Partial tax for clubs
2007-07-26
SINCE 1 April, the tax status of recreational organisations such as golf clubs has changed from one of tax-exemption to one of partial exemption.
Erle Koomets, senior tax consultant at PricewaterhouseCoopers, says that social and recreational clubs were previously completely tax exempt under the rather vague applicable section of the Income Tax Act.
“All income was automatically tax-exempt including investment income and rent from leasing out premises to non-members. But for tax years commencing on or after 1 April this year, complete tax-exemption is no longer automatic.
SARS believes that clubs have exploited their tax-exempt status and have now tightened up tax rules as the activities of these clubs have been vastly expanded to include activities such as restaurants, facilities hire and pro-shops.”
Koomets says that under the new dispensation, recreational clubs will continue to be exempt from tax on income derived from these sources: membership fees or subscriptions but these must be annual or seasonal; members’ payments for social or recreational facilities such as green fees, use of tennis or squash courts, saunas etc.; income from fund-raising activities which are occasional and undertaken by members on a voluntary unpaid basis; trading or business income which is derived from providing amenities to members and is integral to the provision of such amenities.
Koomets says that income from any other sources will then be taxed – but only by whatever exceeds the greater of R50 000 per annum or 5% of total membership fees and subscriptions payable by members in that tax year.
“So income from ordinary trading activities such as investing of surplus finds or the hiring out of premises to non-members could be taxed if the threshold is exceeded.”
Koomets reassures clubs that income such as bar or restaurant takings will continue to be classified as tax-exempt business income as they are core to the provisions of amenities to members. “But these services must be integral and directly related to the club facilities, provided to members, and their costs should be substantially recovered.”
“Some interpretation problems do arise. For example, if a club organises a package holiday or golf tour for members and takes a slice of the profits, are these profits integral and directly related to the activities of the undertaking?
There are also complications relating to interpreting “the recovery of costs” and problems could arise where a profitable bar operation subsidises a loss-making golf division.”
Koomets says that where a club has non-exempt income that exceeds the thresholds and must be taxed, administrative problems may arise with regard to apportioning the club’s expenditure into that which produces tax-exempt income and that which produces taxable income.
Koomets says there is no need for clubs to assume the worst. “Under the new dispensation they will remain completely exempt on income they receive in the form of membership fees and subscriptions and from certain club activities conducted with members within defined statutory parameters.”
“The major impact of the new rules will be on payments received from non-members for green fees, bar sales and facility hire. Also, activities which are not directly related to club activities, not conducted substantially on a cost-recovery basis, or are fund-raising activities where members are compensated are the most likely areas to be subject to tax.”
Koomets emphasises that clubs will now have to apply to SARS for approval as a club.
“The exemption is no longer automatic but they have until 31 March 2009 to apply and the approval can be given retrospectively which means tax liabilities can be reversed if approval is received later. Clubs may also have to amend their constitutions to ensure they contain provisions prescribed by SARS. “
There will inevitably be accounting and administrative burdens arising from the new tax dispensation as clubs will have to ensure systems keep track of amounts paid by non-members.
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