Explanation of the three tests
Some not-for-profit (NFP) organisations must pass one of three tests to be exempt from income tax. The tests are the:
- physical presence in Australia test
- deductible gift recipient (DGR) test
- prescribed by law test.
If your organisation exists, operates and incurs its expenditure solely and entirely in Australia, you meet the physical presence in Australia test. You do not need to read anything further about the three tests.
If your organisation does not exist, operate and incur its expenditure solely and entirely in Australia, read on to work out if you meet any of them.
Physical presence in Australia test
Your organisation will meet this test if it meets both of the following requirements:
- your organisation has a physical presence in Australia
- to the extent your organisation has a physical presence in Australia, it pursues its objectives and incurs its expenditure principally in Australia.
If your organisation does not meet these requirements, it could still meet the test – see Disregarded amounts.
An organisation has a physical presence in Australia if it is wholly in Australia, or it has a division, branch or sub-division in Australia.
It does not have a physical presence in Australia if it is present in Australia only through an agent, or it merely owns investment property in Australia.
Objectives and expenditure principally in Australia
If your organisation has a physical presence in Australia only, it must pursue its objectives and incur its expenditure principally in Australia.
Principally means mainly or chiefly. Less than 50% of expenditure is not considered principally.
The pursuit of objectives in Australia can include things done offshore if they are only a means of pursuing those objectives. For example, sending employees to an offshore conference to aid their efficiency for the Australian objectives will be pursuing objectives in Australia.
Example – Physical presence in Australia test
A community service association is physically present only in Australia, but it also sends materials to organisations overseas. As long as these activities and expenditure are not major, it will meet the physical presence in Australia test.
End of example
If your organisation has a physical presence in Australia as well as another country, you need to work out the extent to which your organisation is physically present in Australia. It is only to that extent that your organisation's purposes and expenditure must be principally in Australia.
Therefore, even if your organisation, when viewed as a whole, does not principally have its purposes and expenditure in Australia, it can still meet the physical presence in Australia test.
Example 1 – Physical presence test
A sports club operates two centres, one in Australia and one in Papua New Guinea. Each centre operates separately, with general administration being done in Papua New Guinea.
If the Australian activities and expenditure are mainly for the Australian centre, it will meet the physical presence in Australia test.
Example 2 – Physical presence test
BNM Welfare is a community service organisation. It runs four centres, one in Australia and three in Malaysia. All funding comes from Australia and a similar amount is spent on each centre.
To the extent BNM Welfare has a physical presence in Australia, it is not principally pursuing its objectives and incurring its expenditure in Australia. It could only meet the physical presence in Australia test through the distribution of disregarded amounts.
End of example
An organisation may still meet the physical presence in Australia test even if it does not pursue its purposes and incur its expenditure principally in Australia, to the extent it has a physical presence in Australia. This will depend on its distribution of disregarded amounts.
Disregarded amounts are amounts that the organisation receives as:
- gifts, including testamentary gifts (that is, gifts made under a will)
- proceeds from raffles, dinners, auctions, jumble sales and similar fundraising activities
- government grants.
Distributions of these amounts are disregarded when working out where the organisation pursues its objectives and incurs its expenditure.
We assume any offshore distributions are made first from any disregarded amounts that can be distributed offshore. The assumption does not apply if a disregarded amount cannot be distributed offshore. For example, government grants made only for use in Australia, or gifts of land physically in Australia, are not assumed to be distributed offshore.
The effect of this assumption is that offshore distributions can be made, up to the total of these amounts, without affecting your entitlement to income tax exemption.
Example – Disregarded amounts
An Australian musical association also provides funding to a school in the Philippines for the purchase of musical instruments. The association hopes to promote and nurture musical education there. The distribution does not exceed its disregarded amounts.
Because the disregarded amounts are assumed to pay for the Philippine activities, the association can still meet the physical presence in Australia test.
End of example
Does your organisation meet the physical presence in Australia test?
Deductible gift recipient test
The deductible gift recipient test requires your organisation to be a deductible gift recipient (DGR). DGRs are entities donors can make income tax deductible gifts to. The income tax law determines which organisations and types of organisations can be DGRs.
To be a DGR, you must either:
- be listed by name in the income tax law – includes organisations such as Amnesty International Australia and Landcare Australia
- meet the requirements of a general DGR category set out in the income tax law – includes registered PBIs, public universities, public hospitals, school building funds, public libraries, registered cultural and environmental organisations, and ancillary funds.
DGRs that are not listed by name in the income tax law need to be endorsed by us.
Several general DGR categories require your organisation, if it is a charity, to be registered with the Australian Charities and Not-for-profits Commission (ACNC).
Your organisation will meet the DGR test if it either:
- has been endorsed as a DGR in its own right and not merely for a fund or institution that it operates
- is listed by name in the income tax law as a DGR.
Your organisation will not meet the DGR test if it is endorsed as a DGR only for a fund or institution that it operates.
Example – DGR test
A community service organisation is endorsed as a DGR for a necessitous circumstances fund it operates. Gifts made to its necessitous circumstances fund could be tax deductible.
The community service organisation would not meet the DGR test because it is a DGR only for the necessitous circumstances fund.
End of example
Does your organisation meet the DGR test?
Prescribed by law test
Your organisation will meet this test if it is prescribed by name in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.
The government decides which organisations will be prescribed by name in the income tax regulations. You can send applications for prescription to us and we will forward them to the government for consideration.
If your organisation is not listed by name in the income tax regulations for exemption purposes, it does not meet this test.
Does your organisation meet the prescribed by law test?
If your organisation has not passed one of the three tests, your organisation is not income tax exempt. To understand the outcomes of this, see Table: Self-assessment outcome 'Not-exempt' in Self-assessment.
If you are unsure if your organisation meets the requirements, see Table: Self-assessment outcome 'Unsure' in Self-assessment.
Some organisations must pass one of three tests to be exempt from in income tax.