Club Leaders: The Three Most Common Tax Issues and How to Avoid Overpayments & Penalties
Article by Karen Mortimore
Tax-related oversights and innocent mistakes are quite common in an environment as specialized as the clubs industry.
Left unchecked, tax issues for clubs may translate into heavy penalties and substantial losses.
We outline the most common tax issues and related remedies encountered in our work with clubs, so that you can address each of the main areas.
Tax issues for clubs: The three key areas
Generally, we encounter three main areas of tax issues for clubs:
1. Goods and Services Tax (GST)
Many clubs incorrectly calculate their GST position, often resulting in a tax overpayment.
As clubs implement new and innovative promotional activities to expand their operations, administrative aspects in relation to GST can easily be overlooked.
In one review of a client’s GST treatment of cash prizes and promotions, we found an overpayment of approximately $150,000 in GST. Having subsequently lodged GST amendments with the Australian Taxation Office, we were able to recoup the full overpayment on behalf of the club.
Another tax issue for clubs is when a club’s net GST liability is accurate but the method used does not comply with GST law, as there is no entitlement to input credits.
There can also be various GST outcomes from the issue of club vouchers from gambling.
Depending on the format of the voucher, GST may be payable on subsequent redemption of a voucher even if the initial supply of the voucher was for no consideration.
We regularly advise clubs on their promotional materials to ensure the best GST outcome.
2. Carried-Forward Income Tax Losses
Clubs with carried-forward income tax losses should be aware that changes to voting rights of members or changes to operations may jeopardise the ability to recoup income tax losses in subsequent years.
To access income tax losses, you must satisfy the Continuation of Ownership Test (COT) or the Same Business Test (SBT) of the Income Tax Assessment Act 1997.
If you pass the COT test, tax losses can be accessed. If not, then the SBT can be considered.
Additionally, there are special rules to cater for the membership interest structure in clubs. These differ from the typical shareholding structure of proprietary companies.
Membership interests are worked out on a concessional tracing rule basis and these rules vary depending upon the number of members in your club.
For these reasons, we recommend that you seek tax advice prior to considering any constitutional changes to existing members’ voting rights.
3. Income tax exemption for clubs
Income tax exemption is another major tax issue for clubs.
Clubs are able to self-assess their income tax exempt status. This assessment should be done on an annual basis by completing the ATO form Income tax status review worksheet for self-assessing non-profit organisations.
There is no requirement to send the form to the ATO. However, we recommend that it is kept on file to demonstrate that you have undertaken this process and compiled your documentary evidence, in the event of a query from the ATO.
The form contains an approval section and it is advisable that this is completed and signed, followed by signed approval by a member of the Board.
In order to attain income tax exemption, you must pass the “established for community services purposes” test. Your club must show that altruistic activities with regard to the wellbeing and benefit of others is its main purpose
If the main purpose is to provide social or recreational facilities and activities, your club will not be income tax exempt.
The ATO’s approach when selecting clubs to audit is to access publicly available information such as:
- Examining the financial statements of the club, dissecting income and expenditure items such as gambling, bar and restaurant as a measure of its main purpose;
- Visiting the club’s website and noting other external advertising to establish how it is marketed to the local community;
- Reviewing the published annual reports to determine the extensive nature of community benefit services undertaken during the
If your club’s self-assessment process determines that you are not income tax exempt, the most likely outcome is that you will be concessionally taxed under the principle of mutuality and would therefore be required to lodge an annual tax return.
Need help tackling tax issues in your club?
Each of the three main areas of tax issues for clubs can become complex. With our experience in helping clubs with their accounting and tax, we can help you get on top of all the key issues. Contact us here.