Tips paid to employees
If your organisation receives non-voluntary tips from customers (for example, for a pre-set amount, a surcharge or a service charge) and pays these tips to its employees or contractors, it can usually claim a deduction for the amount it paid.
The mutuality principle applies to the amount paid to employees or contractors where the customers are at a trading activity or function for members only (non-deductible expenses), or for both members and non-members (apportionable expenses). If the trading activity or function is for non-members only, the amount paid is fully deductible to the organisation.
However, if your organisation receives voluntary tips and pays all the tips to its employees or contractors, it cannot claim a deduction for the amount it paid because the tips are not assessable income to the organisation.
A NFP organisation can deduct a debt, or part of a debt, that it writes off as bad in an income year if the amount was included in the assessable income of the organisation for that year or for an earlier year.
Where the bad debt, or part of the debt, is related to mutual receipts, it is not deductible.
If your organisation receives a payment for providing such things as advertising space, signage or naming rights, the costs incurred in earning this income may be deductible in full.
Your organisation's costs to sponsor others or promote itself may need to be apportioned to the extent that the sponsorship or promotion is incurred in earning its assessable income.
Advertising to attract membership is not deductible. Sponsorship of a member's interests will generally not be deductible.
If your organisation enters into arrangements with external parties under which the external party conducts or provides particular operations on your organisation's premises - including the operation of gaming machines, Keno and TAB facilities - the income from the external operators is fully assessable. The expenses your organisation incurs in earning this income are fully deductible, including gaming tax.
However, under the principle of mutuality, apportionment of gaming expenses will be necessary if gaming machines are:
- owned or leased by the organisation
- operated by the organisation
- played by members and non-members.
For example, state tax (including 'tax shortfalls') on a club's gaming machine revenue is apportioned so that only that part of the tax (or shortfall) that relates to the non-member revenue is deductible.
Some state and territory gaming laws require organisations with gaming machines to make or record contributions to community purposes, such as:
- paying a community or gambling levy
- preparing community contribution statements
- making community contributions up to a required minimum.
Related expenditure is apportioned where the principle of mutuality applies. An exception is where the expenditure on community contributions is required to claim a rebate of gaming machine tax. As the rebate is fully assessable to the organisation, the expenditure is not subject to mutuality.
Regardless of whether mutuality applies, a deduction for expenditure on community contributions cannot include:
- notional amounts claimed for providing rooms or volunteers to other community groups - only actual costs may be deductible
- claims for capital expenditure
- amounts already claimed as a tax deduction.
A contribution to a deductible gift recipient (DGR) made to meet an organisation's minimum community contribution is not considered a tax-deductible gift.
Example 1: Deductible – ClubGRANTS expenditure
An eligible club participates in the ClubGRANTS scheme (previously the Community Development and Support Expenditure (CDSE) Scheme) in NSW. The scheme provides a tax rebate of up to 1.85% of the club's annual gaming machine profits over $1 million. The rebate is fully assessable under income tax law. To receive the maximum rebate available, the club must expend eligible ClubGRANTS-related expenditure of at least $210,000.
The club's actual ClubGRANTS-related expenditure for the year was $220,000 and comprised:
- $219,000 eligible expenditure on community projects and services (which included $10,000 to DGRs)
- $1,000 ClubGRANTS local committee expenses.
No capital or in-kind (notional) expenditure was made.
Under state law, the club's actual ClubGRANTS-related expenditure of $220,000 is $10,000 above the required expenditure to claim the maximum rebate.
For income tax purposes, the club's tax deduction for its ClubGRANTS-related expenditure is:
$219,000 + $1,000 = $220,000.
The club's required expenditure of $210,000 is fully deductible under income tax law as it is incurred in earning the rebate as assessable income. As its $10,000 payments to DGRs are extra to the required expenditure, the club may claim the payments to the DGRs as income tax deductible gifts.
Example 2: Deductible – preparing annual community benefit statements
A NFP club in Queensland is required by the state's gaming law to prepare and lodge an annual community benefit statement. The costs of preparing the statement are deductible to the extent of the non-member revenue from its gaming machines.
Where the club fails to lodge a statement and is subject to a penalty under the gaming law, the penalty is not a deduction under the income tax law.
