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Edited version of your written advice

Authorisation Number: 1012979776399

Date of advice: 7 March 2016

Ruling

Subject: Income Tax Exemption as a Sporting Club

Question 1

Is the entity exempt from Income Tax 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 and sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The entity is an incorporated association and is governed by its Constitution.

The Constitution details the objectives of the entity.

The Constitution provides that income and property of the entity shall be applied solely to the promotion of its objects and shall not be paid or transferred directly or indirectly to its members.

The Constitution includes the entity's dissolution clause. The entity is prohibited from applying surplus assets to the benefit of members. Any surplus assets remaining following the winding up of the company will be transferred to another club, association or institution having objects similar wholly or in part.

The entity has Honorary Members, Life Governor Members, Foundation Members, Life Members, Ordinary Members and Transit Members.

Approximately XX% of the entities members are registered sports players.

The entity has three committees; the main committee, the building committee and the sports committee.

The financial statements for the year ended 30 June 20XX of the entity state that the main activity of the club is 'cultural club'.

Clubrooms

In a previous income year the entity used its surplus revenue to renovate the clubrooms.

Sport

In the 20XX income year the club hosted a number of sports competitions. In the 20XX income year the club is scheduled to host a similar number of sports competitions.

Both members and the public play sport at the entity's clubrooms.

The entity has junior players (ages 10 years and up) and senior men and women players. Members play on most days of the week.

The entity advised that the sport is promoted to its members and to the wider community, as well as locally and internationally.

Social activities

The entity also offers bistro dining facilities and is open to both members and the general public for this.

The entity participates in cultural festivals/events during the year including onsite weekly programs.

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

Section 50-1 of the ITAA 1997 provides the total ordinary income and statutory income of entities covered in section 50-45 is exempt from income tax. This includes at item 9.1(c) of the table in section 50-45 of the ITAA 1997, a society, association or club established for the encouragement of a game or sport.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) provides the Tax Office view and describes the circumstances under which a society, association or club is regarded as being established for the encouragement of a game or sport.

Paragraph 7 of TR 97/22 sets out the relevant tests in determining an entity's tax exempt status under item 9.1(c) of section 50-45 of the ITAA 1997, as detailed below:

For a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy the following three tests:

Society, Association or Club

The entity was incorporated as a non-proprietary company and has been conducting activities permissible under its objects.

The requirement that it is a club is therefore satisfied.

Meet the requirements of section 50-70 of the ITAA 1997

Item 9.1(c) in the table in section 50-45 of the ITAA 1997 requires consideration of the special condition under section 50-70 of the ITAA 1997.

The entity's constitution suggests that the club was established not for individual profit or gain. It contains clauses to prohibit the distributions of profit or gain to its members in the life of the operations and in the event of winding up. These clauses are considered to be suitable non-profit and winding up clauses.

The entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It therefore satisfies paragraph 50-70(1)(a) of the ITAA 1997.

Further subsection 50-70(2) provides that the entity must:

The entity has advised that it complies with both of these obligations.

Main Purpose of Encouraging a Sport or Game

To satisfy item 9.1(c) in section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the main purpose of the club.

Paragraph 38 of TR 97/22 includes the clubs sport as a form of sport.

Paragraph 11 of TR 97/22 provides the following regarding the encouragement of a sport:

The Notes on Clauses of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 state:

It is accepted that the entity carries on and promotes sporting activities and tournaments. Particularly since an earlier income year when it undertook extensive renovations to its clubroom facilities.

However, to be eligible for exemption under item 9.1(c) of section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the entity's main purpose.

Main Purpose

In determining main purpose, difficulties can arise when a club conducts other activities, particularly social and/or commercial activities. There have been a number of Federal Court cases and Administrative Appeal Tribunal decisions that have considered the main purpose of a club that has a sporting purpose while also conducting extensive social activities.

Hill J in St Marys Rugby League Club Limited v FT of T 97 ATC 4528; (1997) 36 ATR 281 (St Marys) said in relation to subparagraph 23(g)(iii) of the Income Tax Assessment Act 1936:

In the case of the entity, it provides social and commercial/entertainment activities including: dining facilities, a social meeting place, a weekly program for senior citizens, and participation in cultural events and festivals.

Paragraph 14 of TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all the club's features, including those features described in paragraphs 15 and 16.

Further, it is necessary to look to the relevant years of income, in the entity's case being the financial year ending 30 June 2016 to determine if each of the elements are satisfied, paragraph 48 of TR 97/22 stating:

A club's main purpose hinges on whether the dining/bar and cultural activities (social activities) are beyond a secondary purpose to the clubs sporting objectives. In St Marys case it was held that the gaming activities and bar profits totalling $1,494,203 for 1995 were outweighed by the sporting objectives.

In St Marys case it was considered "It is obvious from the evidence that persons are drawn to membership of the club because of their interest in rugby league". The consideration here must be whether the members drawn to the entity's clubrooms are for sport or social reasons.

As per the ruling application, only 25% of members attend the club to partake in sport. The majority of members are not drawn to the club for sporting purposes but rather the social and cultural aspect of the Club. It is therefore considered that the main purpose appears to be weighted to social rather than a purpose of encouraging sport.

Each of the highly persuasive features is examined in the context of the entity.

