ClubPack (current to 19 June 2003)

Chapter 2 - Income tax - taxable organisations

This document has been archived. It is current only to 19 June 2003.

In this chapter we explain the income tax consequences for taxable organisations: that is, those that are not income tax exempt.

This chapter explains:

• whether a taxable organisation is a non-profit company
• what rate of income tax applies
• whether income tax returns need to be lodged, and
• how to calculate taxable income.

How to pay income tax is outlined in Pay As You Go in Chapter 3.

This guide does not cover the special taxation arrangements for certain friendly societies, trade unions and employee associations (registered organisations) which are exempt for only some of their income.

Are you a non-profit company?

Quick Reference

Clubs, societies and associations are generally treated as companies for income tax purposes. In this chapter there are two categories of companies applying to clubs, societies and associations:

• non-profit companies, and
• other taxable companies.

Clubs, societies and associations are generally treated as companies for income tax purposes, but there may be situations where, due to the relationship between the members, the organisation is more correctly treated as a partnership. A club, society or association that is exempt from income tax (see chapter 1 ) will be exempt whether it is a partnership or a company.

Non-profit clubs, societies and associations that are treated as companies (that is, non-profit companies) have the benefit of special rates of tax. In circumstances where a club, society or association is more correctly treated as a partnership, it will not itself be taxable and its members will disclose in their individual return their share of the net income of the partnership. It will therefore not have the benefit of special rates of tax afforded to non-profit companies. As circumstances where such organisations will fall into this category will be rare, partnerships are not further discussed in ClubPack .

This chapter looks at the income tax consequences for clubs, societies and associations that are companies and are not exempt. In this chapter clubs, societies and associations that are not exempt are referred to as either 'non-profit companies' or 'other taxable companies'.

Non-profit companies and other taxable companies have some different tax obligations. Apart from the different rates of tax for non-profit companies, they also have special arrangements for lodging income tax returns. These are explained later in this chapter.

Non-profit companies

For an organisation to be a non-profit company:

• it must be a company that is not carried on for the purposes of profit or gain to its individual members, and
• its constituent documents must prohibit it from making any distribution, whether in money, property or otherwise, to its members.

An organisation can be a non-profit company and still make a profit. However, any profits it makes must be used to carry out its purposes. The profits must not be distributed to the members.

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.

The prohibition on distributions applies while the organisation is operating and on its winding up. If it permits the organisation's members to transfer the assets to themselves on winding up, it is not a non-profit company.

A non-profit company can make payments to its members as bona fide remuneration for services they have provided to it, and as reasonable compensation for expenses incurred on behalf of the organisation.

The income tax law does not prescribe a form of words that a non-profit company must have in its constituent documents. The following example clauses would be acceptable, as long as other clauses were not contrary to them. The organisation's activities must be consistent with the clauses.

Non-profit clause 'The assets and income of the organisation 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 organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.' Dissolution clause 'In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to any organisation with similar purposes and which has rules prohibiting the distribution of its assets and income to its members.'

Organisations carried on for the joint or common benefit of their members can qualify as non-profit companies. An example would be a professional association established to advance the professional interests of its members. However, the association must not be carried on for the profit or gain of its individual members.

Strata title bodies corporate do not qualify as non-profit companies - see Taxation Determination TD 93/73. Non-profit company also includes a friendly society dispensary.

Rates of income tax

Quick Reference	Non-profit companies		Other taxable companies
Income year
	Taxable income	Rate of tax	Rate of tax
1999-2000	0 - $416 $417 - $1204 $1205 and above	Nil 55% for every $1 over $416 36% for every $1 Note: If the taxable income is $1205 or more the whole amount is taxable.	36%
2000-01	0 - $416 $417 - $1089 $1090 and above	Nil 55% for every $1 over $416 34% for every $1 Note: If the taxable income is $1090 or more the whole amount is taxable.	34%
2001-02 and later years	0 - $416 $417 - $915 $916 and above	Nil 55% for every $1 over $416 30% for every $1 Note: If the taxable income is $916 or more the whole amount is taxable.	30%

Non-profit companies

For non-profit companies, the income tax payable depends on the level of taxable income.

If the taxable income is $416 or less for a year, no tax is payable.

A non-profit company has taxable income of $380 in the year 2000-01. The income tax is nil.

If a non-profit company has a taxable income between $417 and the threshold, the amount in excess of $416 is taxed at 55 per cent.

A non-profit company has taxable income of $1000 in the year 2000-01. The income tax is $321.20. It is calculated as ($1000 - $416) x 0.55.

If the taxable income is more than the threshold, the ordinary company tax rate is applied to all the taxable income as follows:

Income year	Threshold	Rate
1999-2000	$1204	36%
2000-01	$1089	34%
2001-02 and later years	$915	30%

A non-profit company has taxable income of $2000 in the income year 2001-02. The income tax is $600. It is calculated as $2000 x 0.30.

