A Guide to the ATO’s NFP Self-Review Return

Introduction

The Australian Taxation Office (ATO) has introduced a significant new compliance measure for the not-for-profit (NFP) sector: the annual NFP self-review return. This requirement marks a major shift, compelling non-charitable NFPs to formally assess and confirm their eligibility for income tax exemption each year, aiming to enhance transparency and accountability.

Understanding these new obligations is crucial for any eligible NFP organisation to maintain its tax-exempt status and avoid potential penalties. This guide provides essential information to help your organisation navigate the self-review process, understand the key requirements, and ensure ongoing compliance with tax laws.

The New NFP Self-Review Return

What Is the New NFP Self-Review Return & Who Is Required to Lodge It

The NFP self-review return is a mandatory annual report that non-charitable NFPs with an active Australian business number (ABN) must lodge with the ATO. This return serves to confirm the organisation’s eligibility to self-assess as income tax exempt for the income year, representing a significant shift in compliance for the NFP sector.

However, not every NFP organisation faces this obligation. Certain entities are excluded from lodging this self-review return, including:

• Registered charities, as they cannot self-assess for income tax exemption and must be endorsed by the ATO
• Specific types of government entities
• NFP sub-entities established for Goods and Services Tax (GST) purposes
• Other specific entities excluded by the ATO

The Purpose of the Annual Self-Assessment for NFPs 

The ATO has introduced the annual self-assessment to enhance transparency and accountability across the NFP sector. Its primary purpose is to ensure that NFPs are correctly and regularly reviewing their eligibility for important tax concessions, particularly the income tax exemption.

This self-review framework encourages NFPs to proactively manage their tax obligations. By conducting an annual assessment, organisations can confirm that their activities and purpose remain aligned with the requirements for their tax status, thereby maintaining public trust and ensuring compliance with Australian tax laws.

Key Areas Covered in the NFP Self-Review Return

Determining Your NFP’s Main Purpose

To complete the NFP self-review return, your organisation must select a category that best reflects its main purpose. This assessment should be based on a thorough review of several key elements:

• Your NFP’s governing documents
• The organisation’s history
• Its primary activities
• How it uses its funds

Any other purpose the organisation has must be secondary or incidental to this main one.

The ATO provides several categories for NFPs to choose from, ensuring that the organisation’s self-assessment for income tax exemption is based on its core mission. These categories include:

Category	Description
Community service	An organisation established for community service purposes, such as promoting the welfare of the community. This does not include organisations that primarily advance the common interests of their members, like social clubs.
Cultural	A society or club whose main purpose is to encourage art, literature, or music.
Educational	A public institution whose main purpose is to provide education to the public or a segment of it.
Sporting	An organisation established to encourage a game, sport, or animal racing.
Scientific	An institution or association that encourages science through activities like research or teaching.
Resource development	An organisation that promotes the development of Australian resources, aviation, or tourism.
Health	This includes public hospitals, hospitals run by a not-for-profit, or certain private health insurers.
Employment	A trade union or a registered employee or employer association.

Reviewing Your NFP’s Governing Documents & Rules

A critical part of the NFP self-review return involves confirming that your organisation’s governing documents contain specific clauses. The return asks whether these documents prohibit the distribution of income or assets to members, both while the NFP is operating and when it is winding up.

These rules are essential for maintaining your NFP status and eligibility for tax concessions.

The ATO recognises that some NFPs may need time to update their governing documents to meet these requirements. To support these organisations, a transitional arrangement is in place. If your NFP has not distributed any income or assets to members, it has until 30 June 2026 to make the necessary updates to its documents.

During this transitional period, for the 2023–24 and 2024–25 NFP self-review returns, your organisation can answer ‘Yes’ to the question about governing document clauses. This response will:

• Grant your NFP the extra time needed to comply
• Allow it to continue to self-assess as income tax exempt

Assessing Your NFP’s Australian Operations & Expenditure

The NFP self-review return also examines where your organisation operates and spends its funds to determine its eligibility for an income tax exemption. To qualify for the concession, your NFP must pass one of three tests related to its connection to Australia.

