The steps for calculating taxable income, as discussed in Taxable income and mutuality, are:
- Classify revenue
- Classify expenditure
- Separate the apportionable items
- Calculate the taxable income
We provide two worked examples of how to calculate taxable income:
- Case study 1: Alizarin Society
- Case study 2: Celadon Club
Case study 1: Alizarin Society
Facts
The Alizarin Society is a not-for-profit company with the following revenue and expenses for the year ended 30 June. It is not registered for GST and not required to be registered.
Revenue |
$ |
Expenses |
$ |
---|---|---|---|
Membership subscriptions |
$3,000 |
Postage (see note 2) |
$100 |
Term deposit interest |
$800 |
Photocopying (see note 2) |
$100 |
Christmas dinner (see note 1) |
$5,000 |
Christmas dinner (see note 1) |
$4,000 |
Lamington sale to public |
$2,500 |
Cost of lamingtons |
$1,800 |
|
|
Term deposit charges |
$50 |
Total |
$11,300 |
|
$6,050 |
Note 1 The Christmas dinner was attended by 70 members and 30 non-members who paid $50 each. It cost $40 per person to cater for the dinner.
Note 2 From an examination of the society's records, 10% of its communication during the year was with non-members.
Steps for calculating taxable income
Step 1: Classify revenue
Revenue |
Non-assessable |
Assessable |
Apportionable |
Total |
---|---|---|---|---|
Membership subscriptions |
$3,000 |
– |
– |
$3,000 |
Term deposit interest |
– |
$800 |
– |
$800 |
Sale of lamingtons |
– |
$2,500 |
– |
$2,500 |
Christmas dinner |
– |
– |
$5,000 |
$5,000 |
Total |
$3,000 |
$3,300 |
$5,000 |
$11,300 |
Step 2: Classify expenses
Expenses |
Non-deductible |
Deductible |
Apportionable |
Total |
---|---|---|---|---|
Postage |
– |
– |
$100 |
$100 |
Photocopying |
– |
– |
$100 |
$100 |
Christmas dinner |
– |
– |
$4,000 |
$4,000 |
Cost of lamingtons |
– |
$1,800 |
– |
$1,800 |
Term deposit charges |
– |
$50 |
– |
$50 |
Total |
– |
$1,850 |
$4,200 |
$6,050 |
Step 3: Separate the apportionable items
Revenue |
Non-assessable |
Assessable |
Total |
---|---|---|---|
Christmas dinner (see note 3) |
$3,500 |
$1,500 |
$5,000 |
Note 3 Revenue from the Christmas dinner is apportioned on the basis that it was attended by 70 members and 30 non-members who paid $50 each.
Expenses |
Non-deductible |
Deductible |
Total |
---|---|---|---|
Christmas dinner (see note 4) |
$2,800 |
$1,200 |
$4,000 |
Postage (see note 5) |
$90 |
$10 |
$100 |
Photocopying (see note 5) |
$90 |
$10 |
$100 |
Total |
$2,980 |
$1,220 |
$4,200 |
Note 4 Expenses for the Christmas dinner are apportioned on the basis that it was attended by 70 members and 30 non-members and it cost $40 per person to cater for the dinner.
Note 5 Expenses for postage and photocopying are apportioned on the basis that 10% of Alizarin Society's communication during the year was with non-members.
Step 4: Calculate the taxable income
Assessable income ($3,300 + $1,500) |
$4,800 |
Less: deductible expenses ($1,850 + $1,220) |
$3,070 |
Taxable income |
$1,730 |
As its taxable income is more than the taxable threshold, the Alizarin Society will need to lodge a company tax return. For information on how to complete the company tax return, see Guide to company tax return for not-for-profit organisations.
Case study 2: Celadon Club
Facts
The Celadon Club provides licensed facilities to its members and the general public. It also provides assistance to community and sporting organisations by way of donations.