Other taxable companies

Other taxable companies are taxable from the first dollar. That is, they are taxable on all levels of taxable income and there is no threshold. The rates of tax are:

Income year	Rate
1999-2000	36%
2000-01	34%
2001-02 and later years	30%

An other taxable company has taxable income of $1100 in the year 2001-02. The income tax is $330. It is calculated as $1100 x 0.30.

Special rates

There are special rates of tax for life assurance companies, credit unions and registered organisations (including trade unions and friendly societies) carrying on insurance business. They are not discussed in this guide.

Lodging income tax returns

Non-profit companies:

• If taxable income is more than $416, an income tax return must be lodged.
• If taxable income is $416 or less, an income tax return is not required for an Australian resident, unless specifically requested.

Other taxable companies:

• A tax return is required regardless of the amount of taxable income.

Non-profit companies

Non-profit companies with taxable income of $416 or less a year that are Australian residents will not be required to lodge an income tax return because the income is below the taxable threshold. However, the ATO may notify a particular company that it is required to lodge a return.

Non-profit companies with taxable income of more than $416 a year are required to lodge an income tax return for that year.

To lodge a return, organisations will need to use Form C (return form for companies). These forms and the accompanying instruction booklet are available from the ATO.

Other taxable companies

Other taxable companies are taxable on any amount of taxable income. They are required to lodge an income tax return each year.

They will need to use Form C (return form for companies). These forms and the accompanying instruction booklet are available from the ATO.

Calculating taxable income

• Taxable income = assessable income - allowable deductions.
• Assessable income of a club, society or association generally does not include receipts from members.
• The effect of the goods and services tax (GST) is excluded when calculating the taxable income of an organisation registered (or required to be registered) for GST.

Non-profit companies and other taxable companies need to know about taxable income because it can affect the lodging of tax returns, rates of tax and the amount of income tax payable.

Taxable income is calculated as the difference between the organisation's assessable income and the allowable deductions.

Taxable income

=

Assessable income

-

Allowable deductions

The taxable income of a club, society or association is calculated in the same way as for other companies. Two particular aspects affecting many clubs, societies and associations are:

• exclusion of the effect of mutual dealings with members, and
• exclusion of the effect of the goods and services tax (GST), if the club, society or association is registered (or required to be registered) for GST.

The exclusion of mutual dealings is discussed below under Assessable income and Allowable deductions.

The exclusion of GST is discussed in chapter 3 - Goods and services tax .

An example of calculating taxable income is given here .

Assessable income

Assessable income is, broadly speaking, the income derived by your organisation. It can also include some capital gains made on the disposal of assets. The instructions for Form C (return form for companies) and other guides available from the ATO will assist you.

Receipts treated as assessable income

Many amounts received by your organisation will be assessable income.

Receipts that are assessable income include:

• bank interest
• dividends and other income from investments
• proceeds from fundraising drives to the public, for example sale of lamingtons, cakes, or chocolates
• drinks sold at the bar to non-members visiting the club
• fees received for hiring out of the club's hall, facilities or equipment to the public
• amounts paid by non-members to attend dinners, parties, dances or social functions organised by the club
• amounts paid by non-members to attend a talk, presentation or workshop organised by the club
• non-member proceeds from a raffle
• selling souvenirs to non-members, and
• gaming income derived by a club under arrangements entered into with an external gaming or keno operator.

Receipts not treated as assessable income (mutual receipts)

Not all amounts of money or property received by your organisation will necessarily be assessable income. Receipts derived from mutual dealings with the members of your organisation are not assessable income. They are called mutual receipts.

Examples of mutual receipts include:

• member subscriptions
• drinks sold at the bar to club members
• amounts paid by members to attend dinners, parties, dances or social functions organised by the organisation, and
• amounts paid by members to attend a talk, workshop or presentation organised by the club.

Not all dealings involving members are necessarily mutual receipts.

A recreation club enters an agreement with an independent gymnasium to operate on the club's premises. Income received by the club from the gymnasium is assessable, even though patrons of the gymnasium may be club members.

Dividing receipts into mutual receipts and assessable income

In most situations it is easy to identify and separate the receipts. However, if the identification and separation is not possible, you may use a practical and suitable method for apportioning the receipts. The method you choose is likely to depend on the type of receipts. We will accept your method of apportionment provided:

• there is a reason for apportioning the receipts
• the method chosen is reasonable and is not arbitrary, and
• it gives a correct reflection of the income earned.

Allowable deductions

Allowable deductions are, broadly speaking, operating expenses that are incurred in earning the assessable income. The instructions for Form C (return form for companies) and other guides available from the ATO will assist you.

If you have incurred expenses in earning both assessable income and non-assessable amounts, the deduction you will be able to claim will be limited to the extent that the expenditure is incurred in deriving the assessable income. Therefore, you may need to apportion your expenses.

