Edited version of your written advice

Authorisation Number: 1051239622255

Date of advice: 15 August 2017

Ruling

Subject: Income Tax Exemption - Sporting Body

Questions and answers

Is the Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association or club established for the encouragement of a game or sport as described under item 9.1(c) of section 50-45 of the ITAA 1997?

Yes

This ruling applies for the following period

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commenced on

1 July 2016

Relevant facts and circumstances

1.The Entity was incorporated in 2015.

2.The objects of the Entity are

1. (a) To promote and support the Club and to promote the sport of A.

2. (b) To raise money for the Club from members and supporters of the Club by way, of donations, testamentary dispositions and other fundraising activities:

(c) To establish and manage the Entity Fund as an ongoing stable source of capital and income to support the activities of the Club and its athletes; and

(d) To perform such other activities as may be incidental to the objects referred to above.

3. The following persons are eligible for membership of the Entity

(a) Life Members of the Club;

(b) Present and past presidents of the Club; and

4. (c) Full A members of the Club who have been members of the Club for not less than 10 consecutive years.

5. The Board will comprise;

6. (a) The President, and

(b) Two other directors (or such greater being not more than 4 as the Board may from time to time determine).

Each of whom must be a member of the Entity and must be elected at the annual general meeting of the Entity.

7. The board will appoint a Secretary and may appoint an Auditor and a Treasurer

8. Under the proposed Constitution, the Entity will raise a pool of funds from donations, bequests and other fund raising activities and will manage and invest the funds with the intention of distributing (by way of donation) a portion of the annual income to the Club.

9. The Entity distributes funds to the Club for the purposes of purchasing assets, capital infrastructure, maintenance of club facilities and assisting in financing club entries at activities and representative teams

10. Any funds not contributed to the Club in any year will be retained and added to the investment fund corpus

11. The proposed Constitution of the Entity sets out the objects of the Entity as well as the responsibilities upon winding up of the Entity.

12. Clause 3.3 of the Constitution contains a No Dividends or other Distributions to Members or Directors clause:

(a) The income and property of the Entity shall be applied solely towards the promotion of the objects of the Entity and no portion thereof shall be paid or applied directly or indirectly by way of dividend, bonus or otherwise by way or profit to the members, nor shall any payment be made to a Director other than for:

(b)The payment of out-of-pocket expenses incurred by the Director in the performance of any duty as a Director where the amount payable does not exceed an amount previously approved by the Board;

(c)Payment for any service rendered to the Entity by the Director in a professional or technical capacity, other than in the capacity of Director, where the provision of the service has the prior approval of the Board and where the amount payable is approved by the Board and is not more than an amount which would be a reasonable commercial payment for the service; or

(d) Payment of any salary or wage due to the Director as an employee of the Entity where the terms of employment have been approved by the Board.

13. Clause 3.4 contains a Disposal on Winding up clause;

If upon a winding up or dissolution (other than for the purposes of reconstruction or amalgamation) of the Entity there remains, after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members but shall be dealt with in accordance with clause 14.2.

14. Clause 14.1 contains a Voluntary Winding Up clause:

UnIess otherwise provided by law, the Entity may only be dissolved or wound up by a Super Majority Resolution passed by members:

15. Clause 14.2 contains a Distribution of Assets on Winding up clause:

(a) Subject to sub-Clause (b), upon a winding up or dissolution of the Entity (whether in accordance with a Super Majority Resolution or otherwise), all of the surplus assets of the Entity will be contributed to the Club.

(b) In the event that, at the time the Entity is wound up, the Club has been (or is being) wound up or is insolvent or is subject to or under threat of any proceedings which might render it insolvent, all of the surplus assets of the Entity will be contributed to a similar club, association or entity which:

(c) Is approved by the Entity;

(d) Has as one of its primary objects the promotion and development of the sport of A: and

(e) Is a sporting body which is exempt from Australian income tax.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-45 item 9.1(c).

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-70

Reasons for decision

Summary

The Entity is an exempt entity under item 9.1(c) of the table in section 50-45 of the ITAA 1997, and its ordinary and statutory income is exempt from income tax in accordance with section 50-1 of the ITAA 1997

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the ordinary and statutory income of the income covered by the tables in Division 50 is exempt from income tax.

