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Edited version of your written advice
Authorisation Number: 1051433380843
Date of advice: 26 September 2018
Ruling
Subject: Exemption from income tax as a not for profit sporting organisation
Question 1
Will the Club continue be an exempt entity under sections 50-45 and 50-70 of the ITAA 1997 upon its entry into the Development Deed and the subsequent performance of that Deed in accordance with its terms?
Answer
Yes
Question 2
Will the Club continue to be classified as an exempt entity under sections 50-45 and 50-70 of the ITAA 1997, if contrary to the parties expectations and subsequent to entry into the Development Deed, B defaults in the performance of its Deed obligations and the Club calls upon the Cost to Complete Bank Guarantee, and:
a) Uses the proceeds secured in its favour to engage an alternate party to complete the redevelopment in accordance with the Development Deed; or
b) Retains the proceeds secured in its favour and then later abandon its operations as a club and distributes the monies to another entity in accordance with its Constitution?
Answer
a) Yes
b) Yes
This ruling applies for the following period:
Year ended 30 June 20xx
Year ended 30 June 20xx
Year ended 30 June 20xx
Year ended 30 June 20xx
Year ended 30 June 20xx
Year ended 30 June 20xx
Year ended 30 June 20xx
The scheme commences on:
7 March 20xx
Relevant facts and circumstances
1. The Club is a company limited by guarantee.
2. The land the Club is located on is owned by a number of different entities.
3. The club is concerned that with further development and or sale of land by the owners, the Club’s sporting activities will not be viable.
The Clubhouse
4. The club operates sporting facilities and a clubhouse with bar facilities.
5. The Clubhouse has a separate function room.
6. The Club caters for Corporate Days.
Constitution
7. The Club’s objectives are set in its Constitution as follows:
The objects of the Club are:
(a) To promote the playing of … as a sport by establishing a non-profit organisation as a … club for that purpose and to promote participation in other sports games and recreational activities
(b) To establish, operate, maintain, alter and improve a Clubhouse, [sporting facilities], associated facilities and other sports games and recreational facilities as determined by the Club on the Club’s premises for the convenience, comfort and well-being of members and for the promotion of the purposes of the Club.
(c) To do all things that are usual and necessary for operating a … club including, but not limited to, joining and maintaining membership of… Unions, Associations and the like and other bodies and organisations which govern the game of … and the operation of … clubs in Australia, and to do all things that may be necessary if the Club undertakes to operate any other sporting activities
(d) To promote, hold and participate, either alone or jointly with any other association or associations, club or clubs or persons, in … and other sports, meetings, competitions and matches and to contribute towards the provision of prizes and awards
(e) To make arrangements by contract or otherwise for the provision of … club professional services to provide … teaching and other … services to members, visitors and other approved persons and to hold promote, organise and run club … competitions and special events.
(f) To make the [sporting facilities] and Clubhouse facilities available to members and members’ guests, visitors and members of the general public on such terms as the Club thinks fit and in accordance with the provisions of the Registered Clubs Act and, in this regard, to promote and hold social and other entertainment for the benefit of members and guests and to make provision for Club premises, property and services to be hired by others on terms determined by the Club, provided such terms or use of Club property do not negate the Club’s non-profit status.
(g) To raise money by entrance fees, annual subscriptions and other lawful means to provide funds to operate the Club and its activities.
(h) To insure and keep insured any insurable property, interests and expectations and the employees servants and members of the Club against all lawful insurance risks including public liability and indemnity for elected Directors of the Club relative to their Club duties and responsibilities, as may be allowed by law and the Act, and to similarly arrange indemnification for any other member authorised by the Board to act on behalf of the Club
(i) To purchase, take on, lease, exchange, hire or otherwise acquire any real or personal property and to dispose, in whole or in part, in any way any such property subject to any limitation imposed by law.
(j) To invest and deal with the monies of the Club not immediately required upon such securities and in such manner as may be from time to time determined.
(k) To borrow or raise money and give security for the money raised.
(l) To hold a Club Licence under the Liquor Act and poker machine entitlements under the Gaming Machines Act and to provide alcohol, drinks and beverages and food and lawful gaming for members and guests of members together with all the usual facilities of a …club.
(m) To do all such other lawful things as in the opinion of the Club are incidental to or conducive to the attainment of any or all of the above objects, acting in accordance with the requirements of this Constitution and the Act.
