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Time is Running Out For Recreational Clubs Exempt Tax Status

Sunday, 01 February 2009   (0 Comments)
Posted by: Author: Marié Ungerer and Kerry de Hart
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Time is Running Out  For Recreational  Clubs Exempt Tax Status

The playing field in which recreational clubs operate has changed drastically with regard to income tax obligations.SARS has set a deadline of 31 March 2009, by which time existing clubs need to apply for approval to enjoy partial exemption.Clubs in general have for many years enjoyed the much sought after tax exempt status with regard to their receipts and accruals, in terms of the now deleted section 10(1)(d)(iv)(aa) of the Income Tax Act.

The deleted section granted recreational clubs complete exemption from income tax.This exemption was granted because the major objective of clubs was for members to share the cost of providing amenities for the collective benefit of all members and not to operate at a profit. It became common practice amongst clubs to operate a business for example, a bar or restaurant at a profit in order to cross subsidise other activities or to improve the club facilities.Although it is generally accepted that income derived from trading activities is subject to income tax, this practice did not provide a problem as long as the bar or restaurant was for the exclusive use of members.In many instances, this was not the case and clubs earned trading income and profited from transactions with non-members. This practice was unfair towards tax-paying entities. 

In April 2006, a system of partial taxation was introduced for Public Benefit Organisations (PBOs) such as welfare organisations.Consequently, the full exemption that was available to recreational clubs became iniquitous.This inequity was addressed with the issue of the Draft Revenue Laws Amendment Bill during October 2006.The draft bill contained a number of provisions aimed at taxing the receipts and accruals of clubs relating to all nonmember business at a rate of 34%, excluding the first R20 000 income per annum.

These provisions would have had serious consequences for clubs in general.Fortunately, the amendments enacted in the Revenue Laws Amendment Act, 2006 introduced a much less harsh tax regime for clubs.The new section 10(1)(cO) introduced a system of partial taxation.

Exempt income of a recreational club

In terms of the new section 10(1)(cO), the following receipts and accruals of an approved recreational club remain fully exempt. They are:

•Membership fees or subscriptions paid by members; and

•Occasional fundraising activities that meet specific requirements.

Although it is SARS’ objective to tax the trading income of clubs (receipts and accruals from a business undertaking), certain concessions have been made that have resulted in some trading (or other) income still not being subject to income tax. 

The first of these concessions is contained in the de minimus-rule (or threshold) that results in any income (other than income from membership fees and from occasional fundraising activities) that is less than the greater of:

•5% of membership fees and subscriptions;or 

•R50 000 (R100 000 for years of assessment commencing after 1 March 2009) per annum being exempt. 

The second concession totally exempts from tax any income from a business undertaking or trading activity that: integral and directly related to the provision of social and recreational amenities or facilities for the members of that club; carried out on a basis which is substantially directed towards the recovery of cost; and

3.does not result in unfair competition in relation to taxable entities.

For the receipts or accruals to be exempt from tax, all three of the above requirements must be met.

1.Integral and directly related to the provision of social and recreational amenities or facilities for the members of that club If a golf club provides cart, club and caddy hire services for a set fee; or a country club provides squash, bowls, golf and tennis facilities as well as restaurant and bar facilities, these trading activities would be regarded as integral and directly related to the provision of amenities to members of the club, irrespective of whether the facilities are used by members or non-members.The letting of the amenities or facilities of the club to non-members will generally not be regarded as an activity that is integral and directly related to the provision of social and recreational amenities for the members of the club.

2.Carried out on a basis which is substantially directed towards the recovery of cost In the Draft Tax Guide for Recreational Clubs, SARS has indicated that a percentage of not less than 85% will be regarded as substantial.If a club serves meals and refreshments, the following costs may be taken into account in the calculation of the recovery of the cost: direct costs such as cost of the refreshments, cost of consumables, salaries and wages; indirect costs such as telephone, electricity, repairs, maintenance, stationery and cleaning materials. Importantly, however, is that a provision for future replacement costs of capital assets can be taken into account when calculating cost.

