FocusOn - Income Tax Exempt Entities

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Generally non-profit organisations are required to lodge income tax returns and pay income tax just like any other organisation.  However, there are some non-profit organisations that qualify for income tax exemption.  They fall broadly into the following categories:

	Charities, being charitable institutions and charitable funds
	Income tax exempt funds
	Community service organisations
	Cultural organisations
	Education organisations
	Employment organisations
	Health organisations
	Religious organisations
	Resource development organisations
	Scientific organisations
	Sporting organisations

An income tax exempt entity will be exempt from paying income tax and lodging income tax returns.  However, the entity may still be subject to other tax obligations such as Goods and Services Tax (GST) and Fringe Benefits Tax (FBT).

Charities

A charity is an institution or fund established for charitable purposes.  Charitable purposes are the relief of poverty, the relief of the needs of the aged, the relief of sickness or distress, the advancement of religion, the advancement of education and other purposes beneficial to the community.  The definition of Charity has also been extended by law to the provision of child care services on a non-profit basis, certain religious orders and some self help groups.

A charitable institution carries on charitable activities.  It is established and run to advance or promote a charitable purpose.

A charitable fund is also established for a charitable purpose, under an instrument of trust or by will.  However, a charitable fund does not itself carry on the charitable activities but instead manages and/or holds trust property to make distributions to other entities to achieve that charitable purpose.

Most charitable funds are not eligible to be deductible gift recipients (DGR) and therefore donations to such charitable funds are not tax deductible.  However, giving to the charitable fund can still be tax effective where the business or investment structure includes a discretionary trust.  Provided the trust deed allows, the discretionary trust can distribute pre-tax income to the charitable trust.

Income Tax Exempt Funds

Income tax exempt funds are non-charitable funds established by will or instrument of trust solely for the purpose of:

	providing money, property or benefits to income tax exempt Deductible Gift Recipients (DGRs), or
	establishing income tax exempt DGRs.

Income tax exempt funds can be divided into public funds and private ancillary funds.  Please refer to our FocusOn Private Ancillary Funds for more information.

An income tax exempt fund can only distribute to DGRS and only to those DGRS that are not ancillary funds.  However, provided the income tax exempt fund is itself endorsed as a DGR, donations to it will be tax deductible.

Endorsement to be Exempt

Charities and income tax exempt funds are required to be endorsed by the Australian Taxation Office for income tax exemption.  Endorsement is also required to access any entitlements to the GST charity concession, FBT rebate or FBT exemption.  In order to be endorsed, your organisation must have an Australian Business Number (ABN).

Before being endorsed, the organisation must be able to meet various tests laid down in the Income Tax Assessment Act 1997.  Different tests apply for different entities.  For example, the tests for charitable institutions are different from the tests for charitable funds.  Please contact us if you require further information about what tests are applicable to your organisation.  Particular care should be taken before distributing amounts or undertaking activities offshore.  Such actions might invalidate the organisation’s tax exempt status.

The endorsement process can be complex.  At Saward Dawson we can assist you in the preparation of the application for income tax exemption and charity tax concessions.

Other Organisations

Non-profit organisations that are not charities or income tax exempt funds, such as lobbying or political bodies and sporting organisations, can self-assess their income tax exemption status.  The organisation must firstly meet the specific requirements under the relevant category in order to be income tax exempt.

An organisation’s income tax exemption self-assessment does not need to be confirmed by the Taxation Office.  However, all evidence used in reaching this conclusion should be retained in case of a Taxation Office audit.  Your organisation should review its exemption status annually as well as when there are significant changes to its structure or activities.

It is possible for an organisation to be both a charity and to also fall under one of the other categories of income tax exemption.  This applies to churches and schools.  In these circumstances, the organisation will be treated as a charity.  Therefore it cannot self-assess its income tax exemption status but will need to apply to the Taxation Office for endorsement.

Saward Dawson can review your organisation’s circumstances and advise on whether the organisation can meet all the requirements to be exempt from income tax.  This would include the examination of the organisational structure, its activities, constitution, trust deeds, articles of association, or rules and regulations and any other governing or constituent documents.  If necessary, Saward Dawson can assist you in the preparation of the application for a private ruling from the Taxation Office.

Published : April 2010