Accounting for Non-Profit Organisations

Transcription

1 Edition 14 Accounting for Non-Profit Organisations OVERVIEW As bookkeepers who have a practical working knowledge of accounting treatments and have the ability to read and understand financial statements, you are no doubt often asked to take on roles in clubs and associations that are considered not-for-profit entities. This edition of Bookkeepers Knowledge Base will examine the accounting and income tax perspectives of such organisations to give you a greater understanding of their workings. Whilst there may be a number of different types of entities that categorise themselves as non-profit including: Charities; Clubs, Societies and Associations; and Deductible Gift Recipients we will concentrate our attention in this edition to those aspects of the more common entities of the not-forprofit sector being the clubs, societies and associations. WHAT IS A NON-PROFIT ORGANISATION? An organisation is considered a non-profit organisation if it is NOT carried on for the profit or gain of its individual members. Typically, a non-profit organisation will have a constitution or other governing document that specifically prevents the organisation from distributing profits or assets to its members either whilst it is operating or on wind-up. The Tax Office usually considers such documents in classifying non-profit entities and looks for acceptable clauses in its constitution to indicate the non-profit character of the entity. A non-profit organisation can still make a profit, however, any profit that it makes must be used to carry out its objectives as set out in its constitution and must not be distributed to owners, members or other private persons. The following clauses have been cited in Tax Office literature as being examples of acceptable clauses to show the non-profit character in an organisations constitution or other governing documents. Example 1 Non-Profit Clause The assets and income of the association shall be applied solely in furtherance of its above-mentioned objects and no portion shall be distributed directly or indirectly to the members of the association except as bona fide compensation for services rendered or expenses incurred on behalf of the association. Example 2 Dissolution Clause In the event of the association being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to any association with similar purposes which is not carried on for the profit or gain of its individual members. 1

2 THE FOLLOWING CHECKLIST SHOULD ASSIST IN DETERMINING THE NON-PROFIT CHARACTER OF THE ORGANISATION YOU ARE DEALING WITH. Is the organisation carried on for the purposes of profit or gain to its individual members? Does the organisation have a constitution or other governing document that prohibits the distribution of money or property to its members during the course of its operations? Does the organisation have a constitution or other governing document that prohibits the distribution of money or property to its members on its dissolution? Does the organisation carry on its activities in a manner that is consistent with the stated objectives set out in its constitution or other governing document? Does the organisation ensure that members and other private persons are not compensated in monetary terms or with other property or assets other than bona fide reimbursement for services that have been provided to the organisation or for expenses that have been incurred on behalf of the organisation? If the organisation does make a profit through its operations, is this profit used to further the objectives of the organisation as stated in its constitution or other governing document? THE FOLLOWING ARE EXAMPLES OF NON-PROFIT ORGANISATIONS Churches Community Child Care Centres Neighbourhood Associations Public Museums and Libraries Scholarship Funds Scouting and Guiding Associations Sporting Clubs and Associations Surf Lifesaving Clubs Traditions Service Clubs ACCOUNTING FOR NON-PROFIT ORGANISATIONS As we will see shortly, non-profit organisations may be exempt from paying income tax and in certain circumstances the organisation can self assess its income tax exempt status. Where a non-profit organisation is not exempt from tax and is required to lodge an income tax return the accounting concepts used are very important in determining the entity s taxable income. Many of you would have heard of the concept of mutual income. This mutual income concept recognises that amounts are not derived for income tax purposes unless they are received from an external source. That is, where amounts are received by an organisation from its members they are not considered income for tax purposes. The principle, which has been upheld by the courts, is that where a number of people agree to contribute sums to a fund for a common purpose that was created and controlled for their mutual benefit, such sums do not have the character of income (you cannot derive income from yourself). There are a number of difficulties that can arise when accounting for income and expenses of a club or association when applying the mutuality principle: 1. Sums derived from the common fund that are not member contributions (eg. investment gains) 2. Sums derived from non-members with respect to the provision of services or facilities to them (eg. funds received through bar receipts from non-member patrons of a club). Many clubs and associations derive income from both members and non-members. Transactions involving non-members are generally treated as trading activities of the organisation. Such transactions are excluded from the mutuality principle without affecting the mutual revenue that has been derived by the organisation from its members. Similarly, with deductions, where expenditure occurs and is in relation to the generation of non-mutual revenue then such related expenditure will be an allowable deduction. Great care must therefore be taken when posting income and expenses of non-profit organisations as these amounts can impact upon the organisations income tax liability. As a general rule your chart of accounts should be established such that there is the ability to distinguish mutual receipts and expenditure relating to mutual receipts from non-member receipts and investment gains and expenditure relating to such receipts. Our case study at the end of the article identifies the importance of the treatment of revenue and expenditure broken down into mutual and non-member classifications. INCOME TAX AND NON-PROFIT ORGANISATIONS The tax office has, over the years, released a number of rulings and published literature outlining its position in respect to the taxation consequences of non-profit bodies. There are special rules depending on whether the non-profit body is a charity, a deductible gift recipient or a non-profit club, society or association. As the scope of this article is limited to the latter of these, we will only be dealing with these more common clubs, societies or associations. 2

