Edited version of your written advice

Authorisation Number: 1012678627980

Ruling

Subject: not for profit exemption: Association for encouragement of sport

Question

Is the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association 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:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

The entity is incorporated.

The entity's objects under its constitution relate to the promotion of sport.

The entity conducts many activities to promote sports, indoor sports, recreations, games etcetera.

The entity organises, hosts and participates in competitions.

The financial resources of the entity are used to develop and maintain its sporting facilities.

The entity had to spend a considerable sum on not only maintaining but also improving its sporting and associated facilities as well as to maintain and increase membership. Thus any surplus made on the years trading is being reinvested into the entity's sport facilities and premises and to provide working capital.

The entity also provides non sporting facilities for its members and guests from which it generates considerable income. A significant portion of this income is used for the promotion of sporting activities.

The entity provides sponsorship to many sport and community organisations.

The entity supports many sports and encourages the use of its facilities for meetings, fund-raising, social events, presentations, etcetera.

The entity conducts coaching clinics for members.

The entity's magazine is prepared for members and visitors detailing the entity's news and along with upcoming sport and social events.

It is stated that all the entity's activities revolve around the sporting activities and any other social activities are merely incidental to the sport. The functions in the entity are only a minor activity in comparison with sports promotion and in any event they are functions which members expect to be conducted in their entity. The social activities are undertaken to attract new sporting membership and to provide financial support to the sporting activities.

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

Relevant legislative provisions

Income Tax Assessment Act 1997

section 50-1

section 50-45 table item 9.1(c)

section 50-70

Reasons for decision

A society, association or club which has been established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45 of the ITAA 1997 is exempt from income tax under section 50-1 of the ITAA 1997.

The exemption is subject to the special conditions under section 50-70 of the ITAA 1997 being met. Subsection 50-70(1) states:

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:

(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; 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.

In the present case, the entity was incorporated and has been conducting its activities permissible under its objects. The entity has a physical presence in Australia, incurs its expenditure in Australia and pursues its objects in Australia. Hence, the special condition in paragraph (a) of subsection 50-70(1) is satisfied.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs covers the circumstances under which a club is regarded as being established for the encouragement of a game or sport.

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:

1. It cannot be carried on for the purpose of profit or gain to its individual members;

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

3. 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 and 10 of TR 97/22 provide:

9. A club must not be carried on for the purpose 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…

Paragraph 23 of the TR 97/22 provides:

23. Where the law or constituent documents do not prohibit distributions, it a is a question of fact in case as to whether the club is not carried on for purposes of profit or gain to the individual members…Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non profit test has been satisfied.

Application to the Club

A clause in the Memorandum of Association of the entity prohibits the distribution of any income or property of the entity by way of dividend, bonus or otherwise to or among members of the entity.

This excludes payments made in good faith to members for services rendered to the entity or the payment in good faith of interest to any member or other person in respect of any services rendered or any materials or goods supplied.

A clause of the Memorandum provides that on dissolution of the entity, any property whatsoever remaining after the satisfaction of all debts and liabilities must be transferred to another entity having similar objects.

We are satisfied that the entity 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 of 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.

Application to the Club

The entity conducts activities directly related to sport by organising hosting and participating in sporting events at local and state level by providing officials at these events, by coaching and entering teams and competitions at different levels of competition.

We accept that the entity 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 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 of sport;

• The sporting activities encouraged by the club are extensive;

• The club uses a significant portion of its surplus funds in encouraging the game of 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

Relevant but less persuasive features are listed at paragraph 16 of TR 97/22 and include:

• 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 the 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

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.

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 one established for the purpose of carrying on 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; 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.

Application to the Club

1. Highly persuasive features:

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

It has been established that the entity conducts activities directly related to the game of bowls. It does this by organising, hosting and participating in competitions.

b) The sporting activities encouraged by the club are extensive

The sporting activity conducted by the entity is of such a scale that it would be classified as extensive.

Further to this, the entity pursues and promotes the 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 entity enters competitions at a significant cost to the entity. Furthermore, its historical and current activities indicate a strong and continuing association with the sport.

