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Non-mutual dealings with members
Not all dealings involving members are mutual dealings.
Although receipts may be received from a member, if they are from activities that go beyond a mutual arrangement and are in the nature of trade, the receipts are assessable income.
Example: Assessable – lease payments from member
A NFP club leases part of its premises to a member so the member can operate a gym business.
This activity is of a business nature rather than a mutual arrangement. As such, the lease payments from the member to the club will form part of the club's assessable income.
End of example
For an explanation of the 'nature of trade', see Nature of trade.
Arrangements with external parties
NFP organisations often enter into arrangements with external parties under which the external party conducts or provides particular operations on the organisation's premises. This may include the operation of gaming machines.
If an organisation enters into an arrangement with an external gaming operator under which gaming machines are installed on the organisation's premises, the gaming income is derived by the gaming operator from the players, according to the contractual arrangements and relevant state legislation.
The amounts paid or allowed to an organisation by the gaming operator under this arrangement are derived by the organisation from the external gaming operator and not from the members and non-members.
Therefore, such income is fully assessable to the organisation because it is derived from an external source and is not subject to the principle of mutuality.
Other arrangements your organisation may have with external parties include Keno, TAB type facilities, catering, entertainment activities and vending machines.
Under these arrangements, amounts paid or allowed to your organisation by the external operators, such as the licensees of the Keno game in respect of Keno, are not derived from your organisation's members and are, therefore, assessable.
We consider such amounts to be similar to the insurance commissions which have been held not to be mutual receipts by the courts. As such, organisations should not apply their non-member percentage to these or other similar types of income in calculating their assessable income.
Examples – External party arrangements
Example 1: Assessable – TAB, Keno and vending machines
The Cordovan Club has a TAB outlet, Keno and food and drink vending machines on its premises. All are provided through external operators.
The amounts received from the external operators are not mutual receipts and are assessable income of the club. These amounts should not be reduced by the application of the non-member percentage in calculating the club's assessable income.
Example 2: Assessable – restaurant and gym
Under an arrangement with the Chartreuse Club, an independent restaurateur operates a restaurant on the club's premises. Similarly, a gymnasium is also operated by an external party on the club's premises.
The income received by the club from these business operators is derived from an external source and is assessable.
Example 3: Assessable – gaming machines and entertainment
Gaming machines are installed on the premises of the Goldfields Country Club by a gaming operator. The club derives income from the machines under a contract entered into with that gaming operator. The club also engages an entertainment operator to provide entertainment to attract members and visitors (so that they will play the gaming machines) and receives a fee from the operator.
The income received by the club from these operations is assessable.
End of example
Gaming machines owned by NFP organisations
Under the principle of mutuality, you apportion the revenue from gaming machines where the machines are:
- owned or leased by your organisation
- operated by your organisation
- played by members and non-members.
Coin-operated machines include vending machines, payphones, amusement machines and pool tables. NFP organisations may own or rent these machines or provide them under an arrangement with an external party.
The revenue from the machines is apportioned if:
- the organisation owns or rents the machines
- the organisation is entitled to collect the monies as its income
- members and non-members use the machines.
If the machines are under an arrangement with an external party and the organisation receives a commission, then the commission is fully assessable income.
Employee contributions towards fringe benefits
If a NFP organisation is an employer, an employee contribution generally refers to the amount of consideration paid to it or a provider by an employee in respect of a fringe benefit - for example, an association provides its employee with a car and the employee pays the association an amount towards the costs of petrol and oil. The contribution is reduced by the amount of any re-imbursement paid by the organisation to the employee in respect of that consideration.
If your organisation receives employee contributions, they are assessable income to it as the employer. As a general rule, the costs incurred by an organisation in providing fringe benefits are income tax deductible.
The principle of mutuality does not apply because the employee contribution is regarded as an external party transaction where the employee is assisting the organisation with an FBT liability.
Tips from customers
If your NFP organisation operates a trading activity such as a restaurant, bistro or bar, or holds a function, it may receive tips (or gratuities) from customers.
If the tips are voluntarily paid by customers and your organisation distributes all the tips to its employees or contractors, the tips are not assessable income to the organisation. However, if your organisation keeps all or some of the tips, the retained amounts are assessable income.
If the tips are non-voluntarily paid by customers (for example, for a pre-set amount, a surcharge or a service charge), the tips are assessable income to the organisation.
