Taxation and concessions
Incorporated organisations along with other nonprofit organisations are subject to state and federal taxation requirements including Income Tax, FBT, GST, Land Tax, Payroll Tax and Stamp Duty. A number of exemptions are available to certain types of associations for these taxes or duties, but in each case the organisation must formally apply for exemption from the relevant authority. The Income Tax Assessment Act affects both the income of an organisation and the donations made to it. All taxpayers, including persons and organisations, are required to pay tax on their income unless they are granted exemption by the Tax Office.
As employers, most organisations are obliged to take tax from the salary of their employees before the wage is paid, as well as account for superannuation contributions. This is sent to the Tax Office. Instructions on how this occurs and rates of tax to be deducted are readily available. If your organisation adopts a salary sacrifice policy, then further obligations under FBT will be imposed. You should speak to your accountant, auditor or the Tax Office about the circumstances of your organisation to choose which system suits you.
The most common income tax exemption for community organisations will either be as a ‘charitable institution’ or a ‘society, association or club established for community service purposes (except political or lobbying purposes’. There are other categories which can be found through the Tax Office material mentioned in the Useful Resources section below.
The Not-for-profit portal of the Australian Tax Office website specifically addresses the not-for-profit sector. It contains details of:
- the various concessional statuses available;
- fringe benefit tax exemptions and rebates available to public benevolent institutions and other organisations;
- income tax exemptions;
- GST concessions;
- tax deductions for charitable gifts;
- lastest news on the federal tax system;
- information about ABN’s and GST;
- tax rate calculators and
- compliance information.
An easy way to determine your organisation’s current status is with the ABN Lookup tool.
The Tax Office refers to charitable institutions as Tax Concession Charities (TCC). All charitable institutions are required to be endorsed by the Tax Office. To be endorsed as an TCC, an entity must have an Australian Business Number (ABN). This must be the ABN of the entity itself. An ABN held for GST purposes by a nonprofit sub-entity is not sufficient. An entity must also meet other requirements to be entitled to endorsement.
In 2000, the federal taxation law was amended to require charitable institutions and funds to be endorsed by the Tax Office. The law generally exempts from tax all income generated by these organisations provided that:
- The organisation’s main purpose or object is exempt and its actual activity is directed to these purposes
- The organisation is nonprofit (i.e. it does not distribute, and is constitutionally prohibited from distributing, its surplus to anyone or any purpose, other than its stated exempt objectives)
- The organisation has an appropriate dissolution clause which transfers any surplus to a similar tax-exempt organisation, not its members or controllers
If the Tax Office endorses an entity as an income tax exempt charity then:
- The entity is exempt from income tax
- The entity does not need to lodge income tax returns, unless specifically asked to
TCCs may also be entitled to the refund of excess imputation credits, certain fringe benefits and GST concessions. Income taxation exemption does not confer any gift deductibility status on an organisation. This is a different status and is discussed below in the section on deductible gift recipients (DGRs).
To be a charitable institution, an entity must be an establishment, organisation or association that is instituted to advance or promote charitable purposes. Types of organisations that may be charitable institutions include welfare agencies, churches, public libraries, parents and citizens associations, refuges and research institutes. The common law defining charity has been built up over 400 years of legal cases developing precedents. It is not a completely logical and rational body of law. The lack of contemporary Australian case law further contributes to ‘fuzzy’ areas of contention that often lead to different conclusions by the ATO, the sector and even judges in the rare instances that a case is brought. The common law definition of charity has been extended for all federal legislation to include the provision of child care, open and non-discriminatory self-help groups (mutual support disease groups) and contemplative religious orders.
For a further explanation of the definition of charity, refer to the Report of the Inquiry into the Definition of Charities and Related Organisations, the Tax Office publication Income Tax Guide for Non-profit Organisations (NAT 7967) and the draft Taxation Ruling TR2005/21 and TR2005/22 (both available at on the ATO website).
Public benevolent institutions
A public benevolent institution (PBI) is a non-profit institution organised for the direct relief of poverty, sickness, suffering, distress, misfortune, disability or helplessness.
The characteristics of a PBI are all of the following:
- it is set up for needs that require benevolent relief
- it relieves those needs by directly providing services to people suffering them
- it is carried on for the public benefit
- it is non-profit
- it is an institution
- its dominant purpose is providing benevolent relief.
To be a PBI, your organisation must be a charity.
The income of a society, association or club established for community service purposes is exempt from income tax, except where it is for political or lobbying purposes.
This provision catches those organisations that often for some technical reason fail to be regarded as charitable, but are set up for altruistic purposes such as promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstance.
The definition of ‘society, association or club’ refers to a voluntary organisation having members associated together for a common or shared purpose. Such bodies may be incorporated or unincorporated, but do not include any body formed and controlled by government and performing functions on behalf of government.