The first and most direct test requires the organisation to exist, operate, and incur its expenditure entirely within Australia. If an NFP does not meet this condition, it may still be eligible if it satisfies a secondary test. This alternative requires the organisation to pursue its objectives and incur its expenditure “principally” in Australia, meaning more than 50% of its activities and spending occur here.

If your organisation cannot meet either of these physical presence tests, there are two other pathways to eligibility. An NFP can still qualify for an income tax exemption if it is:

• A deductible gift recipient (DGR) endorsed by the ATO.
• An organisation located outside Australia that is prescribed by name in Australian income tax regulations and is exempt from income tax in its country of residence.

Practical Steps for Your NFP to Prepare for the Self-Review

Conduct an Annual Review of Your NFP’s Activities & Purpose

It is crucial for NFPs to conduct regular reviews of their activities to ensure they remain aligned with their main purpose as stated in their governing documents. Over time, organisations can experience “purpose creep,” where their activities gradually deviate from their original mission.

This deviation can place an NFP’s registration and its ability to access tax concessions at risk. The ATO often focuses its investigations on understanding the full breadth of an entity’s activities, including its programs, partnerships, and investments.

This scrutiny aims to determine whether an NFP has acted for purposes other than its stated eligible purpose. Therefore, an annual review helps confirm that:

• Your organisation’s operations consistently support its documented NFP purpose
• You are not providing personal benefits to members

Strengthen Your NFP’s Governance & Record-Keeping

Strong governance and meticulous record-keeping are essential for accurately completing the NFP self-review return, as these are key areas of focus for the ATO. NFPs must maintain accurate records of all financial transactions and activities to demonstrate compliance.

This includes keeping financial records that clearly show the organisation’s sources of income and how funds are spent. The ATO treats several issues as red flags that may trigger further investigation. These include:

• Inadequate or informal decision-making processes
• Missing or poorly maintained governing documents and board minutes
• Non-compliance with reporting requirements, including the new annual NFP self-review return
• Poor record-keeping practices

These practices align with the core principles of NFP compliance and governance, including the Australian Charities and Not-for-profits Commission (ACNC) Governance Standards, which require responsible persons, such as directors and committee members, to manage their organisation’s financial affairs prudently. Proper governance ensures that financial statements and annual returns are prepared and lodged correctly, supporting a compliant self-assessment.

Understanding the Outcomes of the NFP Self-Review Return

The Process for Self-Assessed Income Tax Exempt NFPs

After completing the NFP self-review return, your organisation will receive a summary of its answers. If the information provided indicates eligibility, a statement will confirm that the organisation has self-assessed as income tax exempt for that income year.

To finalise the process, you must complete these essential steps:

• Complete an acknowledgment and declaration
• Confirm your income tax exempt status
• Acknowledge that the NFP is not claiming tax offset refunds for the year

Once the declaration is signed and the return is submitted, you will receive a lodgment receipt ID. This receipt serves two important purposes:

1. It confirms that your NFP organisation has fulfilled its self-review obligations for the income year
2. It acts as a reminder that the NFP self-review return must be lodged annually to maintain this status, unless circumstances change

Next Steps for NFPs Self-Assessed as Taxable

If the answers in the self-review return lead to a determination that your NFP is ineligible for an income tax exemption, the summary will state this outcome. The organisation is then considered taxable for that income year.

Before submitting, you must sign a declaration confirming that:

• The lodgment is informational
• The NFP may be required to lodge an income tax return

After submission, you will receive:

• A lodgment receipt ID
• Instructions on the next steps

These instructions will specify that the organisation may need to lodge an income tax return for the relevant financial year. Additionally, the ATO provides further guidance on what taxable NFP organisations need to lodge to remain compliant.

Conclusion

The ATO’s new NFP self-review return introduces a significant annual compliance obligation, requiring non-charitable NFPs to formally assess their eligibility for income tax exemption. To maintain their tax concessions, NFPs must proactively review their purpose, governing documents, and activities to ensure they align with the ATO’s requirements.

To manage these new requirements and safeguard your organisation’s tax-exempt status, contact our experienced not-for-profit lawyers at LawBridge. Our team offers specialised guidance to help your NFP confidently meet its self-review obligations and continue its important work.

Frequently Asked Questions