The club is incorporated in the Australian Capital Territory under the Associations Incorporation Act 1991. Its constitution contains clauses prohibiting it from making any distribution, whether in money, property or otherwise, to its members.
The club's facilities include a bar, restaurant and function room. It also has poker machines (which it owns), Keno and TAB.
The club contracts with an external catering company to undertake the operation of the restaurant. Under the contract, the club receives lease payments and the caterer is responsible for all catering, including kitchen and waiting staff.
The club hires out its function room to the public. It also uses the function room for its own events such as Valentine's Day and Melbourne Cup luncheons.
The club has 5,000 members. A register is kept at the door which records member and non-member attendance. During the income year ended 30 June, 50,000 visitors entered the premises, including 43,000 guests who were signed in by members. The club traded for a total of 360 days during the year, and on average 250 members attended the club every trading day.
The club is registered for GST. Its revenue and expenses are shown net of GST, except where the amount of GST incurred is not recoverable from the ATO.
The club's financial statements for the year ended 30 June show the following revenue and expenses:
Revenue |
$ |
---|---|
Bar sales |
827,695 |
Bingo and raffle income |
23,496 |
Club luncheons – ticket sales |
22,500 |
Function room hire |
6,000 |
Interest received |
54,322 |
Keno commissions |
46,152 |
Lease income – restaurant |
10,000 |
Member subscriptions |
51,800 |
Poker machine revenue – gross net of payouts |
1,598,247 |
TAB commissions |
18,421 |
Vending machine commissions |
21,467 |
Total |
$2,680,100 |
Expenses |
$ |
Accounting – general |
7,000 |
Accounting – management of tax affairs |
3,000 |
Audit |
5,000 |
Advertising |
18,461 |
Bank charges |
1,927 |
Bar expenses: |
|
|
392,576 |
|
13,592 |
|
29,764 |
Bingo expenses |
4,533 |
Cleaning |
45,000 |
Club luncheons – catering expenses |
13,500 |
Club luncheons – entertainer expenses |
3,000 |
Computer expenses |
9,664 |
Decline in value (depreciating assets) |
121,498 |
Directors expenses and honoraria |
19,712 |
Donations to deductible gift recipients |
12,869 |
Electricity |
82,478 |
Insurance |
48,192 |
Gaming machine expenses: |
|
|
210,969 |
|
13,786 |
|
36,438 |
|
262,481 |
|
26,183 |
Keno expenses |
2,157 |
Members magazine |
8,000 |
Membership cards |
2,000 |
Payroll tax |
9,586 |
Printing, stationery and postage |
22,544 |
Raffle expenses |
24,851 |
Rates and land taxes |
19,688 |
Repairs and maintenance |
86,563 |
Salaries and wages |
728,547 |
Pay TV |
21,665 |
Subscription expenses |
9,226 |
Superannuation |
66,499 |
TAB expenses |
3,661 |
Telephone |
15,297 |
Total |
$2,401,907 |
Net profit |
$278,193 |
Steps for calculating taxable income
Follow the four steps below to calculate the taxable income for Case study 2: the Celadon Club:
- Step 1: Classify revenue
- Step 2: Classify expenses
- Step 3: Separate the apportionable items
- Step 4: Calculate the taxable income
Step 1: Classify revenue
Revenue |
Non-assessable income |
Assessable income |
Apportionable revenue |
Total |
---|---|---|---|---|
Bar sales |
|
|
827,695 |
827,695 |
Bingo and raffle income |
|
|
23,496 |
23,496 |
Club luncheons – ticket sales |
