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Edited version of your written advice

Authorisation Number: 1051300026376

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You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

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Date of advice: 31 October 2017

Ruling

Subject: Income Tax Exemption

Question

Is the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) as an association established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s)

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

The scheme commences on

1 July 2017

Relevant facts and circumstances

The Club is a company limited by guarantee. The intention in establishing the Club was and has remained that of providing and improving Sport X and other sporting facilities for the resident of E and nearby suburbs.

The Club was incorporated and it acquired all the assets and liabilities of the unincorporated Club and its objects.

The Club’s facilities include:

The Club uses a great deal of voluntary labour. Many members work long hours to enable the Club to make a surplus which is used to further the Club’s objects via promotion of athletic sports including lawn bowls.

The Club conducts many activities to promote Sport X, indoor sports, recreations, games etc.

The financial resources of the Club are used to develop and maintain its sporting facilities including four sporting fields and associated facilities (change rooms, meeting rooms etc.).

The Club had to spend a considerable sum on not only maintaining but also improving its sporting and associated facilities as well as to maintain and increase membership. Thus any surplus made on the years trading is being reinvested into the Club’s sporting fields and premises and to provide working capital.

The Club has provided the following documentation:

Details of activities undertaken to encourage or promote lawn bowls and other sports

The Club has a full time sports Co-ordinator solely responsible for the promotion and encouragement of Sport X. He is a level 1 National coach and passes his knowledge on to new and current members by holding coaching days for groups as well as private coaching lesson for those who are looking to improve their game.

The Club continues to appoint a current member of the Australian Sport X team to assist the sports Co-ordinator with the day to day running of sports and tournaments for the Club. He also provides valuable coaching advice for members and has a major role in the marketing and promotion of Sport X.

To engage the local sporting community and partly the wider community, the Club has engaged a marketing person who has key job prerequisites including to further the sports at local schools. This incorporates the creation of junior coaching clinics at the Club, regular visitations to junior and secondary schools.

The Club provides sponsorship to many sport and community organisations.

The Club supports many sports and encourages the use of its facilities for meetings, fund-raising, social events, presentations, etc. These facilities are available to other sporting and community groups.

The sub and inter Clubs use the Club’s facilities free of charge.

The functions held in the Club are for fundraising activities of the clubs associated with the club such as reunions and presentations for those clubs. Any other functions and activities undertaken by the Club are to provide income in order to achieve the Club’s objectives as previously stated.

For some of the sporting clubs, the licenced Club underwrites these functions. The majority of the visitors to the Club are attending these functions or having attended an athletic sport (such as Sport X conducted on the four bowling greens located at the Club) then meet in this Club to discuss the games just completed.

Promotional Literature

A bi-monthly magazine is prepared for members and visitors detailing club news and along with upcoming bowls and social events.

Social activities

It is stated that all the Club’s activities revolve around the sporting activities and any other social activities are merely incidental to the sport. The functions in the Club are only a minor activity in comparison with sports promotion and in any event they are functions which members expect to be conducted in their Club. The social activities are undertaken to attract new sporting membership and to provide financial support to the sporting activities.

Any surplus made by the Club is being applied in improving sporting facilities.

Membership

The non-Sport X members would be involved with the other inter clubs fostered and promoted by the Mother Club.

Persons who are members of these sporting organisations are members of the licenced Club.

The annual financial reports have been provided.

Constitution

Objects

The Clubs objectives are set out in clause 2 of the Memorandum of Association. The first six of which are:

Non Profit Clause

A Non-profit clause is set out in clause 7:

Winding up Clause

A winding up clause is set out at clause 5 of constitution of the Memorandum of Association states:

Categories of Members

Classification of club members is found in Rules 1, 4 and 5 of the Articles as follows:

The requirements for each class of ordinary members are in Rule 6:

The conditions for Life Membership are stated in Rule 7 as follows:

Rules 8 and 9 refer to Honorary members and Temporary members who are not entitled to certain privileges of an Ordinary member or life member.

