Not-for-profit organisations do not operate for the profit or gain of its members including the main organisers and directors. No profit or gain could be derived by its members during its operations or when it winds up.
However, a not-for-profit entity can engage with commercial activities and make profits but these cannot be distributed among its members. Profits can only be used for the purposes outlined in the not-for-profit organisation’s constitution.
The common structures used by not-for-profit organisations include Unincorporated associations, Incorporated associations, Companies registered under the corporations Act 2001, Cooperatives, Indigenous corporations and Trusts. A structure has implications for statutory reporting and tax obligations of a not-for-profit organisation.
To register a not-for-profit entity, you would need to consider a number of regulatory and reporting obligations:
- Do you require an Australian Business Number (ABN)?
- Are you required to be registered for GST? Do you need to register for “Pay as You Go” (PAYG) for income tax?
- Do you provide Fringe Benefits Tax (FBT) to your employees and hence, need to register for FBT?
- Do you need to be registered with the Australian Charities and Not-for-profit Commission (ACNC) and have an endorsement for Deductible Gift Recipient (DGR)?
- Do you need to register your business name with the Australian Securities & Investment Commission (ASIC)?
There are two broad categories of not-for-profit organisations for taxation purposes:
- Charities and
- Others such as Sports Clubs, Recreational Clubs, Community Service Organisations, Professional and Business Associations.
To register a not-for-profit organisation as a charity, an application must be lodged with the ACNC. For an organisation to be a charity, it must be not-for-profit, have a charitable purpose and be for public benefit.
The ACNC determines and registers organisations as charities under appropriate charity sub-types which are enshrined in the Charities Act 2013. The charity sub-types are as follows:
- Advancing health; Advancing education;
- Advancing social or public welfare;
- Advancing religion;
- Advancing culture;
- Promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;
- Promoting or protecting human rights;
- Advancing the security or safety of Australia or the Australian public;
- Preventing or relieving the suffering of animals;
- Advancing the natural environment;
- Any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in the subtypes above;
- Advancing public debate (promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a state, a territory or another country);
- Public benevolent institution and Health promotion charity.
An organisation could be registered under one or more charity subtypes. Each subtype has a specific meaning under the law which should be explored in details prior to making an application to the ACNC. An applicant’s objects and activities must be directed towards achieving the charitable purpose described by at least a subtype.
The constitution of a charitable organisation must include clauses ratifying that the organisation is a not-for-profit entity and in the event of winding up, the assets of this entity will be distributed to entities with similar charitable objects and purposes.
An organisation must be registered with the ACNC to access any charity tax concession and apply to be endorsed as a DGR. A DGR endorsement allows donations received by the organisation to be deductible to donors for income tax purposes.
In 2019-20, as an example, an individual on the marginal tax rate of 37% will get a refund of $37 in the tax return for each $100 he or she donates to a DGR endorsed entity.
Apart from DGR tax concession, endorsed charities are able to access a number of tax concessions such as income tax exemption, GST charity concession and fringe benefits tax (FBT) rebate or FBT exemption.
Registration with the ACNC is a must to access these charity tax concessions.