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

Paragraph 54 of TR 97/22 provides:

The club should use a significant proportion of its surplus funds in encouraging its game or sport. As noted in Lockhart J in Cronulla Sutherland as 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.

In Terranora, Hill J concluded (at ATC 4.86-4087; ATR 304):

….while the 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.

An analysis of the entity's financial statements reveals a loss from the sport. These losses are made up for by trading income from other areas.

Although both the social and sporting activities are extensive, we note the social activities are pursued for the purpose of financing the sporting activities.

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

In St Mary's at 97 ATC 4534 Hill J observed:

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 entity's constitution indicates that it is primarily established for the purpose of conducting sports.

This finding is further strengthened by the fact that only sporting members can fill positions on the board, and only financial members can attend and vote on all matters at general meetings.

2. Relevant but less persuasive features:

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

The entity promotes and encourages the game or sport.

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).

A rule of the entity's governing documents supports that the Board of Directors of the entity 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 sporting members of the entity are given full voting rights. While non-sporting members are entitled to vote at the election of the Board, their rights are restricted.

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.

The entity provides information on upcoming events through magazines and its website.

Special conditions - section 50-70 of the ITAA 1997

The entity has a physical presence in Australia, incurs its expenditure in Australia and pursues its objects in Australia. Hence, the special condition in paragraph (a) of subsection 50-70(1) is satisfied.

Relevant Case Law Analysis

In Cronulla Sutherland the Full Federal Court held that a professionally managed leagues club was not entitled to exemption from income tax as a sporting club under section 23(g)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936).

The leagues club provided extensive social facilities including bars, restaurants and an auditorium for live shows and discos. It had as one of its objectives:

To establish, equip, furnish and maintain a Club for the benefit of members and to promote social, sporting and educational undertakings for the advancement and benefit of members.

Lockhart and Beaumont JJ held, in separate judgements that the main or predominant object of the leagues Club was to provide the facilities of a licensed club. Lockhart J stated at 90 ATC 4226:

In my opinion the encouragement and promotion of rugby league football and the provision of amenities of a social club for its members are two objects or purposes of the appellant. Neither is correctly described as ancillary or incidental to the other or as necessarily independent of the other. The two objects and purposes overlap to some degree. The main object or purpose is the provision of the social amenities to its members, not the encouragement or promotion of rugby league football.

In St Mary's case the major object of the club was rugby league. Other objects of the club were concerned with liquor trading and refreshments. Hill J observed at 97 ATC 4533 - 34:

The social activities of the Club are significant, both financially and in number. They cannot be ignored. But the evidence persuades me that while the social and gambling activities of the club are significant in their own right, they are nevertheless subordinate to the activities of the Club in encouraging and promoting rugby league football in the St Mary's area, particularly among children.

The present case differs from the Cronulla-Sutherland case in a number of respects. It will be recalled that there were two clubs in the Cronulla-Sutherland area. One devoted to the pursuit of football and the other, the Cronulla-Sutherland Leagues Club which assisted in financing the football club but which, in all the circumstances was found to be a members or social club rather than a club existing primarily to support or encourage football. The appellant in Cronulla-Sutherland had no football team. It organised no competitive football at all. It's only connection to football were the grants which it made to the football club and the provision of facilities to that club.

…

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 its main object or purpose "the encouragement or promotion" of rugby league within the meaning of section 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 of as being one for the "encouragement or promotion" of rugby league.

In Tweed Heads, the taxpayer was a lawn bowls club which had one indoor and four outdoor bowling greens. The Club participated in and organised a large number of tournaments each year. The Club building was substantial and the catering and entertainment facilities were extensive. The Club's main source of revenue was derived from poker machines which were used predominantly by the 400,000 annual visitors to the club.

