WHERE HAVE ALL THE INCOME TAX EXEMPTIONS GONE ?
Written by Victor Hamit

The Federal Government announced in the 2011 – 2012 Budget that the landscape for the taxation of charities and other not for profit organisations (“NFP’s”) which includes clubs would change significantly.

These changes may have profound impacts on those clubs that have previously enjoyed income tax exempt status (eg sporting, community service and animal racing clubs) whilst generating significant profits from gaming, bistro and other commercial activities. What? The Federal Government announced in May 2011 that it will reform the tax concessions provided to NFP entities to ensure they are targeted only at those activities that directly further an NFP’s “altruistic purposes”. (see Hon Bill Shorten MP then Assistant Treasurer’s Media Release No. 077, 10 May 2011). Treasury then released on 27 May 2011 a Consultation Paper: “Better targeting of not-for-profit tax concessions” which can be accessed at www.treasury.gov.au The Consultation Paper states:- “Income tax concessions will only apply to profits generated by the unrelated commercial activities of NFP’s, if they are directed to the NFP’s altruistic purposes. This means an NFP entity will pay income tax on those profits that are not directed back to its altruistic purpose (that is, the earnings it retains on its commercial undertakings)”. It is understood that “small scale” and “low risk” unrelated commercial activities and “passive income” of NFP’s will not be affected by the announcements. The Government has also stated that “the reforms will not disturb the taxing arrangements associated with mutual income and the principle of mutuality.” It is understood that clubs although no longer income tax exempt on the profits of commercial activities can still benefit from the mutuality principle, that is the club will only be liable to income tax on profits generated by non members. Clearly the definitions of terms such as “unrelated commercial activities”, “small scale”, “low risk” and “passive income” will be critical to the understanding of the scope of the proposed legislation. However, it does appear that fund raising activities such as major raffles, canteen operations, gaming and bistro will constitute unrelated commercial activities. The devil always lies in the detail. By way of example, if a club has made $100,000 taxable income in a year based on the proposed reforms and after the mutuality principle is taken into account, it will pay tax at the current rate of 30%, that is $30,000. However, the intention appears that if the $100,000 is directed to the “exempt” purpose, eg sport, then there will be no tax payable. What is not clear is how long does the club have to make that expenditure? Must it be in that current year, or within one or two years after year end? Many clubs accumulate income over a number of years before undertaking a project (eg ground night lighting) or reaching a critical mass to qualify for Government funding. The proposed tax may have a negative impact on clubs spending on valuable community infrastructure. When? The Government originally announced that the new arrangements would commence on 1 July 2011 but have recently announced that date will now be deferred to 1 July 2012. Initially only new unrelated commercial activities that commenced after 7.30pm (AEST) on 10 May 2011 will be subject to the new arrangements. Those commercial activities that commenced prior to 7.30pm (AEST) on 10 May 2011 will not be subject to the new arrangements during a “transitional period”. The Government has not yet announced the length of the “transitional period”. Of concern to Victorian clubs is that the new gaming arrangements from August 2012 do not constitute “new unrelated commercial activities”. Clubs Australia has made representations to Government on this issue. Why? The Government’s reasoning for the new arrangements is unclear, but appears to be on the grounds of competitive neutrality and to avoid risky commercial ventures by NFP’s. No clear statement of reasons nor any significant evidence has been provided by Government to underpin its policy position. In fact, recent academic writings from scholars at Queensland University of Technology have questioned the lack of evidence to support the Government’s policy and design position. It would appear that the Government’s position is contrary to the Henry Report and Productivity Commission Report of recent years. Further, similar proposals in the US have received strong academic criticism. Implications for Victorian Clubs Clubs with significant gaming and bistro facilities will need to carefully consider their taxation position. Will clubs with gaming, or profits from a major annual raffle, or match day canteen sales now be liable to income tax? The Government needs to quickly confirm that the new gaming arrangements in Victoria do not constitute “new commercial activities” and the length of the “transition period” for existing commercial activities. The Government also needs to indicate quickly what may constitute “small scale”, “low risk” commercial operations, or “passive income”. There can be little doubt that the increased complexity and cost of the new arrangements will be a significant, if not, major impost on clubs. The compliance costs will stretch the resources of many clubs and presumably reduce the capacity of clubs to spend on their sporting, community service or animal racing purpose. Many clubs bid at auction for gaming machine entitlements on the basis of income tax exempt status. Clubs should review their budgets in light of the proposed, albeit currently ill defined, new arrangements. The past two years have seen considerable challenges to the community clubs movement and shows little sign of abating.

Article Published in Club Connect June 2012

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Victor Hamit
Wentworth Lawyers
Level 40,
140 William Street
MELBOURNE VIC 3000

Email: vhamit@wentworthlawyers.com.au
Website: www.wentworthlawyers.com.au

Tel: +61 3 9607 8380
Mobile: +61 408 590 706

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