Edited version of private advice

Authorisation Number: 1052108649547

Date of advice: 18 April 2023

Ruling

Subject: Not for profit - encouragement of sports

Question

Is the entity exempt from income tax under section50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, if it participates in an activity?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The XYZ Club (the Club) is an Australian public company limited by guarantee.

The principal purpose of the Club is to encourage sports and some recreational activities.

The Constitution of the Club include the following clauses:

Clause in the Constitution of the Club states Principal Purpose and powers:

(a)          The Principal Purpose for which the Company is established is to encourage sports and some recreational activities.

(b)          Solely for the purpose of furthering the Principal Purpose, the Company may do all things incidental or conductive to furthering the Principal Purpose

Clause in the Constitution of the Club states Application of income and property

(a)          The income and property of the Company must be applied solely towards the Principal Purpose.

(b)          No portion of the profits, income or property of the Company may be paid or transferred directly or indirectly to Members by way of dividend, bonus or otherwise in their capacity as Members.

(c)           .....

(d)          ..., payment may be made in good faith to any member of the Company:

                             i.                in return for any services rendered to the Company;

                            ii.                for goods supplied in the ordinary course of business;

                           iii.                ...; and

                           iv.                .... of the Company.

Clause in the Constitution states Distribution of property on winding up

Where on the winding up or dissolution of the Company, there is a surplus of assets after satisfying all the Company's liabilities and expenses, the surplus:

(a)          must not be paid or distributed to the Members; and

(b)          will be given or transferred to such other fund, authority, institution or company which:

                             i.                has similar objects to those of the Company as described in this Constitution; and

                            ii.                prohibits the distribution of income, profit or assets to its Members.

(c)           The identity of the fund, authority, institution or company will be decided by the members ...

Clause in the Constitution states different categories of Memberships.

The Club encourages its members and the public to undertake the sporting activities offered by the Club.

The Club undertakes certain incidental activities.

The sports activities are funded by:

•                     the net surplus derived from incidental activities; and

•                     The Club and its sponsors subsidise a portion of the fee for each entrant for the sport.

The Club intends to participate in an activity to raise funds for the Club's sporting purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1.

Income Tax Assessment Act 1997 section 50-5.

Income Tax Assessment Act 1997 section 50-45.

Income Tax Assessment Act 1997 section 50-70.

Income Tax Assessment Act 1997 subsection 50-70(1).

Income Tax Assessment Act 1997 paragraph 50-70(1)(a).

Income Tax Assessment Act 1997 subsection 50-70(2).

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

These reasons are not part of the private ruling.

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

A society, association or club which has been established for the encouragement of a game or sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1.

Section 50-1 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.

(* as defined in section 995-1 of the ITAA 1997)

The tables referred to in section 50-1 are contained in sections 50-5 to 50-45. 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. The society, association or club must meet the special condition detailed in section 50-70.

An entity is 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.

The special conditions in section 50-70 state 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.

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.

The members of the Club voluntarily associate together for a common purpose and common interest. They have a management committee and rules (clause 1.2 (b) and clause 1.2 (o) of the Constitution). It is therefore accepted that the Club is an 'association, society or club'.

Established for the encouragement of game or sport

Paragraph 30 of the Taxation Ruling TR 2022/2 Income Tax: the games and sports exemption (TR 2022/2) states:

For a club to be established for the encouragement of a game or sport, the main purpose of the club in the relevant income year must be the encouragement of a game or sport. 'Encouragement' is not a defined term and takes its ordinary meaning. The ordinary meaning of encouragement (or the act of encouraging) has been described as stimulating by assistance or approval, including through direct or indirect means

Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of a club to determine its main purpose.

Paragraph 17 of TR 2022/2 states,

Game' and 'sport' are not defined terms and take their ordinary meaning, shaped by the statutory context in which they appear. Some activities are obviously games or sports; for example, netball or football. For other activities, characterisation as a game or sport can be demonstrated by evidence of a competitive element and by participants' compliance with the conventions and rules of the activity.

Paragraph 31 of TR 2022/2 emphasises that,

Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of a club to determine its main purpose.

No one factor on its own will determine the main purpose of a club. A weighing of all the factors is needed. When considering the factors together, an objective conclusion must be reached that a club has a main purpose of encouraging a game or sport: paragraph 36 of TR 2022/2.

