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Ruling
Subject : Income tax exemption

Question 1

Is the Club entitled to income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) being an entity described in item 9.1(c) section 50-45?

Answer

No

Question 2

Is the Club entitled to the FBT rebate as a FBT rebateable employer under section 65J of the Fringe Benefits Assessment Act 1986 being an entity described in subsection 65(h)?

Answer

No

Facts

The Club is a company limited by guarantee operating in a State.

The Club has self-assessed as exempt under s50-45 of the ITAA 1997. Following a letter from the Commissioner of Taxation in 2010 the Club elected to lodge returns in case it is in error taking this approach. It now seeks a private ruling that it is an exempt entity for the financial years 2005 to 1 April 2011.

The Club operated under a Memorandum of Association and Articles of Association until 2011 when it adopted a new constitution.

Objects

The objects of in the Memorandum of Association are to encourage sport and provide a sporting Club with all the usual facilities of a Club. The objects in the Constitution are the encouragement of a particular sport and other sports.

Non-profit requirement

The constituent documents contain suitable non-profit and dissolution clauses.

Membership

Membership is open to people over the age of 18 who have a desire to further the objects of the Club.

The Club's headquarters are at one clubhouse and it also has clubhouses at two other venues. Televisions showing sporting competitions are in all three clubhouses.

Venue 1 is used on weekends for local club matches, school competitions and sports expos. Sports offered at the expo include rugby league, Australian rules, soccer, touch football, hockey and netball.

Less frequent school carnivals and senior matches conducted at the premises.

Vacation coaching clinics are held during the school

Venue 2 is used most school days in summer by children and local amateurs. It is used for training in winter. Indoor sports are also played competitively and socially.

Venue 3 runs men's and women's sporting competitions and substantial social sport including cross-generational and mixed social competitions. State and national sporting competitions are also held.

All clubhouses display trophies won by teams sponsored by the Club, sporting honour, memorabilia signed by leading sporting personalities and photographs of successful teams from various years of competitions. Training facilities are provided at the clubhouses, particularly venue 1. Several national, state and local conferences and seminars have also been held at the Club.

Raffles and other fundraising activities occur all of the time at the Club to support one team or another with its sporting endeavours.

Additional encouragement of sport includes:

· establishing future competitions.

· development of young players.

Financial support to encourage sport is provided by way of grants, subsidies and sponsorships.

The Club funds five scholarships for school students including 3 sport-related scholarships.

Staff and volunteers coordinate all of the sporting activities.

Members or directors are not required to have or have had any involvement in sport.

Funding of the encouragement of sport is provided through the establishment of a large enough non-sporting membership to ensure financial viability. Surplus funds are applied to the encouragement of sport.

Chairman's Reports

The Club's Chairman's Reports for the years 2005 to 2010 provided with the application outline sporting activities including major expenditure and financial results.

Financial results noted in each report included:

· gross profit/surplus from bar sales

· net profit/surplus from poker machines

· operating profit

· depreciation

· sponsorship, grants, donations

· net profit/surplus before income tax

Income tax returns

Copies of company tax returns for the 2005 to 2010 years were provided. The returns disclose income and expenses items related to 'non-member' revenue. Mutual receipts from members expenses incurred to earn them are not disclosed. Sponsorships, grants and donations (which may be deductible in part and in full if paid to a DGR) appear not to have been included as deductions in some years.

The ATO received the returns in 2010. The returns were processed with the following outcomes:

· 2005 taxable assessment issued in 2010 with tax payable

· 2006 taxable assessment issued in 2010 with tax payable

· 2007 non-taxable assessment issued in 2010.

The 2008, 2009 and 2010 year returns are for the period ending 30 September for each year. Whilst an application for substituted accounting period has been approved the returns still await processing due to system problems. The calculation statements for each return indicate nil tax payable.

