Edited version of your private ruling

Authorisation Number: 1012575202414

Ruling

Subject: Exempt entities - not for profit and mutual organisations

Question 1

Will the activities to be carried on by the Trust cause the Entity to lose its status as an exempt entity established for the encouragement of a game or sport pursuant to item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997?

Answer

No

Question 2

Will the total net income of the proposed Trust be included in the assessable income of the Entity under section 97 of the ITAA36?

Answer

Yes, to the extent the entity is entitled to it

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Entity is a public company limited by guarantee.

The Entity was incorporated in a particular year.

It is proposed that all of the net income of the Trust will be distributed to the Entity. Any income derived by the Entity will be applied to support and encourage a game or sport consistent with the terms of the Entity 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

Income Tax Assessment Act 1997 115-CIncome Tax Assessment Act 1936 207-B

Income Tax Assessment Act 1997 995-1

Income Tax Assessment Act 1936 97

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Division 6E

Reasons for decision

Issue 1

Will the creation of a new entity impact upon the organisation's non-profit status?

Question 1

Will the activities to be carried on by the Trust cause the Entity to lose its status as an exempt entity established for the encouragement of a game or sport pursuant to item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997?

Summary

The Trust (and its proposed activities) will not affect the Entity's entitlement to income tax exempt status as a society, association or club established for the encouragement of a game or sport.

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (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.'

(* as defined in section 995-1 of the ITAA 1997)

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. A society, association or club established for the encouragement of a game or sport is listed at item 9.1 (c) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special condition detailed in section 50-70 of the ITAA 1997.

An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport if it:

· is a society, association or club,

· is established for the encouragement of a game or sport, and

· satisfies the special conditions.

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.

In Douglas v Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)…Sugerman JA stated 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 organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two…Although clubs can in some respects and 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…

The members of the Entity voluntarily associate together for a common purpose and common interest. The Entity has a management committee and rules of association. The Entity is an 'association, society or club'.

Established for the encouragement of a game or sport

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport.

Game or sport

'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of TR 97/22 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997.

The constituent documents of the Entity reference its association with sports namely, to encourage, promote and further a game or sport.

It is accepted that the Entity is an organisation associated with a game or sport.

Encouragement

A society, association or club will only be exempt from income tax if it has as a main purpose the encouragement of a game or sport. Encouragement can occur directly or indirectly.

TR 97/22 details features considered to be persuasive of supporting a conclusion that the main purpose of a club is to encourage a game or sport.

Paragraph 15 of TR 97/22 describes highly persuasive features which are present when a club is for the encouragement 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 emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents.

TR 97/22 also lists other features considered relevant at paragraph 16:

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

· the members of the committee, or persons who control the direction, of the 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);

· 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; 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.

The objects and activities of the Entity demonstrate that it is actively involved in encouraging and promoting a game or sport.

In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 (Terranora), Hill J, held that in that case, the provision of extensive social activities to visitors to the club did not prevent a finding that the entity was for the encouragement of the sport undertaken by a majority of the ordinary members:

"The attraction the club has for persons living as far away as Brisbane was made apparent by the evidence. Numerous buses arrive at regular intervals during the morning carrying visitors to the club, many of whom are elderly pensioners. Presumably these visitors are attracted, or were attracted in the year of income, by the poker machines not then available in Queensland. The evidence indicates that of the approximately 1,000 visitors per day to the club, 65-70% of them arrive by bus. In addition to the poker machines, the visitors enjoy the special social promotions in the club.

In the year of income, there were 4,076 ordinary members of the club, 226 junior members and 130 social members. A social member is entitled to utilise all the facilities of the club, sporting or recreational, but is not entitled to vote or become an office bearer of the club." (at ATC 4082; ATR 300).

"…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 conducted by the club." (at ATC 4086-4087; ATR 304)

In St Marys Rugby League Club Limited v FC of T 97 ATC 4528 (St Marys), Hill J listed at 4534 a combination of factors which are also present in this Club as being in favour of that club's claim to exemption:

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 as its main object or purpose ``the encouragement or promotion'' of rugby league within the meaning of s 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 as being one for ``the encouragement or promotion'' or rugby league.

Finally, the control of the Club rests in the hands of former footballers (or Life Members) whose task it is not merely to run the Club but also to promote the competitions in which the Club participates in the rugby league season.

Tribunal decisions which also support the Entity's claim are Tweed Heads Bowls Club v. FC of T 92 ATC 2087; AAT Case 8267 (1992) 24 ATR 1068 and Case X25 90 ATC 251; (1990) 21 ATR 3257.

