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Income Tax of Rotary Clubs

Leaders-elect Training Seminar (LETS) 2010.

The Issues:

Only organisations approved by the CharitiesCommission qualify for charitable status and areexempt from income tax.

Only organisations approved by IRD qualify forapproved Donee status

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Income tax concepts

• The Income Tax Act regards “assessableincome” as a gross, or top-line concept

• Where assessable income is received, taxdeductions are available

• What is left is called taxable income

• A Club is taxed at 30% on its taxable income

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What is not AssessableIncome (1)?

• Amounts received by a Club from withinthe circle of membership under the “mutualprinciple” This is largely restricted tomembers’ subscriptions and levies.

• Other amounts received from members byway of gift

- Sergeants’ fines, shrapnel etc

- Members’ donations, raffles (prizes donated), etc

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What is not AssessableIncome (2)?

• Amounts received by a Club from outsidethe circle of membership such as

- Gifts and legacies

- Donations of cash, goods or services

- Money from the sale of donated goods

- One-off sale proceeds from capital assets

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What is Assessable Income (1)?

• Pretty much everything else, for example

- Investment income

- Business income

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Business income

• Any activity that involves the sale of goodsor services with the intention of making aprofit

• Sale of tickets to events

• Sale of purchased goods (excludes sale of donatedgoods)

• Money received for services performed

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What is Assessable Income(2)?

• Surely the sale of goods and services to Clubmembers is within the circle of membership andthus tax-free?

• Unfortunately this is not correct!

• Only subscriptions or levies that apply equallyto all members are treated as non taxable underthe mutual principle.

• Any other transaction between an Associationand its members is taxable (Income Tax Act2007 - sections CB 33 and HE 2).

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What is deductible?

• A deduction is broadly defined as anyexpenditure or loss necessarily incurred in theearning of assessable income e.g.

- the purchase price of goods sold

- the cost of food at a fundraising dinner

• The Income Tax Act also creates deductionsoutside this rule e.g.

- gifts of cash to an “approved donee”

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Approved Donee

• An organisation not carried on for privatepecuniary profit that is- charitable, or- benevolent, or- philanthropic, or- cultural

• All donations in cash are tax deductible upto the amount of the taxable income

• IRD have a list of approved donees

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What is non–deductible?

• Any expenditure that is NOTassociated with earning income.

– This will cover all costs associated with the day to day running ofthe Club, since they are paid for out of subscriptions that are notassessable income

• Any expenditure on capital assets

• Any donation to anyone who is NOTan approved Donee

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Simple?

Mutuality:No Tax

Income generating:Taxable

Revenue

Expenses Taxable Income

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Income tax

• Income Tax is not meant to be fair

• The IRD have little choice. The Income TaxAct 2007 says at Section BB 1:

“Income tax is imposed on taxable income, atthe rate or rates of tax imposed by an annualtaxing Act, and is payable to the Crown underthis Act…”

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Income tax

• The Tax Administration Act says at Section33:

“In each year, a taxpayer … must furnish tothe Commissioner a return of income in theprescribed form for the preceding tax year…”

• For a Club or Society that is a taxpayer, theprescribed form is the IR 9

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What is a taxpayer?

• The Income Tax Act defines a taxpayer as

“ a person who is, or may be, liable toperform or comply with an obligationimposed by this Act.

• The key obligation imposed by the Act on aperson is contained in Section BB 2:

“A person’s income tax liability for a taxyear must be calculated, and satisfied by theperson…”

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Income tax

• We have self-assessment in New Zealand

• Every person, including a Rotary Club has todecide if they are a taxpayer, and if so file atax return

• We cannot wait for the IRD to send us a bill

• If a Club chooses not to file a tax return, itmust be prepared to defend that decision onthe grounds of current tax law

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Non-profit organisations

• “Non-profit organisation” is narrowly defined intax law and means an organisation that:

• Does not have the purpose of making a profit ;AND

• Whose constitution specifically prohibitsdistributions of property to a member,proprietor, or shareholder (Income tax Act 2007 – Section

DV8

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Non-profit organisations

• Non-profit organisations get the first $1,000assessable income tax free.

