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Accountants are concerned about Inland Revenue (IR) plans to make some societies and associations' membership fees subject to tax.
IR has released a draft operational statement looking into the way interactions between associations and their members are taxed.
It applies to entities that involve a group of people working together, often to provide benefit to members, and supplying goods or services to or from members.
Angus Ogilvie, managing director of Generate Accounting, said some organisations such as chambers of commerce or other professional groups had a large part of their income provided by membership fees and could find themselves caught by the change.
He said the change was "out of left field", particularly for organisations that were not set up for the purpose of making a profit or running a business but were only trying to provide a service to members.
"If this is adopted they could have many thousands of members paying fees and all of a sudden have to pay income tax on that."
He said it had the potential to be a very significant change "and for what benefit?"
The update seemed to be based primarily on an Australian case from 2004, which was "questionable and inappropriate" for a New Zealand context, he said.
The Australian government had enacted a legislative change after that court ruling, to avoid the sort of changes that IR was pursuing, he said.
"In essence, the Federal Court in Coleambally ruled that the cooperative's income was taxable because its constitution prohibited the distribution of surplus assets to members upon winding up. This meant that it did not satisfy the mutuality principle…In response, the government introduced legislative changes to ensure that not-for-profit organisations, such as clubs, professional organisations, unions and friendly societies, could continue to benefit from the mutuality principle.
"The amendments…modified the Income Tax Assessment Act 1997 to clarify that income from mutual dealings with members remains non-taxable, even for entities with non-distribution clause.... I wonder if the current government will take a similar view and overrule this IR policy?
"I believe IR should clarify that member subscriptions, fees, and levies are generally non-taxable under the mutuality principle unless explicitly tied to the supply of goods or services. This aligns with New Zealand case law and reduces compliance burdens particularly for small not-for-profits."
Inland Revenue said the commissioner of Inland Revenue has long had a published view that subscriptions were not subject to tax and there has been no occasion to consider the technical reasoning behind that approach.
"The implications of the Coleambally decision became clear during work to bring clarity and consistency to the tax position of mutual associations generally…IR is conscious of the administrative and compliance cost impacts the updated views set out in the draft operational statement may have on not-for-profits and invited comment on a range of suggestions as to how to reduce these impacts particularly for smaller non-profits.
"The issues discussed in the draft operational statement will have no implications for income that is subject to specific exemptions from tax such as the charitable exemption. The draft statement is being consulted following changes or perceived changes to the Commissioner's interpretation of the law as it relates to associations whose income is not tax exempt, the object being to test whether the legal reasoning for the interpretation is sound."
