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Ruling

Subject: Income tax exemption

Question 1

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

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The objects of the Club are concerned with providing sporting and social 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 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:

· operates a clubhouse (which has bar facilities, dining facilities, gaming facilities, and other social facilities)

· runs sporting competition

· fields teams in sporting competitions

· owns and maintains sporting fields

· provides financial support to other sporting groups

The Club has substantial retained profit

The Club uses its retained profit to develop and improve its clubhouse and sporting facilities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1,

Income Tax Assessment Act 1997 Section 50-45 and

Income Tax Assessment Act 1997 Section 50-70.

Reasons for decision

To be an exempt entity under item 9.1(c) of the ITAA 1997 an entity must be a society, association or club established for the encouragement of a game or sport.

Society, association or club

The terms 'society', 'association' and 'club' are not defined in the ITAA 1997. In Pro-Campo Ltd v Commr. of Land Tax (NSW) 81 ATC 4270 Lee J said the following on the meaning of society, association and club:

The three words "society, club or association" are words in frequent use in our community and societies, clubs and associations are well known entities…

In Theosophical Foundation Pty Ltd v Commr. of Land Tax (1966-1967) 67 SR 70 … Sugerman JA stated at p.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.' (Oxford English Dictionary,…) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society."

…

The meaning of "society" as the Oxford English Dictionary 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… Although clubs can in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects… (at 4728-4279)

The Club is a company limited by guarantee with a number of members. The objects of the Club are to provide members with a social and sporting club, and provide and maintain sporting facilities and other amenities as may be deemed necessary or expedient. The Club is considered to be a society, association or club.

Established for the encouragement of a game or sport

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs states the Australian Taxation Office view on the circumstances under which a society, association or is regarded as being established for the encouragement of a game or sport, and provides three (3) tests that must be satisfied for a society, association or club to be exempt (at paragraph 7):

· It cannot be carried on for the purposes of profit or gain to its individual members (non-profit requirement)

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

· That encouragement must be the club's main purpose

If a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45.

Non-profit

Taxation Ruling TR 97/22 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 prevents 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 is not considered to be carried on for the profit or gain to its individual members.

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 30-45, and includes (at paragraph 38):

played with ball or projectile:

badminton; baseball; basketball; bocce; bowling (ten-pin); bowls; cricket; croquet; football (all codes); golf; handball; hockey; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball;

The objects and annual reports show that the Club is involved with sport. We consider the Club to be concerned with a game or sport.

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 annual reports and website of the Club show that the Club is involved with playing and promoting sport. The Club organises and conducts men's, ladies and mixed sporting competitions, fields teams in district competitions, and is involved in training and improving its players (it provides coaching and lessons). The Club owns sporting fields which are used for its sporting competitions, and for practice by it players. The Club also has sporting facilities available for hire. The Club is considered to be for the encouragement of a game or sport.

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 Clubs constitution shows that the Club is established to provide a club facility and sporting facilities for use by its members. To this end, the Club owns and maintains sporting facilities, and a clubhouse that provides bar facilities, dining facilities (including a restaurant and coffee shop), gaming facilities (including TAB, Keno, and poker machines), and other social facilities.

The Club uses the sporting facilities to run intra-club sporting competitions (men's, women's, and mixed) 6 days of the week. When competitions are not being played the sporting facilities are available for practice and for social players. The Club also fields teams in district sporting competitions playing against other clubs.

The Club earns revenue from its sporting activities both through sporting membership subscriptions, and sporting equipment hire.

The Club also supports a range of other sporting groups in the area, including cricket, Australian football, rugby union, rugby league, soccer and netball.

The sporting activities of the Club may be distinguished from the circumstances 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 major sporting activities they supported, the operations of their sporting sub or intra-clubs were considered minor and the provision of social amenities for members were extensive in comparison. In the present case, the Club is directly involved in encouraging the sports it was established to promote and the promotion of the sport of other entities is minor in comparison.

In previous years the Club has generated a loss on its sporting activities account. The Club had a net profit in 2010, and a net loss $26,711 in 2009. The 2010 annual report notes support to community bodies.

The Club has significant retained profits which the Club advises will be used to upgrade its sporting fields and clubhouse.

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 5 membership categories. A person must only be 18 years or over to be a member. Ordinary members and life members have a right to vote at general meetings, and can be elected to the board of director (the Board). The Board is responsible for the business and affairs of the Club.

Membership for the 2010 year indicates participation comparable to the club in St Marys Rugby League Club Limited v FC of T FC of T 97 ATC 4528. Hill J also recognised in that case and in Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 that associates of sporting members will be drawn to social membership in support of the sporting member. Whilst not offered by the Club, given the disparity between social membership and sporting membership, it is likely a significant number of social members become members to play golf regularly at the course at the discounted fee for social members.

The constitution does not require that the directors be comprised by members who are sporting members or give voting preference to sporting members (as was the case in St Marys Rugby League Club Limited v FC of T (supra)). In Cronulla, Lockhart considered that such an obligation is not essential to qualify for exemption, but its absence was a relevant consideration for that club. In this case however as noted above, a significant number of members have a direct or indirect involvement in the Club's sports. Of lesser weight is that the Club has a number of committees which are responsible for administering its activities, including ladies and men's sporting committees, which are responsible for the sporting competitions of the Club. The office bearers of the sporting committees are elected by the relevant sporting members of the Club and in the usual course of events are more likely to filter to directorship.

The Club contends that it provides gaming, TAB, Keno, catering, poker and general meeting areas for members to use and for the use by patrons who have played sport within the club. In the circumstances this contention is accepted at face value however further consideration may be required if for example upon completion of the clubhouse upgrade that there is a change in the focus of the club. Hill J noted such reservations in relation the clubs in his decisions in St Marys Rugby League Club Limited v FC of T FC of T and in Terranora Lakes Country Club Limited v. FC of T.

Other factors supportive of a conclusion that a club's main purpose is to encourage a game or sport include the proximity of the club's social facilities to its sporting facilities; and the decoration and fit out of the club so as to reflect its game or sporting nature. In Case W114 (Grand United Port Macquarie West Bowling Club v. FC of T) 89 ATC 891; AAT Case 5452 the tribunal member used the analogy of a disinterested observer entering premises being aware of non-sporting activity but even so, have an overwhelming impression of attending a bowls club used by bowlers with a high percentage of playing members. The information and photographs provided on the Club's website give this impression.

The nature of sporting and social clubs and the income tax exemption under section 50-45 require each club to be considered on its own facts. The Club's features can be distinguished from the features of the clubs found not to be exempt in Cronulla Sutherland Leagues Club Limited v. FC of T; South Sydney Junior Rugby League Club Limited v. FC of T and North Suburban Club Inc v. FC of T [1999] AATA 463; 42 ATR 1111; 99 ATC 2254.

After weighing the features and operations described in the relevant facts and circumstances above it is accepted that entity described therein is a club with a main purpose being the encouragement of a game or sport.

Special Requirement

Section 50-70 of the ITAA 1997 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:

(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 of the ITAA, 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

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.

The Club is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia. The Club satisfies the requirements of subsection 50-70(a).

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