Edited version of private advice

Authorisation Number: 1012674662169

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Ruling

Subject: Exemption from income tax under section 50-45 of the Income Tax Assessment Act 1997

Question 1

Is the taxpayer exempt from income tax as a sporting club described in item 9.1(c) of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Taxpayer is an incorporated company limited by guarantee.

The Taxpayer was established with the main purpose of the encouragement of a game or sport.

The Taxpayer undertakes other social and commercial activities provided to its members and guests from which it generates considerable income which is incidental to the club's main purpose.

The Taxpayer uses the profits generated from social and commercial activities to subsidise the sporting activities.

The Taxpayer's constitution contains clauses which prevent the distribution of profits to any members while operating or upon winding up.

This Taxpayer is actively involved in the region's competitive sports of various age groups, promotion of sport locally at schools, training and coaching, and sponsorship.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70

Income Tax Assessment Act 1936 Section 23(g)(iii) (repealed)

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts from income tax a society, association or club established for the encouragement of a game or sport described in item 9.1(c) of the table in section 50-45 of the ITAA 1997.

A sporting club is exempt from income tax if:

• it is a society, association or club,

• it is established for the encouragement of a game or sport,

• that encouragement is the club's main purpose, and

• it satisfies the special condition for exemption in section 50-70 of the ITAA 1997, which includes that it is not carried on for the profit or gain of its individual members.

Society, association or club

The Taxpayer must be a 'society, association or club'. This term is not defined in the ITAA 1997 and therefore is 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.

The Taxpayer is a club because the Taxpayer's members are bound by its constitution including its objects which state that the purpose of the Taxpayer is to promote and carry on the encouragement of a game or sport. The Taxpayer's members voluntarily associate together for this common purpose and interest.

It is established for the encouragement of a game or sport

Taxation Ruling 97/22 Income tax: exempt sporting clubs (TR 97/22) describes the circumstances under which a sporting club is regarded as being established for the encouragement of a game or sport. Paragraph 11 of TR 97/22 provides guidance on the meaning of 'encouragement'.

11. '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 competitors in 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 increased and wider participation and improved performance;

and can occur indirectly:

• through marketing; or

• by initiating or facilitating research and development

The Taxpayer conducts extensive activities directly related to sport by organising, hosting and participating in sporting events at the local and state level, providing referees and other officials at these events and coaching and entering teams and competitors in competitions.

The Taxpayer provides sponsorships for various other sports in addition to the main stream sports. The Taxpayer is also involved in the encouragement of sports through coaching and training at local schools.

The Taxpayer is carried on for the encouragement of a game or sport.

That encouragement must be the club's main purpose

Paragraph 13 of TR 97/22 provides:

13. 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 the following features as being 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 portion of its surplus funds in encouraging the game or sport; and

• The club's constituent documents emphasise the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents.

Paragraph 16 of TR 97/22 specifies other factors that are relevant but less persuasive to determining purpose, including whether the persons controlling the direction of the club and whether voting rights vest in those persons concerned with participating in or encouraging sport.

Paragraph 41 of TR 97/22 explains that difficulties can arise in determining the club's main purpose where the club conducts other activities, particularly social or commercial activities. TR 97/22 elaborates at paragraph 42 stating that where the 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. 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 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 or purpose without disqualifying the body from the exemption.'

This view was also elaborated on in Terranora Lakes Country Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294:

'Hill J concluded that: ….while social activities ….were very extensive and could clearly be seen as an end or perhaps as ends in themselves, those activities were…pursued as a means of financing the extensive sporting activities conducted by the club.' (at ATC 4086-4087;ATR 304).

The Taxpayer displays all of the features listed in paragraph 15 of TR 97/22 as being highly persuasive of supporting its contention that the encouragement of sports is the club's main or dominant purpose. It also displays features mentioned in paragraph 16 of TR 97/22 in relation to its controlling Board and member's voting rights.

The Taxpayer does however undertake other social and commercial activities which generate significant revenues. The sporting revenue is relatively marginal and from 2010 - 2013 the sport's trading account shows a net deficit/loss.

Paragraph 54 of TR 97/22 explains one indicator of purpose is when the club uses a significant proportion of its surplus funds in encouraging its game or sport. 'As noted by Lockhart J in Cronulla Sutherland at ATC 4226; ATR 313,'…the potential of [a club] to apply its surplus funds for purposes having nothing to do with the encouragement or promotion of [a sport or game] is a significant matter'. What is important is the way such funds are used and the activities that are financed by the club.'

Analysis of the trading accounts for the various activities shows that in the years 2010 - 2013 the Taxpayer has subsidised significantly the activities of promoting the sport with the income derived from its other social and commercial activities.

We are satisfied that the Taxpayer's social and commercial activities are pursued as a means of financing the extensive sporting activities conducted by the Taxpayer and that its main purpose is the encouragement of a game or sport.

Special condition

A club will satisfy the special condition in section 50-70 of the ITAA 1997 if it:

• 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,

• complies with all the substantive requirements in its governing rules, and

• applies its income and assets solely for the purpose for which it is established.

The Taxpayer satisfies the special condition as explained below.

Not carried on for the profit or gain of its individual members

Paragraphs 9 and 10 of TR 97/22 explain the 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.

Paragraph 22 of TR 97/22 explains that we accept a club as being non-profit where, for example, the Constitution of the club includes a non-profit clause and dissolution clause.

The constituent documents of the Taxpayer provide that any profits or other income of the Taxpayer shall be applied only to the promotion of the purposes of the Taxpayer and shall not be paid to or distributed among its members. In addition, the income and property of the Taxpayer must be applied solely to its objects and not distributed to members except as payment in good faith for services rendered, etc. The constitution also prohibits distribution of the Taxpayer's income and property to its members upon dissolution. The income and property shall be transferred to similar institutions having similar objects to the Taxpayer.

The Taxpayer has met the non-profit requirement.

Physical presence in Australia

The Taxpayer is a resident of and is located in Australia. The Taxpayer pursues its objectives and carries on its activities in Australia. The Taxpayer has a physical presence in Australia and to that extent pursues its objectives and incurs its expenditure in Australia.

Complies with all the substantive requirements in its governing rules

The Taxpayer complies with all the substantive requirements in its governing rules.

Applies its income and assets solely for the purpose for which it is established

The Taxpayer applies its income and assets solely for the purpose for which it is established.

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