The Tax Office has specifically considered the following to be exempt:
- Service clubs such as Apex, Rotary, Lions, Zonta, Quota
- Country Women’s Association of Australia
- Non-profit child care centres including long day care, after school care, day child care in activity caravans
- Aged pensioner and senior citizens associations
- Associations of play groups
- Associations of Justices of the Peace
Not all nonprofit associations will qualify for the exemption as the purpose of the association must be for ‘community services’. ‘Community services’ is to be determined not merely by reference to whether a service is provided or available to the community, but also the motive by which it is provided. There is a distinction to be drawn between an association that is advancing its members’ interests and an association advancing some community interests. The Tax Office states that the following will not be included in the exemption:
- Clubs that only provide a social forum for expatriates of a particular country
- Clubs that promote public speaking or debating
- Clubs that provide a social forum for retired and semi-retired business people and others
- Bodies established to promote tourism
- Military service unit organisations
- Particular residential areas
- Philatelic (stamp collecting) societies
However, even though political and lobbying activities may be driven by altruistic motives, the legislation specifically excludes such purposes. This does not mean that any political or lobbying activities will preclude an organisation from the section. Only those organisations whose dominant purposes are political or lobbying will be excluded and incidental occurrence of such activities will not be fatal to exemption status.
For further explanation of this category refer to the Tax Office publication Income Tax Guide for Non-profit Organisations (NAT 7967) and the Taxation Determination TD93/190 (both available on ATO website).
Deductible Gift Recipient
‘Deductible Gift Recipient’ (DGR) is a term used in taxation law. The main purpose of the definition is to identify organisations, funds or authorities to which a gift may be tax deductible by the donor. Classes of organisations and specifically named organisations described in Division 30 of the Income Tax Assessment Act 1997 can be the recipients of tax deductible gifts, some subject to further conditions. The main category is a Public Benevolent Institution (PBI) and includes some but not all community organisations.
A PBI is a nonprofit institution whose dominant purpose is the direct relief of poverty, sickness, destitution, suffering or misfortune and for the benefit of the community, or a section of it. The Tax Office has issued a ruling on the definition of PBI in TR 2003/5, which is available on the Tax Office website. Like the definition of charity discussed above, the definition of PBI has many fuzzy parts and is subject to ongoing dispute.
The condition or misfortune that is relieved by a PBI will be such as to arouse pity or compassion in the community. Needs might be caused by poverty or lack of financial resources. Disability or sickness can also give rise to misfortune or helplessness. On the other hand, needs that are to be met by education, training or the promotion of cultural or social objectives will not normally arouse community compassion and call forth the giving of benevolent relief. However, they might do so where the needs arise from poverty or helplessness.
Fees charged for the provision of services will be one of the factors to be considered in determining whether an organisation is a PBI. The type and level of charges and any waiver policy may, in light of the types of services provided, indicate that an organisation is not primarily for the relief of distress and suffering.
A PBI directs its activities towards persons in need of relief. If an organisation exists to promote social welfare in the community it will generally lack the required direct benevolence. Similarly, a purpose of preventing distress or misfortune from arising will not on its own be benevolent in the required sense. In the same way, it is not sufficient that the consequences of an organisation’s activities tend to relieve distress and suffering.
Purely governmental bodies, which are constituted, funded and controlled by government and perform the accepted functions of government, operate to promote the welfare of the community generally and are unlikely to be PBIs.
For further explanation of PBIs refer to the Tax Office publication GiftPack (NAT 3132) available on the ATO website.
Other Income Tax Requirements
Each organisation is required by taxation law to appoint a public officer of the organisation for the purposes of the income tax provisions. A written notice of appointment and a change in particulars of the public officer is required by the Act. The person so appointed must be over 18 years and resident in Australia. The appointment is usually minuted by the management committee.
Organisations will need to ensure they keep complete records of all business-related transactions within their books of account. These records may be kept either manually or electronically.
The Income Tax Assessment Act requires organisations to keep sufficient records to explain all transactions and acts that may be relevant to the income tax legislation over a specified period, usually five years. These records must be in English. The publication Keeping Good Records (NAT 3029) describes the issues of preparing and maintaining adequate business records.
Goods and services tax (GST) is a broad based tax of 10 per cent on the sale of most goods and services consumed in Australia. Nonprofit organisations must register for GST if their annual turnover is $150,000 or more, and they may choose to register if their annual turnover is lower. Often granting authorities insist on GST registration before considering a grant application.
If you are registered for GST, you must include 10 per cent GST on most, or all, of your sales. In most circumstances, you can also claim a credit for the GST included in the price of goods and services you buy in carrying on your activities. There are special rules about certain types of sales made by charities, gift deductible entities and government schools. There are a number of different ways you can structure your organisation for GST purposes to minimise the costs of dealing with the tax collection.
The Australian Tax Office has a dedicated web site page for nonprofit organisations in relation to GST. The book Tax Basics for Nonprofit Organisations is also available from the ATO free of charge and includes relevant GST material.
Queensland State Taxes and Charges
Certain educational, religious and benevolent organisations can be exempted from paying stamp duty under the Queensland Duties Act 2001.
It is important to make contact with the Office of State Revenue well before you become engaged in property transfer dealings.
Each request for exemption is considered on its merits and the Commissioner will want to gather information about the applicant organisation and the purpose of the property transfer, the type of people who are involved (including their afflictions), and the type and nature of any work carried out.
Information about payroll tax and land tax can also be obtained from the Office of State Revenue.
The Exempt institutions and exempt charitable institutions page contains information specific to not-for-profit organisations.