Voting Rights

Clauses on voting rights are found in Rules 20 and 21 of the Articles as follows:

Board Membership

Eligibility for membership to the Board of Directors is defined in Rule 29:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-45 table item 9.1(c)

Income Tax Assessment Act 1997 section 50-70

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The Club is exempt from income tax pursuant to 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 or sport under item 9.1(c) of section 50-45.

Detailed reasoning

A society, association or club which has been 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 is exempt from income tax under section 50-1 of the ITAA 1997.

The exemption is subject to the special conditions under section 50-70 of the ITAA 1997 being met. Subsection 50-70(1) states:

In the present case, the Club was incorporated as a company limited by guarantee with over 5,000 members and has been conducting its activities permissible under its objects. It is not disputed that it is a club.

The Club has a physical presence in Australia, incurs its expenditure in Australia and pursues its objects in Australia. Hence, the special condition in paragraph (a) of subsection 50-70(1) is satisfied.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs covers the circumstances under which a club is regarded as being established for the encouragement of a game or sport.

Paragraph 7 of Taxation Ruling TR 97/22 provides that for a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy three tests:

Test 1 – Not carried on for the purpose of profit or gain to its individual members

Paragraphs 9 and 10 of TR 97/22 provide:

Paragraph 23 of the TR 97/22 provides:

Application to the Club

Clause 7 of the Memorandum of Association of the Club prohibits the distribution of any income or property of the Club by way of dividend, bonus or otherwise to or among members of the Club.

This excludes payments made in good faith to members for services rendered to the club or the payment in good faith of interest to any member or other person in respect of any services rendered or any materials or goods supplied.

Clause 5 of the Memorandum provides that on dissolution of the Club, any property whatsoever remaining after the satisfaction of all debts and liabilities must be transferred to another club having similar objects.

The Club was incorporated as a company limited by guarantee and has been conducting its activities permissible under its objects. It is not disputed that it is a club.

Taking into account the above non profit and dissolution clauses, we are satisfied that the Club is not carried on for the profit or gain of individual members.

Test 2 - It must be for the encouragement of a game or sport

Paragraph 11 of TR 97/22 provides:

And can occur indirectly:

Application to the Club

The Club enters teams in many and varied competitions held throughout the year.

Coaching advice is provided to participants by the Bowls Coordinator.

It can be seen from the above that the Club conducts activities directly related to sport by organising hosting and participating in sporting events.

We accept that the club is carried on for the encouragement of a game or sport.

Test 3 - That encouragement must be the club's main purpose

Paragraph 13 of TR 97/22 provides:

Paragraph 15 of TR 97/22 lists the following features as being highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport:

Relevant but less persuasive features are listed at paragraph 16 of TR 97/22 and include:

Paragraph 14 of TR 97/22 also states:

Difficulties can arise in determining a club's main purpose where the club conducts other activities, particularly social or commercial activities.

Where a 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 still be that of encouragement.

Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 (Cronulla Sutherland) said:

Where the main purpose becomes the carrying out of those other activities, a 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. As Lockhart J said in Cronulla Sutherland at ATC 4225; ATR 312:

Therefore, the fact that a sporting club also encourages social and other activities does not, in 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 however conversely if the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply even if sport is encouraged.

In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora), the country club provided and promoted an extensive range of sporting activities including golf, lawn bowls, cricket, and football. The Club also had extensive social facilities that were used by the members and a large number of visitors. In the most recent year reported in the case, 90.3% of the Club’s income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities.

The Court ruled in favour of the taxpayer and concluded that the main purpose of the Club was the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and the selling of time-share units. Hill J concluded that while the social activities of the club were extensive and could be seen as ends in themselves, these activities were pursued as a means of financing the extensive sporting activities conducted by the Club.