Statement of financial position 2010

The 2010 Statement notes "The principal activities of the company in the course of the financial year was the operation of a Registered Sporting and Community Club." Amounts disclosed in the statement include:

· Sales from bar trading

· Sales from poker machine operations

· Cost of sales

· Other income

· Admin expenses

· Cash and cash equivalents

· Property, plant & equipment

· Investment property

· Player payments

· Ground maintenance

· Lighting (estimate)

The ATO requested further information in May 20XX and the Club provided the following response:

It is impossible to separate attendances for sport from attendance for other purposes but clearly attendance for other purposes is incidental to, and ancillary to sport. The clubhouses look over its sport venues. People come to the Club to watch and play sport and then also buy a meal and drink and use the gaming facilities. Most sport is played on Friday night, Saturday, Saturday night and Sunday and most sales income is derived then. People become members and attend the Club because it is committed to the encouragement of sport and spend money there knowing it is to encourage sport - including the sport that they their children and their friends in the local community play.

Financial statements

The 2006, 2008 and 2009 statements were provided on request.

The statements show that the Club's revenue includes:

· sales from bar trading

· Sales from poker machines

· Interest

· Rent received

· Sale of assets

· Other revenue

Other information regarding the Club's operations from the statements shows that revenue was also derived from membership, rebates, ATM, TAB and KENO:

General expenses include:

· Bar - COGS

· Poker machine tax

· Poker machine promotions

· Poker machine fees and rent

· Advertising

· Bus expenses

· Entertainment

· Employee expenses

· Sky channel

· Grounds maintenance

· Groundsmen wages

· Sports development

· Grants/donations

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997. Section 50-45

Income Tax Assessment Act 1997. Section 50-70

Fringe Benefits Assessment Act 1986. Section 65(J)

Reasons for decision

Question 1

Is the Club entitled to income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) being an entity described in item 9.1(c) section 50-45?

Summary

The Club is not entitled to income tax exemption under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) being an entity described in item 9.1(c) section 50-45?

Detailed reasoning

Income tax exemption

Section 50-1 of the ITAA 1997 states: 

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. 

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. Item 9.1(c) in the table in section 50-45 of the ITAA 1997 describes a society, association or club established for the encouragement of a game or sport subject to the special condition contained in section 50-70 of the ITAA 1997.

An entity may therefore be exempt from income tax where it is a society, association or club established for the encouragement of a game or sport and it satisfies the special condition in section 50-70.

Society, association or club 

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

Taxation Determination TD 95/56 refers to the definition of 'association' in paragraph 2 and states:

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.

See also Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722; Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 at 4279 and Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW) at 82:

The ordinary members of the Club are members of the general public who are 18 years or more having a desire further the objects and aims of the Club. They voluntarily associate together for this common purpose and interest. The Club is considered a 'society, association or club'.

Encouragement of a game or sport:

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 in the notes on clause 6 states in relation to 'encouragement' and 'game or sport':

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.

Similarly, there is no special definition of what constitutes a "game" or "sport". However, the words are intended to be given their wide natural meanings. They extend to non-athletic games such as chess and bridge; to sports such as motor racing in which machines facilitate the competition of people; and to non-competitive activities such as mountaineering. The activities of pony clubs are also within the meaning of the words.

The Macquarie Dictionary defines 'encouragement' as '1. the act of encouraging; 2. the state of being encouraged; 3. that which encourages' and defines 'encourage' to include 'stimulation by assistance'. Taxation Ruling TR 97/22 - Income tax: exempt sporting clubs - provides extensive examples of 'encouragement' and 'game or sport'.

The Club has provided evidence that it encourages sport and other sports through financial and other assistance.

Established for the encouragement of a game or sport

Lockhart J in the Full Federal Court in Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner of Taxation 90 ATC 4215 (Cronulla) stated at 4226 in relation to the provision in the 1936 Income Tax Assessment Act exempting the income of an entity established for the encouragement of sport:

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. ..

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. ….