To be an exempt entity under item 9.1(c) of the table in section 50-45 of the ITAA 1997 an entity must be a society, association or club established for the encouragement of a game or sport, and satisfy the special conditions of that item.

Society, association or club

The terms 'society’, 'association’ and 'club’ are not defined in the ITAA 1997.

In Pro-Campo Ltd v Commr. of Land Tax (NSW) 81 ATC 4270 Lee J said the following on the meaning of society, association and club:

The three words ”society, club or association” are words in frequent use on our community and societies, clubs and associations are well known entities…

In Theosophical Foundation Pty Ltd v Commr, of Land Tax (1966 1967) 67 SR 70 Sugarman JA stated at p.82

A society, in the relevant sense, is “a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc,’an association.’ (Oxford English Dictionary…) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society.”

In Douglas v. Federal Commissioner of Taxation 97 ATC 4722 Olney J stated that the collation 'society, association or club’ refers to:

…a voluntary organisation having members associated together for a common or shared purpose (at 4726).

The Entity is an incorporated association. The rules of the Entity include objects that are concerned with the sport of A and the Entity undertakes activities in furtherance of these activities.

The Entity is a society, association or club for the purposes of item 9(c) of the table in section 50-45 of the ITAA 1997.

The encouragement of sport is not only the participation in sporting activities. It also includes the direct involvement by the club in coaching, player development, player payments, providing team equipment, involvement in sport administration bodies, organising teams and providing referees or umpires and having awards for champion players.

Purpose of the Entity

The test to be applied to determine whether a society, association or club is established for the encouragement of a game or sport was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T.90 ATC 4215:

For a society, association or club to qualify for the exemption…it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. It 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. 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 (at 4225).

For a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy three requirements, and also the special conditions of section 50-70 of the ITAA 1997. The three requirements are covered in Taxation Ruling TR 97/22 Income tax: exempt sporting clubs:

● It cannot be carried on for the purposes of profit or gain to its individual members (section 50-70 ITAA 1997)

● It must be for the encouragement of a game or sport, and

● That encouragement must be the club’s main purpose (Section 50-40 ITAA 1997)

The ruling states at paragraph 8 that where a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997.

Established for the encouragement of a game or sport

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs sets out the circumstances under which the Commissioner will regard a society, association or club as being established for the encouragement of a game or sport, and states that “A” is a sport using equipment to achieve mobility.

A is a sport for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997.

Encouragement of a game or sport as main purpose

Paragraph 11 of TR 97/22 states that according to the Macquarie Dictionary, 'Encouragement’ means 'stimulation by assistance’. 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 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 by:

● through marketing; or

● by initiating or facilitating research and development

The Entity objects are:

(a) to promote and support the Club and to promote the sport of A.

(b) to raise money for the Club from members and supporters of the club by way of donations, testamentary dispositions and other fundraising activities;

(c) to establish and manage the Entity Fund as an ongoing stable source of capital and income to support the activities of the Club and its athletes; and

(d) to perform such other activities as may be incidental to the objects referred to above.

The Entity is considered to have a dominant purpose to encourage the sport of A.

Main purpose

The test to be applied to determine whether a society, association or club is established for the encouragement of a game or sport was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T.90 ATC 4215:

For a society, association or club to qualify for the exemption…it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. It 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. 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 (at 4225).

TR 97/22 provides the following commentary regarding the 'main purpose test’

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…

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…

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.

To determine whether a club is established for a game or sport in a particular year of income, Lockhart J in Cronulla Sutherland Leagues Club Limited v F.C. (supra) stated:

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control of the body seeking the exemption these may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely the year of income… (at 4225).

TR 97/22 lists features of a club that the ATO considers either highly persuasive or relevant but less persuasive in identifying whether a club was/is established for the encouragement of a game or sport in an income year.

Paragraph 15 of TR 97/22 identifies the following features as highly persuasive features that support the conclusion that a club has the main purpose of encouraging 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 emphasis that the club’s main purpose is to encourage a game or sport and the club operates in accordance with those documents

Paragraph 15 of TR 97/22 identifies the following features as relevant but less persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport:

● 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.