In St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528; 36 ATR 281 (St Mary's), Hill J found that the significant social activities of a sporting club were acceptable if the club was formed principally for sport and if the sport was financed by the social activities. It was acceptable that in that case that only 20% of the funds earned by the social club were spent on football. Hill J stated the importance of the Club’s constitution which stated that the principal aim of the club was the support of local football and that a large amount of the Club’s activities were sport related. It was also important that the Club’s history centred around the support of local football, and that the Club rules required a certain proportion of its funds support local football.

Application to the Club

1. Highly persuasive features:

a) The club conducts activities in the relevant year that are directly related to the game of sport

It has been established that the Club conducts activities directly related to the game of X. It does this by organising, hosting and participating in competitions.

b) The sporting activities encouraged by the club are extensive

The only sporting activity conducted by the Club is the game of Sport X, however the sporting activity is of such a scale that it would be classified as extensive. The Club has four fully maintained sporting fields which are extensively used for the promotion of Sport X and many zone and other competitions are held at the Club.

Further to this, the Club pursues and promotes the game of bowls with a similar intensity to that observed in St Mary's, where Hill J observed (at 97 ATC4534):

The club enters pennant and other competitions at a significant cost to the club. Furthermore, its historical and current activities indicate a strong and continuing association with the game of X.

c) The club uses a significant proportion of its funds in encouraging the game of sports.

Paragraph 54 of TR 97/22 provides:

In Terranora, Hill J concluded (at ATC 4.86-4087; ATR 304):

In this instance, the activities of the Club involve both social and Sport X activities and both of the activities are extensive. An analysis of the Club's financial statements reveal the percentage of income derived from Sport X is small compared to income derived from other activities and a loss from bowls trading for each of those years. These losses are made up for by trading income from other areas such as gaming and bar trading activities.

Although both the social and sporting activities are extensive in this case and the majority of the profits of the Club came from social trading activities, particularly gaming activities, we note that the Club’s social activities are pursued for the purpose of financing the sporting activities.

d) The club's constituent documents emphasise that the Club's main purpose is to encourage a game or sport.

In St Mary's at 97 ATC 4534 Hill J observed:

The constituent documents of the Club have a total of 25 objects. The first 6 of these objects are directly related to conducting, promoting and participating in the game of Sport X and other sports. The remaining objects relate primarily to the administration of the club. To this extent we are satisfied the Club's constitution lends itself to the conclusion that the Club is primarily established for the purpose of conducting sports.

This finding is further strengthened by the fact that only Sport X members can fill positions on the board, and only financial members can attend and vote on all matters at general meetings.

2. Relevant but less persuasive features:

a) High level of participation in sport encouraged by the club.

In the 2017 income year approximately 3% of the Club's members are Sport X members. This contrasts significantly with other cases where the Courts have been favourably persuaded by the number of members participating in sport:

Notwithstanding the proportion of Sport X members, the Club has provided evidence that it promotes and encourages the game of Sport X to its non-Sport X members and is able to provide coaching to new players. The Club's extensive involvement in Sport X activities and the extent of its facilities that are devoted to the game of X is noted.

b) 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 the day to day management of the club).

Rule 29 of the Club's governing documents states that Life members, Sport X members and Non-Sport X members will fill the positions on the Board. However, there shall not be more than two Non-Sport X members on the Board at any time. Further, Non-Sport X members are not entitled to stand for or be elected or appointed as the Chairman, Senior Vice Chairman, Vice Chairman or Finance Director. It is therefore accepted that the Board of Directors of the Club are predominantly participants in or concerned with the encouragement of sport.

c) 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.

Only Sport X members of the Club are given full voting rights. While Non-Sport X members are entitled to vote at the election of the Board, their rights are restricted. Non-Sport X members do not have the right to vote on any Special Resolution to change the Memorandum or Articles of Association of the Club.

d) 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 Club bi-monthly, magazine is prepared for members and visitors detailing the club news and along with up and coming bowls and social events.

The Club also provides information on upcoming events through its website.

Special conditions – section 50-70 of the ITAA 1997

The Club has a physical presence in Australia, incurs its expenditure in Australia and pursues its objects in Australia. Hence, the special condition in paragraph (a) of subsection 50-70(1) is satisfied.

