Edited version of your written advice

Authorisation Number: 1012771141758

Ruling

Subject: Income tax exempt entities - established for the encouragement of a game or sport

Question 1

Will being a shareholder in a company affect you status as exempt from income tax on the basis that you are a society, association or club established for the encouragement of a game or sport?

Answer

No

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2014

Relevant facts and circumstances

1. You consider that your main purpose is the encouragement of a game or sport.

2. You are a not for profit entity.

3. You have joined with other entities with a purpose to encourage a game or sport (Other Bodies) to establish a company.

4. You have agreed to become a shareholder in The Company.

5. The Company will act as a bulk-buying arm, purchasing consumables in bulk for you and the Other Bodies.

6. By consolidating the orders from you and the Other Bodies, The Company will be able to obtain better discounts than each body could achieve acting independently.

7. You have stated that 'it is envisaged that [The Company] will not make any profits but merely break even'.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 50-45

Reasons for decision

Issue 1

Question 1

Summary

One of the requirements for a society, association or club to self-assess their status as a tax exempt sporting entity is that they must be satisfied that their main purpose, in any given year of income, is the encouragement of a game or sport.

Activities which are merely ancillary or incidental to encouraging the game or sport will not prevent the society, association or club from being exempt.

You have told us that The Company will act as a bulk-buying arm for you and the Other Bodies, enabling better discounts on products than each body could achieve acting independently.

Your involvement with The Company, including being a shareholder, will be merely incidental and ancillary to your main purpose, which you have told us is the encouragement of a game or sport. Thus, your involvement with The Company will not impact on your ability to self-assess as income tax exempt on the basis that you are a society, association or club established for the encouragement of a game or sport.

Detailed reasoning

Item 9.1 of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) provides exemption from income tax for a society, association or club established for the encouragement of a game or sport.

You will be exempt from income tax and can self-assess your exemption if during the year of income you:

• are a non-profit society, association or club,

• are established for the encouragement of a game or sport,

• are not a charity, and

• satisfy either the physical presence in Australia test, deductible gift recipient test or prescribed by law test.

Note: Further details regarding self-assessing your tax exempt status, including the above conditions, can be found in our publication, Income tax exemption and sporting clubs (NAT 73773-02.2011).

Of relevance, you have asked if your involvement with The Company will impact on your status as a tax exempt not for profit entity. The answer to this question depends on whether your involvement with The Company will prevent you from being established for the encouragement of a game or sport.

Paragraphs 41 to 46 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs state that:

41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 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.'

43. However, if the main purpose becomes the carrying out of those other activities, the 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 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.'

44. Therefore, the fact that a sporting club also encourages social and other activities does not, of 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. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

45. The effect of non-sporting activities is illustrated by the decision of the Full Federal Court in Cronulla Sutherland. The club had some 13,000 members and extensive social facilities. It was incorporated in 1957 and had as one of its objects the promotion and development of rugby league. In 1963, the Cronulla Sutherland District Rugby League Football Club was formed as a separate club to administer football activities. In time, the club supported the entry of a team into the first grade competition organised and administered by the NSW Rugby League (NSWRL). Thereafter, the football club was almost entirely dependent upon the leagues club for financial assistance in the form of grants, the provision of facilities and guarantees of expenditure.

46. The majority of the Full Federal Court in Cronulla Sutherland held that the leagues club's main object was the provision to its members of social amenities and licensed club facilities, not the encouragement of sport. Consequently, it was not entitled to exemption. Foster J, in dissenting, noted that the taxpayer had:

' ... rendered financial assistance to the sporting body to such an extent as to prevent it making expenditures on maintenance of club facilities which would otherwise have been deemed desirable.' (at ATC 4250; ATR 339).

The above quote illustrates that in circumstances where an activity is merely incidental or ancillary to the main purpose of promoting or encouraging a game or sport, the activity will have no impact on the tax exempt status of the club society or association.

You have told us that your involvement with The Company will enable you to obtain discounts on consumables. It is considered that the procurement of these items would be incidental and ancillary to your main purpose which you have told us is the promotion of a game or sport.

Based on this, your involvement with The Company, including being a shareholder, will be merely incidental and ancillary to your main purpose of promoting a game or sport. It will not impact on your status as a tax exempt entity or your ability to self-assess as such under item 9.1 in the table in section 50-45 of the ITAA 1997.

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