Changes to tax-exempt sporting and community clubs

From the 2023-24 income year, non-charitable Not-For-Profits (NFPs) with an active ABN are required to lodge an annual NFP self-review return to self-assess income tax exemption. To be exempt, an NFP must be a type of income tax exempt organisation as defined by the ATO, which includes ‘a society, association or club established for the encouragement of a game or sport.

While the law hasn’t changed, this update essentially reforms the administration of NFP organisations that self-assess as income tax exempt and their reporting requirements. NFPs that self-assess as income tax exempt have always been required to review their entitlement to the exemption and maintain governing/ constituent documents to satisfy their operation as an NFP.

Which clubs will this change affect?

It is important to note that this new reporting requirement will not apply to:

• Registered charities endorsed by the ATO as income tax exempt
• Certain government entities
• Taxable NFPs, for example social clubs.

These new reporting requirements will not apply to clubs that are subject to the principle of mutuality, lodge annual income tax returns and pay income tax where applicable. If your club is subject to mutuality and lodges an income tax return, there is no further action required.

However, where your club has self-assessed as income tax exempt entity on the basis it has been established for the encouragement of a game or sport, these new reporting requirements will apply. It is important that your club meets all of the following criteria to ensure it qualifies for the games and sports exemption, being that it:

• Is established for the main purpose of the encouragement of a game or sport
• Is not carried on for the purposes of its individual members' profit or gain
• Meets other special conditions under Section 50.50 of the Income Tax Assessment Act including that its physical presence is in Australia, it incurs its expenditure in Australia and pursues its objectives principally in Australia.

What other factors impact a club’s tax exempt status?

It is not uncommon for a club to have more than one purpose. Taxation Ruling TR 2022/2 notes that where a club that has both sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is:

• Merely ancillary and incidental to its sporting purpose (that is, a purpose that is related to carrying out its sporting purpose), or
• Secondary to its sporting purpose (that is, a purpose that is independent to, but less important or less significant than, the sporting purpose).

These new reporting requirements are likely to have a significant impact where a club has self-assessed income tax exemption as a sporting organisation, but has more than one purpose and sporting is not the ‘main purpose’. If it is concluded that the club is not eligible for income tax exemption, the club may be subject to lodge income tax returns, pay income taxes, including interest and/or penalties in respect of prior income years.

How is purpose determined?

The following factors have been identified by courts and tribunals as relevant when considering a club’s ‘purpose’:

• Emphasis in the club's constituent documents that the main purpose is to encourage a game or sport
• Extent of sporting activities
• The conduct of activities directly related to the game or sport
• A high level of member participation in the game or sport
• Promotion of the organisation to patrons and the public as one that encourages a game or sport
• Involvement of the committee of management in the promotion of sport
• The use of surplus funds for encouraging the game or sport, and
• The provision of financial and in-kind support for encouraging the game or sport.

Clubs can use various mechanisms to ensure they meet the NFP requirement. 'Not-for-profit' clauses in governing documents (eg constitution) are the most common way. These prevent the distribution of profits or assets for the benefit of particular persons while the club is operating and on winding up.

How can the new reporting requirements be met?

The NFP self-review return for the 2023-24 year can be lodged any time between 1 July and 31 October 2024. It can be submitted online through Online Services for Business, or a registered tax agent can lodge on your behalf.

Once the return is accessed, the organisation will need to provide information in the following areas:

• Estimated annual turnover as determined by three bands - small (up to $150,000), medium ($150,000 – $3 million) or large (more than $3 million). 
• Category of exemption, based on the main purpose
• Prohibition of distribution of income and assets to members. This test applies only to certain categories and the online form will direct respondents based on the response to point two
• Operating and incurring expenses in Australia. Again this will only be applicable based on responses to point two 
• If the organisation has any charitable purposes. Where the organisation has a charitable purpose, the ATO may contact the organisation to assist with determining whether a charitable status may be applicable. This will not prevent the organisation from being classified as income tax exempt in the current year. 

After providing the above information, a summary will be generated confirming the NFP’s status as either income tax exempt or taxable. 

Clubs that receive a ‘taxable’ outcome will need to consider their income tax return obligations for the 2023–24 income year. Where the taxable income is greater than $416, a tax return will need to be lodged.

Get in touch

Contact your local BDO expert to enquire about your club’s tax-exempt status, or learn more about BDO’s services for registered clubs and associations.

We strongly recommend Clubs that have self-assessed for income tax exemption review their eligibility by taking into the factors listed above, looking at its governing documents, activities, use of funds and history at the earliest to make sure relevant Clubs are prepared to lodge the NFP self-review return by 31 October 2024.