TAX IMPLICATIONS FOR CLUBS. January Taxation Types

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1 TAX IMPLICATIONS FOR CLUBS January 2014 Taxation Types Income tax Goods and Services tax PAYE Schedular payments and withholding tax Resident withholding tax Gaming machine duty Fringe benefit tax

2 Taxation Clubs should note that there have been a few changes around taxation including some new rates and changes to Inland Revenue s approach to clubs and associations. The key change is to the income tax portion on determining what income is and isn t taxable. Similarly the changes to provisional tax and filing returns, regardless of whether there is taxable income, are new. Clubs are urged to regularly seek assistance from their accountant or adviser and refer to the latest Inland Revenue Club or Societies Return Guide (renewed annually) for assistance. Clubs that are Friendly Societies should refer to the section in the Club or Societies Return Guide specifically relating to Friendly Societies, in regards to tax exemptions. It is the responsibility of the club committee and management to ensure that all returns and payments required by IRD are completed and forwarded by the due date to avoid unnecessary penalties. Under the current legislation, IRD can apply penalties and interest (8.4% pa, calculated daily) when these obligations are not met. If IRD prove the position taken in the tax return is wrong, penalties and interest may also be applied. The current tax regime is largely based on self-assessment. That means you are responsible for calculating your own tax liability, filing your return and paying any tax owing. While Inland Revenue doesn t manually review every return that s filed, if it does and if it disagrees with a tax position you ve taken, then it s up to you to prove your treatment is correct. If the position is incorrect, then Inland Revenue will reassess. It may also apply penalties on the under-paid tax which means your club will be liable for the underpaid tax plus penalties and interest (which accrues daily). If you think that a position taken in a past return was incorrect then a voluntary disclosure can be made to Inland Revenue to prevent most penalties being applied. If this is something you re interested in, speak with your advisor.

3 Income Tax Clubs and societies do not pay tax on member subscriptions, but trading transactions with members and all non-member activities are taxable. When calculating taxable income, transactions need to be split into three categories; Membership contributions (not taxable) e.g. subscriptions, levies, fees paid for membership, and the costs of delivering services covered by these fees (non-deductible). Member transactions (taxable) - these are transactions that relate to trading activities with members. Non-member activities (taxable) e.g. corporate advertising, venue hire, interest income. The calculation of taxable income by clubs and societies comes up a lot with IRD audits, so every club should ensure they have support for the positions they ve taken over the years. It is important to consider whether an amount received from a member is a subscription or whether it is more in the nature of income that if received from a nonmember would be regarded as taxable income. An amount collected from a member is not income if it simply entitles the member to the general benefits associated with membership (i.e. it is not paid directly in relation to any particular product or service). Member and non-member transactions conducted on the club s premises (like venue hire, bar income, etc) will be taxable. These often have a business feel. Overheads attributable to delivering member services are non-deductible. Some outgoings don t fit cleanly in either category and should be apportioned or, split between member and non-member activities on a reasonable basis. It s up to each club to determine what their reasonable basis is, but if you have any concerns you should contact your advisor. Inland Revenue may ask you to justify the basis of this split. It is also worth noting that if the club has a Not-for-Profit status then no tax is payable on the first $1000 of income derived each year. Not for profit status should be confirmed in advance with Inland Revenue by applying for an exemption certificate.

4 Provisional Tax Tax Rates If the club has taxable income and tax payable of more than $2,500, provisional tax payments need to be made three times a year. Provisional tax is due in 3 instalments throughout the year. It is payable on different months, depending on the club s balance date. Failure to pay at each instalment may result in penalties and interest being applied. The rate each club applies depends on the club-type: Incorporated non-profit organisations are taxed at the corporate rate currently 28% Unincorporated organisations are taxed using the same marginal tax rates as individuals ranging from 10.5% to 33% File a return even when there s no tax to pay IRD can only look back 4 years. Prevents issues if audited in future. Current tax law protects taxpayers by capping the time Inland Revenue has available to audit and investigate a taxpayer s return. This is usually 4 years from the year it is filed not when the financial year ended. If returns are not filed, this cap doesn t apply so Inland Revenue can look at every year that the club was in existence. Filing a nil return, even where Inland Revenue has confirmed that it s not compulsory, will limit potential issues if the club is audited as it will reduce the number of years that Inland Revenue can investigate. Goods & Services Tax 15.0% Registration threshold = $60,000+ annually

