CLUBS, associations and trade bodies/associations are distinguished from business enterprises, and the prime differentiator is that making profit is not the main objective of clubs, associations and trade groups. These bodies of peple enjoy beneficial treatment in the taxation of their income.
Clubs and similar associations are formed by a group of people who come together with a shared interest, activity or goal, and they are typically for social or recreational purposes. They are not formed for commercial purposes. They can also be formed for pursuing science, literature or other leisure pursuits for the interests and benefits of their members.
The fine distinguishing factor that separates a trade association from a club is that a trade association is formed by members who carry on business, and their main objective is to safeguard and promote the business of its members.
How are clubs and associations taxed?
Examples of a club or a similar association will include recreational clubs, academic clubs, literature clubs, management corporations in an apartment block, etc. The club or association is established and owned by its members for the benefit of its members. All assets belong to the members of the club who will also control all the dealings of the club. Any surplus of receipts over the expenditure in respect of the income from the transactions with the members must be used for the benefit of the members.
However, when a club or association earns income from its facilities or services provided to non-members on a commercial basis, such income will be taxable from trading with non-members.
Apportionment of expenses and claims for tax depreciation or allowances must be segregated between the income from transactions with members and non-members. Wherever the expenses can be specifically allocated, there is no need for apportionment.
Income from investments and external sources such as interest and rent will be taxable. Other income from external parties operating restaurants or gymnasiums within the club’s premises will also be taxable. Voluntary gifts from the public will also be taxable. However, gifts from the members which are intended to be used for the benefit of the members should not be taxable.
The taxable income of clubs, associations and trade associations are taxed at the same rates which are applicable to individuals. However, they are not entitled to any personal reliefs which are applicable to individuals. The losses generated from transactions with members cannot be offset against income from transactions with non-members and cannot be carried forward. The unused losses and capital allowances generated from transactions with non-members can be carried forward.
How are trade associations taxed?
All income received by trade associations, except for subscription fees from members, are subject to tax regardless of whether the income is received from members or non-members. Similar to clubs and associations, there will be an apportionment of expenses and capital allowances between the taxable income and non-taxable income.
The tax rates applicable to trade associations are also similar to taxation of individuals following the scaled rates without any tax reliefs.
Where is the dividing line?
Associations formed by trade enterprises can also qualify as a club or association provided such associations organise themselves with the prime objective of working for the benefit of its members, and the association is established and owned by its members for the benefit of its members without a commercial objective of achieving profits. In order to fall within this category, the association should not safeguard or promote the business of its members.
The issue of whether an association is a trade association or otherwise is not dependent on its name, but rather on the conduct of the association.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
