Edited version of your written advice

Authorisation Number: 1012994804658

Date of advice: 9 August 2016

Ruling

Subject: Income tax exemption.

Income tax exemption; encouragement of a game or sport

Question 1

Is the Association exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 as a society, association or club 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?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

The Association was established as an incorporated association. The Association operates in Australia.

The Association was set up under the direction of a local council to provide a point of central management for its constituent member organisations to manage repairs and maintenance of a stadium.

The Constitution and Rules of the Association provide for a framework for the governance of the organisation, including membership eligibility, processes for electing committee members, proceedings at general and committee meetings etc.

The founding members of the Association are community-based clubs (referred onwards as 'member clubs') involved in fielding teams in various sport competitions and running development programs to teach and enhance the sport and team play skills. Each member club is an income tax exempt sporting body.

The Constitution and Rules of the Association provides that in the event of the winding up or the cancellation of the Incorporation of the Association, the assets of the Association will be distributed to those community-based clubs which are its founding members.

Activities

Operational Management and Development of the stadium

The Association has entered into an agreement with a local council to use the stadium as a licensee.

The day to day operational management activities of the Association in respect of the stadium include:

• maintaining stadium bookings;

• invoicing member clubs and user groups for court hire;

• paying when due, all charges for the provision of services to the stadium: including electricity, cleaning, pest control, rubbish and sanitary disposal, security, water and telephone;

• co-ordinating continual maintenance of the facility;

• providing advice and assistance to council in relation to council works priorities, practices and functions for the stadium;

• maintaining a key register of all facility key holders; arrange security access to nominated member clubs and user groups;

• providing an on-call contact to the member clubs, user groups and the stadium security provider.

According to the financial statements of the Association for the relevant income years, the main source of revenue is fees paid by community-based clubs and other user groups in the community for the use of the stadium. The income is mainly generated from the member clubs. Other non-operating income includes the stadium public phone and bank interest income which comprised less than 5% of the annual turnover of the Association during the relevant year period. The financial statements indicate that the revenue of the Association is applied to payment for the provision of services to the stadium including cleaning, electricity, insurance, repairs and maintenance etc.

In addition to the office and storage space facilities used by member clubs, the facilities available for use at the stadium include a number of courts for sport event, score table facilities and electronic scoreboards and score table consoles, kitchen/canteen and catering facilities, toilets, change room facilities, chilled water fountain, member club and user group display signage facilities, car parking and conference room facility.

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 states:

The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

(*as defined in section 995-1 of the ITAA 1997)

A society, association or club established for the encouragement of a game or sport is listed as an exempt entity under Item 9.1(c) of section 50-45 of the ITAA 1997. In order to qualify as an exempt entity under section 50-1, the entity must satisfy the special conditions contained in section 50-70 of the ITAA 1997. The special conditions in section 50-70 require that the entity:

• is a society, association or club;

• is not carried on for the purpose of profit or gain of its individual members;

• has a physical presence in Australia, and to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

• is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

• 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 20XX and 20XX income years, two additional special conditions must be met in order to qualify as an exempt entity:

• complies with all the substantive requirements in its governing rules; and

• apply its income and assets solely for the purpose for which the entity is established.

Guidance in determining whether a company is exempt from income tax in circumstances where that company has a relationship or connection with another exempt entity is contained in Taxation Ruling TR 2005/22 Income tax: companies controlled by exempt entities. Paragraph 8 of TR 2005/22 explains that it is the character of the entity itself that will determine its eligibility for exemption.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs contains the view of the Commissioner in respect of determining whether a sporting organisation is exempt from income tax.

Society, association or club

The terms 'society', 'association' and 'club' are not defined in the ITAA 1997 and have their ordinary meaning for the purposes of section 50-45. The Federal Court case of Douglas and Others v. FCT (1977) 77 FCR 112; 97 ATC 4722; 36 ATR 532 (Douglas case) provides clarification in respect of the meaning of the terms 'society', 'association' and 'club'. In that case, Justice Olney refers to the definitions contained in the Concise Oxford Dictionary:

Unassisted by authority I would construe the collation ``society, association or club'' to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary:

Society: Association of persons united by a common aim or interest or principle;

Association: Organised body of persons for a joint purpose;

Club: Association of persons united for some common interest, usually meeting periodically for shared activity.

