Tax MoneySummary – Earnings derived from “new” activities that do not directly support the NFP organisations altruistic purposes are now subject to tax.

We thought it appropriate to provide an update on the proposals for taxation of unrelated business activities (commonly referred to as “UBIT”).

In the 2011-12 Federal Budget the government announced it will reform the tax concessions provided to not-for-profit (NFP) organisations to tax the earnings after 1 July 2011 generated by ‘unrelated commercial activities’ of NFP organisations.  Earnings derived from activities that do not directly support the NFP organisations altruistic purposes are now subject to tax.

Approach to Taxing Unrelated Commercial Activities

Until the exposure draft of the legislation is released, slated for October 2012, it is not clear how earnings from unrelated commercial activities will be taxed.  The government has however considered a number of possible approaches in its public consultation paper released in May 2011.

Makinson & d’Apice forwarded a submission to the government in response to this consultation paper.

Start Date for Reforms

The start date for the reforms has now been deferred to 1 July 2012 and will only apply to “new” unrelated commercial activities that commenced after 7.30 pm (AEST) on 10 May 2011.  Existing unrelated commercial activities that commenced prior to that date will continue to be covered by transitional arrangements as announced in the 2011-12 Budget.

ATO Guidance on Administrative Treatment

On 9 July 2012 the ATO released guidance on the administrative treatment for the taxation of NFP organisations in anticipation of the changes that will be included in new reforms. 

The ATO will accept tax returns, business activity statements (BAS) and fringe benefits tax (FBT) returns as lodged up until the proposed reforms are passed by parliament and until then, the following retrospective arrangements will be available: 

  • NFP organisations that chose to anticipate the changes and did so correctly, do not need to do anything more.
  • NFP organisations that did not anticipate the changes correctly may need to seek an amendment to their earlier BAS, FBT or income tax return.
  • If an NFP organisation has acted reasonably in anticipating the changes, there will be no tax shortfall penalty and, if they actively seek to amend within a reasonable time, the ATO will remit the general interest charge (GIC) attributable to the amendment to nil.
  • If an NFP organisation lodges their BAS, FBT or income tax return in accordance with the law as it was before the measure was passed, they should seek an amendment.

For further information please click here. We will be in touch with a further update when the next exposure draft of the UBIT legislation is released.