Taking on a not-for-profit (NFP) client for the first time feels familiar — there is a bank account, there are expenses, there are payroll runs — until the questions start. Why is there a "restricted fund" that cannot be touched? Should the grant from the government go to income? Why is the organisation registered with the ACNC but not liable for income tax?
NFP bookkeeping uses the same double-entry principles as any other entity, but applies them within a compliance framework that differs significantly from commercial bookkeeping. This guide covers the key differences and the mistakes that catch new bookkeepers out.
Income tax exemption: what it covers and what it does not
Most Australian NFPs can self-assess as income tax exempt under the ITAA 1997. The common exempt categories include charitable institutions, public benevolent institutions, health promotion charities, and certain community service, sporting, and cultural organisations.
What income tax exemption does not cover:
- GST — income tax exemption has no bearing on GST. An NFP that makes taxable supplies above $150,000 annual turnover must register for GST ($75,000 threshold for commercial entities). Income tax exempt status does not reduce this obligation.
- PAYG withholding — employees of NFPs are subject to PAYG withholding in exactly the same way as employees of commercial businesses.
- FBT — some NFPs have FBT concessions (public benevolent institutions and certain health promotion charities have rebates or exemptions), but income tax exemption alone does not confer FBT concessions.
When a new NFP client comes on board, establish the entity's tax category and confirm which specific concessions apply before assuming that "income tax exempt" means "tax doesn't apply to anything."
DGR status and gift registers
Some NFPs hold Deductible Gift Recipient (DGR) status, which allows donors to claim their donations as tax deductions. DGR status is separate from income tax exemption — an organisation can have one, both, or neither.
Why it matters for bookkeeping:
Donations received by a DGR must be receipted correctly. The receipt must state the donor's name, the date and amount of the gift, and that the gift is tax deductible to the extent of the law. If the donation includes a benefit to the donor (a dinner, a raffle ticket), only the amount exceeding the value of the benefit is deductible.
Maintain a gifts and bequests register — a record of every donation received, the receipt issued, and whether any benefit was provided. This is the audit trail if the ATO queries the organisation's DGR reporting.
GST and donations: Most donations are not subject to GST (they are not consideration for a supply). However, where a donor receives something of value in exchange (a gala ticket, merchandise), the exchange is a taxable supply. Code these carefully — the donation component and the consideration component may need to be split.
Restricted versus unrestricted funds
A common NFP accounting requirement is distinguishing between restricted and unrestricted funds:
- Unrestricted funds can be used for any purpose consistent with the organisation's objectives
- Restricted funds are subject to donor or grantor conditions — they can only be used for a specific purpose
Why this matters in the books:
Restricted funds may not be expensed to the general profit and loss. A grant of $50,000 to run a specific program is held in a restricted fund account on the balance sheet until spent on that program. Spending it on general operating costs — even if the organisation is cash-constrained — typically breaches the grant conditions and may require repayment.
Set up separate nominal accounts or fund accounts for each material restricted funding source. Coordinate with the organisation's management on which funds carry restrictions and what those restrictions permit.
Grant income and acquittals
Government and philanthropic grants are a common income source for Australian NFPs. Their accounting treatment depends on whether conditions are attached.
Conditions-based grants are typically recognised as income only as the conditions are satisfied (the work is performed, the approved expenses are incurred). The unspent or unearned portion sits as a liability (deferred grant income) until the condition is met.
Unconditional grants can be recognised as income when received.
Many bookkeepers code all incoming grant amounts as income immediately. For conditions-based grants, this overstates income in the period of receipt and understates it in the period the work is actually performed. The error is particularly significant for ACNC annual reporting, where the timing of income recognition affects the reported financial position.
Grant acquittals: Most grants require a formal acquittal report demonstrating that funds were spent in accordance with the grant agreement. The bookkeeper's transaction records, bank reconciliation, and coding decisions all feed into the acquittal. Maintain clean, grant-specific coding from the start — reconstructing it from general accounts at acquittal time is time-consuming and sometimes impossible.
ACNC reporting requirements
Registered charities must submit an Annual Information Statement (AIS) to the ACNC each year. Financial reporting obligations depend on the organisation's size tier:
| Annual revenue | Reporting requirement |
|---|---|
| Under $500,000 (Small) | Basic financial information only |
| $500,000–$3 million (Medium) | Financial report (can be unaudited) |
| Over $3 million (Large) | Audited financial report |
For medium and large charities, the financial report must follow AASB accounting standards. This is where bookkeeping transitions into formal financial reporting — the bookkeeper's clean records are the input into a financial report that must be prepared (and for large charities, audited) by an appropriately qualified person.
Confirm the organisation's revenue tier and reporting obligation before the first reporting period. Many small charities are unaware they have crossed a reporting threshold.
Five NFP bookkeeping mistakes to avoid
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Coding all income to a single "Revenue" account — NFP income sources (donations, grants, membership fees, trading revenue, government funding) need to be coded to separate accounts. ACNC reporting and management decisions depend on knowing where the money came from.
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Spending restricted funds on general operations — always check whether a payment will draw down a restricted fund before coding it. A conversation with management takes 60 seconds; a grant repayment demand takes months.
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Missing the GST registration threshold — the $150,000 NFP threshold is often overlooked. Review turnover annually.
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Ignoring FBT concessions — public benevolent institutions and health promotion charities have significant FBT concessions (the rebate or exemption). If the organisation is not using these correctly, it is either overpaying FBT or being exposed to a liability.
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Not maintaining a gifts register — the ATO can query DGR gift receipting. A register takes minutes to maintain and provides complete protection.
NFP bookkeeping rewards careful setup. The chart of accounts, fund structure, and grant coding decisions made in the first month shape every subsequent reporting period. Get the framework right early, and the ongoing bookkeeping is no more complex than any other client.
This article was last reviewed on 17 November 2026. ACNC reporting thresholds and ATO concession categories are reviewed periodically. Always confirm current rules at acnc.gov.au and ato.gov.au. This is general guidance, not specific tax or legal advice.