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Tax Implications of Mutuality and Not-for-Profit Organisations in Jamaica

Income, profits and gains arising or accruing to any person or entity in Jamaica are captured within the ambit of the Income Tax Act, or ITA. This is not to say that income arising outside of Jamaica is beyond the purview of the Income Tax Act, but to be caught by its provisions, the person would have to be deemed a resident in the island.

However, not all income, profits or gains earned by residents are deemed taxable, as the income earned or derived by a registered charitable organisation are exempt.

However, there seems to be a big misunderstanding regarding a registered charitable organisation versus a not-for-profit entity. Not all not-for-profits benefit from their income being exempt, in accordance with Section 12 of the Income Tax Act. As a result of this misunderstanding, many persons form not-for-profit organisations with the intention of being exempted from income tax, and thus fail to fulfil their obligations and end up incurring severe penalties.

Charitable organisations are institution, whether incorporated or not, which are established exclusively for charitable purposes to benefit the public at large, and whose income and assets provides no personal benefits to its governors.

The Charities Act also excludes certain bodies from becoming registered charitable institutions, such as political parties, trade unions, chambers of commerce, as well as any bodies that promote unlawful, prejudicial, terrorism and acts of public disorder, among others.

As a precondition to become a registered charitable organisation, the institution is required to be established as a not-for-profit. However, by virtue of the stringent requirements, not all not-for-profit entities are able to obtain registered charitable status and therefore can’t obtain the taxation benefits.

That said, while all registered charitable organisations are not-for-profit entities, not all not-for-profits are registered charitable organisations; therefore, income earned by these entities are taxable, in accordance with the ITA, which seems to be inequitable.

Most if not all not-for-profits are developed with a principal objective of mutually benefiting their members simultaneously. These entities may include clubs, societies, professional associations, chambers of commerce and trade unions.

These associations, unions, clubs or societies collect membership dues, or subscriptions, which assist with funding the day-to-day operations of the societies and clubs in their quest to lobby on behalf of their members. However, in accordance with the ITA, income, profits or gains incurred during the said process are chargeable to income tax.

These organisations occasionally convene events, such as seminars, raffles or concerts, from which the proceeds are used to assist with funding daily operations, as well as for philanthropic purposes.

However, notwithstanding the philanthropic objectives of the income or proceeds derived from events convened by these not-for-profit entities, amounts donated are not purely deductible – as donations are restricted to 5.0 per cent of their chargeable income, in accordance with the ITA – and profits or income earned from these events are also taxable if these associations are not in receipt of charitable status.

Moreover, income earned from dues and subscription contributed by members face the brunt of income tax at a rate of 25 per cent, even though these entities are to the benefit of their members. That said, there is no provision in the ITA for relief, exemption or waiver from income tax for any income earned from not-for-profit activities if the organisation has not been granted status as a registered charity.

Mutuality principle

Luckily, the system of jurisprudence in Jamaica is enshrined in a combination of statutes and legal precedents where common law amplifies or provides solutions in areas where there are gaps in laws passed by Parliament.

Such is the case of the mutuality principle, which is a body of case laws established internationally, which seeks to clarify the fact that it is virtually impossible for an entity or a person to trade with itself and therefore benefits from earning an income simultaneously.

Consequently, any income, profits or gains earned by these associations, societies, unions or clubs as a result of achieving its mutual objectives should not be caught within the provisions of the ITA.

However, one should be cautious, as not all profits or gains are covered by the principle of mutuality. Where an association, club or society engages the public and earns profits, gains or income, it defeats the principle of mutuality and may be taxed in accordance with the provisions of the ITA.

If this is the case, then what profits or gains are to be treated as being exempted in accordance with the mutuality principle? It is safe to say that only income or profits earned from those membership dues or subscriptions collected from their members to achieve a mutually beneficially objective are to be exempted. But that seems quite ludicrous, given increases in inflation locally and the costs involved in properly operating associations and societies that are to advocate and advance arguments with an objective of benefiting their members.

These issues and others compel not-for-profits to be creative in their operation within the confines of the taxation laws in order to achieve their mandates.

Kerwin D. Hamil
Taxation, Accounting and Finance Professional
Lecturer
University of Technology, Jamaica

NOTE: This article first appeared in the Jamaica Gleaner, titled “Tax Implications of Mutuality and Not-for-Profit Organisations in Jamaica”

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