Taxation

Incorporated associations, like any other organisation or corporation, are subject to taxation.  However, not-for-profit organisations, such as incorporated associations may be eligible for certain taxation concessions.  Taxation is highly complex and, therefore, this chapter will provide only a very basic overview of taxation obligations and concessions. The types of tax and exemptions that may be applicable to an association will also be discussed. 

It is important to seek expert advice and help when dealing with taxation because it is so specialised and constantly changing. 

For detailed information on taxation for not-for-profit organisations, visit the Australian Taxation Office (ATO) website at www.ato.gov.au/nonprofit. The website contains most, if not all, of the information that you will ever need regarding your association’s tax obligations. 

The ATO also operates a non-profit infoline 1300 130 248.

Key Points

  • Incorporated associations are subject to taxation unless a relevant tax exemption applies.
  • Incorporated associations may be eligible for certain taxation concessions that apply to not-for-profit organisations.  The availability of such concessions may require that the association satisfies certain criteria and be endorsed by the ATO.
  • Incorporated associations that employ staff are subject to PAYG withholding obligations, and may be subject to paying fringe benefit tax.
  • Incorporated associations are required to pay goods and services tax on some goods and services, and they are exempt from others.  This is a complex area of taxation and associations should seek professional advice.

 

Taxation concessions available for some associations

Tax concessions are available from the ATO for a range of not-for-profit organisations, including charities, public benevolent institutions and other types of incorporated associations. Concessions include exemption from income tax, rebates to reduce fringe benefits tax (FBT) payable, and goods and services tax (GST) concessions.

Not-for-profit status

To qualify for these tax concessions, an organisation must be a not-for-profit organisation. A not-for-profit organisation is one that does not operate for the financial gain of its members. (See Incorporated Associations for more information on being a not-for-profit association.) Incorporated associations are by legal definition not-for-profit organisations, and therefore many will be eligible for one or more tax concessions.

To benefit from any tax concessions, an organisation must be able to show that it is a not-for-profit organisation. One of the distinguishing features of a not-for-profit association is that its rules contain a not-for-profit clause.

For example, the Act requires an incorporated association to include in its rules a provision along the following lines:

The property and income of the association shall be applied solely towards the promotion of the objects or purposes of the association. No part of that property or income may be paid or otherwise distributed, directly or indirectly, to members of the association, except in good faith in the promotion of those objects or purposes.

Associations that do not have an equivalent clause in their rules may not be eligible to remain incorporated, and will not be able to demonstrate their not-for-profit status to the ATO.

Access to some ATO tax concessions also requires an association to have an appropriate dissolution clause in its rules. The association must be able to demonstrate that it is a not-for-profit organisation, both while operating and when winding up.

An example of a dissolution clause that is acceptable to the ATO, and that is also lawful under the Western Australian association’s legislation, is:

In the event that the association is dissolved, any surplus property that remains after the dissolution and the satisfaction of all debts and liabilities shall be transferred to another association, incorporated under the Act, that has similar objects and that is not carried on for the profit or gain of its individual members.

Please note that it is important that the dissolution clause will only allow for a transfer to another association incorporated in Western Australia. The words “incorporated under the Act” provide for this requirement.

Charities

Many incorporated associations are also charities. In broad terms, a charity is a fund or an institution that pursues one or more charitable purposes that are of public benefit. According to the ATO, for an organisation to be a charity, it must:

  • be an entity that is also a (charitable) trust fund or institution (simply being incorporated does not necessarily make an association an institution as far as the ATO is concerned);
  • be not-for-profit;
  • exist for the benefit of the public or the relief of poverty; and
  • have a sole purpose that is a charitable purpose under the law.

Clearly, not all associations fit the ATO requirements to be recognised as charities.

