Let us suppose that you have recently been appointed to the Committee of Management of a non-profit organisation. You want answers to the following. Should you incorporate the association? What are the advantages of incorporation? How does one go about incorporating an association? Do non-profit organisations have to pay tax? Can the members and Committee of Management be made liable for the debts of a non-profit association?
Non-profit organisations are variously described as associations, societies, clubs and institutions. What they all have in common is that their main object is not profit. They usually have a fluctuating membership. An elected Committee of Management usually controls the day-to-day running of the organisation.
Throughout Australia, an existing association may be incorporated or unincorporated. Unincorporated associations are common in all States. But they suffer from a number of disadvantages. The most serious disadvantage is that the Committee of Management is responsible for the debts of the association. Each member of the Committee is personally liable for all the debts of the association to the extent that the association's assets are insufficient to cover the debts. Debts, of course, include compensation claims arising from personal injuries etc. It is usually difficult for an unincorporated association to obtain insurance cover for these risks. Depending on the constitution of the association, in some cases, the individual members may be liable for the debts of the association. However, this would be unusual. Sporting clubs often run bars and large-scale social functions. With so many businesses going bankrupt at the present time, a person who consents to serving on the Management Committee of such an organisation runs a risk to his personal wealth.
Also, an unincorporated association cannot hold title to land and buildings. The title must be in the name of trustees. Conveyancing fees will be incurred each time a trustee resigns or dies.
There may be excessive secrecy regarding the affairs of an unincorporated association. The Rules or the Financial Statements may not be available to members. If incorporated, these documents will be available as public record documents. Some State governments will not give grants to unincorporated associations.
Incorporated associations have a number of corresponding advantages. An incorporated association, theoretically, lasts forever. There is no hassle with trustees. The Financial Statements and the Rules are available for inspection at the local Business Affairs Office. The Act sets out how the affairs of the association must be conducted.
Associations can be incorporated under various Acts. The most popular Act is the Associations Incorporations Act. However, associations can be incorporated under the Corporations Law, Co-operative Societies Act, Friendly Societies Act, Trade Unions Act, Unit Titles Act etc. If formed under the Corporations Law, application can be made to the Australian Securities Commission to omit the word "limited" from the name of the association.
The steps to incorporating an association under the Associations Act are as follows. 1. Decide on the name of the proposed association and apply to the Registrar for approval of the name. 2. Draft the Constitution or Rules of the Association. Take the Rules to the Registrar and have them approved. Model Rules are usually available from the Registrar if required. 3. Place an advertisement in a local paper stating intention to apply for registration. The advert will also state the association's objects. 4. Apply to the Registrar for incorporation of the association. The application must be accompanied by a) a copy of the Rules, b) the names and addresses of the Committee of Management, c) a copy of the newspaper advert and d) the required fee. The Registrar will them issue a certificate of incorporation. The association must then appoint a Public Officer and notify his appointment to the Registrar. The Public Officer is responsible for seeing that the requirements of the Associations Act are complied with.
Needles to say, an organisation should prepare Financial Statements for each year. Also, it should have a financial plan or budget for each year. The financial plan should show its expected income for the year, its expected expenditure for the year and its surplus for the year. Each organisation should also have a short-term, for example a monthly, cash-flow budget. This will show the present balance at bank, the expected cash to be received for the next month, the expected expenditure for the next month and the resulting balance at bank at end of the month. It should be a rule of the association that all moneys received must be banked and all expenditure paid by cheque. A large duplicate deposit book should be obtained from the bank and used for bankings.
Organisations which enjoy media coverage, such as sports clubs, can greatly assist their finances by obtaining sponsors. The most promising sponsors are large organisations with which they do a lot of business such as airlines, breweries etc.
Surplus funds should be invested promptly and not left in a cheque account. Possibly, the best solution is to have an open account with a Cash Management Fund.
A permanent file should be maintained containing a) the Constitution, b) Certificate of Incorporation and c) the financial statements from date of incorporation.