The Cronulla decision involved a leagues club whose objects included:

(a) (i) To establish equip furnish and maintain a Club for the benefit of members and to promote social sporting and educational undertakings for the advancement and benefit of members.

(ii) To provide any or all of the facilities necessary to further the aims of the Cronulla-Sutherland District Rugby League Football Club and the Cronulla-Caringbah Junior Rugby League Football Club and give whatever assistance the General Committee may consider convenient for this purpose.

The Cronulla leagues club ran a substantial social club for its 13,000 members the profits of which were applied in accordance with these objects to an associated rugby league football club. The football club was entirely dependent upon the leagues club for financial assistance, the provision of facilities (a stadium and two other ovals) and guarantees of expenditure. The club had facilities overlooking the stadium available to the use of football club members on days when the football club played. The leagues club also provided assistance to its associated junior rugby league as well as supporting the sporting activities of its member 'intra clubs'. Lockhart J accepted that the encouragement of sport included financial and other indirect support, but found in relation to the leagues club, at 4227:

In my opinion the encouragement and promotion of rugby league football and the provision of the amenities of a social club for its members are two objects or purposes of the appellant. Neither is correctly described as ancillary or incidental to the other or as necessarily independent of the other. The two objects and purpose overlap to some degree. The main object or purpose is the provision of the social amenities to its members, not the encouragement or promotion of rugby league football.

It is unreal to regard the appellant's clubhouse and its social activities as being undertaken for the purpose of encouraging or promoting rugby league football and supporting the football club. This is a secondary purpose.

The Club is similar to the Cronulla leagues club in many ways. It provides clubhouses with social facilities including bars, gaming, dancing and other entertainment for its members. It provides funding, ovals and facilities for associated sporting clubs. It also provides financial and other assistance to junior and school sports.

The Club's primary objects in its memorandum of association are to encourage sport and to provide a sporting Club with all the usual facilities of a Club.

As in Cronulla these objects display two purposes - a sporting purpose and a social purpose. The order may provide greater assistance to a purpose of encouraging sport. However in Cronulla Lockhart J at ATC 4226 noted that that leagues club's objects were not irrelevant, but that in the circumstances, nothing of significance turned on them.

The Club's financial reports state the principal activities of the Club as the operation of a registered club or a registered sporting and community club. They also indicate that the Club's predominant activity since 2005 to have been so. Revenue for these years increased mostly from bar and gaming activities and the Club's expenditure has been incurred in the main at generating this revenue including not insignificant amounts allocated to advertising, poker machine promotion and entertainment.

The information supplied describes the sporting activity undertaken by the Club's members, the sports development manager, high school trainees and an unspecified number of volunteers. Sport facilities are provided for the use of a local team, school teams and touring teams. The Club also provides funds to these and other entities. The expenses involved are not inconsequential, but the similarities with Cronulla cannot be ignored, for instance, a comparable level of funding assistance provided to other clubs.

In Cronulla the club's directors were also members of its affiliated rugby league club. This was not a formal requirement in Cronulla. The Club likewise has no formal requirement for a member or a director to have or have had any involvement in rugby league or other sport.

The 'sheer size and intensity' of the social activities in Cronulla were referred to by Hill J in St Marys Rugby League Club Limited v. FC of T 97 ATC 4528 (1997) (St Marys) in comparison to that club. However, in Cronulla, Lockhart J at 4219 noted that size and intensity are not necessarily important:

In recent years the appellant has derived revenue from poker machines, bar trading and the like in excess of $2m., income which is generated from the provision of social activities for its members, and its expenditure is geared in large part to the production of this income. The appellant carries on very substantial business activities independently of any support it gives to football. However, this fact is not necessarily decisive since, as accepted by the primary Judge, the legislature did not intend to exclude from exemption income which might be described as income from a business where the body deriving that income otherwise met the statutory description in sec. 23(g)(iii). Furthermore, this business activity must be carried on so that the appellant may donate the sums needed to further football.

