Edited version of private advice

Authorisation Number: 1052260874224

Date of advice: 28 June 2024

Ruling

Subject: Income tax exempt entity - encouragement of a game or sport

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 ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

The scheme commences on:

1 July 2024

Relevant facts and circumstances

The Club is an Australian company limited by guarantee.

The Club is located in Australia and pursues its objects at that location.

The Club operates with both sporting and non-sporting recreational facilities.

The Club is governed by a Constitution (governing document).

The objects of the Club are set out in the Constitution and stated as encouraging and promoting sport.

The Club's Constitution includes:

•         not-for-profit clauses, and

•         wind up, and dissolution of assets clauses prohibiting distribution to its members.

The Club runs sporting competitions and social sporting activities weekly.

The Club fields sport team in its sport competitions and tournaments.

The Club has both sporting members and social members.

The Club encourages its players and other sports groups and clubs in the sport.

The Club employs a sports development officer dedicated to the sport.

The Club actively promotes the sport including running a youth sporting program.

The Club uses its surplus funds generated from its ancillary non-sporting activities to maintain and improve the sporting facilities and the services it provides to its members and patrons. The surplus funds are also used to offset losses incurred from the sporting activities.

The Club has also provided various forms of documentation to support their application, including the Club's governing document, and a previous private ruling confirming exempt status for previous financial years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-45

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-70

Income Tax Assessment Act 1997 section 995-1

Australian Charities and Non-for-profits Commission Act 2012 section 25-5

Charities Act 2013 section 12

Reasons for decision

Issue 1

Question 1

Detailed reasoning

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 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 (at 4726).

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270 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 organisations 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, emphasises a 'body of persons' and 'an organisation of people' with a 'common purpose'.

Application to your circumstance

The Club is a public company limited by guarantee. The Club is managed by its board. Its members pursue a common purpose and are governed by the rules outlined in its Constitution.

The Club is a society, association or club for the purposes of section 50-45 of the ITAA 1997.

Established for the encouragement of a game or sport

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. Taxation Ruling TR 2022/2 Income tax: the game and sports exemption (TR 2022/2) describes the circumstances in which the Commissioner will consider a society, association or club to be established for the encouragement of a game or sport. Paragraph 27 of TR 2022/2 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997.

Application to your circumstances

The objects of the Club are concerned with promotion and encouragement of their sporting activities.

Encouragement

Paragraph 30 of TR 2022/2 states that ''encouragement' is not a defined term and takes its ordinary meaning. The ordinary meaning of encouragement (or the act or encouraging) has been described as stimulating by assistance or approval, including through direct and indirect means.

TR 2022/2 provides the following commentary about activities that encourage a game or sport:

42. A club can demonstrate a purpose of encouraging a game or sport where it provides financial and in-kind contributions to other organisations that directly conduct those activities. To demonstrate a main purpose of encouraging a game or sport, a club that does not directly conduct any games or sports will need to objectively show that the activities it carries out are a means to that end.

43. Direct or indirect activities that indicate the encouragement of a game or sport can include:

•         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.

•         encouraging increased and wider participation and improved performance.

•         marketing.

•         initiating or facilitating research and development, and

•         facilitating the activities listed in this paragraph by making a financial or in-kind contribution to an organisation that performs them.

Application to your circumstances

The Club's Constitution includes the Clubs primary object or purpose being the encouragement of games and other sports as made and determined by the Club from time to time.

The Club actively encourages their sport through:

•         organising and running sporting competitions and tournaments, including club championships, pennant, district and zone events,

•         its members and visitors that participate in the sporting competitions and tournaments.

•         a sporting academy for young people.

•         hosting social and community sporting activities.

•         practice and informal sporting sessions.

•         promoting and advertising the sport on its website, including member newsletters which are available to the public to promote the sport.

The Club consequently encourages the sport in question.

Purpose of providing non-sporting activities

The Club's non-sporting and social activities include the operation of bar facilities, catering, keno, TAB, poker machines and dining facilities.

Use of surplus funds:

•         the Club spent about $Xm from its retained earnings to upgrade fields,

•         the Club applies some of its funds to maintain and improve the facilities and services it provides to its members and guests, and

•         the Club's net losses from its sporting activities are covered by surplus funds it generates from its other non-sporting activities.

In this case, the surplus funds the Club generates from its non-sporting and social activities are used, or retained for future use, in line with the Club's primary object of supporting the encouragement of games and other sports, as made and determined by the Club from time to time.

