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Ruling

Subject : Commissioners Discretion

Question:

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 ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Relevant facts and circumstances:

The Club has applied for a private binding ruling on whether the Commissioner considers the Club is an exempt sporting club in accordance with section 50-45 of the ITAA 1997. The correspondence and application enclosed the following information:

· Executive summary

· Statement of purposes and Rules of the Club

· Annual reports and financial statements for the recent four years

· Details of the Club's fixtures

· The Club's history

· Financial information on expenditures

The information listed above provides the relevant facts and circumstances of the arrangement upon which this ruling is provided. A summary of the arrangement is provided below.

History

The Club has operated as a small bowls club in Australia and its essential character, activities and purpose have not changed since inception.

The Club conducts extensive bowls activities including successful pennant competition teams - actively promoted bowls and increase bowls membership activity against national trends.

Rules

The Club's Statement of Purposes state that its objects are to play, promote and encourage the game of bowls and other recreational activities by providing bowling greens, club house and all things incidental to the playing of bowls.

The Constitution also contains non-profit and dissolution clauses.

Facilities of the Club

The Club has the following facilities

· grass greens, synthetic green and indoor carpet bowls area

· coffee shop, bistro, bowlers area for refreshments, BBQ area and around 50 electronic gaming machines

The Club also has a clubhouse which overlooks the bowling greens.

Activities of the Club

The Club has sub-committees in Men Bowls, Ladies Bowls and Carpet Bowls which coordinate the activities of the respective sports. The Club also has many volunteers dedicating their time for the encouragement of Bowls.

Each sub-committee is responsible for managing its respective sporting activities including establishing a program of events for the year, determining competition's conditions, determining the value and allocating trophies and prizes, selecting individual teams, managing all matters affecting the conduct of all competitions and play and to encourage the development of juniors.

The Club organises the extensive activities or programs to encourage its sporting activities such as championships day, training, schools programs and other promotion and fundraising activities. The Club also seek to promote Bowls amongst the elderly, partly disabled and disabled bowlers.

Board of directors & management

Only sporting members are eligible to stand for the Board of Directors, nominate other Members for the position and vote at General Meeting of the Club. Social and Gaming Members have no voting rights. This ensures that the control and direction of the Club is maintained in the hands of Members actively interested in the sport of Bowls.

Relevant legislative provisions:

Section 50-1 Income Tax Assessment Act 1997

Item 9.1(c), Section 50-45 Income Tax Assessment Act 1997

Section 50-70 Income Tax Assessment Act 1997

Relevant Rules and Determinations:

Taxation Determination TD 95/56

Taxation Ruling TR 97/22

Relevant Cases:

AAT Case 8267 (1992) 24 ATR 1068

Cronulla Sutherland Leagues Club Limited v. FC of T 90ATC 4215 at 4225; (199) 21 ATR 300

Quinton v. South Australian Psychological Board (1985) 38 SASR 523

Re South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265

Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100

St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281

Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)

Reasons for decision:

Summary

The Club is exempt from income tax pursuant to 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) of s50-45.

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.

The encouragement of sport is not only the participation in sporting activities. It also includes the direct involvement by the club in coaching, player development, player payments, providing team equipment, involvement in sport administration bodies, organising teams and providing referees or umpires and having awards for champion players.

For a club to be exempt from income tax under section 50-45 of the ITAA 1997, it need to satisfy three tests, and also the special conditions of section 50-70 of the ITAA 1997. The three tests are covered in 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

The Ruling 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.

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 interpretations of society, association or club as described above, emphasise a 'body of persons' and 'an organisation of people' with a 'common purpose'. The Club is an incorporated company which currently has over 1400 members and is continuing to expand. Its objective is to provide for its members and guests a sporting club with the common purpose to promote, foster, support and encourage lawn bowl. Therefore, the Club is considered to be a society, association or club.

Non-profit

Page 6 of the Income tax guide for non-profit organisations (the Guide) provides the following in relation to non-profit requirements:

The basic premise of a non-profit organisation is that it is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up.

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.