In a judgement by Dr P Gerber at 92 ATC 2099 he stated:

…I am satisfied that the club, from its very inception, has been and is dedicated to a very substantial degree to the promotion of lawn bowls and, latterly, to indoor bowls. True it is that some elements of the Club's activities - leaving the poker machines aside for the moment - are social and cannot, as such, be characterised as "promoting the athletic game of bowls", but that is true of virtually all sports clubs. Be that as it may, I am left in no doubt that the Club has, as its main or dominant purpose, the promotion and encouragement of the bowling.

That leaves the issue of the poker machines, which earn substantial revenue, only a relatively small proportion of which was, in the years before me, used for bowling. In the vernacular, the club has money pouring out of its ears and doesn't know what to do with it all. So what? Provided its main object is the promotion of bowls, the fact it also produces repetitive strain injury (RSI) in some 400,000 non bowling poker machine players while at the same time emptying their pockets seems to me to be utterly irrelevant.

The case Terranora Lakes involved a club (incorporated in 1964) whose objects included the promotion of games and pastimes and the acquisition of land to be used for recreational purposes. The club had approximately 4,000 members and provided extensive social facilities including bars, restaurants, a poker machine area and an auditorium for concerts and dancing. It owned a clubhouse, playing fields, a sports ground and sporting complex, and it held a controlling interest in a time share resort.

The club promoted various sports operated by internal clubs, including cricket, clay target shooting, tennis, golf, touch football, softball, deep sea fishing, and horse riding. However the club also promoted its extensive social activities, attracting approximately 1000 visitors per day. The Club derived 90.3 % of its revenue from its poker machines, bar trading and catering.

It was held that having regard to the activities of the club as conducted in the year of income, it was one established for the purpose of the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and selling of time share units.

In a judgement by Hill J at 93 ATC 4086 - 4087 he stated:

Clearly each case will depend upon its own facts. If the social activities have become and end in themselves, as was the case in Cronulla Sutherland, it will be necessary to see whether that end has become the predominant purpose for which the Club is established in the year of income. However, 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 of the club. Thus, I am of the view that, having regard to the activities of the Club as conducted in the year of income, the Club was in that year, one established for the promotion of athletic sport and not one for established for the purpose of carrying on a business, or business of gambling, provision of entertainment, selling of time share units or the provision of food.

The entity can be distinguished from the Cronulla-Sutherland case because the constitution clearly distinguishes the sporting activities of the entity 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 entity point to the characterisation of the entity as having its main object or purpose as being the encouragement or promotion of a sport.

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

Conclusion

Based on the information the entity has presented and having regard to the criteria provided by TR 97/22, we accept that on balance the main purpose of the entity 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 entity leading to this conclusion are summarised as follows:

• the entity conducts extensive activities directly related to sport by organising, hosting and participating in events at various levels, by coaching and entering teams and competitors in different levels of competition;

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

• whilst the entity'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 entity provides substantial sporting facilities for the benefit of its members; and

• the entity'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 entity'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 Mary's, that the social activities are in part undertaken to provide funds for the encouragement of bowling activities.

While there is not a high level of participation by members in the sport, this feature is not so dominant so as to disqualify the entity from obtaining an exemption.

Other factors indicate that the entity's main purpose is the encouragement of sports include:

• the spending of the entity's fund in maintaining and improving its sporting associated facilities

• the engagement of a full time sport Co-ordinator solely responsible for the promotion and encouragement of sports.

• the appointment of an assistant to the Co-ordinator with the day to day running of sports and tournaments for the entity.

• the conducting of coaching clinics for members of the entity whether they are new or experienced players.

• the provision of sponsorship to a number of sporting organisations.

• the history of the entity is one of close association with sports from its inception.

• the support of many sports in the local region and encouragement of the use of the entity's facilities for meetings, fundraising, social events, presentation, etc.

Consequently, we accept that the entity is not carried on for the gain of individual members, and is established for the encouragement of a game or sport, and the encouragement of a game or sport is its main purpose pursuant to item 9.1 (c) of the table in section 50-45 of the ITAA°1997. It is therefore exempt from income tax under section 50-1 of the ITAA 1997 in the years to which this ruling applies.

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