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Edited version of your written advice
Authorisation Number: 1051260010710
Date of advice: 4 August 2017
Ruling
Subject: Capital gains tax
Question 1
Will the grant of the lease by the lessor to the lessee be considered a CGT event and if so, will the capital gain or capital loss be disregarded under sub-section 104-115(4) of the Income Tax Assessment Act 1997?
Answer
Yes.
Question 2
Will the lessor maintain its 'exempt entity’ status under section 50-45 of the Income Tax Assessment Act 1997 as a club established for the encouragement of a game or sport, if it undertakes the proposed arrangement?
Answer
Yes.
This ruling applies for the following periods:
1 July 201B – 30 June 201C.
The scheme commences on:
1 July 201B.
Relevant facts and circumstances
The entity was established in 19XX. It acquired an interest in a property prior to 20 September 1985, where it currently operates a sporting club.
The entity is a public company limited by guarantee.
The Memorandum and Articles of Association of the entity was provided with its application for a ruling.
The entity is currently self-assessed as a tax exempt sporting club based on its main purpose being the encouragement of a sport.
The entity is a non-profit entity.
The entity has a physical presence in Australia.
The entity also operates a bar, catering and gaming facilities.
The entity is registered for GST.
The entity’s Memorandum of Association outlines its purposes and objects for which the entity is established which includes its main purpose as promoting and encouraging the game.
The entity’s Memorandum of Association includes non-profit and dissolution clauses.
The entity is currently negotiating with a developer to utilise part of the property (a part that is not being utilised by the entity).
Details of the proposed arrangement being negotiated with the developer have been provided.
The entity will continue to operate as it always has.
The entity’s main purpose will continue to be the encouragement of sport.
As a result of further information requested by us, the following documents were provided:
● Title search
● Lease Agreement
● Development Management Agreement
● Annual Reports for 201A and 201B income years
● Worksheet – self-assessing your club’s tax status
The term of the proposed lease is XXX years as per the Lease Agreement.
The Title search of the property shows that the property was acquired before 20 September 1985.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 50-45
Income Tax Assessment Act 1997 section 104-5
Income Tax Assessment Act 1997 section 104-110
Income Tax Assessment Act 1997 subsection 104-110(5)
Income Tax Assessment Act 1997 section 104-115
Income Tax Assessment Act 1997 paragraph 104-115(4)(a)
Reasons for decision
Question 1
Section 104-5 provides a summary of the CGT events which includes event F1 for 'Granting a lease’ and event F2 for 'Granting a long term lease’.
According to subsection 104-110, CGT event F1 happens if a lessor grants, renews or extends a lease. The exception to this is contained in subsection 104-110(5) which states that the lessor can choose to apply section 104-115 to certain long term leases. If it does so, section 104-110 does not apply.
CGT event F2 happens if the lessor chooses to apply section 104-115 instead of section 104-110.
Section 104-115 states:
CGT event F2 happens if:
(a) a lessor grants a lease over land (whether or not the lessor owns an estate in fee simple in the land), or renews or extends a lease over land; and
(b) the lease, renewal or extension is for at least 50 years and:
(i) at the time of the grant, renewal or extension, it was reasonable to expect that it would continue for at least 50 years; and
(ii) the terms of the lease, renewal or extension as they apply to the lessee are substantially the same as those under which the lessor owned the land or held a lease of the land; and
(c) the lessor chooses to apply this section instead of section 104-110.
Therefore a lease can be a long term lease if the lease is for at least 50 years and at the time the lease is granted it is reasonable to expect that the lease will continue for at least 50 years.
Exception for pre-CGT assets
Pursuant to paragraph 104-115(4)(a) if CGT event F2 applies to a lease of land by the lessor and the lessor owns the land, a capital gain or loss the lessor makes is disregarded if it acquired the land before 20 September 1985.
In this case, the Lease Agreement states that the term of the proposed lease is XXX years, which would be considered to be a long term lease.
In addition, according to the Title search, the entity has been the registered owner of the property from when the title was created which was before 20 September 1985. Therefore, the entity’s interest in the property is a pre-CGT asset and therefore any capital gain or loss the lessor makes as a result of CGT event F2 will be disregarded under paragraph 104-115(4)(a).
Notwithstanding the reasoning above in relation to Question 1 regarding CGT events F1 and F2 respectively, as the entity is a self-assessed income tax exempt entity, it will not need to pay capital gains tax. Refer to reasoning below in relation to Question 2 for further discussion regarding this issue.
Question 2
Income tax exemption
Whether a non-profit organisation has to pay income tax will depend on whether or not the organisation is exempt from income tax.
Only certain categories of organisations are exempt from income tax including sporting organisations.
Organisations that are not charities can self-assess their entitlement to income tax exemption and they do not need to be endorsed by us. Most have additional tests and rules that must be met before the organisation can be exempt.
If you work out that your organisation meets all the requirements for income tax exemption, all of the following applies:
● your organisation will not need to pay income tax, capital gains tax or lodge income tax returns, unless specifically asked to do so
● you do not need to get confirmation of this exemption from us
● you should carry out a yearly review to check if your organisation is still exempt – you should also do this when there are major changes to your organisation’s structure or activities
Taxation Ruling TR 97/22 Income tax: exempt sporting clubs assists a club’s office holders to determine whether their club is exempt from income tax. Where office holders are satisfied that the club is exempt it is not necessary to seek approval from the Taxation Office. However, if there is reason to do so, the club may request the Taxation Office to make a private ruling.
In this case, a private ruling has not been sought from us to determine whether the entity is exempt from income tax. The entity has self-assessed its income tax status on the basis that the main purpose of the entity is the encouragement of a game or sport.
Therefore we have not ruled on the issue of whether the entity is exempt from income tax. Rather, this ruling is based on the premise that the self-assessment of the entity’s entitlement to income tax exemption is correct.
Income tax status after proposed arrangement
The proposed arrangement is outlined in the terms and conditions of the Lease Agreement and Development Management Agreement.
Based on these terms and conditions the proposed arrangement is considered to be purely a lease arrangement whereby the lessor does not bear any of the risk of the development business and does not bear any of the cost of the development. The entity is merely leasing part of its land to a developer.
It is considered that the grant of the long term lease by the entity as lessor to the developer as lessee is not in breach of the entity’s governing rules.
Therefore, based on the facts which state that the entity will continue to operate as it always has despite the proposed arrangement and that its main purpose will continue to be the encouragement of a game or sport, the entity’s income tax status will be unaffected.
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