Examples of Charities Examples of Non-charities
Alzheimer's association
Women’s shelters
Crisis accommodation services
Disability resource services
Public libraries, museums and art galleries
Alcohol and drug education bodies
Citizens advice bureaus
Parents and citizens groups
Refugee relief bodies
Conservation groups - not for political aims
Guide dog associations
Animal rights groups
Political organisations
Lobbying groups
Social, sport and recreational clubs
(with some exceptions)
Playgroups
For-profit child care centres
Professional associations
Educational trusts
Resident action groups
Cultural organisations
(with some exceptions regarding
  Indigenous associations)

 

Charitable purpose

In terms of Australian taxation law, charitable purposes are those directed towards:

the relief of poverty. Associations formed for relieving poverty will be charitable, as long as the benefit is provided to persons in a particular class and not for the benefit of a particular poor person.

  • the advancement of education. Associations that are formed to advance knowledge and provide for greater educational opportunities will be charitable;
  • the advancement of religion. Not all religious institutions are charitable. To qualify for a charitable status, an association must have a religious purpose that is for the benefit of the community. For instance, religious associations formed to convert people will not be charitable;
  • the provision of child care services on a not-for-profit basis. (This is a relatively recent addition by the ATO to the meaning of charitable purposes); and
  • other purposes that are beneficial to the community. An association may be charitable if it is formed for purposes that are beneficial to the community.

    Examples include the protection of animals, promotion of health and welfare, caring for the aged, and the preservation of cultural sites and historical buildings. While a group's objectives may be 'beneficial to the community', this does not necessarily make it a charity.

Sporting, recreational, cultural, social, political or promotional purposes are not considered charitable.

Associations that are primarily for the benefit of their members are not charitable.

Please note that the meaning of charitable purposes as outlined above is not the same as the meaning of charitable purposes under the charities legislation of Western Australia (the Charitable Collections Act 1946). The ATO meaning is much broader, which means that an association could be considered a charity for tax purposes, but might not require a charitable collections licence under Western Australian laws (see Fundraising).

Australian Charities and Not for Profit Commission

The Australian Charities and Not-for-profits Commission (ACNC) is the independent national regulator of charities. The ACNC has been set up to achieve the following objects:

  • maintain, protect and enhance public trust and confidence in the sector through increased accountability and transparency;
  • support and sustain a robust, vibrant, independent and innovative not-for-profit sector; and
  • promote the reduction of unnecessary regulatory obligations on the sector.

Role of the ACNC

The ACNC:

  • registers organisations as charities;
  • helps charities understand and meet their obligations through information, guidance, advice and other support;
  • maintains a free and searchable public register so that anyone can look up information about registered charities; and
  • is working with state and territory governments (as well as individual federal, state and territory government agencies) to develop a 'report-once, use-often' reporting framework for charities.

The ACNC is responsible for determining charity status for all federal tax purposes. As part of its status determinations, the ACNC also decides whether a charity is a public benevolent institution (PBI) or health promotion charity (HPC).

The ACNC will be responsible for administering tax concessions relevant to charities, including:

  • income tax exemption
  • Fringe Benefits Tax (FBT) rebate or exemption
  • Goods and Services Tax (GST) charity concessions
  • Deductible Gift Recipient (DGR) status.

The ACNC’s relationship with other government agencies

The Australian Taxation Office (ATO) remains responsible for deciding eligibility for charity tax concessions and other Commonwealth exemptions and benefits.

There are also many other government agencies that regulate charities and other not-for-profits. For example, government agencies may provide grants and other funding. They may also regulate particular services provided by charities, such as aged care or education.

In Western Australia the Department of Commerce regulates Incorporated Associations and Charitable Collections Licences.

Important: It is relevant to note that charities or organisations that solicit charitable donations in Western Australia are still required to obtain a Charitable Collections Licence from the Department of Commerce.

Registration with the ACNC DOES NOT preclude this requirement. See Fundraising for more information.

Is your Association or Charity Registered with the ACNC?

If your organisation was recognised (endorsed) by the Australian Taxation Office (ATO) as a charity able to receive charity tax concessions before 3 December 2012, it was automatically registered with the Australian Charities and Not-for-profits Commission (ACNC). This means you don't need to re-register.

The ACNC now registers organisations as charities while the ATO remains responsible for deciding your organisation's eligibility for tax concessions.  You can check if your organisation has been automatically registered by searching the ACNC Register.