Conducts sporting or game activities:

The entity is involved with sport. During the 20XX income year the club hosted a number of sporting tournaments. For the 20XX income year the entity is scheduled to host a similar number of tournaments. The entity provides referees for these tournaments. The entity advised that sport is played almost daily at the club.

The entity also provides social and entertainment activities including; bistro dining facilities, a bar, hosting and participating in cultural events, hall hire and hosting a weekly senior citizens program.

It is therefore considered that the entity conducts and provides both sporting and social activities and facilities.

The sporting activities encouraged by the club are extensive:

The entity states that it encourages and promotes sport throughout the club and to the community. The entity states that the encouragement of sport is the main/dominant purpose of the club and this is emphasised by the investment into the renovated sporting facilities.

The entity states that further encouragement of sport is evidenced by the forming, preparing and entering of teams and competitions locally, nationally and internationally.

Based on above it is concluded that the encouragement of sport by the entity is extensive.

However, the entity also offers a large range of social, recreational and entertainment activities and facilities for members and the public and as stated above the percentage of members participating in sport is low.

The entertainment, dining, social and cultural activities attract people to the entity's clubrooms, members and non-members alike enabling the Club to generate revenue to devote that money to the promotion of its sporting activities.

This supports a conclusion that the entity encourages sporting activities in addition to the social activities, however, it cannot be determined that the social aspects are beyond a secondary purpose.

The club uses a significant proportion of its surplus funds in encouraging the game or sport:

Paragraph 54 of TR 97/22 states:

In an earlier income year the entity committed a large amount of funds the renovation of its sporting facilities.

In an earlier income year the entity also used funds to renovate the dining facilities.

Information has not been provided regarding the expenditure of surplus funds for the 20XX income years. A review of the financial statements for the 20XX income year provide no clear information on what the surplus funds have been used for. From these documents there is no clear indication that surplus amounts have been directed towards the encouraging of a game of sport.

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.

Paragraph 56 of TR 97/22 states:

The Constitution of the entity demonstrates that the Club was established for the provision of both sports/games and for social/cultural purposes.

The Constitution details the objectives of the entity. From these objects, six out of the nine objects of the Club relate to providing a social/cultural environment for its members. Only one object provides for the provision of sports and recreation.

There is no emphasis on a sporting purpose above that of a social and cultural purpose within the Constitution. Therefore, it cannot be concluded from the entity's Constitution that the main purpose is to encourage sport.

Each of the relevant but less persuasive features listed in TR 97/22 are also examined below in the context of the entity.

High level of participation by members in the game or sport

Paragraph 57 of TR 97/22 states:

With 75% of members not being registered sports players it cannot be inferred that the club has a high level percentage of member participation in 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 day to day management of the club)

Paragraph 58 of TR 97/22 states:

There is no requirement under the entity's Constitution for the Main Committee members to be registered and active sports players. However, in noting this, the club is comprised of a main committee, a building committee and a sports committee. So whilst there is no requirement that the main committee members be active sports players there is a separate sub-committee set up for the function of overseeing the sporting activities.

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

Paragraph 59 of TR 97/22 states:

There is no requirement at the entity that voting rights vest only in members involved in encouraging sport. All membership classes, except for Honorary Members, are entitled to vote. There is no requirement to be involved in sport to be a member. There is no requirement to be active in sport for membership to the club.

As only 25% of members are registered sports players, the majority of voting rights vest in members who do not participate in the sport.

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 60 of TR 97/22 states:

The entity has stated in its ruling application that the encouragement and promotion of sport is the main purpose of the club. The entity stated that this is evident by:

Finally, in considering factors that help determine the purpose of a club paragraph 61 of TR 97/22 notes that:

The entity's sporting and social facilities are at the one location.

Comparison to St Mary's, Terranora Lakes and Tweed Heads

The entity stated that the decision in St Mary's (97 ATC 4528), Terranora Lakes (93 ATC 4078) and Tweed Heads (92 ATC 2087) supports the conclusion that the entity's main objective is the encouragement of sport.

St Mary's is distinguished though as their memorandum contained six initial objects dominant in the promotion and encouragement of rugby league. Only one object pertained to a social/recreational pursuit. Membership was associated with rugby league. Football and associate members made the large majority of memberships and both required an involvement with the sport (whether it be playing or coaching or supporting). Control of the club was with former footballers and the history of the club was centred on rugby league from its inception.

Tweed Heads is also distinguished from the entity. Only bowling members and life members had the right to participate in control and management of the club. In addition, only bowling members could vote in the election of the board of directors and on any other resolution at the general meeting. Justice Hill stated that from its very inception the club had been dedicated to a very substantial degree to the promotion of bowls. In addition the club had a high percentage of bowling members (830 of the 920 members were bowling members).

For the relevant year in Terranora Lakes there were 4076 ordinary members of the club. Of that, only 130 were social members and 226 were junior members. Social members were not entitled to vote nor become an office bearer of the club.

Conclusion

In consideration of the highly persuasive features it is determined:

In considering the less persuasive features it is determined:

Whilst the entity does carry on sporting activities it cannot be concluded that the club's main purpose is the encouragement of a game or sport. It is considered that the provision of social and cultural services is equal or greater to its purpose of the encouragement of sport.

Therefore, the entity does not meet all of the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and therefore is not entitled to income tax exemption under section 50-1 of the ITAA 1997.


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