Edited version of your written advice

Authorisation Number: 1051464436412

Date of advice: 17 December 2018

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 a society, association or club established for the encouragement of a game or sport under item 9.1(c) in section 50-45 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period

1 March 2018 to 28 February 2023

The scheme commences on:

1 March 2018

Relevant facts and circumstances

1. The Club is an Australian Public Company Limited by Guarantee.

2. The principal activity of the Club is to provide and promote sporting.

1. The Club has a non-profit and winding up clause in its constitution.

2. The Club’s Constitution contains the Club’s objects and aims.

3. 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 of sport. Social members do not participate in the management of the Club and cannot attend or vote at any Club General Meeting or hold office on the Board of the Club.

4. The club has various classes of members.

5. The Club has various facilities.

6. The restaurant and bar heavily subsidise meals and drinks for events which are held for sporting sections.

7. A full-time sport co-ordinator is employed to oversee the operation of all the sporting sections and communicate with other administration staff. Casual employees are employed to help directly in the running of the sport training programs.

8. The Club maintains control over all the sporting sections, some sections may have advisory committees to handle some day-to-day operations but all of these report to management. The expenses and income are maintained by the Club and only paid on approval by the manager and the board, with all funds being transacted through the general account.

9. The Club promotes itself through its website as being involved in the sport. The website contains a calendar of events, pictures and Club history. The premises contain memorabilia, trophies and honour boards. The Club‘s advertisements and publicity emphasise its sporting facilities and the Club has trophies, honour boards and memorabilia displayed within the clubhouse.

10. The Club conducts extensive activities directly related to sport by organising, hosting and participating in events at various levels and providing officials at these events. The Club provides sponsorship in the way of prizes, meal beverages, etc, throughout the year for various tournaments and events.

11. The Club provided financial information for the 2017 and 2018 years.

Relevant legislative provisions

Section 50-1 Income Tax Assessment Act 1997

Item 9.1(c), Section 50-45 Income Tax Assessment Act 1997

Section 50-70 Income Tax Assessment Act 1997

Reasons for decision

ACNC type entity condition

Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and 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 (‘ACNC Act’). Section 50-47 of the ITAA 1997 provides:

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.

The expression ‘ACNC type of entity’ is defined in subsection 995-1(1) of the ITAA 1997 to mean an entity which meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the ACNC Act.

Broadly, an entity capable of being a registered charity is an ACNC type of entity.

In Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities sets out the Commissioner’s views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. Paragraph 26 of TR 2011/4 provides that an institution is charitable if it’s main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes.

The Constitution provides that the objects are to promote sport.

These objects are non-charitable purpose and not ancillary or incidental. As the Club has non-charitable purposes, it is not capable of being a registered charity. The Club is therefore not an ACNC type of entity and section 50-47 is not applicable.

Society, association or club

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

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW), Sugerman JA defines society 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 organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two.

Paragraph 2 of Taxation Determination TD 95/56 considers the definition of 'association' as follows:

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

The Macquarie Dictionary 2001, 5th edition (The Macquarie Library Pty Ltd, Macquarie University) defines ‘club’ as a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members.

The Club is an Australian Public Company Limited by Guarantee. The purposes of the Club are consistent with that of a sporting body. The Club is considered to be a society, association or club.

For the Club to be exempt from income tax as a society, association or club established for the encouragement of a game or sport, it needs to satisfy the following three tests (as set out in paragraph 7 of Taxation Ruling Income tax: exempt sporting clubs (TR 97/22):

● It cannot be carried on for the purposes of profit or gain to its individual members

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

● That encouragement must be the club’s main purpose

TR 97/22 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.

Non-profit

TR 97/22 states the following on the non-profit requirement:

Non-profit requirement

9. A club must not be carried on for the purposes 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.

The Constitution prevents the income and capital of the Club from being distributed to the benefit of its members both while the Club operates and when it winds up. There is nothing in the facts to indicate that the Club is acting, or will act, contrary to the prohibition.

