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Ruling

Subject: Income Tax Exemption - Encouragement of a game or sport

A sporting club which has been established for the encouragement of a game or sport and which is not carried on for the purposes of profit or gain to its individual members is exempt from income tax in accordance with paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997 subject to the special condition under section 50-70 of the ITAA 1997 which states that:

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:  

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

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

(f) 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.

We consider that the Club has a physical presence in Australia and incurs its expenditure and pursues its objectives in Australia.

In accordance with Taxation Ruling TR 97/22, for a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy three tests:

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

· it must encourage a game or sport;

· that encouragement must be the club's main purpose.

Where a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997. However, in calculating its assessable income it is subject to the mutuality principle. Broadly, this means that member receipts (which include members' subscriptions and trading income relating to members) are not included in the clubs assessable income for tax purposes: see Taxation Determination TD 93/194 in relation to subparagraph 23(g)(iii) of the Income Tax Assessment Act 1936 which is equivalent to section 50-45 of the ITAA 1997.

Test 1 It cannot be carried on for profit or gain to individual members

Section 50-45 of the ITAA 1997 requires that the club is not carried on for the purposes of profit or gain of its individual members. Where members, in their individual capacity, are to receive benefits from the club, the club would not satisfy this test.

Benefits received by members communally as members, for example the use of the club facilities, where these benefits are incidental to the pursuit of the clubs objects, do not prevent the club from satisfying this requirement, nor does the payment of reasonable remuneration to members for services they provide to the club.

Relevant clauses of the Constitution strongly indicate the intention of the Club to comply with the non-profit requirement. Nothing in the Club's activities indicate that the non-profit requirement is not adhered to.

It is accepted, based on the constituent documents, objects and activities, that members are not in receipt of benefits individually and that the club satisfies this requirement.

Test 2 encouragement of sport

Encouragement is not defined in the ITAA 1997. TR 97/22 re-states the Macquarie Dictionary meaning: stimulation by assistance. Paragraph 11 of TR 97/22 then provides a number of examples of what activities are contemplated as constituting direct and indirect encouragement.

The club has advised:

· There are currently X members.

· There is a manager and committee to coordinate and manage events.

· There are currently a number of events.

· Provides a pathway in the sport from beginner to elite level, with the club participating in competitions.

· In the last X years a number of players have gone on to represent in competitions nationally and internationally.

· The Club has a number of facilities and competitions, and encourages various sporting activities.

· It also contributes funds for a junior sports fund.

· It is accepted that the activities of the Club include activities that encourage sport.

Test 3 that encouragement must be the club's main purpose

In order to determine the tax status it is necessary to determine the main purpose of the entity by reference to its objects and activities in the relevant year. In St Mary's Rugby League Club v. FCT 97 ATC 4528; 36 ATR 281 (St Marys case) Hill J stated:

The law governing the interpretation of the exemption was authoritatively settled in the judgment of a Full Court of this Court in Cronulla-Sutherland Leagues Club Ltd v FC of T where it was held that the exemption was available in the circumstances where the applicant had as its main object or purpose in the years of income the object referred to in the subsection, namely, as the section presently stands, the encouragement or promotion of a game or sport.

The question is thus one which goes to the character and nature of the applicant. That a question of characterisation is to be determined having regard to the objects, purposes and activities of the taxpayer.

In Cronulla-Sutherland Leagues Club Ltd v. FC of T 90 ATC 4215 at 4225; (1991) 21 ATR 300, Lockhart J in the Full Federal Court said:

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 Club's objects, set out above, are clearly supportive of a sporting purpose and this purpose is reflected in its activities.

The sporting activities of the Club are significant in terms of money and staff, including volunteers. Surpluses generated by the Club's non-sporting activities subsidise the losses from the Club's sporting activities which consistently run at a loss of $X. Without this direct financial assistance, the sporting activities of the Club would not be able to be sustained.

The operation of the club's motel generates additional income which the Club is able to use in furtherance of its activities. It supports the sporting activities directly by enabling the Club to accommodate people attending competitions run by the Club. In St Marys's Rugby League Club Limited V FC of T 97 ATC 4528Hill J stated in relation to the possible use of surplus funds to build a motel:

I do not think that the evidence permits me to reach a conclusion, one way or the other, as to the proposed use of the funds. I should say, however, that if the Club were to proceed with the building of a motel, as foreshadowed in the 1993 Annual Report, the conclusion that it was established for the purpose of ``the promotion or encouragement'' of rugby league would become progressively more difficult to arrive at.

Hill J did not say that the operation of a motel would lead to a conclusion that St Mary's was not operating for the encouragement of sport, only that it may of itself weaken the case in support of the encouragement of sport. This might be the case where the motel operated for purposes other than the encouragement of sport. The club has advised that a certain percentage of the short-term accommodation complex's patrons stay there for club sporting events. Rooms are block booked for these and only released for other visitors when sporting numbers are confirmed.

The Club, to a lesser extent, is involved in a variety of other sports in addition to their main sport. A certain percentage of the total area of the Club premises is used for sport.

Of the Club's members who attend each year, approximately X percent attend the club for sporting purposes.

The club has advised that voting members are mostly sports people. Voting members vote at general meetings and can vote on changes to the constitution. Only voting members can be nominated to the Board.

Approximately six percent of overall expenses are directly related to sports activities. However, much of the non-sport expenses are incurred in generating the funds that ultimately support the sporting activities. This would be consistent with the decision in the FC of T v Word Investments Ltd 2008 ATC 20-072.

The Club's recreational facilities both in design and function are meant to enhance the sporting activities of the Club. The Club recreational facilities adjoin the sporting facilities and the décor is also designed to enhance the sporting activities of the club.

Quote from Grand United Port Macquarie West-Bowling Club & FCT:

26. The disinterested observer alighting from his Clapham omnibus and entering the premises of West Port on a Friday evening would no doubt have been most aware of non-sporting activity but even so, he could hardly fail to appreciate that he was in the clubhouse of a bowling club with the clubhouse set beside bowling greens. Had he attended in hours of daylight and not limited his appraisal of what was about him, his overwhelming impression would have been of attendance at a bowls club.

The facts in St Marys Rugby League Club Limited v. FC of T 97 ATC 4528 bear marked similarities to the facts in relation to this matter in that both Clubs operate significant recreational facilities, undertake significant sporting activities, and have a high number of management and voting members who were active or had been active in sport in one form or another.

The constitution, activities, history and control point to the characterisation of the Club as one having its main object or purpose to that of promoting the relevant sport. The objects record the significance of the specific sport as the major object of the Club. Control of the Club effectively vests with members. The membership structure gives emphasis to voting members the majority of whom are the relevant sport's supporters. The activities of the Club involve both social and sporting activities. Although income is derived from the social activities and the sporting activities constitute an outgoing, there is an intensity of activity directed towards sport. The history of the Club is one of close association with its specified sport from its inception and again points to the correct characterisation as being one for ``the encouragement or promotion'' of a game or sport.

The combination of these factors leads us to the conclusion that the Club satisfies the requirements for exemption from income tax under item 9.1 (c) of s50-45.

Note that as the club is considering expansion it will need to review its status in future years.

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