Are all non-profit organisations exempt from income tax?
No. The income tax law provides that only certain types of non-profit organisations are exempt.
The following types of organisations must be endorsed by us to be exempt from income tax:
Other organisations can self-assess whether they are exempt from income tax.
Many organisations are taxable and may need to lodge an income tax return and pay income tax.
Is your organisation 'non-profit'?
To access the income tax concessions that apply to non-profit organisations, your organisation must be 'non-profit'.
A non-profit organisation is one which is not operating for the profit or gain of its individual members, whether these gains are direct or indirect. This applies both while the organisation is operating and when it winds up.
We accept an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.
Examples
Acceptable clauses that indicate non-profit character include:
Non-profit clause
'The assets and income of the organisation shall be applied solely in the furtherance of its above-mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.'
Dissolution clause
'In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its individual members.'
A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. The profits must not be distributed to owners, members or other private people.
Does your organisation need to be endorsed to be exempt?
If your organisation is a charity it will need to be endorsed by us to be exempt from income tax.
What is a charity?
For an organisation to be a charity it must be established and operated for altruistic purposes that the law regards as charitable.
The characteristics of a charity are:
- it is non-profit
- it is an entity which is a trust fund or an institution
- it exists for the public benefit or the relief of poverty
- its purposes are charitable within the legal sense of that term
- its sole purpose is charitable.
Charitable purposes are:
- the relief of poverty, sickness or the needs of the aged
- the advancement of education
- the advancement of religion
- the provision of child care services on a non-profit basis
- other purposes beneficial to the community.
Example
Charities include most religious institutions, aged persons homes, homeless hostels, organisations relieving the special needs of people with disabilities and societies that promote the fine arts.
An organisation that is established, controlled and operated by family members and friends will not generally be considered a charity.
Most clubs, societies and associations are not charities.
Your organisation will not be a charity if:
- it is primarily for sporting, recreational or social purposes
- it is primarily for political, lobbying or promotional purposes
- its purpose is illegal or against public policy
- it is primarily for carrying on a commercial enterprise to generate surpluses.
Example
Organisations that are not charities include social clubs run by religious institutions, ethnic cultural associations, cinema clubs, friendship clubs, wine societies, fan clubs, rowing clubs, football clubs, dancing clubs, athletic clubs, model train societies, boating and fishing clubs, boxing clubs, golf clubs, car clubs and motor racing clubs.
What if your organisation is a charity?
If your organisation is a charity, it cannot self-assess its income tax exemption. It must apply to us for endorsement to be exempt.
If your organisation is not a charity, will it be exempt?
If your organisation is not a charity, it can self-assess its income tax exemption.
Only some specified categories of organisations are exempt. They come from these broad categories:
- Cultural organisations
- Community service organisations
- Educational organisations
- Employment organisations
- Health organisations
- Religious organisations
- Resource development organisations
- Scientific organisations
- Sports organisations
Many of the exempt categories require the organisation to be a non-profit club, society or association and to pass one of the following tests:
- physical presence in Australia test: the organisation has a physical presence in Australia and, to the extent of its physical presence, it pursues its objectives and incurs its expenditure principally in Australia
- deductible gift recipient test: the organisation is a deductible gift recipient
- prescribed by law test: the organisation is prescribed by law in the income tax regulations, and it is located outside Australia and is exempt from income tax in its country of residence.
If an organisation meets all the requirements for income tax exemption, it will be exempt without the need to inform us.
Example
A club wanting exempt status as a cultural organisation must be 'non-profit' and its main purpose must be the encouragement of art, literature or music.
The club must also pass one of the three tests described above. If the club meets all the requirements it will be exempt from income tax. It will not need to inform us of its exemption.
Your organisation's main purpose is social or recreational - does it fall within the exempt categories?
No. If your club's main purpose is providing social or recreational facilities and activities, it will not be exempt.
Example
A club is established for persons of a particular nationality. Its main purpose is to provide members with a social outlet and recreational activities. It is not an exempt organisation even though traditional music and dance may be performed at the club.
What if your organisation meets all the requirements for exemption?
If you work out your organisation meets all the requirements for income tax exemption:
- it will not need to pay income tax or lodge income tax returns (unless specifically requested)
- you do not need to get confirmation of its exemption from us
- you should carry out a yearly review to check if it is still exempt. You should also do this when there are major changes to your organisation's structure or activities.
If your organisation is not exempt from income tax, how is it treated?
Clubs, societies and associations that are not exempt are taxable. They are generally treated as companies for income tax purposes, whether they are incorporated or not.
Taxable clubs, societies and associations are treated as non-profit companies if they meet the 'non-profit requirement'. This means that they must be prohibited, by the terms of their constituent documents, from making any distributions, whether in money, property or otherwise, to their members. They have the benefit of special arrangements for lodging income tax returns and special rates of tax.
Clubs, societies and associations that do not meet the 'non-profit requirement' are treated as other taxable companies. This means that although they may not be carried on for the purpose of gain to their individual members, they are not prohibited, by the terms of their constituent documents, from making any distributions, whether in money, property or otherwise, to their members. Such organisations are required to lodge an income tax return each year, regardless of their taxable income. They have the same rates of tax applied as other companies.
Both categories lodge returns using the Company tax return (NAT 0656).
When is a non-profit company required to lodge an income tax return?
A non-profit company with taxable income of:
- $416 or less a year is not required to lodge an income tax return if an Australian resident (unless specifically requested to do so)
- more than $416 a year is required to lodge an income tax return for that year.
Returns should be lodged using the Company tax return (NAT 0656). This form and the accompanying instruction booklet are available from us.
What income tax rates apply to non-profit companies?
The income tax rates that apply to non-profit companies are as follows:
Taxable income
|
Rate of tax
|
0 - $416
|
nil
|
$417 - $915
|
55% for every $1 over $416
|
$916 and above
|
30% on the whole amount of taxable income
|
Examples
A non-profit organisation has taxable income of $380 in the income year 2010-11. The income tax payable is nil.
A non-profit organisation has taxable income of $900 in the income year 2010-11. The income tax payable is $266.20. It is calculated as ($900 - $416) x 0.55.
A non-profit organisation has taxable income of $2,000 in the income year 2010-11. The income tax payable is $600. It is calculated as $2,000 x 0.30.
How is the taxable income of a non-profit organisation calculated?
The taxable income of a non-profit organisation is calculated in the same way as for other companies. However, you will need to know about how amounts received from members are treated.
Other taxes and obligations
Regardless of whether your organisation is exempt from income tax or taxable, it may have other taxes or obligations such as goods and services tax (GST), fringe benefits tax (FBT) and pay as you go (PAYG). Contact us for more information.
More information
Last Modified: Wednesday, 1 August 2012