Edited version of your written advice

Authorisation Number: 1012742580143

Ruling

Subject: Exempt income

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 2014 - 30 June 2015

1 July 2015 - 30 June 2016

1 July 2016 - 30 June 2017

1 July 2017 - 30 June 2018

1 July 2018 - 30 June 2019

1 July 2019 - 30 June 2020

1 July 2020 - 30 June 2021

1 July 2021 - 30 June 2022

1 July 2022 - 30 June 2023

1 July 2023 - 30 June 2024

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You have provided the following information in support of your ruling request.

Previous Private Rulings - The Club has previously received two Private Rulings from the Commissioner confirming the Club is exempt from income tax pursuant to Item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997(ITAA 1997).

Private Ruling Request

The Club's constitution has not materially changed since the last private ruling which confirmed the Club's income tax exempt status

No changes been made to section 50-45 of the ITAA 1997. However, we note that the scope of section 50-45 is affected by the amendments to the special conditions contained in section 50-70, effected by the Tax Laws Amendment (2013 Measures No. 2) Act 2013 which commenced 30 June 2013. Due to the enactment of those amendments, we have specifically addressed the Club's satisfaction of these special conditions now in section 50-70.

The Club continues to carry on activities that are consistent with those which formed the basis for the last Private Ruling that found the Club was exempt.

The information detailed below demonstrates that the Club continues to conduct activities that are directly related to the encouragement of sports and games and appropriates a significant proportion of the Club's surplus funds to encouraging sports and games.

The Club is a public company limited by guarantee.

The Club moved into its current premises in 19**. Since then the Club has undertaken major upgrades, including major sports venues.

The key role and purpose for the Club is to encourage and promote participation in sport in Australia.

The Club remains a non-profit entity. The following clauses from the Club's Constitution state:

Any profits or other income of the Club must be applied only to the promotion of the objects of the Club and must not be paid to or distributed among the members of the Club.

The income and property of the Club, howsoever derived, must be applied solely towards the promotion of the objects of the Club as set forth in this Constitution and no portion thereof is to be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to or among the members of the Club…

If upon the winding up or dissolution of the Club there remains ... any property whatsoever the same must not be paid to or distributed among the members of the Club but must be given up or transferred to any sporting club or body carried on predominantly for the encouragement of the game or sport and that is not carried on for the profit or gain of its individual members and whose members cannot personally benefit upon a winding up, and if and so far as effect cannot be given to the aforesaid provision then to some charitable object.

The Club's dominant purpose is to promote and propagate all forms of sport. This purpose is clearly reflected in the objects of the Club which are stated in the Club's Constitution.

The Club's Constitution stipulates that the Club's income and property are to be applied solely towards the promotion of the Club's objects.

That the object established in Sub-rule XX reflects the Club's dominant purpose is also supported by Rule XX of the Club's Constitution, dealing with the disbursement of the assets on the liquidation of the Club.

Rule XX of the constitution ensures that the Club's assets and income continue to be used to fund the objects established by sub-Rule XX that is for the promotion and encouragement of sport and sporting activities - rather than the historical objects reflected in sub-Rules XX and XX.

Since the earliest days, the Club has had an abiding interest in fostering and encouraging sport in the local community

Sporting sub Clubs have been part of the operations of the Club since formation. The directors all have a sporting background and an interest in sport informs their deliberations on activities the Club undertakes in pursuit of the Club s objectives.

The Club's pervious Private Ruling application contained a highly detailed account of the Club's operations and activities conducted to that point. Since then, the Club has continued to upgrade and expand in order to pursue the Club's primary object of encouraging sport.

Since the last Private Ruling application, the Club has spent approximately $X.XX million on sports-related operating expenses and direct contributions to sport.

These facility upgrades will enable the Club to meet the increasing demand from athletes, sports teams and members, by offering a high performance training area featuring dedicated equipment for elite athletes. A functional training zone for sports teams to participate in boot camp, and high interval training style workouts.

The Club's activities further demonstrate its commitment to the continue encouragement of swimming by investing significantly in swim coaches, managers and additional staff to run elite swimming squads and the 'learn-to- swim' program.

The Club is in the process of establishing a sports academy which will be responsible for the management and support of the various sports clubs by providing:

• Annual grants;

• marketing and promotional assistance,

• Recognising outstanding performances;

• Promoting sports registration days.