You can also check whether your organisation is registered as a charity and which tax concessions your organisation currently receives from the ATO on ABN Lookup.

As part of the automatic registration process, your charity's information has been transferred from the ATO and the Australian Business Register to form its initial entry on the ACNC Register.

Applying for tax concessions from the ATO

Registration with the ACNC is voluntary. However, ACNC registration is now a prerequisite for charities to access charity tax concessions.

A charity must be registered with the ACNC before it can receive any charity tax concessions from the ATO. Many charities may also be eligible to apply for deductible gift recipient (DGR) status. Some DGR categories are only available to registered charities.

You can apply for charity tax benefits including DGR status with the ATO when applying to register with the ACNC.

After the ACNC has decided your charity status, they will pass on your application for tax benefits including DGR status to the ATO. The ATO will decide whether your organisation is eligible.

The ACNC offers a number of key services, including charity registration, a searchable charity register listing registered Australian charities, education and guidance materials. You can keep up-to-date with changes to the ACNC by subscribing to the ACNC Commissioner's weekly column.

For more information concerning Charities and Taxation, visit the ACNC website at www.acnc.gov.au.

Types of tax concessions

All charities that register with the ACNC and some incorporated associations can apply for the following tax concessions.

Income tax exemptions

Income tax applies to any taxable income received by an organisation. All charities registered with the ACNC may apply for income tax exemption, which means your charity may not have to pay income tax.

Only certain types of not-for-profit organisations are exempt from paying income tax. Charities and PBIs are generally exempt from income tax, but this is not automatic. As already noted, both charities and PBIs are required to apply to the ATO for endorsement as a tax concession charity. Endorsement as a tax concession charity provides exemption from income tax, as well as several other tax concessions (referred to in the following pages).

Your association needs an Australian Business Number (ABN) to apply for endorsement. If it already has an ABN, then you can request an endorsement application pack from the ATO on 1300 130 248, or visit the ATO website.

If your association does not have an ABN, you will need to apply for one - details are provided at Registering with the ATO. On the ABN application, you can advise the ATO that your organisation wants to be endorsed and the Tax Office will forward the endorsement application pack.

An incorporated association that is not a charity or PBI may still be exempt from income tax under another category. In this case, the association does not need to apply to the ATO, but can conduct its own assessment (ie self-assess) to determine whether or not it is eligible for tax exemption.

For an exemption to apply, the association would need to fall within one of the following categories, each with its own further requirements:

  • community service organisations;
  • cultural organisations;
  • educational organisations;
  • employment organisations;
  • health organisations;
  • religious organisations;
  • resource development organisations;
  • scientific organisations; and
  • sporting organisations.

In addition, the association may also have to pass at least one of these three tests:

  • have a physical presence in Australia and conduct its activities "principally" in Australia;
  • qualify to be endorsed as a deductible gift recipient; or
  • be prescribed by law in the income tax regulations.

If an association is exempt under one of these categories, it will not have to pay income tax nor lodge income tax returns. If the association does not qualify for exemption, then it is taxable and must lodge tax returns each year. However, even taxable not-for-profit associations may be entitled to special rules for calculating taxable income, lodging their tax returns and special rates of tax.

The ATO website also has useful information about self-assessment.

Registering with the ATO

To be able to comply with taxation obligations and to apply for taxation concessions, an association may need to register for an ABN.

An ABN is an identifier that an incorporated association would use to:

  • register for GST and claim input tax credits;
  • register for PAYG withholding;
  • deal with investment bodies;
  • apply to the ATO for endorsement as a deductible gift recipient or a tax concession charity;
  • deal with other government departments and agencies; and
  • deal with the ATO on other taxes.

An association must have an ABN in order to be endorsed as a tax concession charity and/or a deductible gift recipient (DGR). (DGRs are explained in Fundraising.)

When applying for an ABN, an association is able to register for GST, PAYG and FBT all on the same application form. A Tax File Number will also be issued with the ABN.