As there is no minimum requirement for community benefit payments under a state gaming law, the club's payments to DGRs would be tax-deductible gifts.
End of example
Small business entity concessions
If your organisation is a small business entity, it may be eligible for various concessions, including:
- immediate deduction for certain prepaid business expenses
- simplified depreciation rules.
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Prepaid expenses are expenditure that is incurred for things done (in whole or in part) in a later income year. Where prepaid expenses are incurred in earning mutual receipts and assessable income, the expenses need to be apportioned under the principle of mutuality.
Generally, a prepaid expense is deductible over the eligible service period, or 10 years if that is less, rather than being immediately deductible.
The eligible service period:
- starts on the day the thing under an agreement begins to be done or on the day the expenditure is incurred, whichever is the later
- finishes at the end of the last day the thing under the agreement ceases to be done or 10 years, whichever is the earlier.
However, a prepaid expense may be immediately deductible if either:
- it is excluded expenditure
- the 12-month rule applies.
Excluded expenditure includes:
- amounts of less than $1,000
- amounts required to be incurred by a court order or federal, state or territory law
- payments of salary or wages (under a contract of service)
- amounts that are capital, private or domestic in nature.
Example: Deductible over service period – prepaid audit fees
The Carnelian Club is required under the Corporations Act to have its financial reports audited each financial year. It is not a 'small business entity'.
On 1 June 2015, the club contracts with an accounting firm to provide audit services for the following 12-months. Under the terms of the contract, the club is required to prepay the full audit fee of $10,000.
Although the club is legally required to audit its accounts, there are no statutory fees required to be charged nor are the fees paid to a government body. The prepaid audit fees are not 'excluded expenditure' and the club is not entitled to an immediate deduction for the $10,000 in the 2015–16 income year. The club must apportion the deduction over the period in which the services are provided. It will also need to apportion the prepaid audit fees if it is earning both mutual receipts and assessable income.
End of example
If your organisation is a small business entity, it may be entitled to an immediate deduction under the 12-month rule if the prepaid expenses are incurred for an eligible service period not exceeding 12 months and the eligible service period ends in the income year following the year the expenses were incurred. If the eligible service period is more than 12 months, or ends after the next income year, you must apportion the deduction for the expenses over the eligible service period or 10 years, whichever is less.
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Depreciating assets/decline in value
Your organisation may be able to claim a deduction for the decline in value of its depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of these assets include computers, cars, furniture and equipment.
To work out the decline in value of a depreciating asset, use either the prime cost or diminishing value method based on the effective life of the asset.
Generally, an amount for the decline in value of a depreciating asset is deducted to the extent the asset is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.
A membership-based organisation can have a depreciating asset which, at some time when it was held, had been used or installed ready for use for a purpose other than a taxable purpose.
Under the principle of mutuality, receipts from mutual dealings with members are not assessable income. As a result, the use of depreciating assets in activities from which mutual receipts arise is not use for a taxable purpose.
Therefore, if a depreciating asset is used in part for producing assessable income, or used for part of the income year, your organisation cannot claim a deduction for the full amount.
Example: Apportionable decline in value – gaming machines owned by club
A NFP club owns poker machines that are played by members and non-members. The club works out the decline in value of each poker machine for the income year by using the method it chose based on the seven years effective life of each machine. The club then apportions the decline in value amount by the machines' non-member usage to work out the deduction for the year.
End of example
If your organisation is a small business entity, you may choose to calculate deductions for its depreciating assets using the simplified depreciation rules.
Your organisation may need to calculate a balancing adjustment amount for an asset to include in its assessable income or to claim as a deduction when:
- it stops holding it - for example, if the asset is sold, lost or destroyed
- it stops using it and expects never to use it again
- it stops having it installed ready for use and it expects never to install it ready for use
- it has not used it and decides never to use it
- a change occurs in the holding or interests in an asset which was or is to become a partnership asset.
You work out the balancing adjustment amount by comparing the asset's termination value (such as its sale proceeds) and its adjustable value at the time of the balancing adjustment event.
If the termination value is greater than the adjustable value, you include the excess in your organisation's assessable income. If the termination value is less than the adjustable value, you can deduct the difference.