Other case decisions

South Sydney Junior Rugby League Club Limited v FC of T [2006] AATA 265; 2006 ATC 2150 involved a club which conducted a licensed club in South Sydney, larger than that in Cronulla the profits of which were applied to junior rugby league and also to a football club competing in a national rugby league competition. The club's objects were:

a. To provide for members and members guests a social and sporting Club with all the usual facilities of a Club, including a residential and other accommodation, liquid and other refreshments, libraries and provision for sporting, musical and educational activities and other social amenities.

b. To assist generally in the promotion conduct and propagation of Junior Rugby League Football in the Rugby League Football District of South Sydney or elsewhere and to provide or assist in the provision of training and conditioning and teaching facilities for junior football played in accordance with the rules of the New South Wales Rugby Football League.

c. To assist generally all Sporting Associations in the South Sydney …

The AAT found that the club's case was not as strong as was the case for Cronulla-Sutherland which also failed in its attempt to obtain an exemption.

In St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528; 36 ATR 281 (St Mary's), Hill J observed several differences between that football club and the leagues club in Cronulla at 97 ATC 4533 - 34:

The social activities of the Club are significant, both financially and in number. They cannot be ignored. But the evidence persuades me that while the social and gambling activities of the club are significant in their own right, they are nevertheless subordinate to the activities of the Club in encouraging and promoting rugby league football in the St Mary's area, particularly among children.

The present case differs from the Cronulla-Sutherland case in a number of respects. It will be recalled that there were two clubs in the Cronulla-Sutherland area. One devoted to the pursuit of football and the other, the Cronulla-Sutherland Leagues Club which assisted in financing the football club but which, in all the circumstances was found to be a members or social club rather than a club existing primarily to support or encourage football. The appellant in Cronulla-Sutherland had no football team. It organised no competitive football at all. It's only connection to football were the grants which it made to the football club and the provision of facilities to that club.

…

In the present case each of the matters said by Lockhart J in Cronulla-Sutherland to be significant, namely "constitution, activities, history and control" point to the characterisation of the club as one having its main object or purpose "the encouragement or promotion" of rugby league within the meaning of section 23(g)(iii) of the Act. The Memorandum of Association records the significance of rugby league as the major object of the Club. The Articles of Association both in the membership categories and in the conferring of control upon football members or (life members), point to the significance of the football activities over the social activities. The activities of the club involve both social and football activities. Were this not so then, no doubt, the case would not be before the Court. But, although income is derived from the social activities and the football activities constitute an outgoing, there is an intensity of activity directed towards football which tips the balance in favour of the applicant. The history of the club is one of close association with rugby league from its inception and again points to the correct characterisation of as being one for the "encouragement or promotion" of rugby league.

Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora) involved a club whose objects included:

a. To promote the game of golf, bowls, tennis and other sports, games and pastimes, indoor and outdoor, as the Club may deem expedient.

b. To purchase, lease or otherwise acquire land with all accessories necessary for golf links, bowling greens, tennis courts and other such grounds to be used or recreation purposes

c. To construct, establish, provide, maintain and conduct such golf links, bowling greens, tennis courts, playing areas and grounds as the Club may determine and to construct, provide, establish, furnish and maintain club houses, pavilions and other buildings and conveniences in connection therewith….

The club had extensive social facilities that were used by the members and a large number of visitors. It owned a clubhouse, playing fields, a sports ground and sporting complex, and it held a controlling interest in a time share resort. In the most recent year reported in the case, 90.3% of the club's income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities.