The above demonstrates that the Club's main purpose is to encourage the sport, and surplus funds from non-sporting activities are invested to support sporting activities.

Main or dominant purpose

To be an exempt entity under item 9.1(c) of section 50-45 of the ITAA 1997, the main or dominant purpose of a club must be the encouragement of a game or sport.

The test to be applied was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. 90 ATC 4215 (Cronulla) as follows:

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).

To determine whether a club is established for a game or sport in a particular income year Lockhart J in Cronulla stated:

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely the year of income... (at 4225).

TR 2022/2 then provides the following commentary regarding 'main purpose':

31. Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances...

32. The subjective motives or intentions of the founders or members of the club are relevant but do not necessarily determine the main purpose of the club. The stated purpose of a club is also significant but not decisive. Other important considerations include the activities and history of the club and how the club is controlled.

33. It is the main purpose of the club in the year under examination that is the relevant consideration. it is not enough to examine the purpose of a club at the time of formation (or in past years), as its main purpose may change from year to year...

36. No one factor on its own will determine the main purpose of a club. A weighing of all 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.

37. The following factors have been 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.

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

Application to your circumstances

The following facts in this case were considered in determining the Club's main purpose to be consistent with those of encouraging the sport:

•         the Club's constitution emphasises the main purpose is to encourage sports.

•         the sporting activities undertaken by the Club are extensive.

•         the manner in which the sporting activities are conducted is directly related to sport.

•         the Club is promoted to patrons and the public as an organisation that encourages the sport.

•         members of the Club's board are all sporting members.

•         use of surplus funds from non-sporting activities contributes to encouraging sport as the Club's surpluses from these activities are used to facilitate sporting activities.

•         the Club's other activities generating surpluses are a means to achieve the purpose of supporting and encouraging the sport.

The Club has a history of surpluses and generous retained earnings which are used to achieve the objects of the Club.

The usage of these retained earnings in future years will discharge the Club's main purpose.

Weighing up the Club's sporting and non-sporting activities and considering all the evidence provided and the analysis above, the Club's main purpose is the encouragement of its core sport. The independent non-sporting purpose of the Club, to provide a licenced club with entertainment facilities to members and patrons, is secondary for the period of this ruling.

Special conditions

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 a 'charitable purpose', and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose.

Application to your circumstances

The Club has a purpose of encouraging a game or sport which is a non-charitable purpose. 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 of the ITAA 1997

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 (not-for-profit requirement) 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

TR 2022/2 states the following about the non-profit requirement:

11. To qualify for the games and sport exemption, a club must be not-for-profit... The club must not be carried on for the purposes of individual members' profit or gain, either while the club is operating or on its winding up.

12. Club members may receive communal membership benefits, such as the use of the facilities, that are incidental to the club's objects. This will not prevent the club meeting the not-for-profit requirement. The club may also pay members reasonable remuneration for services they perform for the club.

13. Clubs can use various mechanisms to ensure they meet the not-for-profit requirement. 'Not-for-profit' clauses in governing documents are the most common way. These prevent the distribution of profits or assets for the benefit of particular persons while the club is operating and on winding up.

Application to your circumstances

The Club's Constitution prevents distribution to members while the Club is operating and on winding up. The Club is not carried on for the profit or gain of its individual members as set out in the relevant clauses in their governing document.

There is nothing to indicate that the Club does not operate in accordance with this prohibition.

The Club satisfies the not-for-profit requirement.

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 satisfied this requirement Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities.

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.

Comply with substantive requirements in its governing rules

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) of the ITAA 1997. 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.

Application to your circumstances

The Club's governing documents include its Constitution. The Constitution sets out both substantive and procedural requirements about how the entity is to be operated. The objects and non-profits clauses about the use of assets, clauses governing the admission of members, and the board's composition are 'substantive' requirements.

Based on the supporting evidence and the above analysis, the Club complies with the substantive requirements set out in its Constitution.

Applies its income and assets for its purpose

Paragraphs 33 to 35 of TR 2015/1 states 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. This means that the entity must exclusively or only apply its income and assets for that purpose'.

Application to your circumstances

Based on the supporting evidence and the above analysis, 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

The Club is considered to be a society, association or club established for the encouragement of a game or sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. As such, the income of the Club is exempt from income tax under section 50-1 of the ITAA 1997.

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