Example: Balancing adjustment amount
The Ambrose Society purchased a cabinet that it held for two years and used wholly for a taxable non-member purpose. It then sold the cabinet for $1,300. Its adjustable value at the time was $1,200.
As the termination value of $1,300 is greater than the adjustable value of the cabinet at the time of its sale, the difference of $100 is included in assessable income.
If it sold the cabinet for $1,000, the termination value would be less than the adjustable value of the cabinet at the time of its sale ($1,200). The difference of $200 would be a deductible balancing adjustment amount.
End of example
Generally, costs incurred in earning investment income - such as rental income, interest, dividends and trust distributions - are deductible. Expenses may be for protecting and maintaining investments and can include rent collection fees, interest charged on money borrowed for investment, bookkeeping and secretarial expenses, audit fees, management fees and office expenses.
Where costs incurred relate to both assessable (investment income) and non-assessable income (mutual receipts), those expenses need to be apportioned.
Example: Deductible expenses related to rental income
The Gamboge Society mainly derives mutual receipts. The only non-member income it earns is investment income in the form of rent and interest. The society incurs various expenses including telephone, electricity, accounting and audit fees, management fees, insurance, rent collection fees and office expenses.
Only the rent collection fees are specifically related to the rental income and so are fully deductible. The other expenses need to be apportioned as they cannot be identified as relating to either the mutual receipts or the investment income.
End of example
Deductions specified under income tax law
Under the income tax law, there are some deductions that do not have to be incurred in deriving assessable income and the mutuality principle does not apply to them. They are:
- tax-deductible gifts
- the ATO fee to value property over $5,000 for gift deductibility purposes
- the first $42 of subscription fees to professional associations
- expenses for managing the organisation's tax affairs (for example, the costs of using a tax agent to prepare the organisation's tax return or business activity statement)
- the general interest charge or shortfall interest charge related to federal tax
- superannuation contributions for employees
- rates and land taxes on a NFP organisation's premises wholly used to produce mutual receipts and/or assessable income.
Some deductions have limits on how much your organisation can deduct. These limits are discussed in the following sections.
For your organisation to claim a tax deduction for a donation it makes, the payment must be all of the following:
- made to a deductible gift recipient (DGR)
- truly a gift
- a gift of money or a certain type of property
- complying with any relevant gift conditions.
Payments to DGRs that are not gifts, cannot be claimed as a gift deduction. Examples of what you can not claim include:
- a payment for services supplied by the DGR
- a payment to a DGR made to meet an organisation's minimum required community contribution under a state or territory gaming law.
A deduction for a gift cannot add to or create a tax loss. However, your organisation can elect to spread out deductions for certain gifts over a period of up to five years.
Professional association subscriptions
Under income tax law, if your NFP organisation pays to be a member of a professional association it can deduct the first $42 of the subscription fee each year. This is regardless of whether your organisation incurs the expense in earning its assessable income.
Alternatively, under general principles, your organisation can claim a deduction if the subscription fee is incurred in earning its assessable income. However, the mutuality principle would apply. If the application of mutuality reduces the deductible amount of the subscription fee below $42, you can choose to claim the income tax law deduction of the first $42.
Example: Deductible subscription fee – first $42 or non-member portion
The Amaranth Club pays a $350 annual subscription to a licensed clubs association. In turn, the club receives information from the association on how to promote itself better. This helps the club earn its member and non-member revenue.
The club can choose to claim the first $42 of the subscription fee or to claim the non-member portion of the subscription fee.
If the club's non-member percentage is 30%, the club may choose to claim the non-member portion of the fee as a deduction - that is, $105 ($350 x 30%).
If, however, the club's non-member percentage is 10%, the non-member portion of the fee is $35 ($350 x 10%). In this situation the club may choose instead to deduct the first $42 of the subscription fee.
End of example
Rates and land taxes
Your organisation can claim a deduction for the annual rates (that includes council, water, sewerage and drainage rates) and any land tax imposed by a state or territory law on its premises if the premises is wholly used for producing mutual receipts or assessable income or both.
Your organisation cannot claim a deduction if the premises, or part of the premises, it owns is not used for producing any revenue.
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