What is income tax
Who is exempt from income tax
Funds and trusts
How to apply for endorsement
What is Income Tax?
Income tax is tax levied on the profit of taxable entities. These entities may be individuals or organisations. The tax calculation is based on the tax rate of the relevant entity.
Who is exempt from income tax?
Certain categories of organisations are exempt from paying income tax. These categories are:
- charitable entities registered with the Australian Charities and Not-for-profits Commission (ACNC);
- community service organisations;
- cultural organisations;
- public educational organisations;
- employment organisations;
- health organisations;
- resource development organisations;
- scientific organisations; and
- sporting organisations.
Churches will fall within the first category of registered charities provided they have actually registered with the ACNC.
Definition of a Charity
A charity is defined to mean an entity:
- that is not-for-profit; and
- all of the purposes of which are:
- charitable purposes that are for the public benefit; or
- purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes that are charitable purposes.
Charitable purposes are any of the following:
- the purpose of advancing health;
- the purpose of advancing education;
- the purpose of advancing social or public welfare;
- the purpose of advancing religion;
- the purpose of advancing culture;
- the purpose of promoting reconciliation, mutual respect and tolerance between groups of individuals that are in Australia;
- the purpose of promoting or protecting human rights;
- the purpose of advancing the security or safety of Australia or the Australian public;
- the purpose of preventing or relieving the suffering of animals;
- the purpose of advancing the natural environment;
- any other purpose beneficial to the general public that may reasonably be regarded as analogous to, or within the spirit of any of the above purposes;
- the purpose of promoting or opposing a change to any matter published by law, policy or practice in the Commonwealth, a State, a Territory or another country; if
- in the case of promoting a change—the change is in furtherance or in aid of one or more of the purposes above;
- in the case of opposing change—the change is in opposition to, or in hindrance of, one or more of the purposes
Churches will have the purpose of advancing religion. However, it is possible to have more than one purpose. Although religion would be their primary purpose, some churches will have other purposes such as advancing social or public welfare. Advancing social or public welfare includes the relief of poverty and caring for and supporting the aged and individuals with disabilities.
A church is required to show on the ACNC register into which category or categories their purposes fall. This is displayed in the “Entity Subtype” section.
Note that for unincorporated churches, listing a purpose in addition to advancing religion could have implications for their reporting obligations with the ACNC. Unincorporated churches whose only purpose is advancing religion may be able to access the concession for basic religious charities. This includes an exemption from submitting annual financial reports to the ACNC.
If a charity is not endorsed as a charity with the ACNC, it is not exempt from income tax.
Funds and Trusts
A church may operate separate funds and trusts. For example, these may include trusts resulting from the receipt of a legacy or bequest. More information can be found in the section of Managing Trusts.
You will need to consider the terms of the trust to determine whether they are established for a charitable purpose. In most cases, the trust will clearly be for a charitable purpose. Funds may well be part of the church entity and therefore do not need to be separately endorsed by the ACNC. However a trust that is a separate legal entity must apply for its own ABN and seek registration as a charity with the ACNC.
How to apply for endorsement
To apply for ACNC endorsement, a church will need to complete an on line application on the ACNC’s website. Only charities with an ABN can apply.
Once a church is registered with the ACNC as a charity, the ACNC will forward the application to the Australian Taxation Office (ATO). The ATO will then endorse the church for various tax concessions. These concessions will entitle the church to:
- income tax exemption;
- refundable imputation credits;
- fringe benefits tax rebate; and
- various GST concessions such as non-commercial activities, non-profit sub- entities, fundraising exemptions etc.
Provided the ACNC register shows a purpose of advancing religion, a church will also be able to access the FBT exemption for religious practitioners who meet the specific exemption requirements.
A charity’s status is shown on both the ACNC register and the Australian Business Register and therefore is public information.