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”:

The 2015/2016 annual report of the Club demonstrates that the Club has applied its income and assets solely for its established purpose and complies with all the substantive requirements in its governing in the 2015/2016 year.

While the Club continues to apply its income and assets solely for its established purpose and complies with all the substantive requirements in its governing rules it is accepted that this condition is satisfied.

Relevant Case Law Analysis

In Cronulla Sutherland the Full Federal Court held that a professionally managed leagues club was not entitled to exemption from income tax as a sporting club under section 23(g)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936).

The leagues club provided extensive social facilities including bars, restaurants and an auditorium for live shows and discos. It had as one of its objectives:

Lockhart and Beaumont JJ held, in separate judgements that the main or predominant object of the leagues Club was to provide the facilities of a licensed club. Lockhart J stated at 90 ATC 4226:

In St Mary's case the major object of the club was rugby league. Other objects of the club were concerned with liquor trading and refreshments. Hill J observed at 97 ATC 4533 - 34:

…

In Tweed Heads, the taxpayer was a lawn bowls club which had one indoor and four outdoor bowling greens. The Club participated in and organised a large number of tournaments each year. The Club building was substantial and the catering and entertainment facilities were extensive. The Club's main source of revenue was derived from poker machines which were used predominantly by the 400,000 annual visitors to the club.

In a judgement by Dr P Gerber at 92 ATC 2099 he stated:

The case Terranora Lakes involved a club (incorporated in 1964) whose objects included the promotion of games and pastimes and the acquisition of land to be used for recreational purposes. The club had approximately 4,000 members and provided extensive social facilities including bars, restaurants, a poker machine area and an auditorium for concerts and dancing. It owned a clubhouse, playing fields, a sports ground and sporting complex, and it held a controlling interest in a time share resort.

The club promoted various sports operated by internal clubs, including cricket, clay target shooting, tennis, golf, touch football, softball, deep sea fishing, and horse riding. However the club also promoted its extensive social activities, attracting approximately 1000 visitors per day. The Club derived 90.3 % of its revenue from its poker machines, bar trading and catering.

It was held that having regard to the activities of the club as conducted in the year of income, it was one established for the purpose of the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and selling of time share units.

In a judgement by Hill J at 93 ATC 4086 – 4087 he stated:

In the present case, the Club can be distinguished from the Cronulla-Sutherland case because the constitution of the Club clearly distinguishes the sporting activities of the Club as its main purpose. This is unlike the Cronulla Sutherland case where neither of the two objects or purposes was described as ancillary or incidental to the other.

The facts of this case are more in line with the facts of St Mary's, where the constitution, activities, history and control of the Club point to the characterisation of the Club as having its main object or purpose as being the encouragement or promotion of a sport.

As per St Mary's, Tweed Heads and Terranora, the social facilities of the Club are noted as extensive however this does not preclude a conclusion that on a weighing of the features, the main purpose of the Club is the promotion and encouragement of a sport.

Conclusion

Based on the information the Club has presented and having regard to the criteria provided by TR 97/22, we accept that on balance the main purpose of the club is the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.

The features of the Club leading to this conclusion are summarised as follows:

We note that the Club's social activities are extensive however an analysis of the facts shows that the surplus from those activities is used to fund sporting activities. It is therefore accepted as in St Mary's, that the social activities are in part undertaken to provide funds for the encouragement of bowling activities.

While there is not a high level of participation by members in the sport of X, this feature is not so dominant so as to disqualify the Club from obtaining an exemption.

Other factors indicate that the club's main purpose is the encouragement of the sport of X include:

Consequently, we accept that the Club is not carried on for the gain of individual members, and is established for the encouragement of a game or sport, and the encouragement of a game or sport is its main purpose pursuant to item 9.1 (c) of the table in section 50-45 of the ITAA°1997. It is therefore exempt from income tax under section 50-1 of the ITAA 1997 in the years to which this ruling applies.

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