The Commissioner has previously ruled by Private Ruling that the Club is exempt from income tax.

The Club's activities since receipt of the earlier Private Rulings continue to demonstrate the Club's commitment to the encouragement of games and sports, and that the Club's Constitution has not changed materially since the last Private Ruling was issued. Please note that the sports and games activities mentioned earlier in this letter represent only a snapshot of the Club's actual activities in relation to the encouragement of games and sport. In previous Private Ruling requests, these activities have been comprehensively detailed over hundreds of pages.

The Club's involvement in encouraging sport from grass roots through to professional, elite, Olympic and World levels is extensive, and the Club's continued emphasis on maintaining Olympic class facilities and coaching staff, as well as ongoing financial and in-kind support of individual athletes, sports clubs and teams corroborates that purpose.

The Club has demonstrated, both in this current Private Ruling request and in earlier Ruling requests, that the Club is established for the purpose of encouraging sports and games in Australia. The Club's objects also indicate a secondary, minor purpose of providing Club members with social facilities and entertainment, the profits from which are used to fund the Club's main purpose of encouraging sports and games in Australia.

The Club's main purpose is to encourage sports and games, and its ancillary purpose is the provision of non-sporting recreational and social facilities. Accordingly, the Club will satisfy the special condition if the Club's income and assets are put to use solely for those purposes.

Non-sporting activities

The Club has extensive non-sporting facilities, dining facilities, coffee shops, bars, Tab and a gaming area

Conclusion

The Commissioner has, on two prior occasions, ruled that the Club is exempt from income tax under section 50-45 of the ITAA 1997. The Commissioner's previous Private Rulings have been made on the basis that the Club's social activities are pursued as a means to finance the main purpose of the Club, that being the encouragement of games and sports.

In this and in our other Private Ruling requests we have given comprehensive evidence of the extensive encouragement of games or sport undertaken by the Club. We have also demonstrated in this current Private Ruling request that the encouragement of games and sport continues to increase.

The facts relied upon by the Commissioner in making earlier Private Rulings on the Club's income tax exempt status remain consistent with the Club's present facts, and the Club's increased spending on expanding its sporting and games facilities and activities is further evidence of the Club's pursuit of its main purpose.

The Club requests that the Commissioner extend the Ruling period to at least 10 years to reduce the unnecessary time and cost for both the Club and the ATO in having to prepare and consider Private Ruling requests every three years.

The Club undertakes to notify the Commissioner of any significant change in its activities or Constitution to enable the Commissioner to review its Private Ruling confirming exemption from income tax. This is entirely a sensible, commercial and practical approach and does not place the Commonwealth Revenue in jeopardy.

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

Reasons for decision

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?

Detailed reasoning

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 which 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.

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

Paragraph 7 of Taxation Ruling TR 97/22 Exempt sporting clubs (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:

A club must not be carried on for the purpose of profit or gain to its individual members.

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 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 nonprofit test has been satisfied.

How this applies to you,

The club's constitution stipulates the club's income and property are applied towards the club's objects. Rule XX deals with the disbursement of assets on the winding up of the club. We are satisfied that the Club is not carried on for the profit or gain of its individual members.

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

Encouragement

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 competitors in competitions in the game or sport;

• organising and conducting tournaments and the like;

• improving the abilities of participants;

• 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.

Game or sport

As stated in TR 97/22, at paragraph 24 and 25:

24. There is no special definition of what constitutes a 'game' or 'sport' for the purposes of section 50-45. Accordingly, those words should be given their ordinary meanings.

25. Various sources can throw light on what is meant by a game or sport.

and at paragraph 28:

The Australian Sports Commission (ASC), which is the Federal Government agency responsible for the development of sport in Australia, defines sport as 'a human activity capable of achieving a result requiring physical exertion and/or physical skill that, by its nature and organisation, is competitive and is generally accepted as being a sport'. This definition is used, in part, to determine whether a sport is entitled to funding and support by the ASC.

Paragraph 31 and 32 state:

31. Games and sports can be contrasted with endeavours where a thing, object or animal is the essential focus, or where the activities are merely a means to some other end.

32. Activities that could be games or sports may be merely a means to other ends. This is so where the activities themselves are not organised in a sport- or game-like way and some other purpose is predominant. For example, while the activity of dancing could be organised in a game- or sport-like way, it is commonly a means of promoting sociability, participation and relaxation. In such cases it does not constitute a game or sport.

