The tax treatment of clubs, societies and other not-for-profits (NFPs) could become clearer under proposals in the Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill.

The Bill proposes to confirm the treatment of membership subscriptions, increase the statutory deduction available to eligible smaller NFPs and reduce filing requirements. Inland Revenue has also released revised draft guidance on how the mutuality rules would apply if the proposed changes are enacted.  

So, what could the changes mean for clubs, societies and their advisers? 

Membership subscriptions would remain non-taxable

Membership subscriptions received by taxable NFPs (broadly an NFP not specifically exempt from tax) have generally been treated as non-taxable under the common law principle of mutuality.

However, in the April 2025 draft operational statement ED0265 Inland Revenue took the view that the mutuality principle does not apply to subscriptions and levies where an association was prohibited from distributing funds to its members.

The Bill proposes to address the implications of Inland Revenue’s change in position. Under the proposed amendments, membership subscriptions, fees and levies that would otherwise fall within the mutuality principle would generally be treated as exempt income for qualifying NFP organisations, despite the organisation being prohibited from making distributions to members.

A definition of a “not-for-profit organisation” is also proposed and includes organisations that are not carried on for the gain of their proprietors, members or shareholders and are prohibited from making distributions to them. Incorporated societies registered under the Incorporated Societies Act 2022 would also be included. 

The change is proposed to apply from the 2027–28 income year. 

Member trading is different

The proposed exemption for membership subscriptions does not mean that everything a club or society receives from its members would be exempt.

The distinction between a membership subscription and payments for goods or services remains important. Under current legislation, the mutual association provisions broadly overrides the common law mutuality principle where an association supplies trading stock or services to its members (the mutual association provisions are not being amended in the bill).

An example in the Bill commentary considers an incorporated society that charges annual membership subscriptions but also operates a bar and restaurant for members. While the subscriptions would be exempt under the proposed rules, amounts received from selling meals and drinks to members would be taxable.

For organisations deriving income from both membership fees and activities involving members, correctly identifying the nature of each income stream will be critical.

A higher statutory deduction for smaller NFPs

The Bill also proposes a significant increase in the statutory deduction available to eligible taxable NFPs.

Currently, qualifying organisations can claim a deduction of up to $1,000. The Bill would increase this to a maximum of $10,000 from the 2027–28 income year.

There is, however, an important boundary to watch. If an NFP's net income exceeds $10,000, it would not qualify for the statutory deduction. The proposal is therefore not a general $10,000 deduction available to every NFP.

For eligible NFPs with net income of $10,000 or less (before the deduction), it is envisaged that the increased deduction would effectively eliminate any income tax liability. These organisations would also generally not need to file an annual income tax return unless Inland Revenue specifically requests one.

Inland Revenue revisits mutuality guidance

Inland Revenue also released a revised draft operational statement ED0265: Mutual associations (including clubs and societies), reflecting the proposed changes and explaining how the mutuality and mutual association rules would apply to amounts received from members.

ED0265 is intended to apply prospectively from 1 April 2027 once finalised. Submissions close on 11 December 2026.

Incorporated societies also get some alignment

A separate remedial amendment in the Bill would address a mismatch between the tax rules and the Incorporated Societies Act 2022.

Some existing tax and GST concessions (e.g. the statutory deduction for NFPs) require an organisation's rules to prohibit distributions to members. However, the Incorporated Societies Act permits certain limited distributions, including payments such as hardship assistance or scholarships, without treating the society as being operated for members' financial gain.  This means that an Incorporated Society may be ineligible for NFP tax concessions.

The Bill proposes to align the eligibility requirements for relevant NFP tax concessions more closely with the tax rules.

For income tax purposes, the proposed alignment would apply from the 2024–25 income year, while the corresponding GST change would apply from 5 October 2023.

What should advisers be looking at?

Although the proposals are not yet law, advisers may want to review how their NFP clients derive income; in particular to separately identify the payments for membership subscriptions and payments for goods or services. The proposed $10,000 statutory deduction threshold will also be important for smaller NFPs.

The revised ED0265 is also worth reviewing while consultation remains open.