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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. Neighborhood 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 venturing into establishing a nonprofit organization, it’s crucial to grasp the tax basics for nonprofit organizations.

Types of Nonprofit Organizations

A nonprofit organization can take the form of either an incorporated or unincorporated entity.

Tax Advantages

Nonprofit organizations enjoy several tax benefits compared to profit-driven regular companies. One key advantage is the principle of mutuality, where income derived from members is exempt from taxation, along with associated deductions.

Charitable Status and Tax Exemption

Nonprofit organizations that attain charitable status benefit from income tax exemption and Fringe Benefits Tax (FBT) exemption. To obtain registered charity status, organizations can apply to the Australian Charities and Not-for-profits Commission (ACNC).

Income Tax Exemption

Non-charitable nonprofit organizations can self-assess their entitlement to income tax exemption. However, specific tests and rules must be met before exemption is granted.

GST Registration

Nonprofit organizations are required to register for GST if their turnover exceeds $150,000. However, registration is optional if turnover is below this threshold. The decision to voluntarily register should consider administrative needs and potential benefits.

Withholding Tax and Superannuation

Nonprofit organizations are responsible for withholding tax from employees and reporting it, along with super payments, to the Australian Taxation Office (ATO) via Single Touch Payroll. From July 2022, the superannuation guarantee rate increases to 10.5%.

Not-for-Profit Requirement

To qualify as a not-for-profit company, an organization must meet certain criteria, including:

  • It must not operate for profit or gain for its members.
  • Its constituent documents must prohibit the distribution of assets or income to members.

Reviewing Organizational Clauses

Nonprofit organizations need to review clauses related to nonprofit status regularly. Example clauses include the nonprofit clause, which dictates how assets and income are utilized, and the dissolution clause, specifying the distribution of remaining assets upon dissolution.

Tax Rate

The tax rate for a nonprofit organization depends on whether it qualifies as a base rate entity. However, any profits generated must be reinvested to fulfill the organization’s purposes and cannot be distributed to members.

In conclusion, a comprehensive understanding of tax basics is indispensable for nonprofit organizations in Inner West Sydney. By adhering to regulatory requirements and leveraging available tax benefits, these organizations can effectively serve their communities while ensuring financial sustainability.

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 whose 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 whose 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.