Edited version of your written advice

Authorisation Number: 1051504499511

Date of advice: 17 April 2019

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:

30 June 2017 to 1 July 2018

The scheme commences on:

30 June 2017

Relevant facts and circumstances

1. The Club is an incorporated association.

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

3. The Club has the following non-profit and winding up clauses in its constitution:

Association is non-profit

Subject to the Act and the Regulation, the association must apply its funds and assets solely in pursuance of the objects of the association and must not conduct its affairs so as to provide a pecuniary gain for any of its members.

42 Distribution of property on winding up of association

(1) Subject to the Act and the Regulations, in a winding up of the association, any surplus property of the association is to be transferred to another organisation with similar objects and which is not carried on for the profit or gain of its individual members.

(2) In this clause, a reference to the surplus property of an association is a reference to that property of the association remaining after satisfaction of the debts and liabilities of the association and the costs, charges and expenses of the winding up of the association.

5. The members of the committee or persons who control the direction of the Club are predominantly concerned with the encouragement of the game of sport.

6. The Club leases gym premises, employs coaches and provides equipment for the sporting activities.

7. The Club enters a number of sporting competitions.

8. The Club does not undertake any activities except those relating to sport.

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

Summary

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 s50-45 of the ITAA 1997.

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 ACNC has advised the Club that it is not a charity; rather it is a sporting body.

As the Club is not a registered charity it is not an ACNC type of entity and section 50-47 is not applicable.

Detailed reasoning

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 incorporated association.

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 prevent 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 athletic activity.

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 sporting activities and participates in a number of sporting competitions. It leases gym premises, employs coaches and provides equipment for the sports. The Club has a Facebook page and participates in sporting competitions.

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 lists features of a club that the ATO considers highly persuasive or relevant but less persuasive in identifying whether a club 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

The main purpose is ascertained after objectively weighing all of the club’s features. It has already been established that the activities of the Club are directly related to sport. The Club does not undertake any other activities except those related to sport. The Club uses a significant proportion of its surplus funds in support of its sporting activities. The Club’s constitution is consistent with the aim of encouraging a game or sport and the members of the committee or persons who control the direction of the club are predominantly concerned with the encouragement of the game of sport.

Conclusion

After consideration of the features discussed above, it is considered that the Club is established principally for the encouragement of a game or sport. The Club conducts sporting activities and the objects in the constitution are consistent with those of a sporting club.

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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