ClubPack (current to 19 June 2003)
Chapter 1 - Income tax - are you exempt?
| This document has been archived. It is current only to 19 June 2003. |
The income tax law provides that certain types of clubs, societies and associations are exempt from paying income tax. This chapter helps you work out if the income of your organisation is exempt from income tax.
The income tax obligations of clubs, societies and associations that are not income tax exempt are explained in chapter 2.
Working out if you are exempt
Organisations that are charities need to meet special requirements to be income tax exempt. Charities are explained in detail in Appendix 2 - Are you a charity? If your organisation is a charity you should not use ClubPack . Instead you should use CharityPack, available from the ATO by phoning 13 24 78 .
Most clubs, societies and associations are not charities. You are not a charity if:
- you are not carried on primarily for charitable purposes
- your purpose is not for the public benefit or the relief of poverty
- you are primarily for sporting, recreational or social purposes, or
- you are primarily for political, lobbying or promotional purposes.
Table of exempt entities
The table on the following two pages gives the categories of organisation that can be exempt from income tax. Most of these categories have further requirements for income to be tax exempt. These requirements are explained in Appendix 1-Type of exempt entity .
Clubs, societies and associations that are not charities do not need to apply to the ATO for income tax exemption.
Self-assessment
The self-assessment system allows organisations to work out for themselves what their income tax status is.
You will need to take the following steps to determine whether you are exempt from income tax:
- check the table, Type of exempt entity, to see if your organisation fits into any of the categories listed. Many of the categories require the organisation to be a non-profit club, society or association. An explanation of 'non-profit'
- turn to the page in appendix 1 against your category. You may also find that you need to pass at least one of the three tests explained here, and
- the steps are summarised in the worksheet in appendix 4 .
If you think you fall in any of the categories listed on the following pages, follow the directions to see if you meet the requirements for income tax exemption.
'Non-profit' is explained here .
Type of exempt entity | Page in appendix 1 |
Cultural organisations | |
art - a non-profit society, association or club established for the encouragement of art | |
literature - a non-profit society, association or club established for the encouragement of literature | |
music - a non-profit society, association or club established for the encouragement of music | |
musical purposes - a non-profit society, association or club established for musical purposes | |
Community service organisations | |
community service - a non-profit society, association or club established for community service purposes (except political or lobbying purposes) | |
Educational organisations | |
public educational institution | |
Employment organisations | |
employee association registered under an Australian law relating to the settlement of industrial disputes | |
employer association registered under an Australian law relating to the settlement of industrial disputes | |
trade union | |
Friendly societies | |
friendly society that is non-profit (except a friendly society dispensary) | |
Health organisations | |
public hospital | |
non-profit hospital - hospital carried on by a non-profit society or association | |
health benefits - a non-profit health benefits organisation registered for the purposes of the National Health Act 1953 | |
hospital benefits - a non-profit hospitals benefits organisation registered for the purposes of the National Health Act 1953 | |
medical benefits - a non-profit medical benefits organisation registered for the purposes of the National Health Act 1953 | |
Religious organisations | |
religious institution | |
Resource development organisations | |
agricultural resources - a non-profit society or association established for the purpose of promoting the development of Australian agricultural resources | |
aquacultural resources - a non-profit society or association established for the purpose of promoting the development of Australian aquacultural resources (for the year 1999-2000 and later years) | |
aviation - a non-profit society or association established for the purpose of promoting the development of aviation | |
fishing resources - a non-profit society or association established for the purpose of promoting the development of Australian fishing resources (for the year 1999-2000 and later years) | |
horticultural resources - a non-profit society or association established for the purpose of promoting the development of Australian horticultural resources | |
industrial resources - a non-profit society or association established for the purpose of promoting the development of Australian industrial resources | |
manufacturing resources - a non-profit society or association established for the purpose of promoting the development of Australian manufacturing resources | |
pastoral resources - a non-profit society or association established for the purpose of promoting the development of Australian pastoral resources | |
Tourism - a non-profit society or association established for the purpose of promoting the development of tourism | |
viticultural resources - a non-profit society or association established for the purpose of promoting the development of Australian viticultural resources | |
Scientific organisations | |
scientific institution | |
science association - a non-profit society, association or club established for the encouragement of science | |
scientific research fund - a fund established to enable scientific research to be conducted by or in conjunction with a public university or public hospital | |
Sports organisations | |
animal racing - a non-profit society, association or club established for the encouragement of animal racing | |
game or sport - a non-profit society, association or club established for the encouragement of a game or sport |
Non-profit
Many of the categories require the organisation to be a non-profit club, society or association. You will be non-profit if you are not carried on for the profit or gain of your individual members.
Organisations can satisfy this non-profit requirement if their constituent or governing documents prevent them from distributing profits or assets for the benefit of particular persons, both while they are operating and on winding up. The organisation's actions must, of course, be consistent with this requirement. This is so for both direct and indirect gains.