A society, association or club can be incorporated or unincorporated. In Pro-Campo Limited v. Commissioner of Land Tax (NSW) (1981) 81 ATC 4270; 12 ATR 26, Justice Lee states:

The three words ``society, club or association'' are words in frequent use in our community and societies, clubs and associations are well-known entities. One knows that many organisations which give themselves the title society or association or club are as often incorporated as they are unincorporated.

The Constitution and Rules and activities of the Association Incorporated indicate that the Association is an organisation comprised of persons who are associated together for a common purpose of administering and managing the stadium. The Constitution and Rules provide for a framework for the governance of the organisation, including membership eligibility, processes for electing committee members, proceedings at general and committee meetings etc. Accordingly, the Association is considered to be a society, association or club.

Encouragement of a game or sport as main purpose

The terms 'encouragement' and 'game or sport' are not defined in the ITAA 1997. Paragraph 11 of TR 97/22 adopts 'stimulation by assistance' contained in the Macquarie Dictionary as the meaning of 'encouragement'. Additionally, paragraph 11 describes different activities undertaken by a club which may be considered direct and indirect encouragement of a game or sport, including:

• forming, preparing and entering teams and competitions in competitions in the game or sport;

• co-ordinating activities;

• organising and conducting tournaments and the like;

• improving the abilities 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 increased and wider participation and improved performance;

and can occur indirectly:

• through marketing

• by initiating or facilitating research and development.

Paragraph 12 of TR 97/22 states:

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

The case of Cronulla Sutherland Leagues Club Limited v. Federal Commissioner of Taxation (1990) 23 FCR 82; [1990] FCA 90; 90 ATC 4249 (Cronulla Sutherland case) is the leading case which considers whether the main purpose of a club is the encouragement of sport. In the Cronulla case, the Federal Court considered the encouragement or promotion of sport as the main object or purpose to be sufficient to qualify for the exemption even if the club had other objects which were merely incidental or ancillary to, or which were secondary and even unrelated to, the main object. It is necessary to examine the material facts and circumstances, including the constitution, activities, history and control of the entity, to characterise the main purpose of the club.

Paragraphs 13 and 14 of TR 97/22 adopts the approach in the Cronulla Sutherland case, stating that the main purpose of the club must be the encouragement of the relevant game or sport to qualify for exemption from income tax under item 9.1(c) of section 50-45 of the ITAA 1997. Paragraph 15 provides examples of features which are considered to be highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport, which include:

• 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 these documents.

Examples of activities that are directly related to the game or sport and would support a conclusion that the main purpose of the club is to encourage a game or sport are listed in paragraph 51 of TR 97/22, including:

• participating in competitions or tournaments involving the game or sport;

• bringing into existence, organising and running such competitions or tournaments;

• providing referees, umpires or other officials for the game or sport;

• coaching participants in the game or sport;

• encouraging club members to be spectators at and to support the game or sport; and

• fundraising, for specific events in the game or sport in which the club's teams or competitors are involved, such as organising raffles to fund a club member's participation in an overseas event.

Paragraph 16 of TR 97/22 lists features which are considered to be relevant but less persuasive, including:

• 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 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.

According to paragraph 14 of TR 97/22, a club's main purpose can only be ascertained after objectively weighing all of the club's features. 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.

• providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors;

In the present case, the constituent documents of the Association do not contain any stated objects. Through its activities, the Association demonstrates that its main purpose is to manage and provide leased sporting stadium facilities for the sport activities primarily for the benefit of member clubs and other community user groups. The Association has entered into an Agreement to use the stadium facilities under the auspices of the relevant council. The relevant clause in the Agreement provides that the Association is obliged to promote and control the use of the stadium in an endeavour to achieve the maximum effective amount of usage by community organisations and residents.

An examination of the activities of the Association indicates that their activities are consistent with the purpose of providing leased sporting stadium facilities for the use of its members and other community user groups. The Association's activities primarily involve maintaining stadium bookings and invoicing member clubs and user groups for court hire and co-ordinating continual maintenance and improvements in respect of the sporting stadium facilities.

