Edited version of private ruling

Authorisation Number: 1011704651708

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Ruling

Subject: Sporting Club

Facts

The Club has applied for a private ruling on whether the Club is exempt from income tax as a society, association or club established for the encouragement of a game or sport in accordance with section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997).

The objects of the Club are concerned with promoting and playing the relevant sport and providing facilities for members.

The constitution contains suitable non-profit and winding up clauses

The constitution provides for several membership categories (including ordinary members and life members)

A person need not be interested in the relevant sport to be a member

Only ordinary members and life members can be on the Board

To further its objects the Club does the following:

· fields relevant sports teams

· operates club houses

· hires/leases fields

· employed a Development Officer

· sponsors school competitions

· provides financial support to other sporting groups and charities

The two club houses generated substantial net profit in the years

The Club has not used its net surplus, other than to upgrade clubhouse facilities

Detailed reasoning

A society, association or club which has been established for the encouragement of a game or sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1 of the ITAA 1997.

Society, association or club

The term society, association or club is not defined in ITAA 1997. The term is therefore construed according to its ordinary meaning.

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW), Sugerman JA defines society at 82:

A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association"

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two.

Paragraph 2 of Taxation Determination TD 95/56 considers the definition of 'association' as follows:

…The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The Macquarie Dictionary 2001, 5th edition (The Macquarie Library Pty Ltd, Macquarie University) defines 'club' as a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members.

The Club is a company limited by guarantee. The objects of the Club are to play, support and promote the relevant game, and provide a clubhouse, sporting and social facilities to members. The Club is considered to be a society, association or club in the years, and we consider the Club will be a society, association or club in a future year.

For the Club to be exempt from income tax as a society, association or club established for the encouragement of a game or sport, it needs to satisfy the following three tests (as set out in paragraph 7 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs):

· It cannot be carried on for the purposes of profit or gain to its individual members

· It must be for the encouragement of a game or sport, and

· That encouragement must be the club's main purpose

TR 97/22 states at paragraph 8 that where a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997.

Non-profit

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs states the following on the non-profit requirement:

Non-profit requirement

9. A club must not be carried on for the purposes of profit or gain to its individual members.

10. A club's Memorandum and/or Articles of Association or other 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. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition.

The ATO publication Income tax guide for non-profit organisations states:

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. The profits must not be distributed to owners, members or other private people.

The Club's constitution prevent the income and capital of the Club from being distributed to the benefit of its members both while the Club operates and when it winds up. There is nothing in the facts to indicate that the Club is acting, or will act, contrary to the prohibition. The club satisfied the non-profit requirement in the years, and will satisfy the requirement in a future year.

Encouragement of a game or sport

Game or sport

There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997, hence, those words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that would be considered as 'sport', and includes 'Football (all codes)' at paragraph 38

The Club is concerned with the relevant sport. We consider the Club to be concerned with a game or sport in the years, and will be concerned with a game or sport in a future year.

Encouragement

Paragraph 11 of TR 97/22 states that according to the Macquarie Dictionary, 'Encouragement' means 'stimulation by assistance'. Encouragement can occur directly by:

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

· coordinating activities

· organising and conducting tournaments and the like

· improving the abilities of participants

· improving the standards of trainers and coachers

· 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 constitution of the Club indicates that the club is concerned with playing, supporting and promoting a particular game. To this end the Club, in the years, undertook activities that encouraged the game or the sport. The club fielded teams in the sports competitions in the years, and was involved in the training and development of its players and coaches. The Club employed a Development Officer in the years to promote and develop the game of the relevant sport. The Club also leased/hired sporting fields and change rooms, which were used for the training of players and to play home games of the Club's teams. We consider that the Club was encouraging a game or sport in the years, and will be encouraging a game or sport in a future year.

Main purpose

The test to be applied to determine whether a society, association or club is established for the encouragement of a game or sport was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. 90 ATC 4215:

For a society, association or club to qualify for the exemption… it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. 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 (at 4225).

TR 97/22 provides the following commentary regarding the 'main purpose' test:

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.

42. 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. …

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 of purposes…

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.

To determine whether a club is established for a game or sport in a particular year of income, Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. (supra) stated:

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 of the body seeking the exemption 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… (at 4225).

TR 97/22 lists features of a club that the ATO considers highly persuasive or relevant but less persuasive in identifying whether a club was/is established for the encouragement of a game or sport in an income year. Paragraph 15 of TR 97/22 identifies the following features as highly persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport:

· the club conducts activities in the relevant year that are directly related to the game or sport

· the sporting activities encouraged by the club are extensive

· the club uses a significant proportion of its surplus funds in encouraging the game or sport, and

· the club's constituent documents emphasis that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents

The objects of the Club indicate that the club is concerned with playing, supporting and promoting the relevant game, and providing a clubhouse, sporting and social facilities for the benefit of members. The objects emphasise that the Club will enable interested persons to participate in or support the game.

The activities of the Club distinguish it from the circumstances in the In Cronulla Sutherland Leagues Club Ltd v F.C. (supra), and South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150 cases. In those cases, the clubs were not undertaking the sporting activities they supported. Rather, in both cases there was a separate entity which conducted the sporting activities, and the sporting activities of the separate clubs could not be attributed to the clubs. In the present case, the Club conducts its own sporting activities and is directly involved in encouraging the sport.