The principle of mutuality applies to the retained voluntary tips and non-voluntary tips where the trading activity or function is for members only (mutual receipts), or for member and non-member customers (apportionable revenue). Mutuality would not apply if the trading activity or function is for non-members only.
Under a sponsorship arrangement, when an organisation undertakes a fundraising activity it often receives support in the form of money. In return, it may provide such things as advertising, signage or naming rights or some other type of benefit of value.
This means that the sponsor receives something of value in return for the sponsorship, so the sponsorship payment is not a gift. The payment is fully assessable because of the commercial nature of the sponsorship arrangement.
Often organisations secure funding from government bodies and the private sector. The funding can be in the form of grants.
Government industry payments - in the form of grants, bounties, subsidies and rebates - are from federal, state, territory or local governments or government agencies to help recipients to continue, commence or cease business.
Regardless of where they are from, grants that help an organisation continue its income-producing activities are assessable income at the time they are derived (that is, 'taken to be received' for income tax purposes). A grant may be derived in the same income year as it is paid or it may be derived in a later income year.
Conditional grants are grants that must be repaid unless the recipient meets agreed conditions within a specified period. Once the conditions of the grant are satisfied, the grant becomes unconditional and is assessable income at that time, not when the grant was paid. This means that the grant is derived as assessable income in the year it becomes unconditional.
Example: Assessable – unconditional and fully met conditional grants
The Terracotta Club receives an unconditional grant of $5,000 to fund certain operating costs to help with its income-producing activities in the 2015-16 year. The $5,000 grant is derived as assessable income in the income year it is received - that is, the 2015-16 year because the grant is unconditional.
If the Terracotta Club receives the $5,000 as a conditional grant in the 2015-16 year, the grant is not derived until the conditions are met. In this case, the required conditions are met in the 2016-17 income year, so the $5,000 becomes assessable in that year.
If in the 2015-16 year the club instead receives a $10,000 conditional grant that is paid in two instalments of $5,000, each instalment is derived in the income year the club meets the conditions for that instalment. In this case:
End of example
- the conditions for the first instalment are met in the 2015-16 income year and so the instalment is assessable in that year
- the conditions for the second instalment are met in the 2016-17 income year and so the instalment is assessable in that year.
If an organisation fails to meet the terms of a conditional grant and is required to repay the whole or part of the grant, the amount that is repaid is not assessable income in any year. Because the amount that was repaid is not assessable income, it cannot be claimed as a deduction. If, however, the organisation has used grant monies, prior to it being repaid, to incur expenses in earning its assessable income, the organisation can claim those expenses as a deduction.
Example: Not assessable – repaying conditional grant
If the Terracotta Club fails to meet the terms of the conditional grant of $5,000 and is required to repay it, the $5,000 is not derived as assessable income in any year.
If the club fails to meet the terms for the last $5,000 instalment of the $10,000 conditional grant, that instalment is not derived as assessable income in any year.
End of example
Rebates can be either government industry payments or from private organisations such as wholesalers.
A rebate from a federal, state, territory or local government or government agency is a payment to offset a liability - that is, a payment to assist with operating costs or liabilities. A tax rebate is provided under a federal, state or territory law to organisations that are entitled to it. Where the rebate is received to offset a tax liability that arises because of business operations, the rebate is ordinary income and is assessable in the income year it is received.
The principle of mutuality does not apply to these rebates. They do not require apportionment because the rebates are the result of an external party arrangement between the government body and the organisation.
Example: Assessable – ClubGRANTS tax rebate
Under the ClubGRANTS scheme (previously the Community Development and Support Expenditure (CDSE) Scheme) in New South Wales (NSW), eligible clubs may receive a tax rebate on their annual gaming machine tax (that is, a rebate of up to 1.85% of their annual gaming machine profits over $1 million) if they have expended an equivalent amount on eligible community programs and services.
The tax rebate is provided under the state Gaming Machine Tax Act 2001 and clubs are entitled to it if they have annual gaming machine profits over $1 million, they expend on eligible community programs and services, and they provide evidence to the Independent Liquor and Gaming Authority of those payments.
The rebate is a payment to offset the annual gaming machine tax liability that these clubs are required to pay under state law. Therefore, the rebate is assessable income in the income tax year it is received.