How to apply for an ABN

Registration with the ATO is conducted through the Australian Business Register (ABR).  You can apply:

  • Electronically though the Australian Business Register (www.abr.gov.au);
  • By downloading an application form from the ATO website;
  • In paper form through the Tax Office 1300 130 248; or
  • Through a tax agent.

Goods and Services Tax (GST)

Goods and Services Tax (GST) is a tax on transactions. Where goods and services are sold, the amount received for the sale may be subject to GST. Similarly, where goods and services are purchased, the purchaser may be able to claim a GST credit for the GST included in the amount paid. Charities that are registered with the ACNC may apply to access a number of  GST concessions if they are also registered for GST.

The GST is a broad-based tax of 10 per cent on the sale of most goods, services, real property or other things consumed in Australia.

GST is a tax on transactions that is paid at each step in the supply chain.  GST-registered businesses (or those required to be registered) are liable for GST on the goods and services they supply, which they generally aim to recover from the buyer or recipient by 'grossing up' the sale price of their goods and services. These businesses can also generally claim back the GST they paid on business purchases or supplies as input tax credits.  An input tax credit is what you claim to get back the GST you pay on the price of goods and services you purchase for the business or association.  The cost of GST flows along the supply chain and is finally included in the price paid by the end consumer.  End consumers can't claim input tax credits, so while the liability for paying the GST rests with GST-registered businesses and organisations, the economic cost is intended to be borne by the end consumer.

The most obvious GST concession for not-for-profit associations is a higher GST registration threshold. Associations must register for GST only if their annual turnover is $100,000 or more, but can choose to register if their annual turnover is lower.  Other organisations or businesses must register for GST if their annual turnover is $50,000 or more.

Associations that are also charities can access a broader range of GST concessions including:

  • GST-free status for non-commercial activities;
  • GST-free sales of donated second-hand goods;
  • GST-free status for raffles and bingo tickets;
  • Sales in connection with certain fund-raising events may be input taxed (that is, no GST liability is imposed, however no input tax credits will be available for purchases made in respect of those sales); and
  • GST credits for volunteer expenses.

Remember that an association that is a charity must be endorsed by the ATO as a tax concession charity in order to access any of these additional concessions.

More information on GST concessions and how to register for GST may be found on the ATO website.

Fringe Benefits Tax (FBT)

Fringe Benefits Tax (FBT) is a tax paid on any benefits that an employer provides to their employees outside their salary or their superannuation, such as the use of a work car, phone or any other benefit.

If your organisation is a registered charity (other than a registered charity that is an institution established by a law of the Commonwealth Government, a state or a territory) it may apply for the FBT rebate (capped at $30 000).

If an association provides fringe benefits to its employees, the association may be liable to pay FBT. This is quite separate from income tax, and even if the association is exempt from income tax, it may still incur an FBT liability.

Benefits exceeding the total value of $2000 in an FBT year (which runs from April 1 to March 31) must be reported on an employee’s payment summary as a 'grossed-up' amount.  Grossing-up means increasing the value of the benefit to reflect the gross salary that the employee would have to earn to buy the benefit using after-tax dollars. These amounts must also be reported to the ATO.

Please note that reimbursing an unpaid volunteer for out-of-pocket expenses does not make them an employee. Generally, benefits provided to volunteers do not attract FBT.

The FBT concessions that will apply to some incorporated associations include:

  • an exemption from FBT; and
  • the FBT rebate.

Associations that are public benevolent institutions or health promotion charities may be eligible for an exemption from FBT. The exemption is subject to a cap on the annual fringe benefit amount that can effectively be paid to an employee. For the latest threshold cap that applies to your association, consult the ATO. If the cap is exceeded for any employee, the association would be liable for FBT on the excess.

Associations that are ‘rebatable employers’ may be entitled to a rebate on the gross FBT payable. Rebatable employers are certain non-government, non-profit organisations. Organisations that qualify for the FBT rebate include:

  • certain religious, educational, charitable, scientific or public educational institutions;
  • trade unions and employer associations;
  • not-for-profit organisations established to encourage music, art, literature or science;
  • not-for-profit organisations established to encourage or promote a game, sport or animal races;
  • not-for-profit organisations established for community service purposes
  • not-for-profit organisations established to promote the development of aviation or tourism
  • not-for-profit organisations established to promote the development of Australian information and communications technology resources, and
  • not-for-profit organisations established to promote the development of the agricultural, pastoral, horticultural, viticultural, aquacultural, fishing, manufacturing or industrial resources of Australia.