8. The Constitution provides the required non-profit clauses.
9. The Constitution provides the required winding-up clause.
Membership and Control
10. The Constitution lists the Club’s membership classes.
11. According to the Club’s Constitution, Non-Playing members and House members are entitled to:
● All the social privileges and advantages of the Club;
● Introduce guests to the Club.
Non-Playing and House members are not entitled to:
● Attend or vote any meeting of the Club;
● Hold any office in the Club or take part in the management of the Club;
● Vote in the election of the board;
● Vote on any Special Resolution to amend the Constitution;
● Propose, second or nominate any eligible Member for any office in the Club;
● Propose, second or nominate any eligible Member for Life Membership.
12. According to the Club’s Constitution, Casual Members are entitled to:
● All the social privileges and advantages of the Club;
● Introduce guests to the Club;
Casual Members are not entitled to:
● Attend or vote any meeting of the Club;
● Hold any office in the Club or take part in the management of the Club;
● Vote in the election of the board;
● Vote on any Special Resolution to amend the Constitution;
● Propose, second or nominate any eligible Member for any office in the Club;
● Propose, second or nominate any eligible Member for Life Membership.
13. The Club’s Constitution provides:
The number of Full Members having the right to vote in the election of the Board shall at all times exceed the number of Full Members who do not have the right to vote in the election of the Board.
Voting
14. The Club’s Constitutions provides that only members participating in the sporting activities of the Club are given voting rights.
Board of Directors
15. The Club’s Constitution provides that the Board will be elected annually at the annual general meeting of the Club in accordance with the Constitution and consist of:
● a President,
● Vice President,
● Captain,
● Honorary Treasurer, and
● 5 Ordinary Directors.
16. The Club’s Constitution provides that only members participating in the sporting activities of the Club are able to participate in the management of the Club.
Sporting
17. The 2017 Club annual report details the competitions the club has participated in the 2017 income year.
18. The Club has competed in both club run competitions and inter club competitions.
19. The club fielded representative teams in men’s and women’s events.
20. The club provided managers for these teams.
21. The Club has provided in-house competitions in the 2016-17 income years.
22. The Club organises a significant number of events each year:
Disposal of the club property to Developer
23. The Club entered into a Development Deed (the Deed) with the Developer for the sale of its freehold land.
24. Under the Deed the Club will transfer its freehold land to the Developer, and the Developer will pay the Club money and will (among other things) provide the club with bank guarantees, lease the freehold land back to the Club for sporting facilities, construct new facilities on Council land for use by the Club, and arrange a lease of the new facilities for the Club with the Council.
25. The Deed provides that the transfer of the land may only occur if specified conditions are satisfied.
26. The obligations of the Developer under the Deed are implemented in stages.
27. The amount to be paid by the Developer will be paid in three instalments:
● The first instalment on entering into the Deed,
● The second instalment on transfer of the land to the Developer, and
● The third instalment a number of years after the land is transferred.
28. The first instalment received by the Club will either be held in reserve or applied to general club activities including maintenance and repairs for the existing facilities so that members can continue to use the facilities and will also help reduce pressure to increase the membership subscription fees.
29. In respect of the amount of the third instalment to be received in a number of years, it is expected to be used to maintain and improve the new facilities. This amount will also help to keep down pressure on annual subscription increases.
30. Under the Deed, the Developer must pay the Club compensation for any net operating loss for the period from 12 months after the deed is executed until 12 months after the new facilities are completed.
31. Under the Deed, the Club will grant to the Developer a number of corporate memberships and a number of private memberships.
32. Under the Deed, the Club will grant in favour of the Developer a number of assignable ‘X member’ category memberships.
Background to the Deed
33. The Club entered in the Deed for the following reasons:
● The Club has no security of tenure as it does not own all of the property on which the existing facilities are located, but rather leases or licences.
● There is the prospect that the land occupied under leases or licences will be developed by the owner, and if developed would not allow the existing facilities to operate.
● The Club would not be able to acquire land near the existing facilities to construct new facilities and clubhouse.
● It is not possible for the Club to purchase the Council land that will be used in the construction of the new facilities.
● The Club has no long term future at its current location and will ultimately have to move.
● The lease is considered the best option to obtain the longest and most secure form of tenure available to the Club to operate its facilities and clubhouse.
● To ensure the continuation of the Club.
