Taxation of income and loss of FBT & CGT concessions deferred until 1 July 2014

Measures that are designed to tax certain income of Not for profit (NFP) organisations, along with removing FBT and GST concessions, have been delayed until 1 July 2014.

What are the measures?

Charities often conduct commercial activities to make a profit, which is then used to further their philanthropic purpose.  The new measures are designed to tax profits from ‘unrelated commercial activities’.  Basically, profits are taxed from activities that the Government believe do not directly further NFP's altruistic purpose. 

This broad concept of what is or isn't an unrelated commercial activity can understandably cause significant confusion for your NFP and your advisors. So we’ll break it down for you.

What does this mean for your organisation? 

• No tax will be charged if all these profits are expended with philanthropic purpose.
• You will be required to keep records to prove the above, ie. show that all profits have been spent.
• Often NFPs conduct these activities in a separate entity.  If all of your organisation’s profits are not ‘directed back’ to the NFP, tax will still be payable.  
• The meaning of ‘directed back’ might be confusing.  It is to a lot of people.  It simply means ‘does a dividend need to be paid, or can a donation be made?

These areas of income tax and capital gains tax are most likely new territory for your organisation, as NFPs have never had to consider them in the past.

FBT and GST concessions

In addition to paying income tax, no FBT or GST concessions/exemptions will be available for unrelated commercial activities.  For example, the 48% FBT rebate available to NFPs will not be available for an entity that conducts unrelated commercial activities.

The measures will not apply to commercial activities that further a NFP entity's altruistic purposes. An exemption for small-scale and low risk activities is also proposed.

When will it apply?

The ‘unrelated commercial activity’ measures were announced in the 2012 Budget, and like most announcements on Budget night, limited details were released.  A Consultation paper provides some further guidance, and Treasury's website indicates Exposure draft legislation is due for release "early 2013".

Activities commenced prior to 10 May 2011 will be affected by the new legislation from 1 July 2015. Again, no amendment is required in relation to these activities prior to this date.

The next step

NFP's should plan ahead, to save headaches down the line.  Here’s what you need to do:

• Analyse each activity and identify the ones likely to be affected by the new measures
• Attempt to quantify the potential loss of funds from taxation (factoring in the loss of GST & FBT concessions)
• Determine the extent that planning will be required to limit the financial loss to the NFP

Like the rest of the economy, NFPs are doing it tough, even before you factor in the increased demand for their assistance. The charitable sector is facing considerable change with taxation measures, and new ACNC obligations. To assist with all your tax matters, contact our tax specialists Michael Garrone and Ryan Langley. For all your audit and ACNC needs, contact our Audit Partner Darren Laarhoven.

Darren Laarhoven | d.laarhoven@uhyhn.com.au