Paragraph 11 of TR 97/22 lists 'providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors' as an example of an activity undertaken by a club which may be considered direct encouragement of a game or sport. In addition to providing 'leased' sport facilities for its members to use, each member club is allocated office and storage space within the facility to enable the members to organise and conduct their sport activities.

Furthermore, Example 2 in paragraph 70 to 72 of Taxation Ruling TR 2005/22 Income tax: companies controlled by exempt entities outlines a situation where a not for profit company has been set up and controlled by an exempt sports club and operates solely to bring spectators, from more distant parts of the metropolis, to games played by the club's teams at the home ground. The company's purpose is considered to be the 'encouragement of a game or sport' as required by item 9.1(c) in section 40-45. As such, it will qualify for income tax exemption provided it meets the other requirements of section 50-45.

Similarly, in the present case, the Association is controlled by its member clubs which are exempt entities under section 50-45. The Association is encouraging sport through its activities in relation to managing and providing the sporting stadium facilities for the exempt sport clubs, which are considered to be direct encouragement of the sport in accordance with paragraph 11 of TR 97/22. Accordingly, it is accepted that the Association is established for the encouragement of sport.

Non-profit requirement

In order to be exempt from income tax as an association established for encouraging a game or sport, it is necessary for the Association to satisfy the requirement in subsection 50-70(1) that the association is not carried on for the purpose of profit or gain to its individual members.

The non-profit requirement for the purposes of section 50-70 is discussed in TR 97/22 in respect of exempt entities 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.

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.

The expression 'not carried on for the profit or gain of its individual members' was discussed in the case of FC of T v Cappid Pty Ltd 71 ATC 4121. In that case, Barwick CJ considered that:

Section 23(g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporated which are carried on for the benefit of their members but not for the profit or gain of their members severally or individually.

In the present case, the Constitution and Rules of the Association provides that in the event of the winding up or the cancellation of the incorporation of the Association, the assets of the Association will be distributed to its member clubs. As members are entitled to receive distributions at the time of winding up under the Constitution and Rules of the Association, the Association fails the non-profit test under subsection 50-70(1) of the ITAA 1997.

Other special conditions in section 50-70 of the ITAA 1997

The relevant condition within subsection 50-70(1) applicable to the Association as a not for profit entity, is paragraph 50-70(1)(a) which provides that, in addition to the requirement that the entity is not carried on for the purposes of profit or gain of individual members, it:

has a physical presence in Australia, and, to that extent, incurs its expenditure and pursues its objectives principally in Australia

The Association operates in Australia. The stadium facilities managed by the Association are located in Australia. The activities undertaken by the Association and its financial statements show that the Association has incurred its expenditure; and pursues its objectives principally in Australia.

Subsection 50-70(2) provides that the Association must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt provides guidance in respect of the conditions in subsection 50-70(2). Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

• give effect to the object or purpose of the entity

• relate to the non-profit status of the entity

• set out the powers and duties of directors and officers of the entity

• require financial statements to be prepared and retained

• set out the criteria for admission as a member of an entity

• require an entity to maintain a register of members,

and

• relate to the winding-up of the entity.

Based on a review of the Constitution and Rules of the Association, the Annual Report for the recent calendar year and annual general meeting minutes, it is accepted that the Association complies with the substantive requirements in its Constitution and Rules.

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must exclusively or only apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

As previously determined, the activities and contractual obligations of the Association under the Agreement with the local council demonstrate that the management of the use and maintenance of the stadium facilities is the main purpose for which the Association was established. The financial statements indicate that the majority of the expenditure incurred by the Association is comprised by depreciation of assets and payments for the provision of services to the stadium including cleaning, electricity, insurance, repairs and maintenance etc. The expenditure of the Association is also comprised by the operational costs of the Association, including bank fees, legal fees, audit fees etc. Any earned surplus is allocated for reinvestment in the Association as members' funds. Accordingly, it is accepted that the Association applies its income and assets solely for the purpose for which it was established.

Conclusion

The Association does not meet all the requirements as a society, association or club 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. In this regard, the special condition in subsection 50-70(1) that the association is not carried on for the purpose of profit or gain of its individual members is not satisfied.

Consequently, the Association is not exempt from income tax under section 50-1 of the ITAA 1997

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).