Whilst the Entity is considering establishing a Trust to carry out a business, this arrangement does not materially alter the fact that the Entity encourages a game or sport.

Importantly, the Entity will not be actively involved with any business venture or commercial enterprise. The operator of the Trust will be a Company; the Entity does not undertake any material activities, other than to establish the Trust.

The steps to be undertaken by the Trust and/or the Company are not the activities of the Entity. Each of these bodies is separate and distinct from the Entity.

The creation of the Trust will not alter the main purpose of the Entity as any income derived by the Entity will be applied toward the encouragement of the Entity's sporting activities consistent with the terms of its Constitution.

Consideration of these factors leads to the conclusion that should the Entity establish a Trust and/or Company, its income tax exemption will remain unaffected as it would still be considered as established for the encouragement of a game or sport.

Special condition

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.

Non-profit requirement

Paragraphs 9 and 21 - 23 of Taxation Ruling 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 of the Entity prevents distribution to members. The Entity is not carried on for the profit or gain of its individual members.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

The Entity is located in Australia and carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement.

The Entity satisfies the special condition in section 50-70 of the ITAA 1997.

Question 2

Will the total net income of the proposed Trust be included in the assessable income of the Entity under section 97 of the ITAA36?

Summary

Section 97 of the ITAA 1936 will apply to include in the income of the Entity so much of the net income of the trust estate that is attributable to the Entity.

However Division 6E of the ITAA 1936 will apply to exclude any part of that net income that is capital gains or franked distributions.

Detailed reasoning

Subsection 97(1) of the ITAA 1936 states:

Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and

(b) the exempt income of the beneficiary shall include:

(i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and

(c) the non-assessable non-exempt income of the beneficiary shall include:

(i) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

In brief, section 97 of the ITAA 1936 provides that a resident beneficiary shall include in their assessable income all the income of a trust estate to which they are presently entitled, providing that resident is not under a legal disability.

The terms 'resident' or 'resident of Australia' is defined in section 6(1) of the ITAA 1936 and paragraph (b) states:

a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

The Entity is not under a legal disability and as it was incorporated in Australia it is a resident. Therefore the Entity will have to include in its assessable income so much of the net income of the trust estate that is attributable to it.

To work out how much of the income is attributable to the Entity we need to look at the trust deed and any action taken by the trustee in respect of the distribution of income as allowed by that trust deed.

In the trust deed the Entity is listed as a beneficiary of the trust.

You advise that all of the net income of the Trust for each income year will be distributed to the Entity. Section 97 of the ITAA 1936 will apply to include all of that net income as assessable income of the Entity.

Note:

For the 2010-11 and later income years, Division 6E of the ITAA 1936 will have an effect on the application of section 97 of the ITAA 1997. How Division 6E effects section 97 of the ITAA 1936 is explained in Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions (issued 28 March 2012).

Paragraphs 1 to 5 of Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions (under the heading What this Ruling is about) state:

This ruling is about the meaning of the expression 'income of the trust estate' as used in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and related provisions. Division 6 contains rules for assessing the net income of a trust calculated under section 95 (referred to in this ruling as the trust's 'net income').

Prior to the 2010-11 income year, a resident beneficiary of a trust estate who was presently entitled to a share of the income of the trust estate and not under a legal disability was assessed under section 97 on that same proportionate share of the entire net income of the trust estate. Section 98 operated in a similar manner to assess the trustee on behalf of certain beneficiaries who were presently entitled to income of the trust estate but were under a legal disability or were non-residents at the end of the income year; and certain beneficiaries who were deemed by subsection 95A(2) to be presently entitled to income of the trust estate. If there was some net income not assessed to or in respect of any beneficiary, then the trustee was generally assessed on that net income under section 99 or section 99A.

For the 2010-11 and later income years, capital gains and franked distributions included in the net income of a trust are brought to tax in accordance with Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997 (ITAA 1997) respectively.

The balance of the net income (that is the net income excluding capital gains and franked distribution) of the trust is still assessed under Division 6 in the manner described in paragraph 2, but modified by Division 6E of Part III (Division 6E).

Division 6E adjusts the rules in Division 6 to ensure that capital gains and franked distributions are not taxed twice (that is, as a result of Subdivisions 115-C or 207-B of the ITAA 1997 and Division 6). In broad terms the effect of Division 6E is to apply Division 6 on the assumption that net capital gains and franked distributions are excluded from the trust's net income, and any amount relating to these things is excluded from the income of the trust estate.

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