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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) as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Club is a company.

The applicant has provided the following documentation with the application:

· Detailed Submission;

· Constitution;

· Annual Reports;

· Honour Boards;

· History of Club;

· Calendar

The Club is currently self-assessed as an income tax exempt club since its inception.

The Constituent document of the Club establishes it as a Club.

The Club has a non-profit and dissolution clause within its Constitution.

Relevant legislative provisions

Income Tax Assessment Act 1997 50-1

Income Tax Assessment Act 1997 50-45

Income Tax Assessment Act 1997 50-70

Reasons for decision

A sporting club which is 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 pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, subject to the special conditions under section 50-70 of the ITAA 1997.

The special condition essentially requires that the club not be carried on for the purpose of profit or gain of its members and that it has a physical presence, incurs its expenditure and pursues it objectives principally in Australia.

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 Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect that 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 Club has been established for the promotion of a sport.. It has sporting members who have a desire to further the objects and aims of the Club They voluntarily associate together for this common purpose and interest. The Club is considered to be a 'society, association or club'.

As the Club also has a physical presence in Australia, incurs its expenditure in Australia, and pursues its objects in Australia, it satisfies the special conditions in section 50-70 of the ITAA 1997.

Paragraph 7 of Taxation Ruling TR 97/22 provides that 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 purpose 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.

Test 1 - Not carried on for the purpose of profit or gain to its individual members

Paragraphs 9, 10 & 23 of TR 97/22 provide guidance for when an organisation might not be carried on for the purpose of profit or gain to its individual members.

The constitution of the Club contains an appropriate non-profit clause.

The Club's constitution contains an appropriate dissolution clause for a non profit entity.

Taking into account the above non profit and dissolution clauses, we are satisfied that the Club is not carried on for the profit or gain of individual members.

Test 2 - It must be for the encouragement of a game or sport

Paragraph 11 of TR 97/22 provides:

· Encouragement means 'stimulation by assistance' according to the Macquarie Dictionary. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club. Encouragement can occur directly by:

· Forming, preparing and entering teams and competitions in the game or sport;

· Co-ordinating activities;

· Organising and conducting tournaments and the like;

· Improving the ability 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; or

· Encouraging, increasing and wider participation and improved performance

And can occur indirectly:

· Through marketing; or

· By initiating or facilitating research and development.

1) Forming, preparing and entering teams and competitions in the game or sport

The Club enters teams in many and varied competitions held throughout the year.

Furthermore the Club has achieved success in its sports activities.

2) Co-ordinating activities

The Club has International, National and State representative players as members of the Club and invests time and monetary resources in providing facilities and benefits to retain these sporting members. These members may be employed in administrative roles, training roles and development roles.

3) Organising and conducting tournaments and the like

The Club organises sporting tournaments on a regular basis and provides prize money for the winners.

4) Improving the ability of participants

The Club provides free coaching to all members and potential members.

The Club also seeks to promote and encourage the game or sport to its non sporting members (particularly Social Members). .

5) Improving the standard of trainers and coaches

The Club promotes the registration and accreditation of volunteer sports officials.

6) Providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors

The Club maintains its sporting arenas.

7) Marketing

The Club has an extensive home page on its website. It provides information on results and upcoming sporting events and tournaments.

Summary

It can be seen from the above that the Club conducts activities directly related to sport by organising, hosting and participating in sporting events at the local and state levels, by providing officials at these events and by coaching and entering teams and competitors in different levels of competition.

We also note the success of the club in winning the various type and level of competitions it enters and to this extent we accept that the club is carried on for the encouragement of a game or sport.

Test 3 - That encouragement must be the club's main purpose

Paragraph 13 of TR 97/22 provides:

To be exempt, the main purpose of the club must be the encouragement of a game or sport

Paragraph 15 of TR 97/22 lists features regarded as being highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport:

Relevant but less persuasive features are listed at paragraph 16 of TR 97/22.

Paragraph 14 of TR 97/22 also states:

A club's main purpose can only be ascertained after objectively weighing all of the club's features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

Difficulties can arise in determining a club's main purpose where the club conducts other activities, particularly social or commercial activities.

Where a club conducts other activities, particularly social or commercial activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may still be that of encouragement.

In this case the Club does conduct extensive social activities common to a large social club with gaming machines.

Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 (Cronulla Sutherland) 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 or purpose without disqualifying the body from the exemption.

Where the main purpose becomes the carrying out of those other activities, a 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 or purposes. As Lockhart J said in Cronulla Sutherland at ATC 4225; ATR 312:

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.

Therefore, the fact that a sporting club also encourages social and other activities does not, in 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. However conversely, if the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply even if sport is encouraged.

In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora), the country club provided and promoted an extensive range of sporting activities including golf, lawn bowls, cricket, and football. The Club also had extensive social facilities that were used by the members and a large number of visitors. 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 Court ruled in favour of the taxpayer and concluded that the main purpose of the Club was the promotion of athletic sport and not the carrying on of a business of gambling, provision of entertainment and food, and the selling of time-share units. Hill J concluded that while the social activities of the club were extensive and could be seen as ends in themselves, these activities were pursued as a means of financing the extensive sporting activities conducted by the Club.

