Golf club A is registered as PBO with SARS TEU. They earn subscriptions/greens fees (Club fees) together with Bar/Restaurant sales = R17m. There was also rental income, interest and marketing income earned during the year = R900K SARS raised additional as
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
For purposes of the guidance that follows we accept that the golf club is approved by SARS as a recreational club. Section 10(1)(cO) of the Income Tax Act would indeed then apply. It is in terms of section 23(f) of the Act that the club would not be able to make a deduction in respect any expenses incurred in respect of any amounts received or accrued which do not constitute income as defined in section one.
Section 10(1)(cO) exempts from normal tax, the receipts and accruals derived in the form of membership fees or subscriptions paid by its members. No deduction of expenditure directly, or indirectly, incurred to produce the membership fees can then be made.
The receipts and accruals from the bar and restaurant sales may well qualify under for the exemption as being derived from any business undertaking or trading activity. SARS, in the guide, explains the exemption as follows:
“The receipts and accruals of a recreational club will be exempt irrespective of whether the income is derived from members or non-members, provided its activities are integral and directly related to its sole or principal object of providing social and recreational amenities or facilities (see 17.2). This concession has been made in order to overcome complex and practical difficulties of keeping separate accounts for income and expenditure related to the use of recreational clubs’ facilities by non-members. It is therefore not a requirement that a recreational club keep separate records of transactions with its members.”
SARS deals with the separate payments by members for the use of facilities, such as green fees or golf carts in paragraph 17.1 and state that they generally are not regarded as membership fees or subscriptions.
The exemption in respect of receipts or accruals from any other source is then the greater of –
(aa) five per cent of the total membership fees and subscriptions due and payable by its members during the relevant year of assessment; or
(bb) R120 000.
The point of all of this is that the club will then have multiple sources of receipts that will not be income. All direct expenses to produce these can’t be deducted. Dual purposes expenses must be apportioned and only the part that relates to the income-part (not the exempt one), will be allowed. This of course assumes the expenses qualify for deduction – trade and in production of income.
SARS’s view is explained in the guide for recreational clubs – see paragraph 18.
We copied the following from the paragraph for ease of reference:
The basic exemption is allocated between the various sources of taxable receipts and accruals on a pro rata basis, that is, (taxable receipts and accruals from a particular source / total taxable receipts and accruals) × basic exemption. This step is necessary because the basic exemption in section 10(1)(cO) applies to taxable receipts and accruals, not to such receipts and accruals less related expenses. As a consequence, a portion of the expenditure incurred in relation to the various taxable income sources will be disallowed under section 23(f), since it will be in the production of exempt income.
Expenditure directly incurred in the production of total taxable receipts and accruals from a specific source must be apportioned between the “exempt” and “taxable” portion using the formula below.
Formula:
Total taxable receipts and accruals from specific trade × Expenditure
Total receipts and accruals from the taxable trade
The Income Tax Act does not prescribe how apportionment must be done. The issue of the apportionment of expenses was considered recently by the Supreme Court of Appeal – CSARS v Mobile Telephone Networks Holdings (Pty) Ltd. Judge Ponnan commented as follows:
“Where - as here - expenditure is laid out for a dual or mixed purpose the courts in South Africa and in other countries, have, in principle, approved of an apportionment of such expenditure…”
“Over time, the courts have applied various formulae to achieve a fair apportionment.”
“Apportionment is essentially a question of fact depending upon the particular circumstances of each case (Local Investment Co v Commissioner of Taxes (SR) 22 SATC 4). As Beadle J put it in Local Investment Co (at II):
“It does not seem possible to me to lay down any general rules as to how the apportionment should be made, other than saying that the apportionment must be fair and reasonable, having regard to all the circumstances of the case. For example, in one case an apportionment based on the proportion which the different types of income bear to the total income might be proper, as was done in the Rand Selections Corporation’s case, supra. In another case, however, such an apportionment might be grossly unfair;”
It seems that SARS favours the apportionment on the basis of gross income – they argued that in the MTN case. See also Interpretation note 64 where they state (in paragraph 7.2) that “general expenditure must be allocated to the various sources of income on a logical, fair and reasonable basis. For example, depending on the facts it may be acceptable to allocate the general expenses pro rata by applying the ratio that a particular source of receipts and accruals bears to the total receipts and accruals derived by the entity.”
Some principles may also be found in the Standard Bank and Allied cases.