Edited version of your written advice

Authorisation Number: 1013045061531

Date of advice: 6 July 2016

Ruling

Subject: Income tax exempt status

Question 1

Is the Club 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 sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

1 July 2013 - 30 June 2014

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

The scheme commences on:

1 July 2011

Relevant facts and circumstances

• The Club was established for owners, riders and enthusiasts of a particular type of club.

• The Club has numerous branches throughout Australia

• The Club is not listed by the Australian Securities and Investments Commission

• The Club is a not-for-profit organisation

• The Club has an ABN.

• The objects and aims of the Club are stated in the Constitutions

• The Club's funds are to be used in pursuance of the objects of the association

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70

Reasons for decision

Issue 1

Income Tax ~~ Exempt entities ~~ not for profit and mutual organisations

Question 1

Is the Club 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 sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Summary

The Club is not 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 sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997.

Detailed reasoning

Item 9.1(c) of s50-45 of the ITAA 1997 exempts from income tax an entity that has been established for the encouragement of a game or sport.

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)

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for the encouragement of a game or sport is listed at item 9.1(c) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special condition detailed in section 50-70 of the ITAA 1997.

An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport if it:

• is a society, association or club,

• is established for the encouragement of a game or sport, and

• satisfies the special conditions.

Society, association or club

The term society, association or club is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words.

Taxation Determination TD 95/56 refers to the definition of 'association' in paragraph 2 and states:

The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The term society, association or club is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words.

In Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose. The members of the Club are members of the general public who have the common bond of X ownership. The Club's members meet for companionship, social engagement, enjoyment, education, safety, recreation and the common interest of their club. People become members of the Club because of their desire to further their interest in these activities. The members of the Club voluntarily associate together for this common purpose and common interest. Therefore, the Club is considered an 'association, society or club'.

Established for the encouragement of a game or sport

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport.

Encouragement

Encouragement can occur directly or indirectly. Paragraph 11 of TR 97/22 provides the following examples of direct and indirect encouragement:

Direct

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

• co-ordinating activities;

• organising and conducting tournaments/concerts and the like;

• improving the abilities of participants;

• improving the standard of trainers/teachers and coaches/conductors;

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

• encouraging increased and wider participation and improved performance in the game or sport.

Indirect

• through marketing; or

• by initiating or facilitating research and development.

Game or sport

There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the Income Tax Assessment Act 1997. Accordingly, the words should be given their ordinary meaning.'

Useful guidelines as to what constitutes a sport are provided by the Australian Sports Commission (ASC). The 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.

We note that the definition used by the ASC, while appropriate for its purposes, does not cover all of the meaning of 'game or sport' for the purposes of section 50-45 of the ITAA 1997. The definition, in particular, emphasises competition however amendments to the legislation were intended to remove the element of competition from being a necessary part of the subparagraph's meaning.

Sporting or game-like activity

The following list provides examples of activities that would be considered a 'sport' for the purposes of section 50-45, provided they satisfy the features outlined above:

• athletic activity:

• aerobics, if competitive; amateur wrestling; athletics including hurdling, jumping, running and walking; boxing; dancing, such as ballroom dancing, if competitive; 'field games', including discus, javelin, shot putt and hammer throwing; martial arts such as judo, kung fu, ju jitsu and karate; mountaineering; orienteering; rogaining; water-based sports including diving, swimming, surfing, surf life-saving, synchronised swimming and water polo;

• 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;

• involving animals:

• equestrian activities; polo; pony club activities; rodeo activities;

• using equipment to achieve mobility:

• canoeing; cycling; dragon boat racing; drag racing; go-kart racing; hang-gliding; kayaking; motor-car racing (circuit, rally); motor cross; motorcycle racing; mountain bicycle riding; rowing; yachting;

• using other equipment:

• abseiling; archery; billiards; darts; fencing; gymnastics; pool; power lifting; snooker; skateboarding; snow sports including bobsled, luge, skiing, ski-jumping and snow boarding; target shooting; water skiing; weight-lifting; windsurfing; wood chopping;

• contests involving combinations of activities:

• swimming/running/cycling; swimming/surf ski/running; Highland Games; Olympic Games;

• any outdoor sport when played indoors; and

• any indoor sport when played outdoors.

A 'game' includes card games such as bridge and board games such as backgammon, chess and mahjong.

A common feature of a sport or game 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 sport or game (e.g., hunting, fishing, walking).

The activities undertaken by the Club could not be described as 'sport' as they do not include athletic activity, they are not played with played with a ball or projectile, they do not involve animals, or use other equipment. They also do not involve combinations of activities like swimming/running/cycling or are indoor or outdoor sports. Nor could their activities be described as a 'game'.

Games and sports are not endeavours where a thing, object or animal is the essential focus, or where the activities are merely a means to some other end, such as companionship and social interaction.

Paragraph 31 of TR 97/22 states;

the activities of participants in car owner clubs do not meet the requirements of participation in sports for similar reasons; the participants' focus is on their common interest in a type or make of motor vehicle and not on any sport or game-like activity.

The example of car ownership clubs provided in paragraph 31 of TR 97/22 is also relevant to the participants in motorcycle clubs. Therefore, the activities of the Club do not meet the requirements of participation in sports as the member's focus is on the common interest of a particular type of vehicle and not on a sport or game.

Main or dominant purpose

To be exempt pursuant to item 9.1(c) of section 50-45 of the ITAA 1997, it is essential that the main or dominant purpose of a club is the encouragement of a game or sport.

Where the 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 be that encouragement (Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215; (1990) 21 ATR 300).

The features considered to be highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport are listed in paragraph 15 of TR 97/22. These features are discussed in greater detail in paragraphs 51-56 of TR 97/22. Features that will be highly persuasive 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 those documents.

Other relevant but less persuasive features listed in paragraph 16 of TR 97/22 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 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.

A club's main purpose is determined having regard to its constitution, its activities, its history and its control (Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215; (1990) 21 ATR 300). The Club was established primarily to provide members with social interaction around their mutual interest in X. Its main activities do not fall under the examples of direct encouragement of sport (as described in paragraph 11 of TR 97/22).

The Club does not demonstrate highly persuasive features of being for the encouragement of sport (as listed in paragraph 15 of TR 97/22).

Further, in relation to other relevant but less persuasive features of being for the encouragement of sport (as per paragraph 16 of TR 97/22) the Club does not promote itself to patrons and the public as one encouraging the sport of motorised racing and rallying. There is not a high level of participation by members in such activities but rather a focus on companionship, social engagement, enjoyment, education, safety, recreation and the common interest in vehicles by its members.

Special condition

Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members and:

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

• it is a deductible gift recipient; or

• it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Non-profit requirement

Paragraphs 9 and 21 to 23 of TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members.

Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is operating and on winding up.

The constitution of the Club prevents distribution to members and it is not carried on for the profit or gain of its individual members.

This requirement is satisfied.

Physical presence in Australia

The Club is a resident of Australia. The Club carries on its activities, pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement.

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).