3 Non-profit clubs, societies and associations can self-assess their income tax status. Only some specified categories of organisations are exempt from income tax. Broadly these are: Cultural organisations; Community service organisations; Educational organisations; Employment organisations; Health organisations; Religious organisations; Resource development organisations; Scientific organisations; and Sports organisations. The following is an extract from the Club Pack published by the Tax Office which outlines the criteria to determine the tax status of clubs, societies and associations. Where the non-profit organisation falls into one of the above categories they will only be exempt from income tax if they also meet at least one of three tests. The three tests are: physical presence in Australia: you have a physical presence in Australia and, to the extent of your physical presence, you pursue your objectives and incur your expenditure principally in Australia deductible gift recipient: you are a deductible gift recipient prescribed by law: you are prescribed by law in the income tax Regulations, and you are located outside Australia and are exempt from income tax in your country of residence. Physical presence in Australia test This test has two elements: 1) Do you have a physical presence in Australia? 2) To the extent you have a physical presence in Australia, do you pursue your objectives and incur your expenditure principally in Australia? An organisation has a physical presence in Australia if it is wholly in Australia, or it has a division, branch or sub-division in Australia. It does not have a physical presence in Australia if it is present in Australia only through an agent, or it merely owns investment property in Australia. If an organisation has a physical presence in Australia only, it must pursue its objectives and incur its expenditure principally in Australia. Principally means mainly or chiefly. Less than 50 per cent is not principally. The pursuit of objectives in Australia can include things done offshore if they are only a means of pursuing those objectives. For example, sending employees to an offshore conference to aid their efficiency for the Australian objectives will be pursuing objectives in Australia. Minor offshore expenditure is also acceptable. Example A community service association is physically present only in Australia, but it also sends materials to organisations overseas. As long as these activities and expenditure are not major, it will meet the physical presence in Australia test. Deductible gift recipient test The deductible gift recipient test requires that you are a deductible gift recipient (DGR). As this is outside the scope of this article we offer only a brief explanation of DGRs. From 1 July 2000, DGRs: Are listed by name in the income tax legislation, or Have received a notice from the ATO stating they have been endorsed as DGRs. If you are listed or you are endorsed as a DGR in your own right then you meet the deductible gift recipient test. Prescribed by law test Organisations can be prescribed by name in the income tax regulations. The Government decides which institutions will be prescribed. 3

