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CLUBS AND TRADE ASSOCIATION

Unit 12

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LEARNING OBJECTIVES

After this lecture, you should be able to:

Define the meaning of a club & trade association

Ascertain the assessable profits of clubs

Ascertain the assessable profits of trade associations

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Clubs

An association of persons Gather together for recreational, cultural,

sports, social, educational purposes, etc.It is not formed for business purposes and it

should not exist for the financial advantage of its members

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Chargeable of its profits under profits tax?Whether not less than half of its gross receipts on

revenue account (including entrance fees and subscriptions) are from members

If not less than half are from members =>deemed not to carry on business

If less than half are from members => carry on business => whole of its receipts from transactions both with members and others are deemed to be business receipts

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Trade, Professional or Business Associations (s.24(2))

Any body of persons which is formed for the purpose of furthering the trade interests of its members

Trade association deemed to carry on a business and it’s income assessable under profits tax

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More than half of the receipts by way of subscriptions are from persons who would claim a deduction of such payments under s.16, the trade association is deemed to carry on business

=> the whole of its income from transactions with members and others is business income and the profits as adjusted are chargeable (s.24(2))

If it is not caught by s.24(2), its profits might be taxable under profits tax if it is in fact carrying out trade or business

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Far East Stock Exchange Ltd v CIR (1979)

Whether entrance fees received by the stock exchange should be subject to tax?

Section 24(2) expressly includes entrance fees as trading receipt if the trade association is deemed to be carrying on a business

Entrance fee =>capital in nature and s.14 excludes profits from the sale of capital assets from charge

The Privy Council held that the entrance fees were taxable

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Members

Refer to those who have voting rights only (s 24(3))In D91/89 a snooker club admitted any person who p

aid $10 and completed an application form for membership so that he could use the club facilities. The CIR argued that its ‘members’ were not members within s 24(1). The BoR held that as the articles of association conferred voting rights on these ‘members’, they were members within s 24(1).

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Gross Receipts on revenue account

Gross receipts on revenue account include all receipts not of capital nature and all receipts from club activities and other activities such as rental income, catering and bar receipts, and entrance fees and subscriptions, but exclude:

i. debentures

ii. donations to capital project

iii. subventions from public funds

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Property Tax

If the club and trade association are not liable to profits tax, they may be liable to property tax on rental income received

In D27/98, rent received by an incorporated owner of a building from the letting of car parks was assessed to property tax. The exemption of s 5(2)(a) from property tax does not apply to this incorporated owner

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Kowloon Stock Exchange Ltd v CIR (1984)

The decisions in this case:a stock exchange is a market where stocks and shares are

traded. Brokers are traders and an association formed by traders is a trade association

An association which has as its primary object the financial benefit of its members is not a club or similar institution

Entrance fees and founders’ contributions (once and for all payments) were not subscriptions and thus should not be included in the formula for determining whether a trade association is taxable under s 24(2)

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Example

Joyful Club owns a building, 1/3 of which is used by members for club activities and the other 2/3 is let out to local business. It has the following income and expenditure for a basis period:

Subscription from members $100,000Catering and bar receipts 85,000Rental receipts 245,000 430,000General administration exp (250,000)Property outgoings (60,000)Net profit $120,000 =======

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All members are entitled to vote at general meetings and only members can purchase food and drinks.

Entrance fees of $25,000 have been credited direct to the Accumulated Fund.

Gross receipts from non-members:

Rents $245,000

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Gross receipts from members:

Subscriptions $100,000

Catering etc 85,000

Entrance fees 25,000

$210,000

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As less than half derives from members, the whole of the profits are subject to Profits Tax and the assessment would be:

Profits per account $120,000

Add: Entrance fees 25,000

$145,000

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Conclusion

General definition of a club and a trade association

Chargeability of a club under s24(1)Chargeability of a trade association under

s24(2)Computation of tax liability of a club