The club had approximately 4,000 members, approximately 2,800 of whom were active in the club's sporting sub clubs. However the club also promoted its extensive social activities, attracting approximately 1000 visitors per day. Hill J at 93 ATC 4086 stated:

Clearly each case will depend upon its own facts. If the social activities have become and end in themselves, as was the case in Cronulla Sutherland, it will be necessary to see whether that end has become the predominant purpose for which the Club is established in the year of income. However, in the present case, I have reached the conclusion that, while the social activities (by which I include the gambling, entertainment, dining and accommodation activities) were very extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were, I am satisfied, pursued as a means of financing the extensive sporting activities of the club. Thus, I am of the view that, having regard to the activities of the Club as conducted in the year of income, the Club was in that year, one established for the promotion of athletic sport and not one for established for the purpose of carrying on a business, or business of gambling, provision of entertainment, selling of time share

In Tweed Heads Bowls Club v FC of T 92 ATC 2087 (Tweed Heads), the taxpayer was a bowls club which had one indoor and four outdoor bowling greens. The club participated in and organised a large number of tournaments each year. The club building was substantial and the catering and entertainment facilities were extensive. The membership breakup of the club was 830 bowlers, 170 non-bowlers and 4 life members. The club's main source of revenue was derived from poker machines which were used predominantly by the 400,000 visitors to the club each year. The Tribunal member, Dr P Gerber at 2099 stated:

…I am satisfied that the club, from its very inception, has been and is dedicated to a very substantial degree to the promotion of lawn bowls and, latterly, to indoor bowls. True it is that some elements of the Club's activities - leaving the poker machines aside for the moment - are social and cannot, as such, be characterised as "promoting the athletic game of bowls", but that is true of virtually all sports clubs. Be that as it may, I am left in no doubt that the Club has, as its main or dominant purpose, the promotion and encouragement of the bowling.

That leaves the issue of the poker machines, which earn substantial revenue, only a relatively small proportion of which was, in the years before me, used for bowling. In the Vernacular, the club has money pouring out of its ears and doesn't know what to do with it all. So what? Provided its main object is the promotion of bowls, the fact it also produces repetitive strain injury (RSI) in some 400,000 non bowling poker machine players while at the same time emptying their pockets seems to me to be utterly irrelevant.

In Commissioner of Taxation v Word Investments Ltd [2008] HCA 55 (Word Investments), the High Court accepted as income tax exempt under section 50-5 as a 'charitable institution' an entity that did not directly carry out charitable activities but gave its profits to institutions that did. Word had objects in its memorandum of association which advanced religious purposes and other objects in aid of those purposes. Word at the time carried on a commercial funeral business.

The majority of the High Court found that Word was a charitable institution, as its objects were confined to advancing religious charitable purposes. It found that Word endeavoured to make a profit only in aid of its charitable purposes - to isolate the goal of profit as the relevant purpose is to create a false dichotomy between characterisation of an institution as commercial or charitable. Although the commercial fundraising activities of Word were not intrinsically charitable they were charitable in character because they were carried out in furtherance of its charitable purpose.

In relation to the application of the Word decision to sporting clubs, the April 2009 minutes of the Clubs Consultative Forum available on the ATO website at www.ato.gov.au note:

The Tax Office's basic proposition is the principle in Word does not overtake the principle in Cronulla Sutherland Leagues Club Limited v. Federal Commissioner of Taxation (1990) 23 FCR 82; 90 ATC 4215; (1990) 21 ATR 300 (Cronulla Sutherland) where the Leagues Club was not accepted as an exempt sporting club.

There is no evidence in Word that benefits/services were provided to persons that were members of Word Investments Ltd. Word is a different case to those where the extended benefits are similar to those in Cronulla-Sutherland. The High Court decision did not mention provision of extensive benefits to members. Consequently the Tax Office retains its position that the principle in Cronulla-Southerland is good law. ...

The ATO guide Income tax exemption and sporting clubs also available on the ATO website notes:

An essential element in the Word judgment was that Word Investments Ltd had one set of objects confined to advancing religion. In Cronulla and South Sydney Juniors, the objects in the constitutions included both sporting objects and social or recreational objects. In both cases the provision of the social amenities was found to be a purpose in itself and not carried on only in furtherance of the sporting object.

Further, there is no evidence in the Word decision that benefits or services were provided to members of Word Investments Ltd. The Word decision does not disrupt the Cronulla or South Sydney Juniors decisions.

