tax exemption

Your organisation can be reviewed by the ATO, and if the ATO does not agree with your assessment, you may need to pay back tax for the period that you wrongly self-assessed. Interest and penalties may also apply.

If you are uncertain about the status of your organisation, you can seek a private binding ruling from the ATO on your organisation’s tax-exempt status.

What if your organisation doesn't qualify for an income tax exemption?

Your organisation will be required to pay tax on its 'taxable income', and lodge income tax returns, unless it has taxable income of less than $417.  

If your organisation is a membership organisation (such as a club) refer to the ATO’s webpage ‘Mutuality and taxable income’ to work out the taxable income. Broadly, the taxable income of a club, society or association is calculated in the same way as a company for tax purposes. Organisations should generally use the 'company' tax return to lodge a return with the ATO.  For more information see the ATO's webpage for not-for-profit organisations. 

The content on this webpage was last updated in September 2023 and is not legal advice. See full disclaimer and copyright notice.

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