Not-for-profits scrambling to justify tax-exempt status
The burdens of meeting the changes are being exacerbated by opaque reporting requirements, expert says.
From 1 July, not-for-profit organisations will be required to lodge an annual self-review return to the ATO demonstrating how they meet the criteria of a tax-exempt organisation under income tax legislation.
HLB Mann Judd tax consulting partner Gaurav Chitnis said he, like many of the affected organisations, was caught off-guard by the changes. Tax-exempt status is “critical” for NFPs and many are afraid theirs will be called into question under the obscure new requirements.
“When you think about a sporting association or a cultural organisation, the work they do is really important out in the community and the last thing they want is to be worrying about having to pay tax on any surplus profits that they’re making,” he said.
While meeting the criteria will not be an issue for most NFPs, proving their status will burden the already-stretched resources of many small NFPs.
“With any new tax law, there’s usually some behaviour that’s concerning whereby they have to change the way the tax office administers the law,” he said.
While the ATO is right to go after larger companies who wrongfully “shelter” behind tax-exempt status, Mr Chitnis was troubled by the indiscriminate impact of these changes.
“[The ATO] has the ability to specifically go and review taxpayers and certain organisations that they have concerns with. Instead, they have designed these broad measures that capture everyone,” he said.
The requirements could have been aligned with existing small business thresholds under income tax legislation instead of “putting this burden onto every single NFP … to me, this seems unnecessary,” he said.
Before the changes, NFPs were already required to conduct self-reviews on an annual basis. Mr Chitnis said many will have been unaware of these existing requirements.
“For the most part, that will be fine. We might be talking about a sporting association or an employer type of organisation – they are eligible, but they are not going through this formal process,” he said.
While the costs of meeting the new reporting requirements are yet unclear, the impacts will be most felt by smaller, less well-resourced NFPs.
Any costs associated with conducting these reviews will be exacerbated by the “limited information” published regarding the reporting process, said Mr Chitnis.
“How do you actually go about lodging it? You must have an active ABN, we know that. So, then, is it going to be linked to the ABN?” asked Mr Chitnis. Even once lodged, the ATO review process is unclear.
“There is a bit of concern that some [smaller NFPs] might not be compliant in a very strict sense under the tax law to be tax exempt,” he concluded.