4 If you are not listed by name in the income tax regulations for exemption purposes, you do not meet this test. If you are prescribed, to meet this test you must also be located outside Australia and be exempt from income tax in your country of residence. Does a non-profit organisation need to lodge an income tax return? Having determined your exempt status or otherwise using the above categories and tests, if you self assess your organisation to meet all the requirements for income tax exemption it will not be required to lodge income tax returns. Clubs, Societies and Associations that do not meet the tax exempt status are generally treated as companies for income tax purposes irrespective of the fact that they may not even be incorporated entities. There are two categories of companies that can apply to clubs, societies and associations: 1. Non-profit companies; and 2. Other taxable companies. Taxable non-profit organisations are treated as non-profit companies for income tax purposes where they satisfy the tax office requirement of acceptable clauses contained in their constitution or other governing documents. Such non profit companies have the following tax rates applied to them: Taxable Income Rate of Tax 0 - $416 Nil Tax $416 - $915 55% of every $ over $416 $916 and above 30% on the whole amount of taxable income Where a club, society or association does not meet the Tax Office requirement to be treated as a non-profit company they are classified as other taxable companies irrespective of their incorporation status. Other taxable companies are taxed in the same way as ordinary companies which attract an income tax rate of 30% on total taxable income. HOW IS TAXABLE INCOME OF A NON-PROFIT ORGANISATION CALCULATED? Like any taxable entity, taxable income of non-profit organisations is calculated taking into account assessable income and subtracting allowable deductions. The difference with non-profit organisations however is that the taxable income can be affected by the mutual receipts from members and the expenditure incurred in deriving those receipts. Assessable Income Assessable income for non-profit organisations is determined using the same principles as applied to other taxable entities. Typical examples of assessable income include: Bank Interest Dividends and other income from investments Proceeds of fundraising drives to the general public (eg lamington drive) Food and drinks sold to non-members visiting the club Fees received for hiring out club facilities such as a hall or equipment Amounts paid by non-members to attend dinners and other functions organised by the club Amounts paid by non-members to attend a talk, presentation or workshop hosted by the club Non-member proceeds from a raffle and The sale of souvenirs or merchandise to non-members Non-Assessable Income Non-assessable income of a club, society or association would mainly be derived from mutual transactions with the members of the organisation. Typical examples of mutual receipts would include: Member subscriptions Food and drinks sold to club members Amounts paid by members to attend dinners and other functions organised by the club Amounts paid by members to attend a talk, presentation or workshop hosted by the club. It is important to note that not all dealing with club members would be classified as mutual receipts. 4

5 Example A fitness club rents part of a building from a non-profit organisation. All of the rent paid by the fitness club to the organisation would be assessable even though patrons of the fitness club may also be members of the non-profit organisation. Allowable Deductions Allowable deductions are expenditure incurred in earning assessable income. Many expenses of a non-profit organisation however will be incurred in deriving both assessable and mutual receipts. Where this is the case a deduction will be limited to that portion of the expenditure that was derived in earning the assessable income. Examples of expenditure by a non-profit organisation that typically requires some sort of apportionment include: Printing and stationery Postage Telephone Bank charges Electricity Rent Insurance Examples of expenditure incurred by a non-profit organisation that would be wholly incurred in deriving assessable income (and therefore wholly deductible) include: Costs of running a function solely for non-members Bank fees charged in deriving interest income or receipt of dividends Expenditure incurred in fundraising activities to the general public. Non-Allowable Deductions As already explained, expenditure incurred in the derivation of mutual income will not be considered an allowable deduction. Examples of expenditure by a non-profit organisation that would not be considered deductible include: Costs of running a function attended by members only Printing and postage costs incurred in collecting member subscriptions Advertising costs to promote the club and increase membership. Apportionment of Income and Expenditure In most circumstances it will be a simple process to identify those receipts that are assessable and those that are mutual receipts. Similarly, much expenditure will be able to be classified as having been expended in deriving assessable income compared to mutual income. Where identification and separation is not possible the Tax Office will allow a practical apportionment method. Whilst there are no hard and fast rules on apportionment, tax office literature suggests that your apportionment method will be acceptable provided: You can support the basis of apportionment The method chosen is reasonable and is not arbitrary and The method chosen reasonable reflects apportionment of income and expenditure in light of assessable and mutual receipts. OTHER ISSUES AND TAXES RELATING TO NON-PROFIT ORGANISATIONS There are many other issues and taxes that relate specifically to non-profit organisations. In this edition of the Knowledge Base we are mainly concerned with the accounting treatment of income and expenditure of a non-profit organisation and the impact this accounting treatment has on calculating the organisation s taxable income. What follows is only a brief discussion on a number of topics that affect non-profit organisations. Future editions of the Knowledge Base may lend themselves to further discussion in this area. GST A non-profit organisation is required to be registered for GST where its annual turnover is $ or more. Where a non-profit organisation is not registered for GST and is not required to be registered, its assessable income will include the total amounts received and its allowable deductions will include the total amount paid (including any GST paid). 5