Furthermore, paragraphs 34 to 36 provide that there are expectations around intention, rules, and competition for an activity to be considered a game or sport:

34. The participants must intend that the activities they perform are the activities of a particular game or sport and that the intention and activities must be shared by the other participants.

…

35. A common feature of a game or sport is a set of conventions, expectations and rules. This contributes to the element of organisation that is commonly indicative of a game or sport. While written or defined rules are not essential, the imposition of such rules and conventions in an organised group of participants can convert an otherwise ordinary leisure activity into a game or sport (e.g., hunting, fishing, walking)

36. Competition is a very common feature although not essential.

How this applies to you

Although income of assets of the Club may be applied towards some of the objects of the Club that are not specifically directed towards the encouragement of sports and games - for example, funds may be spent on upgrading the food and beverage facilities at the Club - this application of funds is ancillary to the Club's main purpose, insofar as these facilities are provided as a complement to the Club's sporting facilities. More particularly, without the improvement of the Club's facilities, the Club will not earn the profits to appropriate towards the sports activities.

Therefore the non-sporting activities are seen as being pursued as a means to finance the main purpose of the Club that being the encouragement of a game or sport as evidenced by the extensive games or sport encouraged by the Club, as outlined in the facts and discussions of this case.

It is noted that whilst the non-sporting facilities are quite extensive, they are not dissimilar to those of many Clubs, some of which are not exempt such as in Cronulla, or exempt in cases similar to St Mary's and Terranora.

Therefore, the Club is considered to be one 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.

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 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.

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, including those 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 centered around the support of local football, and that the club rules required a certain proportion of its funds support local football.

How this applies to you

Based on the information provided, 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.

In summary, the fact that a sporting club also encourages social and other activities does not, in itself, preclude it from being exempt. The club will be exempt provided the encouragement of a game or sport is the club's main purpose. Conversely if the club's main or equal purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply even if sport is encouraged. It is acknowledged that the Club, in accordance with its constitution, does encourage sport by operating sporting facilities and sporting sub clubs, and sponsoring sporting organisations and individuals.

Conclusion

We accept that the entity 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.

The Commissioner must consider each new Private Ruling request on its merits, consideration has occurred on two prior occasions and on each occasion, the Commissioner has ruled that the Club is an exempt entity 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.

We accept that the entity is 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.

Period of Ruling

The law does not require either the applicant or the Commissioner to specify the period applicable to a private ruling. However, our practice is to specify the years of income or periods to which the ruling applies, in the interests of providing certainty.

Private rulings may be given for:

• a past income year or period

• the current income year or period

• a future income year or period.

Normally, a ruling will be for the period specified by the applicant. There may be occasions, however, where we consider that a ruling needs to cover a different period from that specified in the application. When this occurs, the ruling must specify the time it applies to the taxpayer.

Following internal ATO consultation, the policy in relation to determining the period for which to provide a private ruling has changed.

The previous guideline of issuing a ruling for not more than 3 to 4 years has been removed, and the appropriate length of time for which to rule is determined by the case officer and approving officer.

In determining the appropriate length of time for which to rule, consideration has been made to:

• the likelihood of a change to the law, and

• the likelihood of changes to the facts of the scheme

These considerations are balanced against the facts of the case.

It is important to note that a private ruling will no longer apply, and the taxpayer will no longer be protected by it:

• if the law changes

• if the facts underlying the scheme change and the scheme is not implemented in the way set out in the private ruling

• if it is overridden by a later ruling.

In addition, a court may refuse to entertain a case based on a ruling if it considers that the facts or tax law are so likely to change that it would make the case of no legal consequence to either of the parties.

The Club has requested a ruling for a ten year period. They have cited significant administrative costs, ongoing organisational stability and the Commissioner's commitment to cut red tape as reasons for requesting the extended period. The Club has supported their request by stating two favourable rulings have been issued previously. The constitution has not materially changed since the last ruling. The Club has undertaken to notify the Commissioner of any significant change in its activities or Constitution to enable the Commissioner to review its Private Ruling.

As a result of the policy change, the unlikely change to the facts and the lack of revenue risk it is considered reasonable to issue the ruling for a ten year period.

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