The Entity does not have social club facilities such as a bar and gaming. The constitutional documents and activities of the Entity show that it is concerned with encouraging the sport of A.

The main purpose of the Entity is the encouragement of the sport of A.

Special conditions

Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from tax unless:

(1) … 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 of the ITAA, 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;

and the entity satisfies the conditions in subsection (2)

(2) The entity 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 it is established.

Not carried on for the purpose of profit or gain of individual members

The phrase 'carried on for the purpose of profit or gain of its individual members’ is not defined in the tax legislation.

In Commissioner of Taxation v Co-operative Bulk Handling [2010] FCAFC 155, the Full Federal Court considered the operation of section 50-40 of the ITAA 1997, a special condition of which is that an entity 'must not be carried on for the profit or gain of its individual members’. Mansfield and McKerracher JJ stated the following on the meaning of the expression 'not carried on for the profit or gain of individual members’:

...if as a consequence of pursuing the purpose, the members derive a benefit or gain..., that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership... In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members... (at paragraph 94).

This was also the approach of the South Australian Supreme Court in Repromed Pty Ltd v Lucas and Anor (2000) 76 SASR 575 where the court considered whether Repromed Pty Ltd was exempt from pay-roll tax on the basis that it was an employer who provided health services 'otherwise than for the purpose of profit or gain’. Debelle J held that Repromed Pty Ltd was carried on for the purpose of profit or gain as its constitution did not provide barriers to individual profit, and profits could find their way into pockets of individuals (at paragraph 35).

TR 97/22 states the following regarding the prohibition:

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. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition.

Clause x and y of the constitution of The Entity prevent the funds of the Entity from being used for the profit and gain of members both while it is operating and on winding up. The Entity is not carried on for the purpose of profit or gain of its individual members.

Physical presence in Australia and expenditure

The Entity has a physical presence in Australia and, to that extent, incur their expenditure and pursue their objectives principally in Australia.

Comply with all substantive requirements in its governing rules

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt sets out the Commissioner’s view on the meaning of the special conditions set out in subsection 50-70(2), and provides the following meaning of 'substantive requirements’:

18. The 'substantive’ requirements in an entity’s governing rules are those rules that define the rights and duties of the entity.

19. The substantive requirements in an entity’s governing rules 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.

…

21. The governing rules condition is applied on a continuous basis throughout an income year. The entity must consider whether, at all times throughout the income year, it has complied with all of the substantive requirements in its governing rules. In order for an entity to be exempt from income tax for all of an income year, it must (among other things) satisfy the governing rules condition at all times during that income year. While an entity is in breach of the governing rules condition, its ordinary and statutory income will not be exempt from income tax. (Footnotes removed)

Based on the evidence, the Entity complies with the following substantive rules in its governing documents:

● the objects and purposes of the entity;

● rules that prohibit profit or gain to members;

● rules that require financial statements to be prepared and audited.

There is no evidence that the Entity has failed to comply with other substantive requirements in its governing rules.

It is accepted that the Entity complies with all of the substantive requirements in its governing rules.

Apply its income and assets solely for its purpose

Paragraph 23 of TR 2015/1 provides that:

23. Two questions must be considered to determine whether an entity satisfies the income and assets condition:

● What is the 'purpose for which the entity is established’, and

● Has the entity applied its income and assets solely for the purpose for which the entity is established?

As discussed above, the main purpose of the Entity is to encourage the sport of A.

The Entity has not prepared financial reports and has not to this point operated. The Entity has confirmed that they do intend to abide by the rules and conditions of this new constitution.

The Entity is an exempt entity under item 9.1(c) of the table in section 50-45 of the ITAA 1997, and its ordinary and statutory income is exempt from income tax in accordance with section 50-1 of the ITAA 1997.

Conclusion

We assume that you will adopt the Constitution forwarded as part of this ruling request. Provided the Entity does it will satisfy the requirements to qualify as an organisation that has been established for the encouragement of a game or sport that has a physical presence, incurs its’ expenditure and pursues its’ objectives principally in Australia as required by section 50-70 (a) of the ITAA 1997.

It meets the requirement under item 9.1(c) of section 50-45 of the ITAA 1997, and its ordinary and statutory income is exempt from income tax in accordance with section 50-1 of the ITAA 1997.

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