3.Does not result in unfair competition in relation to taxable entities.Unfair competition means that the club should not be in a more favourable position than a taxpaying entity conducting the same trading activity. Each case will be considered on its own merits.Various factors will be taken into account, such as active advertising or marketing, location and availability of similar facilities, and whether or not the activity is conducted on a competitive basis with the intention of maximising profits.

Non-exempt income

Although a club’s receipts and accruals from trading activities could be exempt from income tax irrespective of whether the trading activities take place with members or non-members, from the examples given in the guide, it seems as if rental received from transactions with nonmembers entails a trading activity which does not comply with all three requirements and will consequently be taxable. For example rental received from a cellphone mast on the club’s property; rental received from a billboard erected by a motor car dealer; or rent received from the letting of the club’s facilities.Interest received is not trade income, but it is specifically excluded from the general exemption and can be exempt only to the extent that it is less than the threshold (as discussed above).

Registration requirements

The partial taxation of recreational clubs is not automatic.All clubs need to apply to SARS for approval, in terms of section 30A, to be granted partial exempt status, even clubs that earn income that is below the threshold (as discussed above). In terms of section 30A, the constitution of the club must contain the following provisions before SARS will consider the club for approval:

•The activities of the club must be carried out in a non-profit manner; 

•No surplus funds may be distributed to any person. On dissolution, surplus funds must be transferred to other registered recreational clubs or PBO;

•May not pay remuneration that is excessive, having regard to what is generally considered reasonable in the sector and in relation to the services rendered, nor may any remuneration be determined as a percentage of amounts accrued to that recreational club; 

•Members may not sell their membership rights; and

•All members must be entitled to annual or seasonal membership.

Clubs must submit an EI1 form (available to download on the SARS website) to SARS along with a copy of their constitution or other written instrument in terms of which the club is established. The application for approval must be submitted before 31 March 2009 for existing clubs; and on the last day of the first year of assessment for new clubs.

Approved clubs

Should SARS approve the recreational club, partial taxation in terms of section 10(1)cO will apply in the future and complete exemption will be construed retroactively.This approval will be subject to annual review upon receipt of the club’s income tax return by SARS. SARS retains the power to withdraw this partial exemption should any of the actions of the club transgress the original requirements.Approved clubs will also be exempt from making provisional tax payments for a three-year transitional period as from its first year of assessment commencing on or after 1 April 2006; in effect 2009 will be the last year in which clubs will be exempt from making provisional tax payments. 

As some of the income will be exempt, section 23(f) prohibits the deduction of expenditure that is incurred in the earning of exempt income. According to the Draft Guide apportionment of the expenditure related to income that has an exempt and taxable portion, will be required. 

Non-approved clubs

If SARS does not approve a club or if the club did not apply for approval, then all income received by or accrued to the club as from 1 April 2007 (after deducting deductible expenses) will be subject to normal tax at 28%.  Non approved clubs will be required to submit provisional tax returns and payments from the first year of assessment from when the exemption fell away.


It is generally accepted that SARS is targeting the trading income of clubs, but the concessions are still very generous.Membership fees and occasional fund raising activities remain fully exempt.Other income below the threshold remains fully exempt, on condition that the club applies for approval.

Trading income directly related to the provision of social and recreational amenities that are carried out and directed towards the recovery of cost and do not result in unfair competition in relation to taxable entities, remain fully exempt even if trading takes place with non-members.Rent received by the letting of club facilities to non-members as well as interest received (above the threshold) will however now be taxable.It is imperative to apply for approval, even if trading or other income is below the threshold. Non-approved clubs are regarded as taxable entities and will be taxed on any income they receive (even membership fees) at 28% per annum.For a detailed discussion, it is important to refer to the Draft Tax Guide on Recreational Clubs available on SARS’ website (


SARS - Draft Tax Guide for Recreational Clubs - November 2008                                                                 Explanatory Memorandum on the Revenue Laws Amendment Bill 2006,Revenue Laws Amendment Act, No. 20 of 2006

Source: By Marié Ungerer and Kerry de Hart (TaxTALK)



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