For small associations, the association should have a leather or canvas bag to contain all of its financial and other records. This bag should be transferred by the outgoing treasurer to the incoming treasurer at the conclusion of the Annual General Meeting.
It is desirable to rent a Post Office box in the name of the association.
The association should have one or more rubber stamps made showing its name. The name should end with the word "Inc." where appropriate.
Many organisations will find it necessary to obtain licenses for selling liquor and running raffles.
Free publicity if often available from the media. It is common for local newspapers to publish news of coming events free-of-charge. The local ABC radio station will usually do likewise.
All associations, be they incorporated or unincorporated, are regarded as companies for tax purposes.
The following associations are wholly exempt from tax: trade unions, employer/employee associations, sporting bodies, cultural bodies, religious institutions, charitable or public benevolent institutions, racing clubs, Service clubs such as Lions, Rotary, Zonta etc. The exemption from tax applies to income received from social activities such as bar, dances etc.
With regard to charitable or public benevolent associations mentioned above, some stringent conditions apply in order to qualify under this heading. The charitable institution must serve the whole community and not some segment of it. This will rule out, for example, specialised charities and ethnic organisations. It must also have a clause in its Constitution prohibiting distribution of funds and assets to the members. Furthermore, the Constitution must provide that on the dissolution of the association, the association's assets are to be transferred to another association of a type which is exempt from income tax.
Even if an association does not qualify for tax exemption under any of the above headings, it does not mean that it will have to pay company tax on all of its surplus for the year. The "mutuality" principle will exempt a large proportion of its income. Broadly, the "mutuality" principle means that the Tax Office believes that an organisation cannot make a profit out of trading with its own members. The Tax Office believes that a profit can only be made by trading with non-members. It follows from this that all moneys received from members will be non-taxable. All moneys received from non-members will be taxable.
Suppose an association received the following income and incurred the following expenditure for the year.
|Social funcition receipts||3000|
|TOTAL INCOME $||6000|
|Social function expenditure||1000|
Assume that the social functions were attended by 2/3rd members and 1/3rd non-members.
Members' subscriptions will not be taxable as, obviously, they were received from members.
One-third of the net income from social functions will be taxable. The whole of the bank interest will be taxable as it was received from non-members. The only expense that could be deducted from bank interest would be bank fees.
|Social functions - 2/3rd of ($3000 - $1000) =||1333|
|TAXABLE INCOME $||3333|
|TAX PAYABLE, 39% of $3333 = $||1300|
Until a few years ago, the Tax Office rarely insisted upon non-profit organisations filing annual Tax Returns. However, with the introduction of the Tax File No. scheme for investment bodies, they have insisted that non-profit organisations apply for Tax File No's and lodge annual Tax Returns.
Charitable institutions, as defined above, are exempt from Fringe Benefits Tax. This means, for example, that a Church could provide it pastor with a rent- free residence and a car for private use and the Church body would pay no Fringe Benefits Tax on the benefits supplied.
Charitable institutions are exempt from Sales Tax. If such an organisation were to buy, say, a motor-car for the use of one of its employees on business, it would obtain the vehicle from the dealer free of sales tax. Sales tax on motor- vehicles is 15% at present. The procedure is for the charity to supply the motor- dealer with the necessary written declaration at time of purchase.
Amounts donated to a charity of $2 and over are tax-deductible. It is common for persons to do work on a voluntary basis for charities. They may use their cars a lot on charity business. Generally, they will not be able to claim the expenses associated with charity work as a tax deduction. The reason for this is this is that there is no income to deduct it from. However, there is a way around this to make the amounts tax deductible. The volunteer worker should enter into an agreement with the charity for reimbursement of vehicle and other expenses. For vehicle expenses, he or she could claim the tax- approved rate of 51.2 cents per kilometre for a vehicle with a CC between 1600 and 2000. He or she could then make an equivalent donation to the charity and obtain a receipt. The donation would be tax-deductible.
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