What Operating As A Not For Profit Organisation Means In Australia

Introduction

Operating as a not-for-profit (NFP) organisation holds specific meaning within the Australian context. Fundamentally, an NFP organisation is one that does not operate for the profit or personal gain of its members or leaders, instead dedicating its resources and any surplus generated towards fulfilling its specific mission or purpose within the community.

For groups aiming to serve the community, correctly establishing and operating as an NFP organisation is crucial for accessing specific legal structures and potential tax concessions. This guide offers essential information on defining NFP status in Australia, navigating the rules around making a profit, and demonstrating the organisation’s commitment to its purpose over private benefit.

Defining A Not For Profit Organisation In Australia

The Core Principle No Private Gain

An NFP organisation is fundamentally defined by its purpose – it does not operate for the profit, personal gain, or other private benefit of specific individuals. This includes:

• Its members
• The people managing the organisation
• Their associates

Instead, any financial surplus generated must be directed back into the organisation to support its objectives and mission.

This core principle applies throughout the organisation’s lifespan, including if it eventually closes down. The income and assets must consistently be used solely to further the organisation’s stated aims. Unlike for-profit entities where profits can be distributed to owners or shareholders, an NFP reinvests everything back into its operations and community services.

Permissible Benefits For Members And Staff

While the primary rule is no private gain, this does not completely prohibit members from receiving benefits under certain circumstances. An NFP organisation can provide services or benefits to a member if doing so directly aligns with carrying out the organisation’s purpose. For instance, a support group for disadvantaged parents can offer counselling to a member who fits the group’s target demographic, as this serves the organisation’s mission.

Furthermore, the NFP principle allows for reasonable compensation in two key areas:

• Staff members can be paid salaries for their work
• In some cases, Responsible Persons (like board or committee members) may also receive payment for services rendered

However, any payment must be reasonable and genuinely reflect the work performed or expenses incurred on behalf of the organisation. Excessive payments could contravene the NFP requirement.

Can A Not For Profit Organisation Make A Profit

Using Profits To Further Organisational Purposes

A common misunderstanding is that an NFP organisation cannot make a profit. However, an NFP can indeed generate a financial surplus, often referred to as profit. The crucial distinction lies in how this profit is used.

Any profit made by an NFP organisation must be reinvested back into the organisation to support its objectives and mission. It cannot be distributed for the personal gain or benefit of members, directors, staff, or their associates.

Instead, profits are used to fund the organisation’s activities, cover operational costs, and advance its stated purposes. For example, profits might be allocated towards:

• Paying reasonable salaries to employees for work performed
• Covering expenses like rent, utilities, and insurance
• Funding specific programs or services aligned with the NFP’s mission

Essentially, while making a profit is permissible, the defining characteristic of an NFP is that these funds are dedicated solely to furthering the organisation’s goals, not enriching individuals.

Retaining Profits For Sustainability And Growth

NFP organisations are permitted to retain profits rather than spending them immediately. Holding onto surplus funds is acceptable provided there is a genuine, purpose-aligned reason for doing so.

Retained profits play a vital role in ensuring the long-term viability and effectiveness of an NFP. Legitimate reasons for retaining profits include:

• Saving for future projects: Accumulating funds for planned initiatives or expansions that align with the organisation’s mission
• Infrastructure development: Investing in necessary buildings, equipment, or technology to improve service delivery
• Building financial reserves: Creating a buffer to ensure financial stability and sustainability, especially if income sources are variable or reliant on grants

It is generally expected that a well-managed NFP might budget for a modest annual surplus to build these reserves. However, accumulating significant profits indefinitely without a clear link to furthering the organisation’s purposes could raise questions about whether the entity is genuinely operating as an NFP.

How Organisations Demonstrate Not For Profit Character

Essential Clauses In Governing Documents

An organisation demonstrates its NFP character primarily through its governing documents, such as a constitution or rules. These documents must contain specific clauses that clearly state the organisation’s NFP nature and how its finances and assets will be managed.

