Non-Profit Associations and Societies Formed for Particular Purposes

20.22. The income of trade unions, certain employer associations, friendly societies, cultural and sporting societies, and aviation, agricultural and manufacturing associations is exempt under section 23 (f) (g) and (h). Trade unions, whether registered or

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not, and associations of employers or employees registered under Federal or State laws relating to the settlement of industrial disputes are exempt from tax on income from all sources, including income from investments and from any business activities. If, however, an exempt trade union or association is a shareholder in a trading company—indeed the only shareholder—the income derived by the company is taxable in the same way as the business income of any other company carrying on the same kind of business.

20.23. The income of a non-profit friendly society is exempt except where it is the income of a dispensary run by the society. The liability to tax of the income of a friendly society dispensary is covered by Division 9A of Part III of the Act and is dealt with in paragraphs 20.38–20.45. The exemption of the income of a non-profit friendly society extends to income from other business activities and income from investments. ‘Non-profit’ is used here and elsewhere in this chapter to describe an activity not carried on for the purpose of profit or gain to individual members.

20.24. A non-profit society, association or club established for the encouragement of music, art, science or literature is exempt from tax on its income—both investment income and business income. The like income of a non-profit society, association or club established for promoting the development of aviation or of agricultural, pastoral, horticultural, manufacturing or industrial resources, or for the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants, is exempt.

20.25. The mutuality principle would apply to prevent at least some of the receipts of a number of the organisations referred to in paragraphs 20.22–20.24 being taxed as income even if those receipts were not made exempt from tax by express provisions. The mutuality principle asserts that a person cannot derive income from dealings with himself. The principle applies notwithstanding that the club or society in which persons are associated is incorporated. The principle may require that subscriptions received from members and some receipts for goods or services supplied to members should not be treated as income. It has been said that for the principle to apply in this way:

‘The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial.’note

The Committee understands that it is the policy of the Commissioner to apply the mutuality principle in the assessment of non-profit clubs and societies whose receipts are not made exempt by express provisions. In the result, these societies and clubs are generally subject to tax only on their investment income and on income from trading with non-members. The law has not insisted on the degree of identity which the above quotation might suggest. In the case of a non-profit association there is sufficient identity in the fact that contributions by members which make up, for example, a cash surplus from bar trading will go to assist in financing the facilities and services available to members.

20.26. There should, in the Committee's view, be a limitation of the exemption of the income of the organisations referred to in paragraphs 20.22–20.24. There are undoubtedly cases, at the present time, where some of these organisations are carrying on business operations in competition with taxable persons and, through the exemption from tax, are enjoying an unfair trading advantage. Exemption should continue to be given to income arising from business activities directly related to the carrying out of the purpose for which the organisation was established and which gives it entitlement to exemption but not to other business income. Investment income should in general continue to be exempt, though it would be necessary to deny exemption to income such as interest or rents arising from an investment in a trading entity in which the organisation had an interest exceeding a specified percentage. There would otherwise be an avenue by which exemption might still be obtained in respect of trading income unrelated to the organisation's purpose: inflated interest and rent might be exempt to the organisation and deducted by the trading entity. Dividends might, however, remain exempt in all circumstances since the profits from which they have been paid will have borne tax. If the dividends were not exempt they would, in any event, give rise to an entitlement to rebate which would have the same effect as exemption from tax. The notion of business should, for the purpose of all these proposals, include ownership of real property. In relation to the taxing of receipts from a non-exempt source, the mutuality principle explained earlier would apply where appropriate.

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20.27. If the Committee's proposal were adopted, the exemption from tax would continue to be given, for example, to the proceeds of agricultural shows received by agricultural societies and to the proceeds of cricket matches received by cricket associations. The income from portfolio investments of trade unions would be exempt but not income from trading activities.

20.28. It has been submitted that the qualifications imposed by section 23 (g) for exemption of sporting clubs or associations are too restrictive. The exemption was introduced into the law in 1952 to give effect to a recommendation of the Spooner Committee and is similar in its terms to a previous concession in relation to entertainment tax for these organisations. The club or association must have been established for the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. Sports such as cricket, tennis and football are clearly included in the exemption; on the other hand, angling, horse racing, trotting and motor racing are clearly excluded. There are some sports which it might be difficult to categorise. In any case, all sports provide recreation to participants and spectators, and it has become difficult to draw any distinction, on the basis of the degree of commercial activity involved, between sports in which human beings are the sole participants and other sports. In New Zealand, exemption of a similar nature to that now given in Australia by section 23 (g) has been extended, from 31 December 1973, to horse racing, trotting and greyhound racing clubs. The Committee sees some force in the arguments which would support an extension of the exemption of sporting clubs and associations. But it would take the view that questions as to what societies and associations should be exempt are matters of government policy. There may be other organisations with equally strong claims for exemption.