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Authorisation Number: 1011812733622

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Ruling

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

Does the club qualify for income tax exemption under sections 50-1 and 50-45 item 9.1(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

A club which has been established for the encouragement of animal racing 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 (a) 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 9.1 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:  

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

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

· 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 club operates in a State of Australia and therefore satisfies the first test.

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 be for the encouragement of 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.

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.

The club's constitution contains suitable non-profit and winding up clauses. The right and benefits available to members are not sufficient to breach the non-profit requirement and have been accepted as being so in the private ruling issued previously.

It is accepted, based on the evidence, that the club satisfies the non-profit requirement.

The main purpose must be for the encouragement of sport

TR 97/22 indicates that in order for an entity to satisfy this requirement, the entity must:

(i) be established for the encouragement of animal racing; and

(ii) that encouragement must be the entity's main purpose.

The phrase "established for the encouragement of animal racing" is not defined in the ITAA 1997, however, the Courts have considered its meaning in the context of section 23 (g)(iii) of the Income Tax Assessment Act 1936 which expresses the same ideas as section 50-45 of the ITAA 1997.

In Cronulla Sutherland Leagues Club Limited v. FCT 90 ATC 4215 at 4220; (1990) 21 ATR 300 at 306, Lockhart J explained the meaning of the word "established" as follows:

At first glance it might be thought that the use of the past tense "established", indeed, perhaps the use of "establish" in any tense, makes it necessary to look only to circumstances existing at the time of the incorporation or establishment of the body concerned to determine this question. This is not correct, Two criteria must be satisfied before the exemption form income tax is available: first, that the income is derived by a body that is not carried on for the purposes of profit or gain to its individual members, which necessarily looks to the circumstances existing in the relevant year of income; and secondly, that the body is a society, association or club established for the encouragement or promotion of the specified athletic game or athletic sport. I do not discern from the language of sec. 23 or the evident purpose of sec. 23(g) (iii) any reason for selecting different times for the application of the criteria.

The word "encouragement" is also given its ordinary meaning. Paragraph 11 of TR 97/22 states that "encouragement" means "stimulation by assistance" according to its ordinary meaning and can occur directly by:

· forming, preparing and entering teams and competitors in competitions

· 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

· encouraging increased and wider participation and improved performance

TR 97/22 also states that encouragement can occur indirectly through marketing or by initiating or facilitating research and development.

There is no definition of the words "animal racing" in section 50-45 of the ITAA 1997. The ATO publication, Income Tax Guide, page 26, provides some guidance, however, by stating that the phrase "animal racing" includes "horse racing and trotting, and grey hound racing".

With regard to evaluating whether an entity has as its main purpose the encouragement of animal racing, the approach which should be adopted was decided in Cronulla Sutherland Leagues Club Limited v. FCT, supra, where Lockhart J said at ATC 4225; ATR 312:

For a society, association or club to qualify for the exemption granted by sec. 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 its control. 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 established.

TR 97/22 provides further guidance by giving examples of features which are highly persuasive of a conclusion that the main purpose of an entity is to encourage a game or sport, as well as examples of features which are relevant but less persuasive of such a purpose. Whilst the examples relate to an entity whose main purpose is to encourage a game or sport, they can be applied by analogy to an entity whose main purpose is to encourage animal racing.

The relevant examples are summarised in paragraphs 15 and 16 of TR 97/22. Paragraph 15 contains a non-exhaustive list of features that are highly persuasive in supporting a finding that the main purpose of an entity is to encourage a game or sport. In particular:

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

· the sporting activities encouraged by the entity are extensive

· the entity uses a significant proportion of its surplus funds in encouraging the game or sport

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

Paragraph 16, on the other hand, gives a non-exhaustive list of relevant but less persuasive features of such a purpose. These features are:

· a high level of participation by members in the game or sport

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

· 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

· the entity 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

Applying these authorities and principles to the present case it is clear that the club's activities are related to X racing, which in turn qualifies as "animal racing" within the meaning of item 9.1(a) of the table in section 50-45 of the ITAA 1997. Therefore, the club will satisfy the requirement that it is established for the encouragement of animal racing if its constitution, activities, history and control indicate that this is in fact its main purpose. If the club has other purposes, these purposes must be incidental or secondary to the purpose of encouraging animal racing. In other words, the club will not qualify for exemption from income tax under item 9.1(a) of the table in section 50-45 of the ITAA 1997 if its other purposes are found to be of equal importance to its purpose of encouraging animal racing.

An examination of some of the club's activities discloses that it encourages animal racing as defined in paragraph 11 of TR 97/22 by:

· conducting thoroughbred horse race meetings at the above mentioned racecourses

· conducting horse training activities at those racecourses

· providing facilities for horse racing - namely, racecourse tracks and training and stabling facilities at the racetracks

The financial data for the years stated above show that both the club derives most of its revenue from racing and related activities: distributions from TAB, bookmakers fees, sponsorships, admission charges, membership fees, X and race-day catering and function centre revenues. Expenditure is incurred on prize money, race meeting expenses, administration, marketing, race-day catering and the function centre. Virtually all income and expenditure is related, either directly or as in the case of catering, indirectly, supporting X racing.

There is no doubt that conducting X race meetings is directly related to the encouragement of animal racing. The magnitude of this particular activity - in terms of both the number of race meetings held and the income generated from same - is therefore considered to clearly indicate that the club's main purpose is the encouragement of animal racing. Another feature of lesser importance which also supports this conclusion is the fact that free admission to race meetings is the primary benefit of becoming a member. In other words, people decide to become members of the club in order to pursue their interest in X racing rather than to participate in the hospitality / social activities which the club also undertakes.

The constitution, which describes the club's objects, is consistent with the abovementioned finding as it emphasises that the club's main purpose is to encourage animal racing. This is made apparent by the fact that whilst this clause allows the club to pursue other purposes, it only authorises the club to pursue them to the extent that they are incidental or secondary to the purpose of encouraging animal racing. This would be the case in relation to catering which is not directly involved with X racing, but by its very nature supports race day activities by adding to the race-day experience for the racing public who attend the race meetings each year at the club's racecourses.

Accordingly, the club is established for the encouragement of animal racing for the purposes of item 9.1(a) of the table in section 50-45 of the ITAA 1997.

ATO view documents

Taxation Ruling TR 97/22.

Other references (non ATO view, such as court cases)

Cronulla Sutherland Leagues Club Limited v. Commissioner of Taxation 21 ATR 300;(1989) 20 ATR 1404;21 ATR 300;(1990) 23 FCR 82;90 ATC 4215

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

No.

Other relevant comments

None.

Keywords

Exempt entities.
Sporting organisations.
Sports clubs.

Technical Assurance

None.

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