Not For Profits

Not for profit (NFP) entities may take any number of corporate forms the most common being:

• Companies limited by guarantee.
• Non-distributing co-operatives.
• Incorporated associations.
• Entities incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI) with rules that prohibit the distribution of surpluses or profits to members.

NFPs must have a constitution or rules that prohibit the distribution of surpluses to members or shareholders.

The standard rules in a non-distributing co-operative provide:

Prohibition on the Distribution of Surplus

No part of the Surplus will be paid directly or indirectly by way of discount, rebate or otherwise by way of profit to the Members of the Co-operative.

“Surplus” for the purposes of this Rule means the excess of income over expenditure after making appropriate allowance for taxation expense, depreciation value of the property of the Co-operative and for future contingencies.

NFP Winding up Rule

If, on the winding up or dissolution of the Co-operative, there remains any property after satisfaction of all its debts and liabilities, this must not be paid to or distributed among the Members of the Co-operative but must be given or transferred to an entity or entities:

1. with objects similar to those of the Co-operative; and
2. whose constitution or rules prohibits the distribution of its property among its members;
3. chosen by the Members of the Go-operative at or before the dissolution or, in default, by a judge of the court with jurisdiction in the matter, and
4. which satisfies the relevant sections of the Income Tax Assessment Act.

Use of NFP Surpluses

NFPs must retain the entire surplus arising in any Financial Year of the business NFP to be applied solely towards the promotion of the objects of the NFP or for the provisioning for future debt.

Use of NFP Surpluses

It is a common misconception that all NFPs are exempt from tax.

Under the Income Tax Assessment Act 1997 (Cth) a not-for-profit organisation must pay tax on any ‘taxable income’, unless it qualifies for an exemption as a registered charity or is otherwise categorised as exempt. Registered charities are a type of exempt entity. Charities must be endorsed by the Australian Tax Office to be exempt from income tax. NFPs and charities cannot self-assess whether they are exempt.

Charities

All charities must be NFPs but not all NFPs are charities. Charities must be registered with the Australian Charities and Not for Profit Commission (ACNC).
One of the requirements of a charity is that the entity must have a “charitable purpose”. There are four heads of charitable purpose:

•  relief of poverty;
• the advancement of education;
• the advancement of religion;
• other purposes beneficial to the community not falling under any of the preceding heads.

These purposes were further clarified under s 12(1) of the Charities Act 2013, to be defined to mean any of the following:

• the purpose of advancing health;
• the purpose of advancing education;
• the purpose of advancing social or public welfare;
• the purpose of advancing religion;
• the purpose of advancing culture;
• the purpose of promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;
• the purpose of promoting or protecting human rights;
• the purpose of advancing the security or safety of Australia or the Australian public;
• the purpose of preventing or relieving the suffering of animals;
• the purpose of advancing the natural environment;
• any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of, any of the purposes mentioned in paragraphs (a) to (j);
• the purpose of promoting or opposing a change to any matter established by law, policy or practice in the Commonwealth, a State, a Territory or another country, if:
• in the case of promoting a change — the change is in furtherance or in aid of one or more of the purposes mentioned in paragraphs (a) to (k); or
• in the case of opposing a change — the change is in opposition to, or in hindrance of, one or more of the purposes mentioned in those paragraphs.

Indigenous Charities

The Income Tax Assessment Act 1997 makes special provisions for the tax treatment of native title and mining payments.

Th Charities Act also relaxes the limitation in the public benefit test to some extent to allow beneficiaries of an Indigenous Charity to be family or clan members.
The ACNC Commissioner has released an Interpretation Statement on Indigenous Charities that recognises the unique situation of Australia’s Indigenous peoples and recognises their disadvantage.

For the purpose of eligibility for registration as a charity under s 25-5 of the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act), an organisation with the purpose of addressing Indigenous disadvantage is accepted as coming within the first head of charity: relief of poverty or impotence, depending on the circumstances and may possibly be included under the category of advancing social or public welfare.

The ACNC Commissioner has published a number of informative Interpretation Statements and these Statements are invaluable source of information on charities.

Deductible Gift Recipient (DGR) status

Division 30 of the Income Tax Assessment Act 1997 contains the requirements for entities to be eligible to receive gifts that are tax deductible by the donor. Subdivision 30-A of the Income Tax Assessment Act 1997, contains a table of all eligible deductible gift recipients.

Not all charities are eligible for DGR status. To obtain DGR status entities must fall within an endorsement category and be endorsed by the ATO as having DGR status or must be listed by name as having DGR status in the Income Tax Assessment Act 1997.

Extensive information about the eligibility criteria for DGR status is available on the ATO website.

Mattila Advisory articles are intended to provide general information. They should not be relied upon as legal advice. We recommend you contact the Australian Charities and Not for Profits Commission for more detailed information about your specific organisation 

https://www.acnc.gov.au