Not-for-profit organisations

Many versions |  Endorsements

It is a generally held belief that any community organisation that is 'not-for-profit' will have escaped the grasp of the taxman. While there is some truth in this assumption, the real story is that not-for-profits only escape having to pay tax on income if they are so endorsed by the Tax Office itself.

Under tax laws, a not-for-profit organisation is still required to pay tax on any 'taxable income' unless it qualifies for an exemption. If it does pass muster, the not-for-profit will not pay tax on income or have to lodge a return or keep the same records and financial information as other businesses.

But such an organisation still has obligations to any employees it has on the books, and still needs to withhold tax for them on PAYG arrangements and pay the super guarantee for example, and may have to pay fringe benefits tax if applicable.

There are more types of not-for-profit organisations than you might think. As well as charities there are sports clubs, community groups, recreational clubs and benevolent institutions.

While a for-profit outfit will apply its income for the benefit of the shareholders, principals or members of the business, not-for-profits exist to provide benefits to the broader or to sections of the community, and will not distribute or otherwise apply its earnings for the benefit of the organisation's owners. Earnings may be retained, but only for later use to provide more benefits for the community in line with the organisation's purpose.

Taxpayers Australia for example is a not-for-profit organisation with a purpose to educate and be the independent voice of all Australians on tax and superannuation matters. It is member-based, but also provides some free information to the community, such as much of the content on this website.

Many versions of not-for-profits
A charity exists for public benefit or relief from affliction like poverty. It is set up with a purpose of a purely charitable nature for the community or a section of it, through activities such as the relief of sickness, poverty or aged conditions or disability, and to support other disadvantaged people.

Charities can also support the advancement of education and religion, and promote areas that are beneficial to the community. They promote health facilities, natural disaster relief, social welfare, family support or counselling.

There is much more to add to this list of course, but generally charitable organisations do not include sporting or social clubs, organisations centred on common interests (like radio-controlled model yachts for example), lobby groups or political parties.

A health promotion charity promotes the prevention or control of diseases or certain conditions, and provides support to sufferers of a disease, carers, family and health professionals on prevention and treatment. An Australian example is Healthy Kids, which promotes healthy food choices in schools.

A public benevolent institution is organised to give direct relief from sickness or suffering due to poverty, misfortune or disability. One Australian example is Kids with Cancer. A public benevolent institution will directly provide services to people in distress and has as its dominant purpose to provide that benevolent relief (with services like hostel accommodation, home help for the infirm or to rescue those who are lost or stranded).

Endorsements
So while charities do not get automatic exemption from paying income tax, there is a system in place to gain this exemption. The Tax Office has labelled such not-for-profits 'tax concession charities', 'income tax exempt funds' or 'deductible gift recipients', and you can apply for these endorsements here.

The Tax Office will decide if your organisation makes the tax-free grade, but it still relies to some extent on groups self-reviewing whether they are entitled to endorsement as tax-exempt not-for-profit organisations. A not-for-profit organisation also needs to be endorsed as a 'deductible gift recipient' (DGR) before donors can claim a tax deduction for their donation to the organisation.

The FBT and GST regimes also contain special rules for not-for-profits. Click here for more details on the Tax Office treatment of not-for-profit organisations.

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