6 Some specific GST issues that have been raised and dealt with in respect to non-profit organisations include: GST and fundraising dinners and similar events GST and donations and grants to non-profit organisations GST treatment of non-commercial sales made by non-profit organisations GST treatment in respect to reimbursements, volunteers and contractor payments GST and educational material or training supplied by non-profit organisations FBT A non-profit organisation, even though exempt from income tax, may still be liable for fringe benefits tax. Concessional treatment applies to non-profit organisations in respect to fringe benefits with most nongovernment income tax exempt organisations qualifying for a $ (grossed up value) threshold for fringe benefits provided to each employee. This is quite a complex area and outside the scope of this publication. PAYG Non-profit and income tax exempt organisations are not exempt from the PAYG withholding provisions. Your organisation has PAYG withholding obligations as a payer if it makes one of the following types of payments: salary, wages, commission, bonuses or allowances to an employee remuneration to a director or member of committee of management salary, wages, commission, bonuses or allowances to an office holder return to work payments retirement payments (that is, unused leave), eligible termination payments, pensions and annuities social security and compensation payments payments for work or services under labour hire arrangements or prescribed by regulations payments for work or services where your organisation and an individual have a voluntary agreement to withhold payments for a supply (services or goods) to another business which does not quote an ABN, and certain dividend, interest and royalty payments. CASE STUDY CALCULATING TAXABLE INCOME OF A NON-PROFIT ORGANISATION Facts The Stanthorpe Stamp Club was formed as a non-profit entity. Members can buy and swap stamps and the club meets monthly at premises they hire to discuss rare and valuable stamps and other issues relating to stamp collection generally. The club has a constitution with appropriate profit and dissolution clauses. The club has an annual turnover of less than $ and is not registered or required to be registered for GST. During the year ended 30 June 2009, the club received the following receipts totalling $19 850: o Member subscriptions $2 900 o Proceeds from a raffle of a rare stamp (Note 1) $1 200 o Proceeds from a fundraising drive (Note 2) $ 600 o Sale of merchandise to members $7 500 o Sale of merchandise to non-members $2 300 o Proceeds from a collectors workshop (Note 3) $ 950 o Proceeds from the Christmas dinner (Note 4) $3 250 o Interest on a Term Deposit $1 150 During the year ended 30 June 2009, the club expended the following sums totalling $14 530: o Postage (Note 5) $ 375 o Cost of stamp used in raffle $ 480 o Costs incurred in Fundraising Drive $ 220 o Cost of merchandise to members $7 125 o Cost of merchandise to non-members $1 840 o Costs of hosting the collectors workshop $ 410 o Costs associated with Christmas dinner $2 600 o Hire of hall for monthly meetings $ 360 o Printing and Stationery (Note 6) $ 220 o Insurance (Note 7) $ 500 o Advertising costs on membership Drive (Note 8) $ 400 Notes 6

