Income tax and exemptions from income tax

What would an income tax exemption mean for our community organisation?

If your organisation qualifies for income tax exemption, then it will not have to:

• pay any income tax on its taxable income;
• lodge tax returns; or
• keep certain complex financial information necessary to enable income tax returns to be lodged.

The exemption does not relate to the income tax that any employees of the organisation are required to pay. If your community organisation has employees, it will still have a legal obligation (under separate provisions of tax legislation) to collect Pay As You Go (PAYG) or other income tax withholding requirements. Also, GST may still be payable as it is not an income tax (see Getting started>Tax issues >GST concessions).

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Which not-for-profit community organisations qualify for an exemption?

Your organisation may need to be incorporated (such as an incorporated association, company limited by guarantee or co-operative).

Exemptions apply to:

• Charities, which need to be registered with the Australian Charities and Not-for-Profit Commission, and then endorsed by the Australian Taxation Office (ATO)
• Community service organisations
• Other categories of organisations specified in the Income Tax Assessment Act, eg:
  • employer/employee associations and trade unions;
  • public hospitals, not-for-profit hospitals and not-for-profit medical and hospital benefit entities;
  • not-for-profit societies or associations established to promote the development of primary and secondary resources and tourism; and
  • societies, associations or clubs established for the encouragement of animal racing, art, a game or sport, literature, or music.

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Does our organisation 'fit' into one of the categories for exemption?

Charities 

Charitable institutions and funds established for public charitable purposes must be registered with the Australian Charities and Not-for-Profit Comission, and then endorsed by the Australian Taxation Office (ATO) as a ‘Tax Concession Charity’ (TCC) to be tax exempt. 

The most common category that community organisations seek to apply for income tax exemption is as a ‘charitable institution’.

If your organisation intends to apply to be TCC, the wording of your constituent documents (your rules and constitution) will be extremely important and will need to include certain clauses.

We have included a short information sheet about applying to be a TCC below, as well as links to relevant documents.

Community service organisations

Community service organisations are not-for-profit organisations which promote, provide or carry out activities, facilities of projects for the benefit or welfare of the community, or any of their members who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. To be a community service organisation, an organisation must be ineligible for endorsement as a Tax Concession Charity.

Community service organisations include associations of Justices of the Peace; associations of play groups; traditional service clubs; community service clubs; and pensioner or senior citizen associations.

Groups which are for lobbying or political purposes, or which only seek to advance the common interests of their members (for example, a social club for newcomers to a particular residential area), are not community service organisations.

You should refer to the ATO’s ‘Income Tax Guide for Non-Profit Organisations’ to ensure that your organisation meets all of the requirements of the community service organisation category (see Resources below).

Other categories in the Income Tax Assessment Act

The other categories of community organisations specified in the Income Tax Assessment Act can ‘self-assess’ that they meet the specific requirements for an exemption category. However, one requirement that these categories have is that, if your organisation is a charity, it must apply for endorsement as a Tax Concession Charity (TCC)(as set out above). So it is best to first work out whether your organisation is a TCC, before looking at these categories.

While the categories sound broad, there are quite specific definitions for each. The ATO has information about these categories and self-assessment on its website and you may wish to seek advice to confirm that your organisation qualifies for a particular category. Your organisation can be reviewed by the ATO, and if the ATO thinks that you do not fit into a category, you may have to pay any income tax owing for the period of time it has ‘assumed’ it was income tax exempt.  

We have included links to relevant web pages in the Resources section below.

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Fact sheet: Applying for Tax Concession Charity (TCC) endorsement?

The fact sheet below has been written to assist community organisations who wish to apply to the ACNC to become a registered charity, and then the Australian Taxation Office (ATO) for endorsement as a Tax Concession Charity (TCC). It is designed to help your organisation understand whether it is likely to be a charity (as defined in taxation laws) and if so, how to apply for TCC endorsement. We have also included relevant links to ACNC and ATO information in the Resources section below.

If your community organisation is endorsed as a TCC, it will be exempt from paying income tax. It may also get access to a range of other tax concessions (eg. GST and fringe benefits tax).

You can check if you are already a registered charity by searching the Charity register.

You can check your TCC endorsement by searching the ABR register. 

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What if our organisation doesn't qualify for an income tax exemption?

If your organisation does not receive endorsement as a 'Tax Concession Charity' from the ATO, and does not otherwise qualify for an exemption, under the Income Tax Assessment Act 1997 (Cth) your organisation will be required to pay tax on any 'taxable income', and lodge income tax returns, unless it is a not-for-profit 'company' (this includes incorporated associations) with a taxable income of less than $416.  Not-for-profit 'companies' with a taxable income of more than $416 a year must lodge an income tax return for that year and pay tax on that income.  Organisations need to use the 'company' tax return to lodge a return.  These forms and the accompanying instructions are available from the ATO.  You should refer to the ATO's 'Income Tax Guide for Non-profit organisations' (for more information see Resources below).

Your organisation should seek advice on its income tax liability. Your organisation may not have to pay tax on all its income (some income items are not included). In some cases, this may reduce your organisation's income tax liability considerably.

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Resources

Australian Charities and Not-for-Profit Commission (ACNC)

Australian Tax Office (ATO)

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