Edited version of your written advice

Authorisation Number: 1012754074269

Ruling

Subject: Except entity - encouragement of sport

Question 1

Is the organisation a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2012 - 30 June 2013

1 July 2013 - 31 October 2013

1 November 2013 - 31 October 2014

1 November 2014 - 31 October 2015

1 November 2015 - 31 October 2016

1 November 2016 - 31 October 2017

1 November 2017 - 31 October 2018

1 November 2018 - 31 October 2019

1 November 2019 - 31 October 2020

1 November 2020 - 31 October 2021

1 November 2021 - 31 October 2022

1 November 2022 - 31 October 2023

The applicant has adopted an accounting period ending 31 October commencing 2013.

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Applicant is a company which was incorporated in 20XX.

The Applicant is a Public Company for the purposes of the Corporations Act, being a company limited by guarantee.

The only members of the applicant are the persons who are the directors.

The applicant's income and property must be applied solely towards promoting the applicants objects. No part of its income or property may be distributed to its members.

The objects of the Applicant are recorded in the applicant's constitution.

The Applicant is responsible for the day to day management, operation and control.

The Applicant is responsible for maintenance, repair, capital replacements and upgrades.

The Applicant will primarily source the necessary funding from functions and events.

The constitution provides that the net profit of the applicant in respect of each financial year must be applied by way of distribution, grant or financial assistance to any of the sporting organisations described in rule X.X of the applicant's constitution which has as a principal object the encouragement of sport and does not carry on business for the profit or gain to its individual members.

The Applicant sought and subsequently obtained a favourable private ruling in 20YY.

Function rooms which are ancillary to the main facility are available for hire for private functions. The applicant estimates that X% of funds derived from the operation of the facility will arrive from these 'recreational' activities. These activities are incidental, ancillary and secondary to the applicant's main purpose.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-10

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70

Income Tax Assessment Act 1997 Subsection 50-75(1)

Reasons for decision

Question 1

Is the organisation a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Detailed reasoning

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of ITAA 1997. 

Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must:

(a) be a society, association or club;

(b) be established for the encouragement of a game or sport; and

(c) meet the special conditions specified in section 50-70 of the ITAA 1997.

(a) Society, Association or Club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Shorter Oxford English Dictionary defines 'association' to be:

a body of persons associated for a common purpose; the organisation formed to effect their purpose.

The Macquarie Dictionary defines it as:

'an organisation of people with a common purpose and having a formal structure'.

'Society' has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35).

This approach is also confirmed in Taxation Determination TD 95/56, which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The Macquarie Dictionary defines 'club' as:

a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members.

The interpretations of 'society', 'association' or 'club' as described above, place emphasis on a 'body of persons' and 'an organisation of people' with a 'common purpose'. AO is registered as a public company limited by guarantee and is brought into existence by its members to pursue a common purpose.

It is considered that the organisation is a society, association or club.

(b) Established for the encouragement of a Game or Sport

Game or sport

The terms 'game' or 'sport' for the purposes of section 50-45 are not defined in the ITAA 1997 and have their ordinary meanings.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) provides the Commissioner's view on what constitutes as exempt sporting clubs. TR 97/22 provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 50-45, and includes (at paragraph 38):

played with ball or projectile:

badminton; baseball; basketball; bocce; bowling (ten-pin); bowls; cricket; croquet; football (all codes); golf; handball; hockey; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball;

The objects of the organisation, as stated in its constitution, are directed at promoting, controlling and managing games of sport.

It is considered that the organisation is directly connected with activities played with a ball or projectile,

It is accepted that the organisation is concerned with a game or sport.

Encouragement

Paragraph 11 of TR 97/22 refers to the meaning in the Macquarie Dictionary which defines 'encouragement' to mean 'stimulation by assistance' and provides that encouragement can occur directly by:

• forming, preparing and entering teams and competitors in competition in the game or sport

• coordinating activities

• organising and conducting tournaments and the like

• improving the abilities of participants

• improving the standards of trainers and coachers

• 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

From the information provided in the private ruling application, the organisation conducts many activities that are connected with sport:

It is evident that the organisation is directly involved in the encouragement of sport. It is responsible for the day to day management, operation and control of the facilities. This includes maintenance, repairs and upgrades.

It is considered that the organisation encourages sport.

Main purpose

Paragraph 41 of the TR 97/22 provides that to be eligible for the exemption, an association's main purpose must be to encourage a game or sport. Difficulties can arise where the association conducts other activities, particularly social or commercial activities.

The main purpose can only be ascertained after objectively weighing all of the association's features such as the constituent document, history, control and activities.

Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting a conclusion that the main purpose of the association 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 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.

The fact that an association also encourages social and other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225 (Cronulla), where an association 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 be that of encouragement. In contrast, where an association's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

In order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to the sporting ends. If they become an end in themselves, it will be difficult for a club to demonstrate that it is predominantly for the encouragement of a game or sport.

To determine whether the organisation displays features that support a main purpose of encouraging a game or sport, its constitution, activities, history and control will be examined:

Constitution

From reviewing its objects, the organisation has mixed objects which are directed at both sport and recreational purposes.

Activities

It is considered that the activities of the organisation are directed at the encouragement of sport:

From the information provided by the applicant it is estimated that does not have extensive social or recreational activities and they can be considered as a secondary purpose to the encouragement of sport. These activities are directed at providing financial assistance to sporting organisations that encourage sport.

History & Control

The organisation was incorporated in 2009.Paragraph 58 of 97/22 states:

The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports a conclusion that it is established for the encouragement of the game or sport…

Control of the organisation is vested in its board of directors. In summary, the organisation directly encourages sport and demonstrates features persuasive of it being for the encouragement of a game or sport.

(c) Special Conditions

Section 50-70 of the ITAA 1997 states:

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

An entity covered by item 1.7, 2.1, 9.1 or 9.2 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.

(i) Not carried on for the profit or gain of its members

Section 50-45 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents.

The organisation has an appropriate non-profit clause and dissolution clause in its constitution:

It is accepted that the organisation operates in a non-profit manner.

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

For the organisation to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

From the information provided, the organisation has a physical presence in Australia as it carries out all activities in Australia. Therefore, it will incur its expenditure and pursues its purposes principally in Australia.

Accordingly, the organisation satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the organisation is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is 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.

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 organisation has requested a ruling for a ten year period. They have cited ongoing organisational stability and the Commissioner's commitment to cut red tape as reasons for requesting the extended period. They have supported their request by stating a previous favourable ruling. The constitution has not materially changed since the last ruling. The organisation 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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