Special Requirement

Section 50-70 of the ITAA 1997 provides that an entity covered by item 9.1 of section 50-45 of the ITAA 1997, is not exempt from tax unless 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

It has already been determined that the Club is a society, association or club which is not carried on for the purpose of profit or gain of its individual members.

In this case, the relevant test is a) - the entity must have a physical presence in Australia. The Club is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia. Therefore this requirement is met.

Encouragement of a game or sport

Game or sport

There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997 therefore; those words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that would be considered as ‘sport’, and includes boat racing; rowing; yachting at paragraph 38.

We consider the Club to be concerned with a game or sport.

Encouragement of sport to be the club’s 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:

● through marketing; or

● by initiating or facilitating research and development

The Club conducts activities directly related to all forms of sport by organising hosting and participating in sporting events. It has competitions for various levels. A full-time sports co-ordinator is employed to oversee the operation of all the sporting sections and communicate with other administrative staff. Casual employees are employed to help directly in the running of the sports programs. The Club maintains control over all the sporting sections, some sections may have advisory committees to handle some day-to-day operations but all of these report to management. Sporting activities are promoted to a customer database, local schools, councils and community groups in order to encourage population and growth. We are satisfied that the Club is established for the encouragement of a game of sport.

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 of 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.

TR 97/22 lists features of a club that the ATO considers 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 emphasise that 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 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 the 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.

Paragraph 14 of TR 97/22 also states:

A club's main purpose can only be ascertained after objectively weighing all of the club's features, including those features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

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:

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.

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 centered around the support of local football, and that the club rules required a certain proportion of its funds support local football.

These cases emphasis the requirement that in order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to a sporting end. Where an association’s main purpose is providing social amenities and licensed club facilities to its members the exemption does not apply.

The main purpose can only be ascertained after objectively weighing all of the club’s features.

Highly persuasive features

Activities directly related to a game or sport

It has already been established that the activities of the Club are directly related to the sport.

The sporting activities encouraged by the Club are extensive.

The Club conducts extensive activities, hosting, participating and providing officials for the various events.

The Club uses a significant proportion of its funds to encourage the game or sport.

The Club should use a significant proportion of its surplus funds in encouraging its game or sport. As Lockhart J noted in Cronulla it is a significant matter if a club has the potential to apply its surplus funds for purposes that have nothing to do with the encouragement of a game or sport.

It is accepted that the Club uses a significant portion of its funds to encourage sport.

The objects in the Club’s constituent document

The Constitution is consistent with the aim of encouraging a game or sport.

Less persuasive features

High level of participation by members in the game or sport;

Full members participate in sport activities and a number of social members also participate in such sports.

The members of the committee are predominantly participants in or concerned with the encouragement of 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 of sport. Social members do not participate in the management of the Club and cannot attend or vote at any Club General Meeting or hold office on the Board of the Club. Thus the members who will be entitled to vote at meetings will all be involved in encouraging the sport.

Voting rights in the club vest only in members involved in the encouragement of the game or sport, whether by personal participation or by encouraging participation by others.

Each full member present at a general meeting has one vote. Social members are not permitted to vote in the running of the Club. Therefore, voting rights vest only in members who encourage sport.

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 promotes itself through its website as being involved in sport. The website contains a calendar of events, pictures and club history. The premises contain memorabilia, trophies and honour boards.

It is accepted that the Club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the sporting facilities provided.

Conclusion

After consideration of all the features discussed above, it is considered that the Club is established principally for the encouragement of a game or sport. The Club conducts extensive activities directly related to sport by organising, hosting and participating in sporting events at various levels and providing officials at these events. The objects in the Constitution of the Club are consistent with those of a sporting club.

The Club’s social activities generate income enabling the Club to fund the sporting sections of the Club. It is considered that on balance while the Club has substantial social activities the main purpose of the entity is the encouragement of a game or sport.

Based on the above, the total ordinary income and statutory income of the Club is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is a club 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.

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