Regulators like the Australian Taxation Office and the Australian Charities and Not-for-profits Commission specifically look for this wording when evaluating an organisation’s status.

Two crucial clauses are essential for establishing and proving NFP status:

• NFP clause: This clause explicitly states that the organisation’s income and assets must be used solely to further its objectives. It prohibits distributing funds directly or indirectly to members, except as genuine compensation for services rendered or expenses incurred.
• Dissolution clause: This clause outlines what happens to the organisation’s assets if it winds up or dissolves. It must specify that any remaining assets, after settling debts, will be transferred to another NFP organisation with similar purposes, preventing distribution to members.

Including carefully worded clauses like these, often based on examples provided by the relevant regulators, is fundamental for an organisation seeking recognition and potential benefits associated with NFP status.

Operational Practices And Governance

Beyond formal documentation, an organisation must demonstrate its NFP character through its day-to-day operations and governance. Its activities must consistently align with its stated NFP purposes and avoid providing inappropriate private benefits to individuals.

This means ensuring that financial decisions and operational conduct genuinely serve the organisation’s mission rather than individual interests.

Effective governance arrangements are key to maintaining NFP integrity. This involves implementing systems to prevent directors, members, staff, or their associates from deriving personal gain improperly.

Key practices include:

• Establishing clear policies on conflicts of interest
• Maintaining a register for declarations of interest
• Documenting how conflicts are managed in governing body meetings
• Ensuring contracts and financial procedures reflect a true NFP culture

These operational safeguards help monitor compliance and ensure the organisation consistently acts in accordance with its NFP objectives.

Why Not For Profit Status Is Important

Access To Specific Legal Structures

Operating as an NFP organisation provides exclusive access to certain legal structures that significantly impact an organisation’s identity, governance, liability, and compliance obligations.

Common legal structures available specifically for NFP organisations include:

• Incorporated associations: These are typically regulated by state or territory legislation and are suited for smaller, community-based groups.
• Companies limited by guarantee: This structure is often used by larger NFPs and is registered with the Australian Securities and Investments Commission (ASIC).
• Non-distributing co-operatives without share capital: These operate under co-operative principles for the benefit of members.
• Charitable trusts: These are established under trust law to manage assets for charitable purposes.

These structures inherently support the NFP principle by restricting the distribution of profits or assets for private benefit.

Eligibility For Tax Concessions And Funding

Formal recognition as an NFP organisation is often a fundamental requirement for accessing various financial benefits. These benefits can significantly support an organisation’s mission and sustainability.

Key financial advantages linked to NFP status include:

• Tax Concessions: Eligible NFP organisations may qualify for concessions from the Australian Taxation Office (ATO). These can include:
• Income tax exemption
• Fringe Benefits Tax (FBT) rebates or exemptions
• Goods and Services Tax (GST) concessions

Charities must generally be registered with the Australian Charities and Not-for-profits Commission (ACNC) and endorsed by the ATO to access charity-specific tax concessions. Meanwhile, other NFPs may be able to self-assess their eligibility for certain concessions.

• Deductible Gift Recipient (DGR) Status: NFP organisations seeking to receive tax-deductible donations must apply for DGR endorsement from the ATO. This status allows donors to claim a tax deduction for their contributions, which can be a significant incentive for fundraising. Both charities and certain other NFP types can apply for DGR status under specific categories.
• Grant Eligibility: Many government grant programs and private philanthropic foundations restrict their funding to organisations with formal NFP status. Proving the organisation operates not for private gain is crucial for securing these funding opportunities.

Conclusion

Operating as an NFP organisation in Australia fundamentally means dedicating resources and any generated surplus towards a specific mission, rather than the private gain of individuals. Demonstrating this NFP character through governing documents and operational practices is essential for accessing specific legal structures and potential tax concessions.

For expert guidance on establishing or managing your NFP organisation and navigating the associated legal requirements, contact LawBridge today. Our specialised law firm and consultancy is composed of expert not-for-profit lawyers to help ensure your organisation operates effectively and compliantly.

Frequently Asked Questions