New rules for not-for-profit tax reporting “need to be re-evaluated”

A leading industry figure and tax expert warns there are multiple issues with in-coming tax reporting changes for not for profits, which take effect from July next year.

A lack of consultation with the charity and not for profit sector regarding changes to tax reporting structures means there are multiple issues with incoming tax regulations, according to a leading industry figure and tax expert.

Professor Myles McGregor-Lowndes from the Queensland University of Technology’s (QUT) Business School and former director of The Australian Centre for Philanthropy and Nonprofit Studies said the changes will have “wide reaching implications” for the sector.

McGregor-Lowndes, the author of a paper entitled A Primer on Reform of Tax Exempt Nonprofit Entities, outlined the many flaws to the tax reform that need to be evaluated.

“There is an overlap in exempt classes of charities, the terminologies and context need to be reviewed and there is no statutory definition as to what not for profit means,” he said.

“I would further point out that section 50 is not fit for purpose and requires legislative reform.”

Initially, recommendations from the report published by the ACNC regarding tax in the sector was simply for not for profits with an annual turnover exceeding $5 million to report income to the ACNC itself.

“The government rejected [that] recommendation and made changes directly with the Australian Tax Office (ATO) requiring all not for profits to digitally file an annual self assessment form,” said McGregor-Lowndes.

“As far as I am aware there was no public consultation with the sector about the decision. It merely appeared in the budget papers.”

As part of the 2021-22 federal budget, the government announced $1.9 million in capital for the ATO to build an online system to “enhance the transparency of income tax exemptions” claimed by exempt nonprofit entities.

“Usually the government consults with the sector on any legislative changes to tax that broadly affect the sector,” McGregor-Lowndes said.

“There should be some wide reaching discussions about how this is implemented and whether it should be implemented at all.”

Aside from the lack of consultation, the tax expert outlines multiple issues that would have been corrected if consultation had taken place.

“There needs to be removal of exempt classes with charity definitions and also internal division 50 class overlap, which only produces confusion,” he said.

“Also, amateur sport being part of the charity statutory definition and the appropriateness of Division 50 governance conditions also needs to be addressed.”

The requirement comes into effect from 1 July 2023 when the ATO will require not for profits with an active ABN which self-assess as income tax exempt, to submit a self-review return each year. 

The first return will need to be lodged for the 2023-2024 income year from 1 July 2024.