Edited version of private ruling

Authorisation Number: 1011684546119

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Ruling

Subject: Income Tax Exemption

Subject

Income Tax Exemption

What this ruling is about:

Is the Entity entitled to income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of game or sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Ruling:

The Entity meets all the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and is therefore entitled to income tax exemption under section 50-1 of the ITAA 1997.

This ruling applies for the following period

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commenced on

1 July 2009

The scheme that is subject to the ruling:

The Entity is incorporated as a company limited by guarantee.

The Entity's constitution contains an acceptable non-profit and dissolution clause.

The Entity's constitution included clauses supporting purposes of sport, games and to a lessor degree social facilities.

The Entity's constitution differentiates between sporting and social membership, with greater rights for sporting members.

The Entity has provided information regarding the various sports and games that it undertakes, its social facilities and the property it leases out.

The Entity provided financial information from its annual reports.

Assumptions

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

Reasons for decision

Issue 1

Question 1

Is the Entity entitled to income tax exemption under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of game or sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Detailed reasoning

The Entity has requested a private ruling on whether it is exempt from income tax under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, covers the circumstances under which a club is regarded as being established for the encouragement of a game or sport. For a club to fall within item 9.1(c) of section 50-45 of the ITAA 1997, it needs to satisfy the following three tests:

1. It must be a society, association or club;

2. Meet the requirements of section 50-70 (special conditions); and

3. Its main purpose must be for the encouragement of a game or sport.

1. Society, Association or Club

The Entity was incorporated as a company limited by guarantee and has been conducting activities permissible under its objects.

This requirement is therefore satisfied.

2. Section 50-70 of the ITAA 1997

Item 9.1(c) in the table in section 50-45 of the ITAA 1997 states that there are special conditions under section 50-70 of the ITAA 1997 which must be satisfied. Section 50-70 of the ITAA 1997 states:

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that:

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

(b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; 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 resident.

The constitution of the Entity contains suitable non profit and winding up clauses.

It has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It satisfies item 50-70(a).

The requirements of section 50-70 are therefore satisfied.

3. Main Purpose of Encouraging a Sport or Game

To satisfy item 9.1(c) in section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the main or dominant purpose of the Entity.

In Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner Of Taxation (1990) 90 ATC 4215; 21 ATR 300 (Cronulla-Sutherland case), which was a case where the Leagues Club sought income tax exemption as a club established for the encouragement of a sport, Lockhart J examined in detail the judgment of the High Court in the Royal Australasian College of Surgeons v FCT (1943) 68 CLR 436 and a later High Court case, Stratton v Simpson (1970) 125 CLR 138 and said at ATC 4225; ATR 312:

In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities.

For a society, association or club to qualify for the exemption granted by s 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

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.

The question is therefore whether in all the circumstances of this case the main purpose for which the appellant was established during the income tax years in question was the encouragement or promotion of rugby league football.

3.1 Encouragement of a game or sport

Paragraph 11 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs states:

11. 'Encouragement' means 'stimulation by assistance', according to the Macquarie Dictionary. 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

The Notes on Clauses of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 state:

The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support.

The Entity encourages participation of a game or sport through its sporting venue.

It is accepted the Entity meets the requirement of encouragement of a game or sport.

3.2 Main Purpose

To be eligible for exemption under item 9.1(c) of section 50-45, the Entity's main purpose must be to encourage a game or sport.

As stated above difficulties in determining main purpose can arise where a club conducts other activities, particularly social or commercial activities.

TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all the club's features and lists the following features in paragraphs 15 and 16 as indicating a club's main purpose.

15. Features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include:

· the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51);

· the sporting activities encouraged by the club are extensive (see paragraph 53);

· the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); and

· the club's constituent documents emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents (see paragraph 56).

16. Other features that are relevant but less persuasive include:

· a high level of participation by members in the game or sport (see paragraph 57);

· the members of the committee, or persons who control the direction, of the club are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from day to day management of the club) (see paragraph 58);

· voting rights in the club vest only in members involved in encouraging the game or sport, whether by personal participation or by encouraging participation by others (see paragraph 59); and

· the club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided (see paragraph 60).

As recommended by TR 97/22 each of the highly persuasive features listed in paragraph 15 above was considered in context to the Entity.

Each of the relevant but less persuasive features listed in paragraph 16 of TR 97/22 were also examined.

Analysis

TR 97/22 states that a clubs main purpose can only be ascertained after objectively weighing all of the club's features, stating in paragraph 47 that:

47. 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.'

And further in paragraph 14 that:

14. A club's main purpose can only be ascertained after objectively weighing all of the club's features, including those features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

While the Entity has shown that it has sporting activities it also undertakes social activities. TR 97/22 states:

41. 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.

43. However, if the main purpose becomes the carrying out of those 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. As Lockhart J said at ATC 4225; ATR 312:

'But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.'

44. Therefore, the fact that a sporting club also encourages social and other activities does not, of itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

In determining the Entity's main purpose it is necessary to consider the features described in paragraph 15 and 16 of TR 97/22. In so doing paragraph 14 of TR 97/22 notes that the presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

In consideration of the highly persuasive features it is determined the Entity undertakes sports and games, but also concurrently undertakes some social and recreational activities.

The Entity applies a proportion of its surplus funds to the development and running of both its sports and social facilities. However it has deliberately reduced sporting fees to encourage new players and its sporting activities are run at a loss while the social activities are run to produce a profit for the Club.

The constituent documents emphasise a dominant purpose of the provision of sport and game activities with a lesser emphasis on social and recreational activities.

In considering the less persuasive features listed in TR 97/22 the social and sporting membership is almost equally numbered. Supporting a sporting purpose is that the Entity limits the rights of social members and the Committees listed in its Annual Report are all bowling related. The Entity promotes itself as a sporting facility on its webpage, publicly emphasising the sporting facilities it provides and has a history of being established for the sport and a long tradition - since 1924 of promoting sport.

On this basis it is determined that the main purpose of the Entity is the encouragement of a game or sport.

Conclusion:

The Entity meets all the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and is therefore entitled to income tax exemption under section 50-1 of the ITAA 1997.

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