• This can be claimed by a Club either

– Filing a tax return, or

– Obtaining the written agreement of the IRD that it meetsthe statutory definition of “Non-profit organisation” andso does not need to file a tax return.

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Non-profit organisations

• Any Club that engages in sale of goods andservices would be hard pushed to argue it doesnot have the purpose of making a profit

• However tax deductible donations will result inno taxable profits

• The way a club spends its profits may thereforeimpact its status

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Urban Myth

But what about the $1,000 rebate available toclubs? Surely we have to earn more than$1,000 from outside the circle ofmembership before we start filing taxreturns?

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The $1000 deduction

• Partly true. First, the $1,000 is not a rebate.It is a deduction.

• As noted, a Club first has to qualify as a non-profit organisation which means getting theconsent of the IRD.

• The income still has to be managed becausea return must be filed if ever the assessableincome exceeds $1,000.

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Urban Myth

• But why bother with all thisstuff. A Rotary Club ischaritable and charities don’thave to file tax returns

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OLD Charitable exemption

• The Income Tax Act contains a specificexemption for a trusts or other body that has“Charitable Purposes” (Section CW 41 and 42)

• Its income may then be non-taxable

• To qualify up to 30 June 2008 a club simplyhad to assert it was charitable, and thenconvince the IRD

• If the IRD agreed, it would issue a letterconfirming charitable status.

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NEW Charitable exemption

• After 1 July 2008 the IRD no longer has thepower to approve charitable purpose

• A Club now has to convince the CharitiesCommission that it has a charitable purpose

• The Charitable Purposes exemption will nowonly be available to Clubs that are registeredwith the Charities Commission

• All letters from the IRD have now expired

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Charitable purpose

• The Charities Commission has its primaryfocus on establishing that a body has acharitable purpose

• The body’s constitution must clearly showobjectives that are of benefit to asufficiently wide cross section of the public

• AND satisfy the four heads of charity

• No personal pecuniary gain to any membereither though operations or on winding up

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Charitable purpose

• Four heads of Charity are

- the relief of poverty

- advancement of education.

- advancement of religion

- any other purpose beneficial to thecommunity at large

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Where did Rotary go wrong?

• Rotary provides fellowship and networkingopportunities to its members, which are unavailableto the public at large (club good not public good)

• Rotary supports organisations such as sports clubsand individuals who do not have a charitable purpose

• Rotary supports overseas organisations that provideno benefits to the New Zealand public

• Rotary bylaws don’t require Clubs to give any spareassets to a charitable body on winding up

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Charitable exemption

• The consequence of failing to register is thatany Rotary Club previously relying on thecharitable purposes exemption can no longerdo so.

• No Club has yet succeeded in registering as acharity!

• Clubs automatically became taxpayers on 1July 2008 regardless of what has happenedup until then

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The solution

• Rotary Clubs can sponsor their owncharitable trust

• Rotary in New Zealand has produced amodel Charitable Trust deed

• Rotary Clubs are encouraged to use this deed

• The Charities Commission was consulted andagreed that this deed satisfies its registrationrequirements. Dozens of Clubs have nowformed Charitable Trusts

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Tax effective giving: CLUB

• Ensure deductibility of Club giving by onlydonating to IRD approved doneeorganisations

• For international giving this meansdonating to the Rotary Club CharitableTrust NZ for the Rotary Foundation

• For NZ charitable giving outside the list ofapproved donees, donate profits to yourcharitable trust and make the payments outof the trust

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Where to from here

• Go back to your Clubs make sure the Clubis filing an IR 9. If not, find out why not.

• Download the booklet IR9GU “Clubs andSocieties IR 9 Guide”

• Decide whether the reason given is stillvalid.

• If not register your Club with the IRD