34. The development deed provides for the building of new facilities and clubhouse. The new Clubhouse will comprise:
● Secure parking,
● Air conditioning throughout occupied spaces, and
● Function space.
Relevant legislative provisions
Income Tax Assessment Act 1997
section 50-1
section 50-45 table item 9.1(c)
section 50-70
Reasons for decision
Question 1
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.
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 conditions detailed in section 50-70 of the ITAA 1997, and the special condition in section 50-47 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.
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.
In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279:
In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)…Sugerman JA stated at 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'…
The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two…Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects…
The meaning of society, association or club as described above, emphasise a 'body of persons' and 'an organisation of people' with a 'common purpose'.
The Club is a limited company which has 744 members. The Constitution describes its objectives, which include:
● To promote the playing of … as a sport by establishing a club for that purpose.
● To establish, operate, maintain, alter and improve a Clubhouse, [sporting facilities], associated facilities and other sports games and recreational facilities as determined by the Club for members and for the promotion of the purposes of the Club.
The Club is managed by a Board, it has a Constitution and the Club members voluntarily associate together for a common purpose and common interest. Therefore, the Club is considered to be a society, association or club.
It must be for the encouragement of a game or sport
Game or Sport
Paragraph 38 of TR 97/22 lists the sport undertaken by the Club as an activity considered to be a sport for the purposes of section 50-45 of the ITAA 1997.
The objects of the Club contained in their constitution, are for the encouragement, promotion and fostering of the relevant sport.
It is accepted that the sport undertaken by the Club meets the description of a game or sport as intended by section 50-45of the ITAA 1997.
Encouragement of a game or sport
Paragraph 11 of TR 97/22 states that ‘encouragement’ means ‘stimulation by assistance’. Encouragement can occur directly by:
● Forming, preparing and entering teams and competitions in the game or sport;
● Co-ordinating activities;
● Organising and conducting tournaments and the like;
● Improving the ability 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, increasing and wider participation and improved performance
And can occur indirectly:
● Through marketing; or
● By initiating or facilitating research and development.
The Club has sporting facilities which it uses to run various competitions for its members. The Club employs staff to develop and maintain the facilities and employs a professional who coaches members of the Club. The Club also fields teams in inter club competitions.
Based on this, it is considered that the Club, manifested in its purpose and activities, is encouraging the relevant sport .
That encouragement must be the club’s main purpose
Paragraph 13 of the TR 97/22 provides:
To be exempt, the main purpose of the club must be the encouragement of a game or sport.
Paragraph 14 of TR 97/22 states:
A club’s main purpose can only be ascertained after objectively weighing all of the club’s features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the clubs main purpose is or is not the encouragement of a game or sport.
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:
(a) The club conducts activities in the relevant year that are directly related to the game or sport;
(b) The sporting activities encouraged by the club are extensive:
(c) The club uses a significant portion of its surplus funds in encouraging the game or sport; and
(d) The club’s constituent documents emphasise the club’s main purpose is to encourage a game or sport and the club operates in accordance with those documents
Relevant but less persuasive features are listed at paragraph 16 of TR 97/22 and include:
(a) A high level of participation by members in the game or sport;
(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;
(c) Voting rights in the club vest only in encouraging the game or sport, whether by personal participation or by encouraging participation by others; and
(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 above features will now be considered as they apply to the Club.
Highly persuasive features
a) The club conducts activities in the relevant year that are directly related to the game of sport
The club conducts activities for members - men, women and juniors. It has a facility, maintained by people and has a pro shop and professional providing coaching to members.
b) The sporting activities encouraged by the club are extensive
The club conducts competitions annually at various levels and also has members involved in inter-club competitions. The Club’s facilities are maintained to a competition standard by employees. Its historical and current activities indicate a strong and continuing association with the game. The club is currently in the process of negotiating the establishment of sporting facilities and club facilities with a developer.
c) The club uses a significant proportion of its surplus funds in encouraging games or sports
Under the Development Deed the Club will receive money for its land. The Club intends to use the funds receives under the Development Deed to maintain and improve the sporting facilities, and to keeps its membership fees competitive.
The surplus funds of the Club will be used to encourage the relevant sport.
a) The club’s constituent documents emphasise that the Club’s main purpose is to encourage a game or sport
The objects of the Club are to promote the playing of the relevant sport by establishing a club for that purpose, operating a clubhouse for members, providing a professional to teach members, and to run competitions and award prizes. The Constitution also requires that the Club be managed by members who play the sport.
