income tax of rotary clubsrotary9940.24hours.co.nz/resources/docs/lets treasurer tax issues.pdf ·...
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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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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