|
|
22,500 |
22,500 |
Function room hire |
|
6,000 |
|
6,000 |
Interest received |
|
54,322 |
|
54,322 |
Keno commissions |
|
46,152 |
|
46,152 |
Lease income – restaurant |
|
10,000 |
|
10,000 |
Member subscriptions |
51,800 |
|
|
51,800 |
Poker machine revenue |
|
|
1,598,247 |
1,598,247 |
TAB commissions |
|
18,421 |
|
18,421 |
Vending machine commissions |
|
21,467 |
|
21,467 |
Total |
$51,800 |
$156,362 |
$2,471,938 |
$2,680,100 |
Step 2: Classify expenses
Expenses |
Non-deductible expenses |
Deductible expenses |
Apportionable expenses |
Total |
---|---|---|---|---|
Accounting – general |
|
|
7,000 |
7,000 |
Accounting – management of tax affairs |
|
3,000 |
|
3,000 |
Audit |
|
|
5,000 |
5,000 |
Advertising |
|
|
18,461 |
18,461 |
Bank charges |
|
|
1,927 |
1,927 |
Bar expenses: |
|
|
|
|
|
|
|
392,576 |
392,576 |
|
|
|
13,592 |
13,592 |
|
|
|
29,764 |
29,764 |
Bingo expenses |
|
|
4,533 |
4,533 |
Cleaning |
|
|
45,000 |
45,000 |
Club luncheons – catering expenses |
|
|
13,500 |
13,500 |
Club luncheons – entertainer expenses |
|
|
3,000 |
3,000 |
Computer expenses |
|
|
9,664 |
9,664 |
Decline in value (depreciating assets) |
|
|
121,498 |
121,498 |
Directors expenses and honoraria |
|
|
19,712 |
19,712 |
Donations to deductible gift recipients |
|
12,869 |
|
12,869 |
Electricity |
|
|
82,478 |
82,478 |
Insurance |
|
|
48,192 |
48,192 |
Gaming machine expenses: |
|
|
|
|
|
|
|
210,969 |
210,969 |
|
|
|
13,786 |
13,786 |
|
|
|
36,438 |
36,438 |
|
|
|
262,481 |
262,481 |
|
|
|
26,183 |
26,183 |
Keno expenses |
|
2,157 |
|
2,157 |
Members magazine |
8,000 |
|
|
8,000 |
Membership cards |
2,000 |
|
|
2,000 |
Payroll tax |
|
|
9,586 |
9,586 |
Printing, stationery and postage |
|
|
22,544 |
22,544 |
Raffle expenses |
|
|
24,851 |
24,851 |
Rates and land taxes |
|
19,688 |
|
19,688 |
Repairs and maintenance |
|
|
86,563 |
86,563 |
Salaries and wages |
|
|
728,547 |
728,547 |
Pay TV |
|
|
21,665 |
21,665 |
Subscription expenses |
9,226 |
|
|
9,226 |
Superannuation |
|
66,499 |
|
66,499 |
TAB expenses |
|
3,661 |
|
3,661 |
Telephone |
|
|
15,297 |
15,297 |
Total |
$19,226 |
$107,874 |
$2,274,807 |
$2,401,907 |
Step 3: Separate the apportionable items
Revenue |
Non-assessable |
Assessable |
Total |
---|---|---|---|
Bar sales |
595,609 |
232,086 |
827,695 |
Bingo and raffle income |
16,908 |
6,588 |
23,496 |
Club luncheons – ticket sales |
18,000 |
4,500 |
22,500 |
Poker machine revenue |
1,150,099 |
448,148 |
1,598,247 |
Total |
$1,780,616 |
$691,322 |
$2,471,938 |
Club luncheons
The club held three special event luncheons during the year (Valentine's Day, Melbourne Cup and Christmas Day). The ticket price to attend each event was $50. The club apportions the revenue from the luncheons on the basis that a total of 450 tickets were sold to the events – 360 tickets to members and 90 tickets to non-members. The non-member percentage to apply using this method is 90/450 = 20%.
The club regularly attracts members of the public, making it difficult to identify and separate its other revenue items. The club apportions these items using the Waratahs formula as follows:
The percentage of members who attend on a daily basis is 5%, or 250 members on average who attend on a daily basis divided by 5,000 memberships. The total number of visitors for the year was 50,000, which included 43,000 members' guests – that is, visitors signed in by members.
