Tax Basics for Nonprofit Organization

The nonprofit organization operates in many areas of our society; this will include:

  1. Church schools 
  2. Churches in the community 
  3. Childcare centers 
  4. Cultural societies 
  5. Environmental protection societies 
  6. Neighbourhood associations 
  7. Public museums and libraries 
  8. Scholarship funds 
  9. Scientific societies 
  10. Scouts 
  11. Sports clubs 
  12. Surf lifesaving clubs 
  13. Traditional service clubs.

Before you consider putting up a nonprofit organization you should understand first the tax basics for a nonprofit organization.

First, it can be either an incorporated organization or an unincorporated organization. 

It has many tax advantages over profit-driven regular companies.

It enjoys the mutuality principle, which means that the income derived from the members is exempt and is not subject to tax, saying that all the deductions associated with the members are not deductible items. 

It is also important to note that nonprofit organizations that have not gained the gift deductible recipient status are not a charity and do not enjoy the income tax exemption and FBT exemption from being a registered charity. You can apply for registered charity status from the ACNC.

Organizations that are not charities can self-assess their entitlement to income tax exemption. They do not need to be endorsed by us to be exempt from income tax. Most have additional tests and rules that must be met before the organization can be exempt.

The GST registration threshold for a nonprofit organization is $150,000. This means your nonprofit organization is not required to be registered for GST unless the GST turnover of your organization is $150,000 or more. You may still choose to register your organization for GST if its GST turnover is less than $150,000. The decision to voluntarily register for GST is one that should be based on the administrative needs of your organization. Some organizations may choose not to register for GST because they consider the GST reporting requirements to be a greater burden than the benefit they would receive, for example, access to GST credits.

It is also important to note that as a nonprofit organization, you need to withhold tax from your employee and report the withheld and super payment to ATO via the single touch payroll. From July 2022, the superannuation guarantee rate would be increased to 10.5%. 

For your organization to be a not-for-profit company it must meet the ‘not-for-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 organization can be a not-for-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.

It is important to review the clause in the nonprofit organization to assess whether the followings are still valid

Example clauses for not-for-profit companies

Nonprofit clause

The assets and income of the organization 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 organization except as bona fide compensation for services rendered or expenses incurred on behalf of the organization.’

Dissolution clause

‘In the event of the organization being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organization with similar purposes and has rules prohibiting the distribution of its assets and income to its members.’

The tax rate for the nonprofit organization depends on whether it is a base rate entity or not.

The Act divides associations into two tiers for reporting purposes.

Larger, or Tier 1 associations are those whose gross receipts are more than $250,000 or current assets are more than $500,000. Tier 1 associations are required to submit audited financial statements each year to the members at the AGM.

Smaller, or Tier 2 associations are those whose gross receipts are less than $250,000 or current assets are less than $500,000. Tier 2 associations are required to submit a summary of their financial affairs to the AGM.

Associations must lodge annual financial summaries in the approved form with Fair Trading within 1 month after the AGM and no later than 7 months after the end of the association’s financial year.