Not-for-profit explained

As described by the Australian Tax Office (ATO), a not-for-profit organisation exists to serve its community and not to generate a profit.

To explain not-for-profit organisations, we need to unpack what they are, why they exist, how they’re governed in Australia, how they work and how to set up an NFP with the tax concessions made available by the Australian Government.

What is an NFP?

The definition provided by the ATO about a not-for-profit organisation is “an organisation that provides services to the community and does not operate to make a profit for its members (or shareholders, if applicable).”

NFPs can be education, healthcare, sport, arts and culture, social, professional or animal welfare based. They use funding supplied through government grants and corporate donations to operate their day-to-day business operations. Any generated profits must go back into the services the business provides to the community it serves.

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What is the ACNC?

The ACNC is the Australian Charities and Not-for-profits Commission. It is the national regulator for charities across Australia.

The role of the ACNC, per their website, is to:

  • maintain, protect and enhance public trust and confidence in the Australian not-for-profit sector
  • support and sustain a robust, vibrant, independent and innovative not-for-profit sector
  • promote the reduction of unnecessary regulatory obligations on the sector.

A large part of the ACNC’s role is to assist charities, NFPs and the public in understanding an NFP’s obligations and their work within the community. The ACNC offers guidance, support and resources for not-for-profit organisations and works closely with state and territory government departments to create a reporting framework.

The ACNC also maintains a charity and not-for-profit register.

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The NFP framework

A not-for-profit organisation must fall within the framework of two categories in order to be eligible for tax concessions:

A charity must be not-for-profit, have a clear, charitable purpose and be for public benefit (except for the relief of poverty). Charities can be further broken down into public benevolent institutions (PBIs) or health promotion charities (HPCs) and include religious groups, NFP aged care homes, education facilities, animal welfare groups or arts, culture or social-based organisations.

Other NFP organisations are those seeking access to tax concessions. NFPs must be endorsed or self-assessed based on the submission of clearly defined, formal governing documents that outline the organisation’s purpose, its not-for-profit character, the way it is governed and operated and how decisions are made.

Setting up an NFP

Firstly, any not-for-profit organisation must register with the ACNC before becoming eligible for tax concessions or deductible gift recipient (DGR) status.

Every NFP must define a purpose that is charitable or regarded as ancillary to a charitable purpose.

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Questions to ask whilst defining this purpose as recommended by the Australian Tax Office are:

  • What will your organisation try to achieve?
  • What will its main activities be?
  • What programs or services will you provide?
  • Who is your target audience?
  • Who will benefit from the organisation’s activities and programs?
  • Why is there a need for this new organisation?
  • How long will your NFP organisation or charity last? Will it be for a one-off short-term project or operating on an ongoing basis?

Your NFP organisation must also identify its legal structure and NFP type in order to apply for the relevant tax concessions. You will then need to register your organisation with the Australian Government to obtain an ABN (Australian business number) and determine whether you need a director identification number.

NFP tax concessions

NFPs qualify for tax concessions depending on the type of not-for-profit organisation you have registered as, either a PBI, HPC, Charity or other NFP. Tax concessions available to not-for-profit organisations are as follows:

  • Income tax exemption
  • FBT exemption
  • FBT rebate
  • GST concession
  • DGR endorsement
  • Refunds of franking credits.

To know which tax concessions you are eligible for, it is best to consult our team of expert accountants, who specialise in NFP accounting. To find out more about registering your not-for-profit organisation, contact us.