After putting in the figures, the non-member percentage to apply using the Waratahs formula is 28.04%.
(B x 75%) + C = (43,000 x 0.75) + 7,000 = 0.2803571(R x S x T) + A 5,000 x 0.05 x 360) + 50,000 or 28.03571%
Expenses |
Non-deductible |
Deductible |
Total |
---|---|---|---|
Accounting – general |
5,037 |
1,963 |
7,000 |
Audit |
3,598 |
1,402 |
5,000 |
Advertising |
13,285 |
5,176 |
18,461 |
Bank charges |
1,387 |
540 |
1,927 |
Bar expenses: |
|
|
|
|
282,498 |
110,078 |
392,576 |
|
9,781 |
3,811 |
13,592 |
|
21,418 |
8,346 |
29,764 |
Bingo expenses |
3,262 |
1,271 |
4,533 |
Cleaning |
32,382 |
12,618 |
45,000 |
Club luncheons – catering expenses |
10,800 |
2,700 |
13,500 |
Club luncheons – entertainer expenses |
2,400 |
600 |
3,000 |
Computer expenses |
6,954 |
2,710 |
9,664 |
Decline in value (depreciating assets) |
87,430 |
34,068 |
121,498 |
Directors expenses and honoraria |
14,185 |
5,527 |
19,712 |
Electricity |
59,351 |
23,127 |
82,478 |
Insurance |
34,679 |
13,513 |
48,192 |
Gaming machine expenses: |
|
|
|
|
151,813 |
59,156 |
210,969 |
|
9,920 |
3,866 |
13,786 |
|
26,221 |
10,217 |
36,438 |
|
188,881 |
73,600 |
262,481 |
|
18,841 |
7,342 |
26,183 |
Payroll tax |
6,898 |
2,688 |
9,586 |
Printing, stationery and postage |
16,223 |
6,321 |
22,544 |
Raffle expenses |
17,883 |
6,968 |
24,851 |
Repairs and maintenance |
62,291 |
24,272 |
86,563 |
Salaries and wages |
524,262 |
204,285 |
728,547 |
Pay TV |
15,590 |
6,075 |
21,665 |
Telephone |
11,008 |
4,289 |
15,297 |
Total |
$1,638,278 |
$636,529 |
$2,274,807 |
* These payments are required under a state law. The law requires clubs holding gaming machine licenses to make payments from their gaming machine revenue to community organisations at a rate prescribed by the state. For this year, the club made cash payments that met, but did not exceed, the prescribed rate.
Club luncheons
The club held three special event luncheons during the year (Valentine's Day, Melbourne Cup and Christmas Day). Catering was through the club's contract caterer at a cost of $30 a head. The club apportions the cost of the luncheons on the basis that a total of 450 tickets were sold to the events – 360 tickets to members and 90 tickets to non-members. The percentage to apply using this method is 90/450 = 20%. This percentage would also apply to other costs associated with the club luncheons – that is, the entertainer expenses.
Other expense items
The club regularly attracts members of the public, making it difficult to identify and separate its other expense items. The club apportions its other expense items using the Waratahs formula. The percentage to apply using the Waratahs formula is 28.04% (as calculated in Other revenue items).
Step 4: Calculate the taxable income
Assessable income ($156,362 + $691,322) |
$847,684 |
Less: deductible expenses ($107,874 + $636,529) |
$744,403 |
Taxable income |
$103,281 |
As its taxable income is more than the taxable threshold, the Celadon Club will need to lodge a company tax return.
For information on how to complete the company tax return, including a worked example that uses the figures from Case study 2, see Guide to company tax return for not-for-profit organisations.
This guide explains the principle of mutuality and helps not-for-profit clubs, societies and associations calculate their taxable income. (NAT 73436).