In St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528; (1997) 36 ATR 281 (St Mary's), Hill J found that the significant social activities of a sporting club were acceptable if the club was formed principally for sport and if the sport was financed by the social activities. It was acceptable that in that case that only 20% of the funds earned by the social club were spent on football. Hill J stated the importance of the Club's constitution which stated that the principal aim of the club was the support of local football and that a large amount of the Club's activities were sport related. It was also important that the Club's history centred around the support of local football, and that the Club rules required a certain proportion of its funds support local football.

Findings

1. Highly persuasive features:

a) The club conducts activities in the relevant year that are directly related to the game or sport

It has been established that the Club conducts extensive activities directly related to the game or sport. It does this by participating in numerous competitions and tournaments, bringing into existence, organising and running such competitions and tournaments, providing officials for the game, coaching participants of the game or sport, and encouraging members to participate and support the game or sport.

b) The sporting activities encouraged by the club are extensive

The only sporting activity conducted by the Club is the game or sport however the sporting activity is of such a scale that it would be classified as extensive.

Further to this, the Club pursues and promotes the game or sport with a similar intensity to that observed in St Mary's, where Hill J observed (at 97 ATC4534):

…..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 as being one for "the encouragement or promotion' of rugby league.

The Club puts a lot of time and effort into preparing for and entering tournaments, pennant and other competitions. Furthermore, its historical and current activities indicate a strong and continuing association with the game or sport.

c) The club uses a significant proportion of its funds in encouraging the game or sport.

The club uses a significant proportion of its funds in encouraging the game or sport.

d) The club's constituent documents emphasise that the Club's main purpose is to encourage a game or sport.

The constituent documents of the Club indicate a main purpose of encouraging a game or sport.

2. Relevant but less persuasive features:

a) High level of participation in sport encouraged by the club.

· In St Mary's case, 2257 of its 6648 members were football members (players and ex-players) the club fielded 32 teams of 450 players plus a reserve grade and a metropolitan cup team, or

· In the Terranora case, 2854 of 4076 members were active sporting members

· In Re Tweed Heads Bowls Club v FC of T 92 ATC 2087; (1992) 24 ATR 1068 (Tweed Heads), 830 of its 920 members were active bowling members.

· In Case W114 (Grand United Port Macquarie West Bowling Club v. F.C. of T.) 89 ATC 891, 1353 of its 2476 members were bowling members.

Notwithstanding the proportion of sports members, the Club has provided evidence that it promotes and encourages the game or sport to its non sporting members and is able to provide sports coaching to new players. The Club's extensive involvement in sport activities and the extent of its facilities that are devoted to the game or sport is noted.

b) 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 the day to day management of the club).

The Club's constitution states that only sport Members or Life Members will fill all positions on the Board. It is therefore accepted that the Board of Directors of the Club are participants in or concerned with the encouragement of sport.

c) 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.

Only Sport Members and Life members of the Club are given full voting rights. While social members are entitled to vote at the election of the Board, they cannot be elected to the Board, nor can they vote on any special resolution amending the constitution of the Club. This ensures that the interests of members involved in sport dominate.

d) 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.

Promotional materials supplied by the Club and on its website focus on the Club's sporting events, competitions and prize monies from those events.

The Club also provides information on results and upcoming events through its website.

The Club can be distinguished from the Cronulla Sutherland case because the constitution of the Club and its Annual Reports clearly distinguishes the sporting activities of the Club as its main purpose. This is unlike the Cronulla Sutherland case where neither of the two objects or purposes was described as ancillary or incidental to the other.

The facts of this case are more in line with the facts of St Mary's, where the constitution, activities, history and control of the Club point to the characterisation of the Club as having its main object or purpose as being the encouragement or promotion of a sport despite the Club having extensive social facilities and activities.

As per St Mary's, Tweed Heads and Terranora, the social facilities of the Club are noted as extensive however this does not preclude a conclusion that on a weighing of the features the main purpose of the Club is the promotion and encouragement of a game or sport.

Conclusion

Based on the information provided, we accept that on balance the main purpose of the Club is the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.

The features of the Club leading to this conclusion are summarised as follows:

· the club conducts extensive activities directly related to sport by organising, hosting and participating in sport events at various levels, providing officials at these events, and by coaching and entering teams and competitors in different levels of competition;

· the club's constituent documents emphasise its main purpose is to promote and encourage sport, and it operates in accordance with those documents;

· the club's sports activities are extensive;

· Whilst the club's social activities are also extensive, it uses a significant portion of the surplus funds generated from those activities to promote and encourage its sporting activities;

· the club provides substantial sporting facilities for the benefit of its members; and

· the club's constituent documents ensure through control of the Board of directors that it is controlled by persons with a sporting involvement.

We note that the Club's social activities are extensive however an analysis of the facts shows that the surplus from those activities is used to fund sporting activities. It is therefore accepted as in St Marys, that the social activities are in part undertaken to provide funds for the encouragement of the clubs sports activities.

While there is not a high level of participation by members in the sport, these features are not so dominant so as to disqualify the club from obtaining an exemption.

Consequently, we accept that the Club is not carried on for the gain of individual members, is established for the encouragement of a game or sport, and the encouragement of a game or sport is its main purpose.

We accept that the Club continues to be a club established for the encouragement of a game or sport pursuant to item 9.1 (c) of the table in section 50-45 of the ITAA 1997.

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