Income tax exemption for gaming machine income of gaming trusts

Section CW 40B of the Income Tax Act 2004

The Income Tax 2004 has been amended to provide an exemption from income tax for the gaming machine income of gaming trusts. Under the previous rules, gaming trusts were able to apply for an exemption from RWT.

Background

During the select committee stage of the Charities Bill (now the Charities Act 2005) an issue was raised concerning the impact of the new legislation on gaming trusts. Specifically, the concern related to the fact that gaming trusts which are already subject to a regulatory regime imposed by the Department of Internal Affairs (under the Gaming Act 2003) would be subject to a second tier of supervision by the Charities Commission. This could result in conflicting objectives and influence their decisions on how they split their funding between sporting and recreational bodies on one hand and charities on the other.

Under the previous rules, a gaming trust could qualify for an income tax exemption under section CW 34 or CW 35 of the Income Tax Act in respect of its charitable purposes, and under section CW 39 for the promotion of amateur games or sports. As a result of the Charities Act 2005, from 1 October 2007 entities that wish to obtain a tax exemption for "charitable income" under sections CW 34 or CW 35 will be required to register with the Charities Commission.

However, to become a licensed gaming machine operator, gaming trusts are required to apply or distribute net proceeds only to or for an authorised purpose. An "authorised purpose" can include a charitable purpose and a non-commercial purpose that is beneficial to the whole or a section of the community. A non-commercial purpose can include the promotion of amateur sport. Although both purposes are authorised purposes and would qualify for a tax exemption, the promotion of amateur sport does not require the additional compliance costs of registration under the Charities Act. Consequently, under the previous trust it is more likely that gaming trusts would have opted to support amateur sport and rely on the section CW 39 tax exemption. This would have resulted in a reallocation of funds away from charities in favour of supporting amateur sport.

Key features

The new exemption removes these concerns. New section CW 40B of the Income Tax Act provides an exemption for gaming machine income of gaming trusts, in the hands of licensed operators, provided that they apply or distribute it as required by the Gambling Act 2003. This exemption means that gaming trusts would not have to rely on any of sections CW 34, CW 35 or CW 39 of the Income Tax Act for an income tax exemption.

Application date

The new section will apply from the date of enactment, 3 April 2006.