Is Your Club Really Non-profit?

	Mr Herbison opened the Otago University club in 2000, and it became legally non-profit in 2001. He is pictured with some of the equipment purchased from over $90,000 he has raised from community trust in the past five years.

Mr Grant Eccles is the instructor of the Hamilton club, which he does not run to make a profit. A little while ago, Mr Eccles received a letter from Inland Revenue saying they would take him to court if he did not pay income tax for the club’s income. Mr Eccles rang Inland Revenue and explained how his club was run. Fortunately they decided not to continue the proceedings. What if they decided to take him to court anyway?

This situation highlighted a legal issue that is pertinent to many of our clubs: running a club to make zero profit is not the same as a legal non-profit club.

What's the difference?

A legal non profit club has rules, which says it is non-profit. This does not mean you have to spend lots of money incorporating and having your accounts audited, but it does mean you must have a constitution. Aargh! Hard work! Not any more. This article, and Mr Herbison’s 4th dan thesis, ease the process of making your club legally non-profit - in just four simple steps!

What's more, a legal non-profit club can actually make money. It just isn’t allowed to distribute it to its members as profit, although it can employ them to do jobs such as instructing.

Why become legally non-profit?

Not all ITFNZ clubs are non-profit, and there is no need for them to be. Instructors have invested a lot of money – not to mention time – into learning the skills they teach, and they are completely entitled to earn money from teaching. Indeed, many instructors overseas make a living from teaching Taekwon-Do.

Many instructors, however, are happy to teach for free, or to teach if the club simply covers their Taekwon-Do expenses.

Of course, non-profit clubs can also pay their instructors a wage or salary, so even instructors who want to earn money from teaching may create their club as legally non-profit. (The NZ Rugby Union is non-profit, and we all know the All Blacks don't play for free!)

There are three major advantages of being legally non-profit:

1. The club can become exempt from income tax and resident withholding tax (RWT).
2. The club has access to community funding.
3. There can be less work for the instructor.

Income tax exemption

A legally non-profit club can apply to Inland Revenue for exemption from income tax (under an exemption for “amateur sport promoters”). Once you have that hot letter from Inland Revenue, you never need to worry about getting the nasty letter from them that Mr Eccles received.

Access to community funding

Many community trusts exist to give money back to the community. Most of these trusts require a club to be legally non-profit to receive funding. In the past, many of these trusts have been a bit slack ensuring a club is actually non-profit, so even profit-making clubs have received funding. This is changing. Many trusts now require proof of your non-profit status before they will consider your funding application, and it will only get stricter.

Less work for the instructor

Legally non-profit clubs are usually run by a Club Committee. That means other people do all the paperwork. Isn’t that great! You put controls into your constitution – so the “Taekwon-Do” club doesn't decide to become a "fishing club", and the instructor retains control of what is taught – so the instructor keeps control of the important stuff. You can also write into your constitution that the instructor is a member of the Club Committee, or even its President, but you might get some of the work back if you do that!

Four easy steps

It is easy to become a legally non-profit club. There are four easy steps:

1. Vote in a Club Committee.
2. Draft a constitution.
3. Adopt the constitution at a General Meeting.
4. Apply to Inland Revenue for tax exemption.

Vote in a Club Committee

When Mr Banicevich went through this process, he started by talking to his students about it while warming them down over the course of a few training sessions. With the idea planted in their heads, they had their own ideas about who would make a good President, Secretary and Treasurer. He opened the positions to adult students and the parents of younger students.

Then he distributed a notice that announced a training session when the club would finish half an hour earlier to have a club meeting. At that meeting, students and parents agreed on a President, Secretary and Treasurer.

Draft a constitution

Legally non-profit clubs must have adopted a constitution, so the next step is to draft one. Hey! Mr Herbison has already done that for us! All your club needs to do is read it, and change things you might like to change. (Note that there are some clauses that must be in the constitution, so don’t change the important bits.) The draft constitution is available in the “Instructors Only” section of the ITFNZ website with Mr Herbison’s
thesis.

You might make the second draft yourself, then give copies of it to your students so they can suggest changes. Mr Banicevich let the club Secretary do that (the workload reduces already!). If you do make changes, Mr Herbison is happy to review it to ensure you haven’t changed anything that must not be changed.

Adopt the constitution at a General Meeting

Mr Banicevich’s club Secretary then suggested a date for the first club General Meeting. The Secretary produced a notice for the students (which must be at least two weeks in advance), and an agenda.

On the date of the General Meeting, the club finished training half an hour early and parents attended. Students and parents voted to adopt the Constitution, which was easy because everyone had had time to read it, and changes had been discussed and made already. They then formally voted in the President, Secretary and Treasurer and a few other officers (which was easy too, because they had already done this informally at the first meeting).

Apply to the Inland Revenue for tax exemption

Mr Herbison’s thesis includes a draft letter to send to Inland Revenue. Complete the blanks and you are away. Soon a hot letter of tax exemption finds its way to your door. Mission complete!

Is there more work afterwards?

There are a couple of things a legal non-profit club must do. Most instructors do half of them anyway, but now someone else does them. How cool!

1. Keep accounting records.
2. Maintain a register of members.
3. Hold an Annual General Meeting (AGM).
4. Keep a minute book.

Keep accounting records

A legally non-profit club must keep records of its income and expenses. This doesn’t need to make an accountant euphoric – just a simple record of student fees, and a cashbook of other income and expenses. Issue a receipt for all money coming in and bank it all, so it balances with the receipt book. Try to pay all expenses by cheque. If you need to pay for things in cash, you should cash a cheque to do so. This is what the Treasurer does.

If members agree, its records do not have to be audited.

Maintain a register of members

Most clubs have a list of their active members. Yep, that’s pretty much it for this requirement. You just have to record the names, addresses, occupations and dates of joining of your members. You will probably want their telephone numbers and email addresses as well.

Hold an Annual General Meeting

Now this is new. Once a year you have to have an Annual General Meeting. Stop class half an hour early, or hold your AGM before a club social event, such as a barbeque. Elect a few officers, and be happy with the financial records - not a big deal really.

Keep a minute book

The Secretary has to have something to do! They just keep a record of the decisions the Club Committe makes. At your first AGM, there will be minutes about who is voted in as officers, and adopting the constitution.

So there you have it

Four easy steps to making your non-profit club legally non-profit and income tax exempt. There is a bit more to it if the instructor is paid a salary or wages – you have to pay PAYE. If your annual fees are over $40,000 (I wish) you have to register for GST. Most clubs won’t be affected by these bits. Read Mr Herbison’s thesis for more information about them.

Once again, the draft constitution, letter to send to Inland Revenue, and Mr Herbison’s thesis are all available in the “Instructors Only” section of the ITFNZ website.

Go forth and be non-profit!