At The Accounting Hub, we often act for incorporated societies set up for a range of purposes including industry associations and community organisations. Sometimes we get asked questions along the lines of “if we’re an incorporated society, aren’t we tax-exempt?”
The answer, as is often the case, can be a bit more complicated! While membership-based organisations do have certain advantages, mostly tax-free status for income derived solely from members’ subscriptions, these benefits apply only up to a point. If a society’s income sources extend beyond member contributions, such as through investment and commercial activities, the organisation might have tax to pay, and the calculation is not straightforward.
What is an incorporated society?
An incorporated society is a not-for-profit legal entity with its own identity, separate from its members. Members aren’t personally liable for the society’s debts, nor can they hold personal interests in its assets. This structure works well for sports clubs, cultural groups, professional associations, and charitable organisations aiming for long-term, non-profit goals.
More about incorporated societies
Principle of mutuality and tax-exempt income
The concept of “mutuality” in New Zealand tax law means that if a society’s income is derived solely from its members (e.g., membership fees or subscriptions), it’s usually exempt from income tax. This is because any membership subscriptions are not considered income for tax purposes. It’s essentially a case of the members paying into their own organisation, they are clubbing together to share costs.
Taxable income from investment or commercial activities
Things change, however, if the society earns income from investments or commercial activities. If the society charges fees for services to non-members or generates income through non-member events like conferences, this income is subject to income tax, as it falls outside the scope of mutuality. This income is considered taxable, and the society must track it separately from member-based income.
Similarly, investment income, such as interest and dividends, is very common in incorporated societies and will not be tax exempt unless another exemption applies, for example the $1,000 credit detailed below or if the incorporated society is a registered charity.
$1,000 income tax credit
If an incorporated society or club operates as a non-charitable, non-profit organisation, it can claim up to a $1,000 annual income tax credit on its taxable income under Income Tax Act 2007, Section DV 8. This tax credit applies only if the society’s rules prevent profit distributions to its members.
Amateur sports exemption for clubs
Although not typically forming part of our client base, sports clubs that promote amateur games or sports for the recreation or entertainment of the public enjoy a unique tax exemption. Under the Income Tax Act 2007, Section CW46, a sports club’s income is exempt from tax if the main purpose of the club is to foster amateur sports and none of its funds are used for the private gain of any members. This is an essential provision for community sports organisations, as it enables them to focus resources on club activities without tax obligations, provided they remain true to their primary mission of supporting amateur sports.
Apportioning expenses between taxable and non-taxable income
Since many incorporated societies handle both member-based and commercial income, they often need to split expenses proportionally. To do this accurately:
- Identify direct costs associated with taxable and non-taxable activities (like event expenses vs. membership services).
- Allocate indirect costs (overheads) proportionally. For instance, if 60% of total revenue is from members and 40% from commercial activities, then 40% of your indirect expenses might be allocated as deductible against taxable income.
Charitable societies and tax exemptions
A charitable society enjoys broader exemptions under the Income Tax Act 2007, Sections CW41 and CW42, as long as it has IRD tax-exempt status. Charitable status cannot be assumed by an organisation just because they believe they have a charitable purpose. An entity must apply for charity status from Charities Services. Although charitable status provides an income tax exemption, this exemption doesn’t cover all taxes—GST, PAYE, and FBT, among others, still apply.
In summary
Incorporated societies can benefit from a variety of tax exemptions, but there are nuances depending on income sources. Societies should regularly evaluate their income and expenses, especially as they expand activities. Whether it’s a local club or a professional association, understanding these distinctions can ensure correct tax compliance and reduce IRD audit risk. Please get in touch if you would like specific advice on your organisation’s situation.
References
Community Toolkit: Tax Obligations and Exemptions
Income Tax Act 2007 Section DV8 Non-profit organisations