Background 

The exposure draft, ED0265: Mutual transactions of associations (including clubs and societies), covers bodies or associations of people acting together to further an object (often being to provide benefit to members), and which supply or receive goods or services to or from members.

Examples include chartered clubs, co-operatives, trade associations, professional and regulatory bodies, trade unions, cultural societies, industry councils and associations, and possibly mutual insurance groups, institutes and body corporates for unit title developments. (Of note, the Income Tax Act provides exemptions for groups such as amateur sports promoters and friendly societies.)

Under common law, transactions between mutual associations and their members are not treated as taxable, mainly because it is seen as a person transacting with themselves. Specific provisions in the Income Tax Act override this principle, meaning transactions such as supplying goods and services to members, e.g. the local cosmopolitan (cossie) club bar selling drinks, are treated as taxable. 

Unfortunately, limited historic commentary has resulted in inconsistencies around the tax treatment of such transactions, resulting in some organisations treating transactions with members as not giving rise to income, while others return income from all transactions. Inland Revenue plans to resolve this issue by issuing an operational statement. 

Sale of goods and services

The exposure draft makes it clear the mutual association provisions apply to all associations that charge for goods and services supplied to members and non-members where the amounts derived would usually be income. This approach is consistent with the Income Tax Act, and any non-compliance has been largely due to ignorance.

Membership and subscriptions

The interpretation in the draft would see membership and subscription fees treated as taxable income of a mutual association where there is an express prohibition on the distribution of funds to members. This is on the basis that the mutuality principle would no longer be available and membership and subscription fees would instead be taxed according to the normal provisions of income. Inland Revenue attempts to differentiate between larger entities run on a commercial basis and smaller entities not run on a commercial basis and suggests the smaller entities’ membership and subscription fees might not be income under ordinary concepts, and even if they were, the $1,000 deduction available to non-profit organisations might offset any income arising.

Comment

It is worth noting the relevant legislation has existed for all mutual associations since 1950, with similar legislation having been enacted for co-operative companies in 1935. As such, we had thought the legal position was largely settled years ago.

While it is logical that transactions such as interest earned or the sale of drinks by the local cossie club are taxable, we are concerned about the suggestion that membership subscriptions could be seen as taxable to mutual associations. 

In our view Inland Revenue’s approach is a threat to the existence of certain small clubs and societies up and down the country. While it may be outside the parameters of the Commissioner’s responsibilities under the Tax Administration Act, his stance could be very damaging for the social fabric of New Zealand society.

Inland Revenue seems to be unaware that many small clubs are already under pressure from the requirement of the Incorporated Societies Act 2022 to file new compliant constitutions by April 2026. If they fail to file by that date they will officially cease to exist, which will be a sad loss for the many communities where they operate. We know from our sources that the rate of filing with the Registrar for Incorporated Societies is currently very low. We believe that many of these smaller organisations do not have the expertise to do this themselves and cannot afford the legal professional fees for this assistance.

The same problem will apply to their income tax compliance. In the case of most smaller clubs and societies, the membership fees are relied upon to meet expenses for continued operation. While they may make no profit from subscriptions, Inland Revenue is forcing on them the compliance cost of proving they have no profit. While there are exemptions under the Income Tax Act for groups such as amateur sports promoters and friendly societies, there are complexities involved that are well beyond the expertise of most treasurers of smaller clubs and societies (who it must be emphasised are usually community-minded volunteers) – and the cost of obtaining professional advice will be well beyond their bank balances. This interpretation acts as a double blow for the clubs and societies that make our communities strong places.

Many mutual associations do not carry on business activities and therefore do not file a tax return or only file a return to cover de minimis passive income such as interest income received from bank deposits. 

Taking Inland Revenue’s interpretation to its logical conclusion could result in most mutual associations being required to file tax returns. We would also note the committees of many of those mutual associations are made up of volunteers and often struggle to fill committee slots, so the extra compliance associated with this interpretation of the law risks hindering the not-for-profit sector more broadly.

Inland Revenue suggests that the income of smaller entities might not be income under ordinary concepts. This is not a credible response and it offers little comfort for the average club, as annual membership fees paid to smaller clubs have the same regular, recurrent or periodic nature of fees paid to much larger mutual organisations.

It is also worth noting the Australian case cited in the exposure draft resulted in a law change in Australia. We have previously seen Inland Revenue draft statements result in law changes in New Zealand and it remains to be seen whether that might occur in this instance.

Inland Revenue is accepting submissions until 25 June 2025. If you are interested in making a submission or have any queries about the tax treatment of transactions undertaken by your mutual association, please contact your Baker Tilly Staples Rodway tax advisor. 

Does your charity still need to become incorporated? Read more here.