Remember, an association that is also a charity (including a PBI) must be endorsed by the ATO as a tax concession charity in order to access the FBT exemption or the FBT rebate.

More information on FBT and how to register for FBT may be found on the ATO website.

Deductible gift recipient (DGR) status

As well as applying for the tax concessions listed above, charities can apply for DGR status when registering with the ACNC.

The benefit of being a deductible gift recipient is that donations made to your organisation may be tax deductible. If a donation is tax deductible, donors can deduct the amount of their donation from their taxable income when they lodge their tax return.

Donors can find out more about making tax deductible gifts and contributions on the ATO's website.

If your organisation is a charity that wants to apply for DGR status, you will need to be registered with the ACNC first.

If your charity is already a DGR, check the ACNC Register to see if it has automatically been registered with the ACNC. If it is not registered, you will need to apply to register with them so you can continue to receive tax deductible donations. You must do this by 2 December 2013.

All DGRs should review whether they are required to register with the ACNC by following the guidance provided by the ATO. For a short summary, you can also read the factsheet on DGR’s.

Public benevolent institutions (PBI)

Some incorporated associations that are charities will also qualify for public benevolent institution (PBI) status. This is different from being classified as a charity.  Only some charities will be classified as PBIs.  A PBI has to be a not-for-profit institution set up for the relief of poverty, sickness, suffering, distress, misfortune, disability or helplessness. For PBI status, the emphasis is on the provision of a service directly to those people requiring 'benevolent relief' in order to meet their particular needs.

Examples of public benevolent institutions are: women's refuges, hostels for homeless people, disability support, crisis care and emergency relief services.

Not-for-profit associations that do not provide direct benevolent relief will not be assessed as public benevolent institutions, despite their good deeds. 

Examples of associations that are generally not regarded as public benevolent institutions are: social groups, associations that charge a fee, self-help groups, Boy Scouts and Girl Guides, cultural groups, hobby clubs and conservation groups.

More detailed information can be accessed about PBIs on the ACNC website.

Tax concessions from state and local governments

There are a number of tax concessions available to charities from state and local governments. Your organisation does not need to be registered with the ACNC to receive state or local government tax concessions.

Concessions may be available on taxes like stamp duty (a tax on some financial and property transactions), payroll tax (a tax on wages that exceed a certain threshold paid by employers) and land tax (a tax on land owners). Each state and territory has different requirements for accessing these concessions.

Local governments may also give concessions to charities (for example, on rates).

Western Australian tax concessions

For information about payroll and land taxes, stamp duty and compliance:

Department of Finance (WA)
GPO Box T1600, Perth WA 6845
General Enquiries: (08) 9262 1400
Country Callers: 1300 368 364
Website: www.finance.wa.gov.au
Online contact form: Make an enquiry

Exemptions from state taxes

Exemptions from state taxes apply to range of eligible bodies, including certain incorporated associations.

For example, under section 40(2) of the Western Australian Pay-roll Tax Assessment Act (2002), most of the salaries and wages paid by a range of bodies may be exempt from pay-roll tax. These bodies include:

  • religious or public benevolent institutions; 
  • private hospitals run by not-for-profit organisations; and
  • schools and colleges (at or below secondary level) run by not-for-profit organisations.

Charitable organisations may apply to the Commissioner of State Revenue for an exemption from pay-roll tax (under section 41).

Pay As You Go (PAYG)

All organisations, including incorporated associations that employ staff are subject to PAYG withholding obligations from salaries and wages paid to employees.  Associations that are exempt from income tax are not exempt from PAYG.  Associations are required to withhold an amount from an employee's pay and send this to the ATO.  The amount of money that is withheld depends on how much the employee earns and the information the employee has provided in the Tax File Number Declaration.