Expenses that could be allowable deductions, but could require apportionment, include printing, postage, stationery, telephone, electricity, bank charges, rent and insurance.

Depreciation may be allowable on capital items like cars, furniture and equipment.

Some expenses may be wholly incurred in deriving your organisation's assessable income. .

Allowable deductions include:

• costs of running a function solely for non-members
• fees for earning bank interest or dividends, and
• costs of fundraising drives to the public.

However, there are some allowable deductions that do not have to be incurred in deriving the assessable income. They include tax deductible gifts and superannuation contributions for employees. Rates and land taxes are allowable deductions to the extent that premises are used to get mutual receipts or derive assessable income.

Expenses against mutual receipts

If your organisation has mutual receipts, not all the operating expenses will be allowable deductions. The part of the expenses that were incurred to get the mutual receipts will not be allowable deductions.

Expenses that are not allowable deductions include costs of:

• running member-only functions
• collecting subscriptions, and
• increasing membership.

In most situations it is easy to identify and separate the expenditure into allowable and non-allowable deductions. For example, the costs of buying badges for members (not an allowable deduction) could be separated easily from the costs of buying promotional buttons sold to the public as part of a fundraising drive (an allowable deduction).

However, there may be situations where the identification and separation is not possible or where the expenditure may relate to earning both assessable income and mutual receipts. In such situations, you may choose to use a practical and suitable method of apportioning the expenses. The method of apportionment is likely to depend on the type of expenses in question. We will accept your method provided:

• there is a reason for apportioning the expenditure
• the method chosen is suitable for that type of expenditure
• the method chosen is reasonable and is not arbitrary, and
• it gives a correct reflection of the expenditure incurred.

Licensed and registered clubs

If your organisation is a licensed club or registered club, the calculation of its taxable income may be more involved. The calculation is explained in Taxation Determination TD 93/194 and the pamphlet Guidelines for registered and licensed clubs.

Clubs that derive income under arrangements with third parties to conduct gaming or other activities on the club's premises should read Taxation Determination TD 1999/38. It discusses the assessability of such income.

These publications are available from the ATO.

Goods and services tax (GST)

The effect of GST on the calculation of taxable income differs depending on whether your organisation is registered (or is required to be registered) for GST.

GST and registration for GST are outlined in chapter 3 .

Registered or required to be registered

If your organisation is registered for GST, or required to be registered, adjustments to assessable income and allowable deductions may be needed to calculate the taxable income.

Your assessable income will not include the GST payable on a taxable supply you make.

A fitness association is registered for GST. It supplies equipment to non- members for $220 per item. The price includes $20 GST. The association's assessable income would include $200 for each item. The $20 GST would not be included.

Your allowable deductions will not include the input tax credits to which your organisation is entitled.

A community club is registered for GST. It buys goods for $550 for a fund-raising drive to non-members. It is entitled to an input tax credit of $50 on the purchase. The club's allowable deduction would be $500. It cannot claim a deduction for the part of the purchase price that it can claim as an input tax credit, in this case $50.

Not registered and not required to be registered

If your organisation is not registered for GST and is not required to be registered, no adjustment for GST is needed in calculating taxable income.

A social club is not registered for GST and not required to be registered. It supplies equipment to non-members for $330 per item. The club would include $330 per item as assessable income. A lobbying association is not registered for GST and not required to be registered. It buys goods for $220 to help in deriving its assessable income. The $220 included $20 GST. The association's allowable deduction would be $220.

Example of calculating taxable income

ABCD Society is a non-profit company with the following receipts and expenditure for year ended 30 June 2001. It is not registered for GST and not required to be registered.

Total receipts	$	Total expenditure	$
Subscriptions	3000	Postage	100
Term deposit interest	800	Photocopying	100
Christmas dinner*	5000	Christmas dinner*	4000
Lamington sale to public	2500	Cost of lamingtons	1800
		Term deposit charges	50
Total	11300		6050

*Note: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.

The taxable income of ABCD Society is calculated as follows:

1. Determine the assessable income

	Mutual receipts (not assessable income)	Assessable income	Total
Subscriptions	$3000	-	$3000
Term deposit interest	-	$800	$800
Sale of lamingtons	-	$2500	$2500
Christmas dinner	$3500	$1500	$5000
Total	$6500	$4800	$11300

2. Determine the allowable deductions

	Non-allowable deductions	Allowable deductions	Total
Postage**	$90	$10	$100
Photocopying**	$90	$10	$100
Christmas dinner	$2800	$1200	$4000
Cost of lamingtons	-	$1800	$1800
Term deposit charges	-	$50	$50
Total	$2980	$3070	$6050

**Note: The postage and photocopying expenses have been apportioned. For ABCD Society, the basis used, from an examination of its records, was that 10 per cent of communication during the year had been with non-members.

3. Taxable income

Assessable income less Allowable deductions

= $4800 - $3070

= $1730

ATO references:
NO NAT 13727