It is accepted that the constitution of the Club emphasises the encouragement of the sport as its main purpose.
Relevant but less persuasive features
a) High level of participation in sport encouraged by the club
The Courts have been favourably persuaded by the number of members participating in sport:
- In the St Mary’s case 2257of its 6648 members were football members (players and ex players). The club fielded 32 teams of 450 players plus a reserve grade and a metropolitan cup team.
- In Terranora lakes Country Club Ltd v. FC of T (1993) 93 ATC 4078 (Terranora), 2854 of 4076 members were sporting members
- In Re Tweed Heads Bowls Club v FC of T 92 ATC 2087; (1992) 24 ATR 1068 (Tweed Heads), 830 of its 920 members were bowling members.
- In Case W114 (Grand United Port Macquarie Bowling Club v. F.C. of T) 89 ATC 891, 1353 of its 2476members were bowling members.
Of the members of the Club, 88% belong to a membership class which entitles them to participate in the sport promoted by the Club.
The club fields teams in inter club competitions and runs singles, doubles, and foursomes competitions for both men and women at the Club.
It is accepted that a high level of participation in sport is encouraged by the Club.
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)
The constitution of the Club only permits members who are eligible to participate in the sporting activities of the Club to stand for office and to vote for office bearers.
It is accepted that the members of the committee, or persons who control the direction of the Club, are predominantly participants in or concerned with the encouragement of a game or 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 members participating in the sporting activities of the Club are given voting rights and are able to participate in the management 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 actively promotes itself to patrons and the public as a club that encourages sport and its advertisements and publicity emphasise sporting activities and facilities.
Other purposes including social or commercial activities
Difficulties can arise in determining a club’s main purpose where a club is involved in other activities particularly social or commercial activities.
Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (21 ATR 300 at 312 (Cronulla Sutherland) said:
It (the club) 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.
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:
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.
In Terranora the Terranora Country Club provided and promoted an extensive range of sporting activities, including golf, lawn bowls, cricket, and football. Terranora Lakes Country 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 Terranora case, 90.3% of the Terranora Lakes Country Club income cane 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 Terranora Lakes Country 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 Terranora Lakes Country 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 Tweed Heads, the taxpayer was a lawn bowls club which had indoor and four outdoor bowling greens. The club participated in and organised large number of tournaments each year. The club building was substantial and the catering and entertainment facilities were extensive. The clubs 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:
…I am satisfied that the club, from its very inception, has been and is dedicated to a
very substantial degree to the promotion of lawn bowls and, latterly, to indoor bowls. True it is that some elements of the Club’s activities- leaving the poker machines aside for the moment- are social and cannot, as such, be characterised as “promoting the athletic game of bowls”, but that is true of virtually all sports clubs. Be that as it may, I am left in no doubt that the Club has as its main or dominant purpose, the promotion and encouragement of the bowling.
That leaves the issue of the poker machines, which earn substantial revenue, only a relatively small proportion of which was, in the years before me, used for bowling. In the Vernacular, the Club has money pouring out of its ears and doesn’t know what to do with it all. So what? Provided its main object is the promotion of bowls, the fact it also produces repetitive strain injury (RSI) in some 400,000 non bowling poker machine players while at the same time emptying their pockets seems to me to be utterly irrelevant.
In 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 clubs history centred on the support of local football, and that the club rules required a certain proportion of its funds to be applied for the support of local football.
Therefore, the fact that a sporting club also encourages social and other activities does not, in itself, preclude a club from being exempt. A club is still exempt provided the encouragement of a game or sport is that clubs main purpose. Conversely if a club’s main purpose is providing social amenities and licenses club facilities to its members, the exemption does not apply even if sport is encouraged.
The objects and activities of the Club show that its main purpose is to encourage the relevant sport. Although the Club does have social facilities, the social activities are not substantial in comparison to the sporting activities of the Club. The sporting activities of the Club are extensive - they run competitions, maintain and improve the sporting facilities, and provide coaching for members. The social facilities of the Club are considered to be incidental to the activities of the Club. The Commissioner accepts that, based on the current operations of the Club, its main purpose is to promote the encouragement of the relevant sport.
The development deed
The Club has entered into the Development Deed to sell its land to the Developer. Under the Development Deed, the Club will transfer its land to the Developer and in return, the Club will receive compensation, a lease of the current land back from the Developer for use by the Club for its sporting facilities, the Developer will construct new sporting facilities and clubhouse on different land, and will arrange a lease of the new sporting facilities and clubhouse for the Club with the Council.
