These entities collect subscriptions from its members each year, to pay for events, support and advocacy - if you make a surplus, is it taxable?
Until now, the answer has been, ‘Maybe yes, maybe no’.
While we welcome the clarification after waiting nearly a decade, it is sober reading for those now facing unexpected tax obligations - simply for pursuing their entity’s purpose, while working toward a purpose other than profit.
Likely to affect between 6,000 and 10,000 societies
Clear guidance about this area has been needed for a long time, and it’s finally made its way to the top of Inland Revenue’s to-do list. That has resulted in April’s Exposure Draft of its Operational Statement, which aims to outline Inland Revenue’s technical view on transactions in the mutual association space that are not subject to other specific tax exemptions.
The draft operational statement will apply to mutual associations not subject to a specific tax exemption, i.e. they’re not charities, and they don’t fall under other exemptions such as ‘amateur sports promoter’. The new guidance could impact thousands of organisations, including residents’ associations, industry bodies like CAANZ or the law society, and unions for professions as wide-ranging as teachers, public servants, manufacturing and building.
How many mutual associations will be affected? Our best guess is anywhere between 6,000 and 10,000. There are 17,000 incorporated societies that are not registered as charities, and amongst that number 7,000 of these are sports clubs that have their own exemption.
Lumpy cashflow will need careful management
The clarified IRD view sees membership fees such as subscriptions now likely to become taxable income. If applied, this could well cause some major cashflow headaches. Let’s say an association accumulates subscription funds, with a plan to spend it on a major event in two years’ time or to build prudent reserves. The association will need to pay tax on surpluses arising from those subscriptions in the first two years, then face a large deficit when it pays for the event or spends its reserves – and no ability to get a refund for the previous tax paid.
While we don’t view this as a revenue-generating exercise by Inland Revenue, it’s a push to make the tax regime clearer and more consistent, but the implications are going to have a real cash impact on associations whose whole purpose is not to make a profit but to positively contribute to communities throughout New Zealand.
With subscriptions being in the tax net, associations will need to manage their income and expenditure over the years with more caution, and pay closer attention to tax compliance. There will be extra costs associated with compliance, which the larger societies will be able to absorb, but which might prove a major hurdle for your local brass band or book club.
The changes we would like to see for mutual associations
Our team will be making a submission on the draft statement, and some of our recommendations will be:
- the ability to carry tax losses backward. This would not be difficult to implement, given it was possible during Covid, and it will ensure mutual associations won’t bear tax costs purely due to timing of income and expenses landing across multiple periods.
- delay any implementation of the proposed clarifications for two to three years to give the sector time to understand the impact and prepare.
- allow associations to file amended historic tax returns, where the clarification would have resulted in tax losses historically.
We will also recommend raising the non-profit deduction to at least $10,000. This could help remove many smaller associations from the impacts of this clarification and assist with reducing compliance costs. There is a $1,000 non-profit deduction available to some mutual associations, but the compliance costs often outweigh the benefit. Perhaps that’s no surprise when the amount is well out of date. The $1,000 sum was set back in 1979 and has never been revisited. Adjusted for inflation, it would be around $8,000 today, and we believe a more appropriate figure would be $10,000. To put the inflation in context, you could buy an average house for $30,000 in 1979.
You might not be informed directly, so be aware of your obligations
The topic of taxable income for mutual associations hasn’t been widely discussed. If the new draft statement is implemented as is, it will have wide ranging implications for not-for-profit associations.
If you are the treasurer of a residents’ association, community trust, welfare society, or any other mutual association, you don’t want to find out about this change when you receive an unexpected letter from Inland Revenue. This clarified tax treatment isn’t a cause for panic, but it’s yet another reminder that you must be vigilant when it comes to tax compliance.
By taking the time to understand your responsibilities and tax obligations, you can manage your cashflow and ensure your association continues to serve its members and purpose. Unfortunately, small societies caught unawares might find they have no cash left in the kitty, and that could be a real setback for many associations working in communities across New Zealand.