In the years the Club fielded teams in the sports competitions

The Club does not own sporting fields or change rooms, but in the years leased/hired sporting fields and change rooms, which were used for the training of players and to play home games of the Club's teams.

The club also sponsored competitions between schools in the years, employed a Development Officer to promote the game, and funded charities and other sporing groups in the area.

In the years the Club had social facilities. The Club generated significant net profit from club activities in the years, and anticipate a profit from club activities in the future. In the years the Club generated a loss from its relevant sports activities, and anticipate a loss in the future year. The relevant losses in the years were funded by the profits generated by the club activities, and it is anticipated the same will occur in the future.

The club has not provided a business plan that outlines how its profits will be used, but has stated the profits of the club are used to modernise the club facilities, and to acquire land for its relevant sport activities.

In its submission the Club recognises that its social activities are extensive, and that they could be seen an ends in themselves. We agree. Although the Club does have significant sports activities, the club has clubhouses in which extensive social activities are undertaken. These social activities have generated substantial net profits in the years, and the retained cash holdings. However the only capital expenditure has been on modernising non-sporting club facilities and the only planned capital expenditure is for renovation of the non-sporting club facilities. The Club stated that its main reason for not purchasing relevant sports fields is that there is a shortage of suitable land in the CBD. There is no plan to purchase grounds elsewhere in the area and there is no evidence that the Club plans to use its substantial surplus to promote relevant or any other sport.

The Club does fund its relevant sport activities from the profits generated by its clubhouse activities but at a significantly lower rate than in Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 or St Marys Rugby League Club Limited v FC of T 97 ATC 4528.. For example in Terranora, see 93 ATC 4077-4078, the social/non-sporting income in 1989, 1990 and 1991 was $1,104,000, $1,493,000 and $2,178,000 respectively. The amount sporting activities were subsided in 1989, 1990 and 1991 were $1,060,00, $1,101,000 and $1,375, 000 respectively. This amounts to 96%, 74% and 63% of social/non-sporting profits being used in 1989, 1990 and 1991 respectively to fund sport activities. In comparison in the relevant years the Club used less of its retained social/non sporting profits to fund sporting activities. In St Marys, see 97 TATC 4533, in 1992, 1993, 1994 and 1995 the percentage of non-sporting profits used for funding football was 23%, 35%, 39% and 28% respectively.

Furthermore in the St Marys Rugby League Club Limited (Supra) case it was emphasised that significantly more time and effort was taken to field the teams that to undertake the social activities. In that case from 1992-1995 the wages spent on the relevant sport significantly exceeded wages spent on undertaking the social activities. In comparison in the years the Club had only one employee dedicated to promoting or engaging in the relevant sport activities but had over 100 employees engaging in other activities.

The participation of the Club's members in the promotion of the game or sport is also quite small. While it is recognised that older members may not be able to play the game given its physical demands, of the Club's members in the years, only comparatively small number participated in or spectated the sport weekly, compared to approximately a larger amount that attended the clubhouses weekly and used the social facilities.

Paragraph 15 of TR 97/22 identifies the following features as relevant but less persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport:

· 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).

The Club's constitution provides for 6 membership categories; ordinary member, life member, honorary member, temporary member, provisional member and junior member. All members can participate in the sporting and social activities of the Club. Only ordinary members and life members have the right to vote at general meetings of the Club, and are able to be elected as directors of the Club.

Ordinary membership is open to all persons over the age of 18 who have an interest in the relevant sport and playing in or assisting with the teams of the Club and all persons desiring to participate in the sporting and social activities of the Club or desiring to enjoy the facilities or amenities of the Club.

The Board of Directors (the Board) is responsible for the business and affairs of the Club, and the Secretary is given charge of all relevant sporting activities but is required to abide by the directions of the Board. There is nothing in the constitution that requires the Board of Directors to be comprised by persons concerned with the game.

The governance of the Club is distinguishable from the circumstances in the St Marys Rugby League Club Limited (Supra) case. In that case the constitution of St Mary required that the club be managed by 'sporting members' and the classes of members all require being current or past players of the sport or supporting the sport "by reason of consistent attendance at relevant matches or personal effort in relation to the organisation, coaching, managing or otherwise carrying out work or duties in relation to the playing of the relevant sport. The constitution of the Club does not require the Club to be managed by people concerned with the game or sport (although, in the relevant periods there was/is a strong representation of people involved in the encouragement of the relevant sport on the Board of the Club (including past and present players, coaches, and volunteers)) . Only ordinary members and life members of the Club can be elected to the Board. Membership to the club is open to people interested in the relevant sport or those desiring to enjoy the facilities or amenities of the club. A person does not have to be interested in the sport to be on the Board. The constitution of the Club allows for it to be managed by members with an interest only in the social activities of the Club.

After considering the Club's features and operation in the years, the Club is not considered to have, in both of those years, the main purpose of encouraging a game or sport, and it is not considered that the club will have that main purpose in a future year.

Special Requirement

Section 50-70 of the ITAA 1997 provides that an entity covered by item 9.1 of section 50-45 of the ITAA 1997, 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 of the ITAA, 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

It has already been determined that the Club is a society, association or club which is not carried on for the purpose of profit or gain of its individual members.

In this case, the relevant test is a) - the entity must have a physical presence in Australia. The Club is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia. Therefore this requirement is met.

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