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 contains an acceptable non-profit clause which prohibits distribution of income or property to its members. It also contains an acceptable winding up clause which requires that any surplus property on winding up to be transferred to local charitable organisations. The Club meets the non-profit requirements.

Encouragement of a game or sport as main purpose

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides the Commissioner's view on what constitutes as exempt sporting clubs. In particular, paragraph 11 states that it is essential that the encouragement of a game or sport is the main or dominant purpose of a club.

Game of 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'

The Club conducts activities in relation to lawn bowls, which is listed as a game or sport under paragraph 38 of the TR 97/22 under 'played with ball or projectile'. Therefore, this requirement is satisfied.

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 by:

· through marketing; or

· by initiating or facilitating research and development

One of the Club's objects is to play, promote and encourage the game of bowls. The Club achieves this object by providing facilities such as bowling greens, indoor bowls area, coaches and umpires. The Club also conducts expert coaching, school programs, competitions and other fundraising events throughout the year. Therefore, the Club is considered to be encouraging a game or sport, but the main issue is whether such encouragement is the Club's main purposes, which will be discussed below.

Main purpose

Paragraph 41 of the TR 97/22 stated that to be eligible for 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.

Paragraph 42 to 44 provides the following explanation:

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. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90ATC 4215 at 4225; (199) 21 ATR 300 at 312 (Cronulla's case) said:

'It [the club[ may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object of purpose without disqualifying the body from the exemption.'

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.

The main purpose can only be ascertained after objectively weighing all of the club's features such as the constituent document, history, control and activities. Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage 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 Club's objects listed in its Constitution seem to have two main objects - to promote and encourage the game of bowls and to provide for members and guests other sports and recreational activities and refreshments. Although the objects refers to 'recreational activities and refreshments', they do not specifically emphasis on the provision of 'social' activities and facilities. This can be distinguished from the Cronullla's case and Re South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265 (South's case) where they both had an at least equal object to provide social activities to members. Both of the above cases were not exempt because it was evident that both clubs placed great emphasis on its provision of social amenities to its social members. On the other hand, the activities of the Club suggest that it has extensive sporting activities with many Bowls team and volunteers for the encouragement of Bowls. The Club also provide its bowling lawns to be used for extensive training, competitions, championships, school programs…etc throughout the year.

The Club does provide social activities and facilities such as a coffee shop, a bistro, a BBQ area and gaming machines which comprise most of the Club's operating revenue. However, the social activities are accepted in part as the incidental use of a sporting club's social facilities to assist the financing of the Club's sporting activities. This can be supported by the fact that a majority of its operating profit is used for operating and capital expenditure for its sporting activities.

The structure in which the Club is set up can also be distinguished from the Cronulla and South's case. Both the Cronulla and South's case had a separate football club as a separate legal entity which conducted the sporting activities. For both cases, the main purpose was to provide facilities and entertainment to their members. In this case, the Club itself conducts its sporting activities and competitions directly for the encouragement of sport.

Another relevant, but less persuasive features to consider is whether the Club is run and controlled by sporting members or social members as discussed in paragraph 57 of the TR 97/22. Paragraph 58 provides the following explanation:

The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports a conclusion that it is established for the encouragement of the game or sport: Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100; AAT Case 8267 (1992) 24 ATR 1068; St Marys case ATC 4534, ATR 288.

The Club's Constitution contains specific requirements regarding the eligibility to apply as ordinary, life and honorary members in which they must be active sporting members. Since only full bowls members are eligible to be part of the management board and can vote at General Meeting, the Club is controlled and operated by sporting members as a bowls club. Also, gaming and social members can only use the Club's non-bowling facilities and have no voting rights. This ensures that the control and direction of the Club is maintained in the hands of members who are actively interested in the sports of bowls. Such formal nomination requirements were noted as significant in the St Mary's case which also had formal requirements giving control of the club to its football members. This can be distinguished with the Cronulla's case where the membership structure did not give emphasis and importance to footballers or supporters and the control of the club was not formalised. Therefore, it is accepted that the focus of the Club is to promote its sporting activities - bowls.

After taking into account of the Club's features and operation, its main purpose is considered to be for the encouragement of a game or sport.

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

As discussed above, it has already been considered 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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