Paragraph 37 of TR 2022/2 provides:

The following factors identified by courts and tribunals as relevant when considering purpose:

•                    emphasis in the club's constituent documents that the main purpose is to encourage a game or sport

•                    extent of sporting activities

•                    the conduct of activities directly related to the game or sport

•                    a high level of member participation in the game or sport

•                    promotion of the organisation to patrons and the public as one that encourages a game or sport

•                    involvement of the committee of management in the promotion of sport

•                    the use of surplus funds for encouraging the game or sport, and

•                    the provision of financial and in-kind support for encouraging the game or sport.

In case of the Club, the Club and its members confirmed that they comply with its objects as outlined in its constitution. They encourage sporting activities and enable sporting competitions.

Paragraph 34 of TR 2022/2 emphasises that:

A club that has both sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is:

•                    merely ancillary and incidental to its sporting purpose (that is, a purpose that is related to carrying out its sporting purpose), or

•                    secondary to its sporting purpose (that is, a purpose that is independent to, but less important or less significant than, the sporting purpose).

Clause in the Club's Constitution lists its principal purpose for which it is established is to encourage sports. Their Constitution also says that the Company may do all things incidental or conductive to furthering the principal purpose.

Participation in a one-off activity will not affect the Club's objects and purpose as listed under their Constitution, as the revenue attained from the activity will be applied as per the requirements under their Constitution and therefore it meets the requirements under section 50-45.

Satisfying the special conditions

Section 50-47

Under this special condition:

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 Club is not an ACNC type of entity therefore it does not need to be registered under the Australian Charities and Not-for-profits Commission Act 2012.

As per subsection 50-70(1):

An entity covered by item 1.7, 2.1, 9.1 or 9.2 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; 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;

and the entity satisfies the conditions in subsection (2).

Subsection 50-70(2) states:

The entity must:

a)            comply with all the substantive requirements in its governing rules; and

b)            apply its income and assets solely for the purpose for which the entity is established.

The Club is in a State in Australia; therefore it meets the requirements of paragraph 50-70(1)(a).

The activity to be undertaken will raise funds for the Club's sporting purposes. The funds raised from the activity will be used to meet the Purpose and objects of the Club. The activity will not affect their income tax exempt status. Therefore, it is considered that the Club is established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45.

Paragraph 8 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1),explains that:

Three questions must be considered to determine whether an entity satisfies the governing rules condition:

•                    What are the 'governing rules' of the entity?

•                    What are the 'substantive' requirements in the entity's governing rules?

•                    At what time must the entity comply with all of the substantive requirements in its governing rules?

The substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity.

The Club is complying with its objects as outlined in its Constitution. The Club is encouraging sporting activity and enabling sporting competitions.

Paragraphs 22 and 23 of Taxation Ruling TR 2015/1 explain that:

The income and assets condition requires an entity to 'apply its income and assets solely for the purpose for which the entity is established'.

Two questions must be considered to determine whether an entity satisfies the income and assets condition:

•                    what is the 'purpose for which the entity is established', and

•                    has the entity applied its income and assets solely for the purpose for which the entity is established?

Paragraph 45 of TR 2022/2 states,

Using surpluses from commercial activities to support the conduct of sporting activities is a factor that would support a conclusion that the main purpose of the club is encouraging a game or sport. However, where a club uses surpluses to undertake commercial activities which provide services to members, the extent of those activities, which do not achieve a sporting end, may result in the club's main purpose not being about encouraging a game or sport. It is necessary to carefully consider all relevant factors when determining the main purpose of a club.

Paragraph 61 of TR 2022/2 states,

The main purpose of a club can change over time and there is an ongoing requirement to make an objective evaluation of all of the facts and circumstances that apply to that club to determine its main purpose.

The primary object and purpose of the Club for which it is established is in their Constitution. It will continue to encourage a game or sport and use its income and assets for the purposes of undertaking the activities for which it is established, and the surplus funds are being retained and not distributed to members consistent with its non-profit requirements.

The activity to be undertaken will raise funds for the Club's sporting purposes. Therefore, the Club continues to be exempt from income tax under section 50-1 as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45.

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