Impact of JobKeeper on income tax for Clubs

For clubs, mandatory shutdowns due to COVID-19 have been particularly devastating and JobKeeper has been a welcome lifeline to help keep employees on the books.

However, the mismatch of assessable income from the Jobkeeper payment against deductions under the mutuality principle for the underlying wages has prompted questions around the potential consequences for preparation of year end accounts and tax returns.

Working with a number of clubs, we identified a couple of "sleeper" issues, which may have fallen through the net, without our proactive discussions with the ATO. Dealing with these issues now is critical as many clubs come to prepare their year end accounts and tax returns.

The mutuality principle and JobKeeper as assessable income

While JobKeeper payments are assessable, by applying the mutuality principle using the Waratah formula, the wages subsidised by them are only deductible to the extent of the club's non-mutual percentage. This would mean that a club receiving $500,000 in JobKeeper payments and having a 90% mutuality percentage, would only get a $50,000 deduction for the wages. Extra taxable income of $450,000 at a time when their cash flow is non-existent due to closures.

Thankfully, the ATO has agreed that clubs can treat wages as deductible to the full extent that they are subsidised by JobKeeper payments. This is a win for common sense and a great outcome for the clubs sector.

The Waratah formula and member surveys

The Waratah formula requires clubs to undertake member surveys to establish the membership percentage. The ATO's Guide to Mutuality and Taxable Income recommends clubs undertake at least two surveys each year.

Unfortunately, club closures have meant that many clubs will have only undertaken one survey. So what does this mean for clubs in calculating their taxable income?

The Guide is just that – a guide. There is no legislative or case law support for a specific number of surveys. In this regard, we understand that if a club has only been able to undertake one survey, documents the reasoning and why a particular member percentage has been applied (for example, one survey or combined with surveys from a prior year), that, in the event of an ATO review, the club should be confident that their calculations (at least in relation to the percentage) will be accepted.

These are troubled times we live in and the clubs sector, which plays such a vital role in many communities, has been one of the worst affected. However, these practical and pragmatic approaches to difficult issues will leave clubs with two less issues to worry about.

What steps can you take now?

1. Keep clear records in relation to JobKeeper payments received – keep a note of how much you’ve received and when
2. Review the regularity of member surveys, along with the appropriateness of their timing
3. Consider whether member survey results in 2020 are broadly consistent with those of prior years

If you are unsure about the income tax rules that apply to your club around JobKeeper, would like another opinion or are looking for a change, please feel free to contact us. We have broad experience in the clubs sector and have a deep understanding of the specialised accounting rules applicable to clubs. We also work closely with the ATO to resolve any grey areas that emerge.