The submission attached to the ruling application suggests that the activities of an entity are not relevant in determining whether an entity is covered by one or more of the exempting provisions in Division 50. However the High Court in the Word decision stated that an examination of the activities remains is still necessary.

17…….But there is no reason to suppose that the tests laid down in the s 23(e) line of cases no longer apply in relation to the 1997 Act to companies like Word, which state objects in a memorandum. That is, it is necessary to examine the objects, and the purported effectuation of those objects in the activities, of the institution in question.

The High Court examined the activities of the Word entity.

26. Word's activities. In Royal Australasian College of Surgeons v Federal Commissioner of Taxation[ McTiernan J said that whether the appellant in that case fulfilled the description of a scientific institution depended less on the fact that it could direct its efforts to scientific objects than "what it does in pursuit of each of them." The inquiry, so far as it is directed to activities, must centre on whether it can be said that the activities are carried on in furtherance of a charitable purpose. So far as the actual activities of Word in furtherance of its purposes are relevant, it is plain that, subject to the Commissioner's contentions in relation to the second and third issues, the funds paid out by Word were paid to bodies fulfilling charitable purposes. The activities of Word in raising funds by commercial means are not intrinsically charitable, but they are charitable in character because they were carried out in furtherance of a charitable purpose.

Upon finding that commercial operation was charitable in character, the High Court reminded that a charity may cease to carry out its charitable purpose and that an examination of "the purpose for which it is currently conducted" is required.

34. A caveat. To avoid doubt in future, it should be noted that it would not be enough that the purpose or main purpose of an institution were charitable if in fact it ceased to carry out that purpose. Just like the former s 23(g)(iii) of the 1936 Act, so the former s 23(e) of that Act, and item 1.1 in the table in the present s 50-5 of the 1997 Act, being provisions in the legislation exempting tax on annual income, have "a periodic operation"; the statute "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 [institution] was established but also the purpose for which it is currently conducted."

This does not suggest that an examination of the activities of an entity such as Word Investments Ltd be limited to the application of its profits. If it did, paraphrasing from paragraph 26 of the decision - raising funds by illegal means is not intrinsically charitable, but is charitable in character because it is carried out in furtherance of a charitable purpose. That circumstance is extreme, but it highlights that where the activities of an entity point to another or a non-qualifying purpose the activities must be examined in order to determine an organisation's main purpose; or in the case of a charity, its sole purpose.

The High Court found that the commercial operations of Word Investments Ltd were undertaken in furtherance of its sole charitable purpose. Lockhart J in Cronulla noted at ATC 4219 in relation the sporting exempting provision:

the legislature did not intend to exclude from exemption income which might be described as income from a business where the body deriving that income otherwise met the statutory description in sec. 23(g)(iii).

However in Cronulla the Full Federal Court (one judge dissenting) found that the 'business' of providing social amenities for the leagues club members was the main purpose of the leagues club; not the encouragement of sport. Rather than being the antithesis of Word, the Cronulla decision merely provides an example of where the 'commercial operations' providing funds for an exempt purpose, are an end in themselves. See also Terranora Lakes Country Club Limited v. FC of T.

Conclusion

It is difficult, on the facts provided, to separate the Club's circumstances from those in Cronulla. Both clubs mainly provided social amenities for their members and applied profits from this activity to the encouragement of sport. The Club has chosen not to detail its social activities - bar trading, poker machines and entertainment - other than to note the necessity of these to derive profits for sport and a correlation between increased revenue and sporting events. The same could be said for the leagues club in Cronulla including its football club's match days. The differences found by Hill J in the St Marys decision (see above) are not present for the Club's circumstances.

