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Recreational Clubs and tax

This first article of three briefly discusses the essence and responsibilities of forming a recreational club; in articles two and three, the following taxes that may affect organisations approved as recreational clubs will be discussed:

• Income tax
• Donations tax
• Estate duty
• Transfer duty
• Dividends tax
• Securities transfer tax
• Skills development levy
• Capital gains tax
• Value-added tax
• Employees’ tax
• Unemployment insurance fund

The reader will notice that forming a club is not as simple as it seems; to enjoy tax benefits a number of criteria must be complied with.


“basic exemption” means the amount determined as a threshold and applied to the total receipts and accruals which do not qualify for a specific exemption contemplated in section 10(1)(cO)(ii);
“Companies Act” means the Companies Act 71 of 2008;
“fiduciary” means a person who holds a position of trust or responsibility including decision-making powers over the affairs of a recreational club;
“founding document” means the written instrument under which a recreational club is established and governed such as the constitution or memorandum of incorporation;
“income tax” means the normal tax payable by a taxpayer under the Act;
“Minister” means the Minister of Finance;
“NPC” means a “non-profit company” as defined in section 1 of the Companies Act;
“partial taxation” means the method of taxing the receipts and accruals derived from any other source or activities which fall outside the parameters of the exemptions including the basic exemption as set out in section 10(1)(cO)(ii);
“PBA” means a public benefit activity listed in Part I of the Ninth Schedule;
“PBO” means “public benefit organisation” as defined in section 30(1) which has been approved by the Commissioner under section 30(3);
“prescribed requirements” mean the formal conditions and requirements set out in section 30A(2)(a), which an organisation must comply with in order to qualify for approval as a recreational club;
“recreational club” means a “recreational club” as defined in section 30A(1) which has been approved by the Commissioner under section 30A(2);
“section 10(1)(cO)” means the section that provides for the exemption from income tax of certain receipts and accruals of a recreational club and the taxation of receipts and accruals which fall outside the parameters of the exemptions provided in that section;
“section 30A” means the section which sets out the conditions and requirements that an organisation must comply with in order to obtain and retain approval as a recreational club;

Clubs are formed for the mutual benefit of members who contribute to share the cost of providing a collective benefit, namely, the social or recreational facility. The common objective of recreational clubs excludes personal financial gain of individual members. Under this principle, the sharing of expenses by various members joining together based on mutuality, does not generate additional taxable income for the recreational club and it is to this extent that clubs enjoy preferential tax treatment.

Sporting organisations qualifying for preferential tax treatment may be divided into two categories, namely –

• recreational clubs; and
• amateur sporting bodies generally approved as PBOs.

Although both categories qualify for exemption from income tax on certain of their receipts and accruals, they are approved under different sections of the Act, each section having its own requirements and conditions.

The Tax Exemption Unit (TEU) is a dedicated office within SARS established to:

• consider all applications by organisations for approval as a recreational club; and
• raise assessments on recreational clubs.

The centralisation of the approval and assessment processes is intended to promote uniform treatment by SARS. The TEU also monitors compliance by approved recreational clubs with the legislative requirements in order to prevent malpractice and abuse.


The SARS Commissioner will approve an organisation as a recreational club only if:

• its sole or principal object is to provide social and recreational amenities or facilities for the members of that recreational club; and
• it complies with all the conditions and requirements of section 30A as detailed.

The approval as a recreational club is generally effective from the date the approval is granted by the Commissioner, unless the Commissioner advises otherwise.
An organisation approved as a recreational club is subject to partial taxation.

For an organisation to be approved as a recreational club, it must be constituted in one of the following ways:

• An NPC incorporated in South Africa.
• An association established in South Africa as a voluntary association of persons.
• A society formed in South Africa by a group of persons who are the members of such society.

Pre-existing companies incorporated or deemed to be incorporated under section 21 of the repealed Companies Act 61 of 1973 continue to exist under the Companies Act and will qualify for approval as a recreational club provided all the conditions and requirements of section 30A are complied with.

A trust is not an association of persons or a society and therefore does not qualify for approval as a recreational club. A trust does not have members that share collectively in a common purpose. Furthermore, the beneficiaries of a trust are not members of the trust.

Examples of recreational clubs providing social and recreational amenities or facilities

  1. A golf club providing grounds and facilities for playing the game of golf.
  2. Social and recreational clubs providing recreational facilities such as tennis courts, a swimming pool, squash courts and social facilities such as a restaurant or a bar.
  3. Soccer, tennis or rugby clubs providing members with the facility to play the relevant sport.
  4. Vintage car clubs, motorcycle or cycling clubs.
  5. Angling, flying, hang gliding, hiking, mountaineering or yacht clubs.
  6. Hobby clubs such as stamp collecting, literary, quilting or gardening clubs.
  7. Bird watching, dog breeders or photography clubs.


A recreational club must have as its sole or principal object the provision of social and recreational amenities or facilities for its members.

a. Sole or principal object

The word “principal” is used in conjunction with “sole” and this concept implies that the club must have as the predominant or foremost aim or objective the provision of social and recreational amenities or facilities for its members.