7 Note 1 A review of the ticket stubs identified members purchased $700 of the total tickets sold in the clubs rare stamp raffle. Note 2 The fundraising drive was specifically targeted at the general public and members only gave their time in the fundraiser. Note 3 The collectors workshop arranged by the club was open to members and non-members alike. A review of the registration forms identified that 60% of the registrations were attributable to members. Note 4 The Christmas dinner was attended by 40 members and 25 non-members who paid $50 per head. The cost to cater for the function was $40 per head. Note 5 The clubs postage book was examined and it was determined that 15% of all correspondence mailed went to non-members. Note 6 Cost associated with printing and stationery for the year were identified as being flyers printed for the collectors workshop of which 30% were forwarded to members and 70% distributed to non-members. Note 7 The club throughout the years of its operation has acquired a number of rare stamps that are not for resale. The insurance costs are for loss or theft of these valuable assets. Note 8 In a bid to increase club membership, advertisements were placed in the local paper to encourage new membership. Solution Step 1 - Determine the tax status of the Stamp Club The club has a constitution with appropriate non-profit and dissolution clauses contained within and would be classified as a non-profit organisation. The club however is not a charity and as such is not exempt outright and must self-assess its own tax status. The stamp club must consider whether it falls into one of the categories that provide specific exemption (these categories are listed above). As previous court decisions have held that a stamp club is not an educational organisation or a sports organisation, the club self-assesses as a taxable non-profit company. Step 2 - Determine the amount of assessable income In determining assessable income, we must categorise the receipts into mutual receipts and assessable receipts and apportion any receipts that are of a combined nature. Subscriptions are receipts derived solely from members and as such are attributable as mutual income. Raffle Proceeds were identified as being attributable to members to the value of $700 and is therefore mutual income, with the balance of $500 being non-member receipts and treated as assessable. Fundraising Proceeds were all attributable to non-members and therefore treated as assessable income. Sale of Merchandise has been attributed to both member and non-member with the member proceeds being mutual income and the non-member proceeds being assessable income. Collectors Workshop receipts identified 60% attendance by members and therefore mutual income with 40% attendance by non-members and assessable. Christmas Function attended by members and non-member raised $3250 of which $2 000 (40 x $50) was attributable to members and hence a mutual receipt with the balance $1 250 (25 x $50) attributable to nonmembers and assessable. Interest Income is classified as assessable income. SUMMARY Receipt Mutual Assessable Subscriptions Raffle Proceeds Fundraising Proceeds 600 Merchandise Sales Collectors Workshop Christmas Function Interest Income Total

8 Step 3 Determine the allowable deductions As with assessable income we must categorise the expenditure into expenditure that relates to mutual income (a non-allowable deduction) and expenditure that relates to assessable income (allowable deduction). Expenditure needs to be apportioned where it relates to both categories of income. Postage was identified as being attributable to the value of $319 (85%) to members and $56 (15%) to nonmembers. Raffle Costs can be apportioned in the same manner as the income was derived with $280 (700/1200 x $480) being attributed to members and the balance $200 being attributable to non-members. Fundraising Costs are solely attributable to non-members. Merchandise Costs have been identified as $7 125 attributable to members and $1 840 attributable to nonmembers. Collectors Workshop Costs are apportioned on the basis of receipts derived with 60% being attributable to members and 40% to non-members. Christmas Function attended by 40 members at a cost of $40 per head ($1 600) is a non-allowable deduction whilst the 25 non-member attendees at $40 per head ($1 000) is considered an allowable deduction. Hall Hire for monthly club meetings is attributed solely to members and is non-allowable. Printing and Stationery Costs have been identified as being attributable to members to the value of $66 (30% x 220) with the remaining amount of $154 (70% x 220) attributable to non-members. Insurance Costs are solely attributable to members for the use and enjoyment of the clubs rare stamps and hence are non-allowable. Advertising Costs, although not spent specifically on members, was designed to increase the club membership which in turn would have resulted in mutual income. As a result such costs are non-allowable. SUMMARY Expenditure Non-Allowable Allowable Postage Raffle Costs Fundraising Costs 220 Merchandise Costs Collectors Workshop Christmas Function Hall Hire 360 Printing and Stationery Insurance 500 Advertising 400 Total Step 4 Calculate Taxable Income Having categorised both receipts and expenditure into mutual and non-member categories, taxable income is then determined in accordance with the normal formula of Assessable Income less Allowable Deductions. Assessable Income - Allowable Deductions = Taxable Income $ $3 634 = $2 546 Step 5 - Calculate Tax Payable The Stamp Club, being treated as a non-profit company, pays tax in line with the schedule outlined above dealing with lodgement of an income tax return. As the club as taxable income in excess of $916 it will pay tax at the rate of 30% on the total amount of taxable income. Tax Payable = Taxable Income x 30% = $2 546 x 30% = $764 The Stamp Club will lodge a company tax return being classified as a non-profit taxable company. 8

9 Disclaimer The information contained in this edition was written in February 2003, and last updated in February Information contained herein is general in nature and is intended to provide guidance to bookkeepers in providing bookkeeping services for their clients. It is not intended to be taken as a substitute for you or your clients seeking professional advice in relation to their own specific circumstances. Copyright Except for use with other staff members or contractors of your bookkeeping firm, no part of this publication may be reproduced without the express permission of Australian Bookkeepers Network Pty. Ltd. 9