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This document has been archived.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.

Acceptable clauses to indicate non-profit character are: Non-profit clause 'The assets and income of the association shall be applied solely in furtherance of its above-mentioned objects and no portion shall be distributed directly or indirectly to the members of the association except as bona fide compensation for services rendered or expenses incurred on behalf of the association.' Dissolution clause 'In the event of the association being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to any association with similar purposes which is not carried on for the profit or gain of its individual members.'

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.

A society makes a $40 000 profit for the year. It uses the profit to reduce its debts and provide for the activities it will carry on next year.

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.

A community service association is physically present only in Australia, but it also sends materials to organisations overseas. As long as these activities and expenditure are not major, it will meet the physical presence in Australia test.

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.

A sports club operates two centres, one in Australia and one in Papua New Guinea. Each centre operates separately, with general administration being done in PNG. If the Australian activities and expenditure are mainly for the Australian centre it will meet the physical presence in Australia test. BNM Welfare is a community service organisation. It runs four centres, one in Australia and three in Malaysia. All funding comes from Australia and a similar amount is spent on each centre. To the extent BNM Welfare has a physical presence in Australia, it is not principally pursuing its objectives and incurring its expenditure in Australia. It could only meet the physical presence in Australia test through the distribution of disregarded amounts.

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.

An Australian musical association also provides funding to a school in the Phillipines to enable the purchase of musical instruments. The association hopes to promote and nurture musical education there. The distribution does not exceed its disregarded amounts. Because the disregarded amounts are assumed to pay for the Phillipine activities, the association can still meet the physical presence in Australia test.

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.

A community service organisation is endorsed as a DGR for a necessitous circumstances fund it operates. Gifts made to its necessitous circumstances fund could be tax deductible. The community service organisation would not meet the deductible gift recipient test because it is a DGR only for the necessitous circumstances fund.

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: you do not need to pay income tax or lodge income tax returns (unless specifically requested) you do not need to get confirmation of your exemption from the ATO, and you should carry out a yearly review to check if you are still exempt. You should also do this when there are major changes to your structure or activities. The worksheet in appendix 4 will help you self-review.	If you work out you are not income tax exempt: go to chapter 2. It explains about lodging income tax returns, working out taxable income, and rates of tax.	If you can't work out if you are income tax exempt: contact the ATO. The ATO will need the information and copies of documents relevant to your possible exemption. Check the requirements for exemption in chapter 1 before contacting the ATO. You can use the Application for private ruling if you want to receive a private ruling from the ATO on the exemption of your income. The application is available from the ATO by phoning 13 28 61 .
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