5 Examples: Taxable activities Bar / catering Venue hire Professional lessons Exempt activities Bequests Unconditional donations Bank interest and dividends Residential rents You must register for GST if you carry out a taxable activity and if your turnover was over $60,000 for the last 12 months or is expected to go over $60,000 for the next 12 months (this equates to $5,000 per month). A taxable activity is an activity carried out continuously or regularly by a business, trade, manufacturer, professional, association or club. It includes any activity that supplies, or intends to supply, goods and services to someone else for a consideration (money, compensation, reward) but not necessarily for profit. We refer to these goods and services as taxable supplies. Conditional donations attract GST. Taxable activities don t include: activities that if carried on by an individual would essentially be a private recreational pursuit or hobby; activities that involve exempt supplies such as letting or renting a dwelling for use as a private home, financial services (e.g. interest on loans, deposits), or the sale of donated goods or services by a non-profit body. Note that this doesn t include venue hire, etc, which is subject to GST. PAYE Payable on all wages and salaries includes casual staff. The employee must provide a certificate with a tax number and code. Covers other employee-specific payments e.g. ACC, student loans, KiwiSaver, child support. Paid monthly. Employer s responsibility. Paid monthly large employers with PAYE of $500,000+ each year must file fortnightly. Unlikely to be relevant to most clubs/societies.

6 Employer s responsibility failing to file returns, deduct tax and/or forward the withheld tax to Inland Revenue will result in penalties. Schedular Payments (prev. Withholding Payments ) Applies to payments the club makes for: o o o Contractors, caretakers, commercial cleaners etc. Committee honoraria. Bands and entertainers. o Sports prizes paid to individuals in excess of $500. Without a withholding tax exemption certificate (IR13), withholding must occur on all payments. The rate of withhold depends on the payment type. Tax code declaration (IR330) required, or higher rate applied. Payable with PAYE. Sports prizes Where prize money over $500 is paid to an individual, withholding tax at the rate of 20 cents in the dollar is deducted for all amounts in excess of $500. Therefore if the prize is $600, $20 tax is paid on $100. The tax is deducted at source i.e. deducted from the prize before it is paid to the winners. If the winner is not a professional sportsperson, in other words an amateur, the withholding tax will be refunded when their annual tax return is completed. All winners that receive prizes in excess of $500 that have tax deducted are required to complete and sign an IR330 form. It is vital that the winner s IRD number is correctly stated on the form otherwise monthly PAYE returns will be incomplete, and it may be difficult for the recipient to reclaim the tax. Exemption certificates To be valid a Withholding Tax Exemption Certificate (IR13) must be for the current year and be addressed and signed by the person supplying the services and be produced to the person making the payments for example the members of a band.

7 Rates of withhold Rates of withhold are all specified on the IRD website. There will be a standard rate and a higher non-declaration rate. If the recipient of the payment does not provide a tax code declaration form (IR330), the higher non-declaration rate must be used. Example; with a completed tax code declaration form, a NZ entertainer would face withholding of 20%. Without the declaration form, the withhold is 35%. PAYE return The tax is to be declared as part of the Club s monthly PAYE return. The responsibility for ensuring the tax is deducted lies with the organising Club. Failure to deduct the tax could result in the Club being liable for the tax and subsequent penalty charges. Resident Withholding Tax Clubs can apply for a Resident Withholding Tax Exemption Certificate to be exempt from paying these taxes. This is generally only available to: Not-for-Profit clubs. Amateur sports or racing clubs. Clubs expecting to make a tax loss for the year. Large clubs with gross income of $2 million or more. What this means is instead of the bank paying the tax on any interest earned etc. as it arises the club is paid the full amount and then the club must declare the interest when filing its annual tax return and pay any necessary tax incurred. The advantage of the exemption certificate is - if the club makes a loss then it doesn t need to bother about paying the tax incurred and has use of that money throughout the year. But if it makes a profit then it will still have to pay the tax incurred on the interest, either by way of provisional tax or as part of the annual tax return. Gaming Machine Duty 20% of gaming machine profits only flat 20% duty on profits - Not gross takings. Payable monthly.

8 Problem Gambling Levy 1.31% + GST on gaming machine profits (additional to Gaming Machine Duty) works out at 1.5% levy on profits. Payable in the gaming machine duty return. Note: return. Gaming machine income does not need to be included in the club s income tax Entertainment and Fringe Benefit Tax (FBT) This applies to non-cash payments to employees and office-holders. Examples: Hospitality allowances. Motor vehicles. Medical or life insurance. Car-parking etc. Up to 49.25% of the value of the benefit % looks high, but it has the same overall cost to the club. The FBT rates were calculated to ensure that Inland Revenue is in the same position whether the club pays a cash honoraria, or provides goods instead - the same amount of tax is paid. The employees/office-holders will be in the same position too, because if they were to have purchased the goods themselves, they would have had to buy it with after-tax income. Both approaches should have the same cost to the club making the payment. If the club believes that giving away free drinks to members and their guests is an Entertainment Expense rather than a Hospitality Allowance or Honoraria, it must ensure that it keeps a record and auditable trail of who has received these benefits, their status and the amount of each transaction. These records must then be presented to the auditor who will decide whether they should be presented for tax purposes.