A new exposure draft operational statement1 released by Inland Revenue for consultation proposes that member subscriptions received by incorporated community sport organisations (ICSO), amongst others, are typically taxable income. As regards ICSOs, according to Inland Revenue, member subscriptions have historically and incorrectly been regarded as non-taxable, despite their income nature.
Importantly, this proposal will only apply to non-tax exempt ICSOs; will only apply prospectively; may be mitigated by applying for a specific tax exemption; and, even without a tax exemption may add compliance costs but not necessarily an ultimate tax bill. ICSOs it will not apply to (past or future), include those with a CW46 (bodies promoting amateur games and sports) income tax exemption or that have another tax-exempt status, (i.e. registered as a charity). As noted, if this view is confirmed by the Commissioner of Inland Revenue (following consultation), it proposes to apply it only on a forward-looking basis.
Irrespective of wheter a new interpretation is confirmed, the Association urges all ICSOs to review their income tax status as part of re-registering under the Incorporated Societies Act 2022.
We note that ICSOs (that do not hold a CW46 or other income tax exemption) as non-profit organisations are eligible for an extra (not backed by an expense) income tax deduction of $1,000, under section DV8 of the Income Tax Act. In effect, for these ICSOs, income above that line (including member subscriptions if the proposed interpretation is confirmed), is taxable.
The Association’s view is that where possible, ICSOs should apply for a CW46 income tax exemption to fully mitigate the income tax risk posed by the draft operational statement2.
We note, in-any-event, that in most cases ICSO member subscriptions are applied to the costs of affiliation with a national body and/or directly to the non-profit purposes of the ICSO in providing amateur sport access to members and local communities. These expenditures, historically treated as non-deductible, are acknowledged as generally deductible in line with a taxable treatment of subscriptions. Our submission to Inland Revenue will reinforce these points as being strong mitigants to any rationale for future taxable income classification.
More broadly, the Association notes that the need to confirm (and if necessary apply) for a new income tax exemption is another administrative complexity which volunteer governors of ISCOs, at a time when their future is jeopardised by legislative reform, could well do without.
1In accordance with its internal approach to managing changes or perceived changes of interpretation or practice, Inland Revenue has recently released Exposure Draft 0265 (or ED0265) which is a draft operational statement outlining technical views on how income tax laws apply to various transactions between a not-for-profit association (including sport clubs) and its members.
2Inland Revenue have confirmed to the Association that all income tax exemptions granted under the Incorporated Societies Act 1908, are automatically grandfathered to an entity which re-registers under the 2022 Act.