Edited version of private ruling

Authorisation Number: 1011544600167

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Ruling

Subject: Income tax exempt status

Question

Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an association established for the encouragement of sport under item 9.1 of the table in section 50-45 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 2009 to 30 June 2012

Relevant facts and circumstances

The Company is a public company limited by guarantee and is governed by a Constitution.

The Company's main object and purpose is the encouragement of the game of X.

The Company's Constitution contains suitable non-profit and dissolution clauses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1,

Income Tax Assessment Act 1997 section 50-45,

Income Tax Assessment Act 1997 section 50-70 and

Income Tax Assessment Act 1997 section 30-15.

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ordinary income and statutory income of the entities covered by the tables in Subdivision 50-A of the ITAA 1997 are exempt from income tax.

Under item 9.1 of the table in section 50-45 of the ITAA 1997 a society, association or club established for the encouragement of game or sport is considered an exempt entity provided that it meets the special conditions outlined in section 50-70 of the ITAA 1997.

The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it:

(a) has a physical presence in Australia, and to that extent, incurs it expenditure and pursues its objectives principally in Australia; or

(b) is a deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; or

(c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is a resident.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, describes the circumstances under which a society, association or a club (a club) is regarded as being established for the encouragement of sport.

Paragraph 7 of TR 97/22 states that for a club to be exempt from income tax under section 50-45, it needs to satisfy three tests which are as follows:

1. It cannot be carried on for the purpose of profit or gain to its individual members.

2. It must be for the encouragement of a game or sport.

3. That encouragement must be the club's main purpose.

Each of the requirements will be considered in turn.

Non-profit

A club must not be carried on for the purpose of profit or gain to its individual members. Its constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and on its winding-up.

The Company's Constitution states that no income or property will be paid, transferred or distributed to any Member of the Company whilst it is operating and on winding up any surplus assets will be transferred to another organisation with similar objects.

The Company's Constitution has the required clauses and therefore satisfies the non-profit requirement.

Encouragement of a game or sport

Paragraph 11 of TR 97/22 states that 'encouragement' means 'stimulation by assistance'. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club.

Encouragement can occur directly by:

· forming, preparing and entering teams and competitors in competitions in the game or sport;

· co-ordinating activities;

· organising and conducting tournaments and the like;

· improving the abilities of participants;

· improving the standard of trainers and coaches;

· providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors; or

· encouraging increased and wider participation and improved performance;

and can occur indirectly:

· through marketing; or

· by initiating or facilitating research and development.

There is no special definition of what constitutes a 'game' or 'sport' for the purposes of section 50-45 of the ITAA 1997. Accordingly those words take on their ordinary meaning.

Activities that could be games or sports may be merely a means to other ends. This is so where the activities themselves are not organised in a sport or game-like way, and some other purpose is predominant. For example, while the activity of dancing could be organised in a game or sport like way, it is commonly a means of promoting sociability, participation and relaxation. In such cases it does not constitute a game or sport.

Consideration is also given to the intention of the participants and whether they consider they are participating in a sport, whether rules or concessions exist over the activities conducted and also if any competition takes place.

Games or sports that are considered acceptable as outlined in TR 97/22 include: tennis, table tennis, bowls, football and golf, provided they satisfy the features outlined above.

The Company's main object stated in the Constitution is the encouragement of the game of X which is considered to be a game or sport that is acceptable.

Main purpose

To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. If the main purpose becomes the carrying out of other activities, the club is not exempt, nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes.

The determination of a club's main purpose in the relevant year of income is a matter of fact and degree. In Cronulla Sutherland, Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312:

'The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.'

Section 50-45 of the ITAA 1997 looks to the year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport.

In order to identify a club's activities, regard would normally be had to sources such as:

· the club's constituent documents;

· resolutions of the committee or of the persons controlling the direction of the club;

· minutes of meetings of that committee or of those persons;

· the club's business plans;

· promotional material concerning the club's activities; and

· published reports about the club, such as its annual report.

A highly persuasive feature that supports a conclusion that a club has a main purpose of encouraging a game or sport is that the club conducts activities in the relevant year that are directly related to the game or sport. Examples of such activities include:

· participating in competitions or tournaments involving the game or sport;

· bringing into existence, organising and running such competitions or tournaments;

· providing referees, umpires or other officials for the game or sport;

· coaching participants in the game or sport;

· encouraging club members to be spectators at and to support the game or sport; and

· fundraising, for specific events in the game or sport in which the club's teams or competitors are involved, such as organising raffles to fund a club member's participation in an overseas event.

Based on the objects in the Constitution and information provided by the Company in relation to its proposed activities, it is evident that the Company's purpose is solely for the encouragement of X. The Company will offer scholarships to any talented male or female junior X residents. The minimum age is 15 years. There will be no limit on the number of scholarship holders. Each scholarship will be subject to annual review. Therefore it is accepted that the Company's main purpose is to encourage sport.

Special conditions

The Company meets special condition (a) as it has a physical presence in Australia and to that extent intends to incur its expenditure and pursue its objectives principally in Australia.

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