Are you planning to set up a club or other organisation as a not-for-profit (NFP) entity? If you are, you will need to answer the following questions from the ATO website in order to avoid a nasty surprise at tax time.
- Is your organisation not operating for the profit or gain of its individual members, either directly or indirectly?
- Do your organisation’s constituent documents prohibit it from making any distribution – whether money, property or otherwise – to its members during the course of its operations?
- Do your organisation’s constituent documents prohibit it from making any distribution – whether money, property or otherwise – to its members on dissolution?
- Are your organisation’s activities consistent with its constituent document’s clauses?
- Does your organisation have sufficient controls (processes) in place to ensure that members and other private persons do not receive the property or assets of the organisation? Property or assets can be bona fide (legitimate) reimbursement for services they have provided to the organisation, or as reasonable compensation for expenses incurred on behalf of the organisation.
- Are any profits made by your organisation used to carry out its purposes?
If you answered yes to all the above questions, chances are that your organisation is a NFP; however, that doesn’t automatically mean the organisation is exempt from tax, as there are certain requirements within NFP categories to receive that benefit.
In addition to charities, the following organisations are common NFP tax-exempt organisations:
- Community service organisations
- Cultural organisations
- Educational organisations
- Health organisations
- Employment organisations
- Resource development organisations
- Scientific organisations
Basically, the aim of a NFP is to profit is usually to provide some sort or service or benefit to the community or particular groups within the community, without actively seeking to make money for distribution to members or other parties. This doesn’t mean the organisation can’t make money; it just needs to use that money in running the organisation. If the organisation doesn’t fall under a tax-exempt category, such as charities, then those profits will be taxed accordingly.
By Jennifer Lowe