It will be unacceptable for a recreational club:

• to provide its facilities mainly to members of the public for, say, five days of the week and use the resulting income to subsidise the maintenance and upkeep of the facilities for use by its members over the weekend; and
• to engage in commercial activities in order to provide the necessary funds to maintain the social and recreational amenities or facilities for use by its members.

b. Social and recreational amenities or facilities

The amenities or facilities provided by the recreational club must be of a social and recreational nature which the members use for a pastime, hobby or to engage socially. Such amenities or facilities may, amongst other things, include:

• sporting facilities such as tennis courts, squash courts or polo fields; or
• a venue such as a clubhouse for meeting or getting together for members to socialise or partake in hobbies of mutual interest.

The provision of holiday accommodation is not regarded as the provision of a social and recreational amenity or facility for purposes of section 30A.

c. Members

The ordinary meaning of “member” is “a person belonging to a group or society”. Membership of a recreational club must be annual or seasonal.

A member is generally required to pay a membership fee for the use of the facility or for the right to belong to the club in order to share in the mutual interest, expenditure or facility provided by the recreational club.


An organisation that applies for approval as a recreational club must have a founding document.

The founding document will depend on the type of organisation established:

• An NPC will have a memorandum of incorporation.
• An association and a society will have a constitution adopted by its members.

The conditions set out above must be met in order to qualify for approval as a recreational club. In addition to those conditions the prescribed requirements below must be complied with and included in the founding document of the organisation. The founding document must be submitted to the Commissioner as part of the application for approval as a recreational club. The founding document as a whole will be examined to ensure that the prescribed requirements are included.


a. Fiduciary responsibility

A recreational club is required to have at least three persons who are not connected persons in relation to each other to accept fiduciary responsibility for the recreational club.

No single person may have the ability or authority, either directly or indirectly, to control the decision-making powers of the recreational club.

Natural persons are considered to be connected if they are relatives to one another. A relative includes a person’s spouse and anybody related to a person or the person’s spouse within the third degree of relation.

b. Manner in which activities must be carried on

The activities of the recreational club must be carried on in a NON-PROFIT manner.

Organisations operating for the financial gain of individual persons or members will not qualify for approval as a recreational club.

A recreational club may not conduct activities for purposes of making a distributable profit. It will be unacceptable for a recreational club to conduct profit-making activities in order to fund the cost of running the club. It is not always desirable from a club’s perspective to run on a break-even basis since clubs may need to create reserves for future expenditure such as the cost of replacing equipment, resurfacing tennis courts and replanting grass. The activities carried on by a recreational club should not be to maximise profits but rather to recover direct and reasonable indirect costs.


A recreational club may not distribute its funds directly or indirectly to any person, unless on dissolution. It must use its funds solely for the sole or principal object for which it was established, which is to provide social and recreational amenities or facilities for the members.

It will be unacceptable if funds are distributed by a recreational club by way of:

• making a loan to a member which is later written off;
• paying excessive salaries or wages which are not commensurate with services rendered; or
• donating assets to members.

The sale by members of their membership rights or any entitlement to them could also be construed as the indirect distribution of profits of a recreational club.


A recreational club may not, on dissolution, distribute any of its assets and funds to individuals or other tax-paying entities and in so doing enable the recipients to share in the tax concession which it has enjoyed.

On dissolution a recreational club must transfer its remaining assets and funds to one or more of the following organisations:

• another recreational club;
• a PBO;
• any institution, board or body exempt under section 10(1)(cA)(i) which has as its sole or principal object the carrying on of any PBA; or
• the government of the Republic in the national, provincial or local sphere contemplated in section 10(1)(a).

If a recreational club fails to transfer, or to take reasonable steps to transfer, its remaining assets as required, an amount equal to the market value of the assets not transferred less the amount of the bona fide liabilities of the recreational club, will be deemed to be taxable income which accrued to the recreational club during the year of assessment in which dissolution took place.


Employees, office bearers, members or other persons may receive remuneration from a recreational club for services actually rendered to that club provided the remuneration:

• is not excessive taking into account the particular service rendered and what is considered to be reasonable in the particular sector; and
• is not determined as a percentage of any amounts received or accrued to the recreational club.

It will be unacceptable for office bearers to be paid a salary without any obligation to perform any services other than attending meetings. It will, however, be acceptable to reimburse them for reasonable and actual expenses incurred. An honorarium paid to the secretary or treasurer will be acceptable provided it is reasonable. A salary paid to a person in the capacity of chairperson would generally not be acceptable. It may, for example, be acceptable for a manager, under an employment contract, to qualify for an incentive bonus of R10 000 if the annual target for a recreational club exceeds R100 000. However, it would be unacceptable if the manager qualified for an incentive bonus of 10% of the excess of the annual budgeted turnover.

The ultimate test remains whether the remuneration is reasonable in the sector in relation to the service rendered and the burden is on the recreational club to motivate that the remuneration is not excessive.


A recreational club may not be a party to or permit itself to be used for any transaction, operation or scheme, the sole or main purpose of which is or was to reduce, postpone or avoid any tax, duty or levy which would otherwise have been or would have become payable by any person under the Act or under any other Act administered by the Commissioner. This rule will apply irrespective of whether the recreational club itself or any other person benefits from the reduction, postponement or avoidance of any applicable tax, duty or levy.


A person responsible in a fiduciary capacity for the management or control of the income and assets of a recreational club and who intentionally fails to comply with any provision of section 30A or any provision of the founding document under which the recreational club has been established to the extent that it relates to section 30A, will be guilty of an offence and on conviction liable to a fine or to imprisonment for a period not exceeding two years.

This concludes article one of three.

Author Craig Tonkin

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