Does our association need to lodge an income tax return?

This exemption does not extend to other potential tax obligations such as GST, PAYG withholding and Fringe Benefits Tax; each of which must be considered separately.  Certain non-profit organisations can only obtain relief from income tax by receiving endorsement from the Australian Tax Office (‘ATO’).  This includes charities and certain charitable funds.

Non-charity non-profit organisations are able to self-assess their income tax status.  This assessment must be made each year and, to help protect against penalties, should be documented by completing the ATO’s income tax status review worksheet.  This can be found here.

Where the relevant law and the activities / purpose of the organisation have not changed, the self-assessment is unlikely to differ from year to year.

Broadly, the following types of organisations can self-assess as exempt from income tax:

• Community Service Organisations (excluding for political or lobbying purposes)
• Cultural Organisations (for the encouragement of art, literature, music or medicine)
• Education Organisations
• Employment Organisations (recognised under Fair Work)
• Health Organisations
• Resource Development Organisations (for the promotion of agriculture; aquaculture; aviation; fishing; horticulture; industrial resources; manufacturing resources; pastoral resources; tourism; viticulture and IT).
• Scientific organisations
• Sporting organisations

Each of these broad headings have specific conditions which must also be considered.  For example, most, but not all, require that the organisation is non-profit.  Professional advice should be obtained if an association is unsure of its income tax status.

Many professional and business associations may be able to self-assess as resource development organisations though the purpose of the association, usually evidenced by its actual activities, constitution and marketing documentation, is critical.  Take the following two examples from the ATO:

Example: Exempt resource development association

A non-profit association’s purpose is to run a tourism information booth.  Its volunteers provide brochures and information to tourists and residents about the tourism opportunities in the district.  The association is performing the development of tourism.

Example: Not resource development and non-exempt

A non-profit association is set up by a group of horticulture businesses.  Its purpose is to buy supplies for its members in bulk and undertake joint marketing of their businesses.  The association is not promoting the development of horticultural resources and is not exempt.

Where there is a non-profit requirement for a particular type of organisation, this does not mean that the organisation cannot made a profit.  However, any profit made by the organisation must go back into its operations to enable it to carry out its purpose and cannot be distributed to its members.  The ATO consider that the governing documents of the organisation should prevent the distribution profits to members, both during operation and on windup.  There is no prescribed wording which must be used, though the ATO provide examples on their website.

Where an organisation is not prescribed as income tax exempt, certain income may still qualify as income tax exempt under the mutuality principle.  Under this principle, where a group of individuals join together and contribute to a common fund, created and controlled by all of them for a mutual purpose, any surplus created in the fund from the individual contributions or most dealings between the members is not considered to be assessable income of the organisation for tax purposes.  Where this principle can be applied, this does not relieve the organisation from the requirement to lodge an income tax return.

This article was also published in the AES March newsletter which can be found here.