End of example
Rebates may also be offered by private organisations. For example, retailers may be entitled to a volume rebate when they make qualifying purchases from a wholesaler. A rebate from a private organisation is considered an arrangement with an external party and so is fully assessable income to the entity that is entitled to the rebate.
In the case where an organisation acts as an agent for its members, receives a rebate on behalf of its members and then passes on the rebate to its members, the rebate is not assessable income to the organisation.
Example: Not-assessable volume rebates – agent for members
A NFP retailer association receives volume rebates from a wholesaler on behalf of its retailer members. The members are entitled to the rebates because of qualifying purchases they made from the wholesaler.
The association spends part of the rebates on administrative overheads and on activities benefiting members individually or collectively. The remaining balance of the rebates is then paid to the members according to their share of purchases from the wholesaler.
The rebates are not assessable income to the association. This is because the association is not entitled to the rebates and is only acting as an agent for its members. Also, the expenses related to the rebates are not deductible to the organisation. It is the members who are entitled to the rebates that need to include the rebates as assessable income and expenses as deductions.
End of example
- TR 2004/5 Income tax: taxation treatment of volume rebates paid to a retailer association
GST rebate on gaming machines
In NSW, the Office of State Revenue (OSR) pays a 'GST rebate' to clubs with gaming machines at the end of each quarter to compensate for the impact of the goods and services tax (GST). The payment is currently under a memorandum of understanding between the NSW Government and Clubs NSW.
For income tax purposes, the GST rebate payments received in a club's income tax year are assessable income. The payments are not a reduction in a club's GST liability on its gaming machine revenue because the GST law does not include a rebate on GST. The GST rebate paid by the OSR is a government industry payment to help compensate clubs for their GST liability.
The principle of mutuality does not apply to the GST rebate payments. They do not require apportionment because the payments from the OSR are the result of an external party arrangement (that is, an agreement between the OSR and Clubs NSW).
Hotels, motels, gyms, squash courts, swimming pools
Taxable NFP organisations may have hotels, motels, gyms, squash courts, swimming pools or other such facilities.
Where an organisation leases out a facility it owns to an external operator, the lease revenue is fully assessable regardless of who uses the facility.
Example: Assessable motel lease payments
A NFP club owns a motel and leases it out to a motel operator. The lease revenue received by the club is assessable, even though guests at the motel may include club members.
End of example
Similarly, where an organisation owns a facility and operates it purely as a commercial investment to generate income and the facility does not form part of the organisation's facilities for its members, the revenue from the facility is fully assessable income.
Example: Assessable income from hotel owned by club
A NFP sporting club owns and operates a hotel purely as an investment to earn income. The hotel is not used in pursuing the club's purposes for which it was established. The income the club receives from the hotel is assessable, even though guests at the hotel may include club members.
End of example
Where an organisation sets up a facility for the benefit of its members but allows non-members to use it, the revenue needs to be apportioned.
In the case where an organisation operates a facility for its members only, the revenue, if any, is classified as mutual receipts.
Revenue specified as assessable under tax law
Revenue specified under income tax law as assessable income includes:
- interest on any overpayment of federal tax
- amounts received from a lessee or former lessee for failing to comply with a lease obligation to make repairs to the premises you leased to them to run a business.
Example: Assessable amount for failing to comply with lease
The Viridian Club leases part of its premises for two years to an individual to operate a gym. The lease contract includes an obligation for the gym operator to repair and maintain the leased premises.
After one year, the leased premises needed some repair work. When the lease ended, the club charged the gym operator an amount agreed under the contract for failing to comply with his obligation to carry out the repairs.
The agreed amount the club received from the gym operator is assessable income.
End of example
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Apportionable revenue is revenue that comprises both assessable and non-assessable income.
This revenue needs to be separated using a practical and suitable method.
Revenue that may need to be apportioned includes:
- drinks sold at the bar to members and non-members
- meals sold to members and non-members at an organisation's restaurant/bistro
- fees from members and non-members using the organisation's facilities, such as gyms, pools and squash courts
- amounts members and non-members pay to attend dinners, parties, dances or social functions arranged by the organisation
- amounts members and non-members pay to attend a talk, workshop or presentation arranged by the organisation
- member and non-member proceeds from a raffle
- gaming income derived by an organisation from members and non-members where the organisation owns and operates the gaming machines.
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