Edited version of private advice

Authorisation Number: 1052169497203

Date of advice: 15 September 2023

Ruling

Subject: Exemption from income tax - encouragement of sports

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 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 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:

I July 20XX.

Relevant facts and circumstances

The Club is established in Australia.

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

A Rule of the of the Club's Constitution (the Constitution) states the following objects:

Objects

The objects of the Club are to encourage, promote and foster the sports.

A Rule of the Constitution contains the following non-profit clause:

Not for profit organisation

1)    The assets and income of the Club shall be applied exclusively to the promotion of its objects and must not distribute any surplus, income or assets directly or indirectly to its members.

2)    Sub-rule(1) does not prevent the Club from paying a member-...

A Rule of the Constitution contains the following dissolution clause:

Winding up and cancellation

1)    The Club may be wound up voluntarily by special resolution.

2)    In the event of the winding up or the cancellation of the incorporation of the Club, the surplus assets of the Club must not be distributed to any members or former members of the Association.

3)    Subject to the Act ....individual members.

4)    The ...are to be given must be decided by special resolution.

Membership

A Part of the Constitution among other, lists the rules about membership, its privileges and eligibility.

A Financial Statement for 20XX-20XX income year state that the Principal Activities of the Club were to provide its members with sporting facilities.

The Club's facilities include, sporting fields and other facilities for the members and visitors.

The Club enters the teams into competitions for sports.

The Club's committee assists in organising competitions, organisation of events, sourcing sponsorship funds, allocating prizes and arranging stewards for competitions.

The sporting activities are funded by the revenue of the Club.

The Club promotes itself to the area as a club that conducts sporting activities and publishes its results of the sporting tournaments and competitions in Local newspapers and on its website.

The Club also provides donations and other kinds of assistance to local sporting clubs and other organisations.

The Club spends its income and surplus in improving the facilities for sports and members.

The Commissioner has issued a private ruling in 20XX confirming that the Club is exempt from income tax under section 50-1 of the ITAA 1997. The Club now requests exemption for future years.

Relevant legislative provisions

Income Tax Assessment Act 1997section 50-1.

Income Tax Assessment Act 1997section 50-5.

Income Tax Assessment Act 1997section 50-45.

Income Tax Assessment Act 1997section 50-70.

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

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

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

Reasons for decision

Summary

The primary object and purpose of the Club for which it is established is to encourage a game or sport. The dissolution rule in the Constitution ensures that the surplus assets of the Club must not be distributed to any members or former members of the Club is consistent with its non-profit requirements. 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.

Detailed reasoning

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.

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.

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, that state, any person who supports the purposes of the Association is eligible for membership (rule 9.0 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.

Paragraph 31 of TR 2022/2 further states:

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 27 of TR 2022/2 provides some examples of games or sports. The category, 'played with ball or projectile' lists bowling (ten-pin), bowls, golf, squash as a sport for the purposes of section 50-45.

Paragraph 36 of TR 2022/2 further emphasises:

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 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 your case, 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.

The Club's committee members assists in:

•         organising competitions;

•         organising events, courses to be played, source sponsorship funds;

•         allocating prizes and arranging stewards for competitions;

The Club:

• uses its revenue to fund the sporting activities;
• promotes itself as a club that conducts sporting activities;
• provides results of the tournaments and competitions to the Local newspapers and on its website;

Based on the activities, the Club manifested in its purpose and activities, is encouraging the sports. The objects of the Club contained in a Rule of the Constitution are to encourage, promote and foster the sports, therefore it meets the requirements and description of a game or sport as intended under section 50-45.

Satisfying the special conditions

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. As it pursues its objects and incurs its expenditure in Australia it is considered that it meets the requirements of paragraph 50-70(1)(a).

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.

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.

Conclusion

On the information provided, the primary object and purpose of the Club for which it is established is to encourage a game or sport. The Constitution of the Club ensures that the Club's income and assets are used for the purposes of undertaking the activities for which it is established. The Club has confirmed that they utilise their resources and surplus on the promotion of sport, in maintaining the sporting fields and providing facilities for its members. The dissolution rule in the Constitution ensures that the surplus assets of the Club must not be distributed to any members or former members of the Club is consistent with its non-profit requirements.

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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