The current sporting facilities are located on land that is only partly owned by the Club. The Club otherwise occupies the land under leases or licences. The Club is concerned that the land occupied under lease or licence will be developed, which will prevent the existing sporting facilities from operating i.e. the Club is concerned that it has no long term future at its current location. The Club has entered the Development Deed as they consider the lease arrangements under the Development Deed will give it the most secure form of tenure to operate their sporting facilities and clubhouse long term.
The Club intends that the proceeds from the sale under the Development Deed will be used (amongst other things) to maintain and improve the facilities.
It is considered that the Club entered into the Development Deed to ensure the ongoing operation of sporting facilities by the Club. Although a new clubhouse will also be developed under the Development Deed with much improved facilities, we accept that the provision of the clubhouse is not the purpose for entering the Development Deed.
The Commissioner accepts that the Club has entered into the Development Deed to further its main purpose of encouraging sport.
Section 50-47 of the ITAA 1997
Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states:
An entity that:
(a) is covered by any item; and
(b) is an ACNC type of entity;
is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012.
Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an ‘ACNC type of entity’. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are ‘charitable purpose’, and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose.
The Club has sporting and social purposes which are non-charitable purposes. As such, the Club is not capable of being a registered charity, and is not an ACNC type of entity.
Section 50-47 of the ITAA 1997 does not apply to the Club.
Section 50-70
Subsection 50-70(1) 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 – 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 functional and on winding up. The organisation's actions must be consistent with this requirement.
The Club’s Constitution prevents distribution to members. The supporting evidence shows that the Club acts in accordance with this prohibition. The Club is not carried on for the profit or gain of its individual members.
Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia
The Club is a resident of, and is located in, Australia. The Club carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement.
Subsection 50-70(2) of the ITAA 1997 provides that the Association must:
● comply 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.
Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) 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.
The supporting evidence shows that the Club complies with the substantive requirements set out in its current constituent document.
Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely 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.
The earlier discussion shows that the Club applies its income and assets solely for the purpose for which it was established.
The Club satisfies the special conditions in section 50-70 and section 50-47 of the ITAA 1997.
Conclusion
Based on the information provided, we accept that 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:
● The Club conducts, and will conduct, activities in the relevant year that are directly related to a game or sport.
● The sporting activities conducted by the Club are extensive.
● The Club uses a significant portion of its funds in encouraging sport.
● The Club’s constituent documents emphasise the Club’s main purpose is to encourage sport.
● A high number of the Members of the Club participate in the sport promoted by the Club.
● The members of the Committee, who control the Club, are participants in the sport promoted by the Club.
● Voting rights in the Club vest only in members who are involved in the sport promoted by the Club.
● The Club promotes itself to members, patrons and the public as a sporting club.
● The social activities of the Club provide facilities for members and an income stream to support the sporting activities of the Club. Although the club is currently trading at a loss, they are still using funds for maintaining the sporting facilities, running club events and funding a club professional.
We consider that the Club is non-profit and pursues its objects principally in Australia and incurs its expenditure principally in Australia.
As such the Club is exempt from income tax under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport.
Question 2
As discussed in question 1, we accept that the Club has entered into the Development Deed to ensure the ongoing operation of its sporting facilities, which is in furtherance of their main purpose of encouraging sport. That conclusion will not change if the proposed agreement under the Development Deed is not fulfilled by the Developer, but by another developer (in accordance with the Development Deed). The purpose of the Club in pursuing the Development Deed is to ensure the ongoing operation of the Club and provision of sporting facilities.
The Club will continue to have a main purpose of encouraging sport if it calls upon the Guarantee and arranges for the completion of the Development Deed by another developer. The Club will be an exempt entity under section 50-45 of the ITAA 1997.
Further, the Constitution of the Club provides that on the winding-up of the Club any surplus property is to be transferred to another not-for-profit that has objects similar to the Club. Any surplus property of the Club cannot be distributed to its members.
Therefore, provided the Club has acted in furtherance of its objects prior to winding-up, and the Club is wound up in accordance with the relevant clause, the purpose of the Club will not be affected. The Club will continue to have the main purpose of encouraging the relevant sport and will be an exempt entity under section 50-45 of the ITAA 1997.
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