In the circumstances of the leagues club in the Cronulla case, the Full Federal Court found that that club's main purpose was not the encouragement of sport but the provision of social amenities for its members. Beaumont J summarised his finding at ATC 4244 as:

It is true that a significant proportion of the profits generated from that activity are given to the football club to be used for its purposes. But, as Rich J. pointed out in the College of Surgeons case, the fact that benefits may result for others (in that case, surgeons; in this case, footballers) does not detract from the intrinsic character of the object sought to be promoted by the taxpayer. In Forrest's case, the main or predominant object of the institution was the promotion of science and this was its intrinsic character, notwithstanding that professional engineers may have received some incidental benefit from its activities. In the College of Surgeons case, the main or predominant object of the College was the promotion of science, notwithstanding that practising surgeons may have received some incidental benefits. In the present case, the main or predominant object of the taxpayer was to provide for its members, and others, the facilities of a licensed club. This was the true character of the object or purpose for which it was and is established, notwithstanding that footballers may have received same incidental benefits in the form of the grants made to the football club. Although these benefits may have resulted from transactions entered into by the taxpayer, as Rich J. put it, ``the inclusion of [the taxpayer] in the exemption clause depended upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions''.

Lastly, it is considered that the main purpose of the Club did not become the encouragement of sport upon adoption of the new constitution. The High Court in Word at paragraph 34 noted that consideration must also be given to the purpose for which an entity is currently conducted. Lockhart J in Cronulla at ATC 4226 noted that ``established'' involves an examination of the purposes and activities over a number of prior years to support the tax exempt status of the body and that the blend of objects and purposes and powers of the leagues club threw little light upon the question as to whether the club was established for the encouragement of sport. Given that nothing has changed materially to the Club other than an enunciation of an object in the Club's constitution, it is considered that the main purpose of the Club remains the provision of social amenities for its members.

For the above reasons and based on the information provided, it is considered that the Club does not satisfy exemption under item 9.1(c) of section 50-45 for the period of this ruling.

Should the Club wish to confirm the 2005, 2006 and 2007 assessments, it is considered that the correct course of action is to object to those assessments. That objection may also include a secondary objection covering for example the deduction that may be claimed in relation to donations, grants and sponsorships.

Non-profit requirement

Paragraphs 9 and 21 to 23 of TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members.

Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement.

The constitution and Memorandum of Association of the Club prevent distribution to members whilst it is in operation and on winding up.

Special conditions

Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members and:

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

· it is a deductible gift recipient; or

· it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

The Club is a resident of and is located in a State, Australia. The Club carries on its activities, pursues it objectives and incurs its expenditure in Australia and therefore satisfies the special condition in section 50-70 of the ITAA 1997.

Question 2

Is the Club entitled to the FBT rebate as a FBT rebatable employer under section 65J of the Fringe Benefits Assessment Act 1986 being an entity described in subsection 65(h)?

Summary

The Club is not entitled to the FBT rebate as a FBT rebatable employer under section 65J of the Fringe Benefits Assessment Act 1986 being an entity described in subsection 65(h).

FBT Rebate

For the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986, an employer is a rebatable employer for a year of tax if the employer is not a public benevolent institution, is not a health promotion charity, and is covered by paragraph (h) at any time during the year of tax:

a non-profit society, non-profit association, or non-profit club, established for the encouragement or promotion of a game or sport.

It has already been established that the Club is not a non-profit society, association, or club, established for the encouragement or promotion of a game or sport.

The Club is not a rebatable employer as described in ss65J(1)(h) and is not entitled to the FBT rebate.

This ruling applies for the following periods:

1 July 2007 to 30 September 2008

1 October 2008 to 30 September 2009

1 October 2009 to 30 September 2010

1 October 2010 to 30 September 2011

Constitution

The objects of the Club in its constituent documents encourage and promote sport but they also permit social activities for members and guests of members.

The constituent documents has non-profit and winding-up clauses that prevent income from being distributed to members whiles the Club is in operation and on winding up.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997. Section 50-45

Income Tax Assessment Act 1997. Section 50-70

Fringe Benefits Assessment Act 1986. Section 65(J)

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