Taxation of Management Corporations, Clubs and Similar Institutions (2002)
Introduction
1. This Practice Note is being issued as a consequence of the decision of the Income Tax Board of Review made on 18 August 1992 in Management Corporation Strata Title XYZ v CIT.
2. In that decision, the Board ruled on the meaning of a "club or similar institution" for the purposes of section 11(1) of the Income Tax Act and how the provisions of the section were to be applied in the taxation of such a club or similar institution.
3.Section 11(1) sets out the circumstances under which a club or similar institution is deemed to carry on a business. It provides that:
(a) where a club or similar institution receives from its members not less than half of its gross receipts on revenue account (including entrance fees and subscriptions), it shall not be deemed to carry on a business;
(b) but where less than half of such gross receipts are received from members, the whole of the income from transactions both with members and others (including entrance fees and subscriptions) shall be deemed to be receipts from a business and the profits therefore chargeable to tax.
4. The practice of the Comptroller in taxing clubs and similar institutions under section 11(1) has been:
(a) where less than half of the gross receipts on revenue account are from members, the net profit, including rents, interest, etc. is assessed to tax as income from a business; and
(b) where at least half of the gross receipts on revenue account is from members, the club is not assessable to tax on its entire income.
5. Management Corporations set up under the Strata Titles Act have been treated as failing outside the ambit of section 11(1) as they are not voluntary associations of persons. However in view of the special purpose for which the Management Corporation is formed, the Comptroller has been applying the principle of mutuality in dealing such corporations. Hence any surplus from dealings with members was not brought to tax. On the other hand, all other income derived by such corporations in dealing with non-members were taxed as income accruing to a body of persons.
6. The case on which the Board of Review gave its decision on 18 August 1992 arose from an appeal by a Management Corporation against the action of the Comptroller in: (
a) treating the appellant as not coming within the ambit of section 11(1); and
(b) taxing the income of the appellant derived from non-members via interest, rent, forfeiture of deposit.
The appellant contended that it was carrying on a club or similar institution and since more than half of its gross receipts were from members, it should therefore not be subject to tax in accordance with the Comptroller's application of section 11(1).
7. The Board of Review held that:
(a) the appellant carried on a club or similar institution within the meaning of section 11(1);
(b) even though more than half of the gross receipts of the appellant on revenue account is from members and the appellant is therefore not deemed to carry on a business, its income from such sources as interest, rent, fees for use of facilities and forfeiture of security deposit on early termination of lease were held to be taxable, after allowing the appropriate expenses. The income from these sources were derived from dealings with non-members.
Administrative Practice
8. Arising from the decision of the Board of Review, the Comptroller will be making the following changes in the application of the provisions of section 11(1):
(a) management corporations set up under the Strata Titles Act will be treated as clubs or similar institutions for the purposes of section 11(1);
(b) where a club or similar institution is deemed not to carry on a business under section 11(1) because at least half of its gross receipts on revenue account is from members, it is nevertheless taxable on income from all other sources derived through its dealings with non-members.
9. These changes in the application of section 11(1) took effect from the year of assessment 1993.
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