Non-profit or other taxable company
To work out if your organisation needs to lodge an income tax return and what rate of tax it pays, you first need to determine if your organisation is a non-profit company or other taxable company.
A NFP organisation does not need to be incorporated to be treated as a company for income tax purposes.
For your organisation to be a non-profit company it must meet the 'non-profit requirement'. This means that:
- it must be a company that is not carried on for the purposes of profit or gain to its individual members
- its constituent documents must prohibit it from making any distribution, whether in money, property or otherwise, to its members.
Your organisation can be a non-profit company and still make a profit. However, any profits it makes must be used to carry out its purposes. The profits must not be distributed to members.
Example: Making a profit
A society makes a $40,000 profit for the year. It uses the profit to reduce its debts and provide for the activities it will carry on next year.
End of example
The prohibition on distributions applies while the organisation is operating and on its winding up. If it permits its members to transfer the assets to themselves on winding up, it is not a non-profit company.
A non-profit company can make payments to its members as bona fide remuneration for services they have provided to it, and as reasonable compensation for expenses incurred on behalf of the organisation.
The income tax law does not prescribe a form of words that a non-profit company must have in its constituent documents. The following example clauses would be acceptable, as long as other clauses were not contrary to them. The organisation's activities must be consistent with the clauses.
Example clauses for non-profit companies
'The assets and income of the organisation shall be applied solely in 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.'
'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 and which has rules prohibiting the distribution of its assets and income to its members.'
End of example
Organisations carried on for the joint or common benefit of their members can qualify as non-profit companies. An example would be a professional association established to advance the professional interests of its members. However, the association must not be carried on for the profit or gain of its individual members.
Other taxable companies
Clubs, societies and associations that do not meet the 'non-profit requirement' are treated as other taxable companies.
This means that other taxable companies will include clubs, societies and associations that are not carried on for the purposes of profit or gain to their individual members but whose constituent documents do not prohibit distributions to their members.
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