Alert – Extension to the start date of legislation for taxing the earnings from the commercial activities of NFP entities

3 April 2012

The government has announced that it will extend the start date for implementation of the tax reform measure Better Targeting for Not-For-Profit Tax Concessions to 1 July 2012.  The legislation was originally intended to apply from 1 July 2011.

The reason given for the extension is to satisfy concerns from the not-for-profit (NFP) sector about the need for further consultation. 

Despite the extension to the start date, the legislation will apply to tax the earnings (after 1 July 2012) generated by the 'unrelated commercial activities' of NFP entities where those activities commenced after 7:30 pm (AEST) on 10 May 2011 and where the earnings derived from those activities are not directly applied to support the NFP entity's altruistic purposes.  A NFP entity will also not have access to a fringe benefits tax (FBT) exemption or rebate, goods and services (GST) concessions or deductible gift recipient (DGR) status in relation to their unrelated commercial activities where their activities are caught by the measure.

There will be exemptions from the tax measure including for NFPs who have entered into contracts with government as at 10 May 2011 for the delivery of services in relation to those contracts, and for NFP entities who participate in the National Rental Affordability Scheme, provided that affected contracts are not materially varied.

Transitional arrangements will apply to provide temporary relief from taxation of earnings derived by NFPs from their unrelated commercial activities where those activities commenced before 7:30 pm (AEST) on 10 May 2011.  However, the scope of the transitional relief is unknown until legislation is released.  It is also not clear how such earnings will be taxed, as a number of different models were considered in the original proposals.

Next steps

In the absence of draft legislation the extension to the start date of the measure does not provide much substantive relief from the current uncertainty as to the impact of this measure on NFPs.

While we wait for draft legislation to be issued by Treasury, NFPs should be proactive in reviewing all of their existing commercial activities (including any related contracts) and should obtain advice before seeking to undertake any new commercial enterprises to mitigate any risks of potential loss of existing tax concessions they may be currently entitled to.

Read the Assistant Treasurer's media release on the new start date.

Author(s) Dianne Sisak