The basic premise of a Not-For-Profit (NFP) entity is that they are not subject to tax. However if you breach a new ATO ruling, the tax man may be coming your way.
The Australian Tax Office (ATO) has issued a Taxation Ruling (2015/1) that increases the compliance burden for entities that hold an ‘Exempt Income’ status. To ensure your NFP will remain exempt from income tax under the new ruling, your entity needs to meet the following two conditions:
- “The entity must comply with all substantive requirements in its governing rules” – the governing rules condition.
- “The entity must apply its income and assets solely for the purpose of which the entity is established” – income and assets condition.
Both of these conditions must be satisfied at all times during the financial year to remain tax exempt.
The Governing Rules Condition
The “Governing Rules Condition” relates to the ‘substantive rules’ that establish what an entity, and the people that control it, are required and permitted to do. Most commonly found within the organisation’s Constitution, they include:
- The organisation’s documented purpose
- Powers and duties of directors and office holders
- Conditions for membership
Substantiative rules do not include procedural rules that may be implemented by the entity, such as policies that outline how day-to-day activities are to be carried out.
Income & Assets Condition
Income and assets must be applied purely to serve the purpose of the entity (as outlined in your Constitution). The two key questions to consider in adhering to this condition are:
- What is the ‘purpose’ for the existence of the organisation?
- Has the organisation used its income and assets solely for this purpose?
The Tax Office allows things that may be ancillary or incidental to the main purpose of the organisation. It also allows for a change of purpose, so long as the assets and income of the organisation continue to be used solely for the changed purpose as of the day the change was made.
Tax risk facing charities
If a not-for-profit acts in any way that does not comply with its own governing rules or their purpose as documented, it risks being taxed on the income received in that financial year.
To remain compliant, you need to clearly document any changes in the purpose of your NFP entity, and ensure that all operations are directed towards achieving that purpose, whilst adhering to each of the substantive rules that support the organisations operation.
Review your constitution now!
Reviewing your Constitution is essential to remain compliant. Are your documented rules reflective of the rules that are currently adhered to in your organisation? Is the documented purpose in line with the activities your Organisation currently carries out? Have those activities changed during the financial year? If so, make sure your Constitution is updated as soon as possible to reflect this. Any minor breach puts your organisation at risk.
If you would like further information regarding this Taxation Ruling, please give your local Accru office a call.