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Edited version of private advice
Authorisation Number: 1012660098091
Ruling
Subject: Fixed percentage method of apportionment
Question 1
Can the Rulee adopt the fixed percentage method of apportionment and apply a 10% fixed percentage of non-member income?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2013
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The Rulee has requested a Private Binding Ruling for the entity.
The following facts and circumstances are based on the information provided by the applicant.
The entity is a not for profit club ('the Club') located in an Australian state. The main activities conducted by the Club include gaming, bistro restaurant sales and general bar sales.
The majority (around X%) of the receipts collected from the entity are from the its members and therefore under the mutuality principle, are non-taxable.
For some time now the management of the Club has collected information on how many members are currently active, how often they use the facilities of the Club, and how many non-members enter the Club each year.
Currently the Club calculates its 'non-member income' percentage based on the 'Waratahs formula' apportionment method.
Using the Waratahs formula the mutual percentage of receipts has been in the range of Y% to Z% over the past 10 years. However, due to changes in the Club's non-member conditions of entry, management of the Club and their accountants would estimate this percentage to be in the vicinity of Y%, consistently.
The accountants' research has involved an in depth look at the recording procedures of the Club. There are many systems in place to track members spending within the Club, such as loyalty cards and member specific programs.
Members of the Club are required to maintain a membership with a yearly subscription fee. These members can then access a range of additional benefits from the Club.
Each year the Club provides the accountants with an audited set of financial statements with many additional reports and statistics.
Included in the provided statistics for any given financial year are the following:
• Total visitors to the Club each year;
• Total average memberships for each year;
• Average daily percentage of members that attend the Club for each year;
• The number of members' guests attending the Club during the year and
• The total number of trading days for the year.
The above statistics have been have been observed by the permanent door staff employed at the Club. The Club has kept a register of electronic member's card swipes and manual sign ins.
In addition to the records kept internally by the Club the accountants have conducted their own research to confirm the Club's provided statistics. The accountants have actively questioned the Club's management and senior staff (including bar, bistro and gaming staff) each year, with similar results every year.
Over the past 10 years the Club has been apportioning mutual income using the 'Waratahs formula'.
Provided below are the mutuality calculations for the past 3 financial years which have been prepared using the 'Waratahs formula'.
Due to the nature of the Club, each year the accountants calculate very similar mutuality percentages. For the past 3 years this percentage has been Z% as seen below. These results are unlikely to change in the foreseeable future given the stable nature of the Club. If the nature or operations of either the Club or area as a whole were to change, the Club would elect to either use a different method to calculate a mutual percentage, or reapply for a revised fixed percentage of mutuality.
Non-Member Percentage = __ (B x 75%) + C__
(R x S x T) + A
Where:
A = total visitors for the year of income
B = members' guests for the year of income
C = A - B
R = the average number of subscribed members in the year of income
S = the average daily percentage of member attendance at the organisation
T = the number of trading days in the year of income
Waratahs method - mutuality calculations for 2011, 2012 & 2013
2011 |
2012 |
2013 |
||
A |
72,000 |
71,600 |
63,500 | |
B |
68,000 |
62,000 |
55,000 | |
C |
4,000 |
9,600 |
8,500 | |
R |
10,500 |
11,117 |
11,853 | |
S |
12% |
12% |
10% | |
T |
365 |
365 |
365 | |
10% |
10% |
10% |
Mutuality Percentage |
2013
___ (55,000 x 75%) + 8,500____ __49,750__
(11,853 x 10% x365) + 63,500 = 496,134 = 0.10
2012
___ (62,000 x 75%) + 9,600____ __56,100__
(11,117 x 12% x 365) + 71,000 = 558,525 = 0.10
2011
___ (68,000 x 75%) + 4,000____ __55,000__
(10,500 x 12% x 365) + 72,000 = 531,900 = 0.10
Relevant legislative provisions
Section 6-5 of the Income Tax Assessment Act 1997
Reasons for decision
Waratahs formula
The Club states that for the past 10 years they have been using the 'Waratahs formula' apportionment method. Based on the last 3 years the application of the Waratahs formula has generated a percentage of Y%. The Club claims that this percentage is unlikely to change in the foreseeable future given the stable nature of the Club and its location.
The Club also claims that if the nature or operations of either the Club or location as a whole were to change, they would elect to either use a different method to calculate a mutual percentage, or reapply for a revised fixed percentage of mutuality.
The Guide for taxable non-profit organisations Mutuality and taxable income NAT 73436 ('the Guide') provides the following explanation of the Waratahs formula apportionment method:
The Waratahs formula is a base formula for isolating member and non-member contributions to income of an organisation, and it simplifies the process for separating expenses that cannot be easily identified as either member or non-member.
The formula comes from case law and takes its name from a case involving the Waratahs Rugby Union Football Club and the Commissioner of Taxation. The formula is accepted as a reasonable basis for apportionment, particularly for registered and licensed clubs.
The Waratahs formula calculates the non-member percentage, which is then applied to the organisation's revenue and expenses to arrive at the assessable and deductible components.
The Waratahs formula is as follows:
(B x 75%) + C_
(R x S x T) + A
Where:
A = total visitors for the year of income
B = members' guests for the year of income
C = A - B
R = the average number of subscribed members in the year of income
S = the average daily percentage of member attendance at the organisation
T = the number of trading days in the year of income
Organisations must calculate their non-member percentage for each year of income, as the variables in the formula can change.
The Waratahs formula requires a figure for daily member attendance at the organisation as well as a visitor total for year of income.
The formula also requires that members' guests be differentiated from other visitors.
In addition, the Guide states that for the purposes of calculating taxable income, another method of apportionment may be adopted where there is a reasonable basis to do so and provided it reasonably and accurately reflects the organisation's revenue or expenses for the year in question. Other methods include the fixed percentage method. In relation to the fixed percentage method the Guide states:
This method is where an organisation has negotiated a percentage with the ATO. For example, an organisation applies for a private ruling and we advise them of the percentage to use.
A difficulty with this method is that it does not reflect changes that occur from year to year - for example an organisation's refurbishment or new legislation requirements.
A private ruling only applies to the particular circumstances that it describes. If there is a material difference between the circumstances described and what actually occurs, the private ruling is ineffective.
In conclusion, it is accepted that the Rulee has provided a reasonable basis to adopt another method of apportionment for the purposes of calculating taxable income. Therefore, the Club may adopt the fixed percentage method and may apply a Y% fixed percentage of non-member income.
Should there be a material difference between the facts described in this private ruling and what actually occurs, the private ruling will be ineffective.