Example
A non-profit organisation can still make a profit. However, any profits it makes must be used to carry out its purposes. The profits must not be distributed to owners, members or other private persons.
Example
Three tests
Some organisations will only be exempt from income tax if they meet at least one of three tests. Check appendix 1 to find out whether your organisation must pass one of these tests. You do not need to read this section if the requirement does not apply to you.
The three tests are:
- physical presence in Australia:
you have a physical presence in Australia and, to the extent of your physical presence, you pursue your objectives and incur your expenditure principally in Australia - deductible gift recipient:
you are a deductible gift recipient - prescribed by law:
you are prescribed by law in the income tax Regulations, and you are located outside Australia and are exempt from income tax in your country of residence.
Physical presence in Australia test
This test has two elements:
- do you have a physical presence in Australia? and
- to the extent you have a physical presence in Australia, do you pursue your objectives and incur your expenditure principally in Australia?
If you do not meet these requirements you may still satisfy the test - see Disregarded amounts .
Physical presence
An organisation has a physical presence in Australia if it is wholly in Australia, or it has a division, branch or sub-division in Australia.
It does not have a physical presence in Australia if it is present in Australia only through an agent, or it merely owns investment property in Australia.
Objectives and expenditure principally in Australia
If an organisation has a physical presence in Australia only, it must pursue its objectives and incur its expenditure principally in Australia.
Principally means mainly or chiefly. Less than 50 per cent is not principally.
The pursuit of objectives in Australia can include things done offshore if they are only a means of pursuing those objectives.
For example, sending employees to an offshore conference to aid their efficiency for the Australian objectives will be pursuing objectives in Australia.
Minor offshore expenditure is acceptable.
Example
If the organisation has a physical presence in Australia as well as another country, it is necessary to work out the extent to which it is physically present in Australia. Then it is only to that extent that the purposes and expenditure must be principally in Australia.
This means that an organisation which, when viewed as a whole, does not principally have its purposes and expenditure in Australia can still meet the physical presence in Australia test.
Example
Example
Disregarded amounts
An organisation may still meet the physical presence in Australia test even if it does not, in fact, pursue its purposes and incur its expenditure principally in Australia, to the extent it has a physical presence in Australia. This will depend on its distributions of disregarded amounts.
Disregarded amounts are amounts that the organisation receives as:
- gifts, including testamentary gifts
- proceeds from raffles, dinners, auctions, jumble sales and similar fundraising activities, or
- government grants.
It is assumed that any offshore distributions are made first from any disregarded amounts that are able to be distributed offshore. If a disregarded amount cannot be distributed offshore, the assumption does not apply to it. For example, government grants made only for use in Australia, or if a gift of land is physically in Australia, are not assumed to be distributed offshore.
The effect of making this assumption is that offshore distributions can be made up to the total of these amounts without jeopardising entitlement to exemption.
Example
Deductible gift recipient test
The deductible gift recipient test requires that you are a deductible gift recipient (DGR). DGRs are entities to which donors can make income tax deductible gifts. They are explained in detail in the ATO publication GiftPack which is available by phoning 13 24 78 . The following is a brief explanation of DGRs.
From 1 July 2000, DGRs:
- are listed by name in the income tax legislation, or
- have received a notice from the ATO stating they have been endorsed as DGRs.
If you are listed or you are endorsed as a DGR in your own right you meet the deductible gift recipient test.
An organisation will not meet the deductible gift recipient test if it is endorsed as a DGR only for a fund or institution that it operates.
Example
Endorsement of DGRs applies only from 1 July 2000. For an organisation to work out, in the period up to 30 June 2000, whether it will meet the deductible gift recipient test after that date, it can treat itself as a DGR if:
- it reasonably considers itself to be entitled to endorsement as a DGR
- its endorsement as a DGR is for the entity in its own right (and not only for a fund or institution that it operates), and
- it has lodged an application for that endorsement.
If its application for endorsement as a DGR is later rejected, the organisation will need to determine whether it meets the physical presence in Australia test or the prescribed by law test (see below). If it does not meet either test, it will not be exempt and may have to lodge an income tax return.
Prescribed by law test
Organisations can be prescribed by name in the income tax Regulations. The Government decides which institutions will be prescribed.
At the time of publication, only one organisation had been prescribed for these purposes. Applications for prescription can be sent to the ATO which will forward them to the Government for consideration.
If you are not listed by name in the income tax Regulations for exemption purposes, you do not meet this test.
If you are prescribed, to meet this test you must also be located outside Australia and be exempt from income tax in your country of residence.
Now that you've gone through this chapter, appendix 1 and the worksheet in appendix 4 , check the following table for what to do next.Exempt | Not exempt | Unsure |
If you work out you are income tax exempt:
| If you work out you are not income tax exempt:
| If you can't work out if you are income tax exempt:
|
Other taxes - irrespective of whether you are exempt from income tax, you may have obligations for other taxes - see chapter 3 . | ||
ATO references:
NO NAT 13727