Edited version of private advice

Authorisation Number: 5010068185199

Date of advice: 13 October 2020

Ruling

Subject: Exempt entities - not for profit and mutual organisations - clubs - conditions

Question

Is the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 as a club established for the encouragement of a game or sport under item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 201A to 30 June 202E

The scheme commences on:

1 July 201A

Relevant facts and circumstances

1.    The Club is a public company limited by guarantee and was incorporated on DDMMYY.

2.    The Club is located at Z, NSW.

3.    The land on which the Clubhouse is located is leased to the Club (via an operating lease).

4.    The Club is governed by a Memorandum and Articles of Association (MAA) and Rules.

Club's Memorandum and Articles of Association

5.    Clause 2 of the MAA relevantly sets out the Club's objects as follows:

(a)  To foster promote and conduct sailing in the 16ft Skiff, VJ, Skate and other classes.

(b)  To promote the sport of sailing and other past times associated therewith.

...

(e)  To hold or arrange sailing and other sporting events trial and competitions and provide or contribute towards the provision of prizes, awards and distinctions, PROVIDED that no member of the Club shall receive any prize or award or distinction except as a successful competitor at any sporting event trial or competition held or promoted by the Club or to the cost of the holding or promotion of which the Club may have subscribed out of its income or property and which under the regulations affecting the said sporting events trial or competition may be awarded to him.

(f)    to subscribe to become a member of and co-operate with any other club association or organisation whether incorporated or not whose objects are altogether or in part similar to those of the Club, PROVIDED that the Club shall not subscribe to or support with its funds any club association or organisation which does not prohibit the distribution of its income or property among its members to an extent at least as great as that imposed on the Club under or by virtue of Clause 3 of this [MAA].

(g)  In furtherance of the objects of the Club to buy sell and deal in all kinds of apparatus and all kinds of provisions liquid and solid required by the members of the Club or persons frequenting the Club's premises.

(h)  To purchase, take on lease or in exchange hire and otherwise acquire any lands buildings easements or property real or personal and any rights or privileges which may be requisite for the purposes of or capable being conveniently used in connection with any object of the Club PROVIDED that in case the Club shall take or hold any property which may be subject to any trusts the Club shall only deal with the same in any such manner as is allowed by law having regard to such trusts

...

(l) To construct improve maintain develop work manage carry out later or control any houses buildings ground works or conveniences which may seem calculated directly or indirectly to advance the Club's interests and to contribute to subsidise or otherwise assist and take part in the construction improvement maintenance development working management carrying out alteration or control thereof.

...

(t)    To print and publish and publish any newspapers periodicals books or leaflets that the Club may think desirable for the promotion of its objects.

(u)  In furtherance of the objects of the Club to amalgamate with any companies institutions societies or associations having objects altogether or in part similar to those of the Club and which shall prohibit the distribution of its or their income or property among its or their members to an extent at least as great as that imposed upon the Club under or by virtue of clause 3 of the [MAA].

(v)   In furtherance of the objects of the Club to purchase or otherwise acquire and undertake all or any part of the property assets liabilities and engagements or any one or more of the companies institutions societies or associations with which the Club is authorised to amalgamate.

(w)  In furtherance of the objects of the Club to transfer all or any part of the property assets liabilities and engagements or any one or more of the companies institutions societies or associations with which the Club is authorised to amalgamate.

6.    Clause 3 of the MAA relevantly provides for how the Club's income and assets must be expended:

The income and property of the Club whencesoever derived shall be applied solely towards the promotion of the objects of the Club as set forth in this [MAA]; and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to the members of the Club.

7.    Clause 8 of the MAA relevantly provides for how the Club's property must be dealt with in the event of the Club's dissolution:

If upon the winding up or dissolution of the Club there remains after satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed among the members of the Club but shall be given or transferred to some institution or institutions having objects similar to the objects of the Club and which shall prohibit the distribution of its or their income and property among its or their members...

Club's sailing activities

8.    The sailing activities of the Club include:

(a)  the purchasing of sailing vessels, rescue boats and safety equipment;

The Club currently has X sailing boats and Y rescue boats. The Club also has a work area for repairing boats on the ground floor of the Clubhouse.

(b)  incurring expenditure to upgrade and maintain boat ramps;

(c)   running and sponsoring local/state/national sailing competitions and regattas;

The Australia Day Regatta, the Anzac Day Regatta, specific class Regatta/s and the Christmas Fun Day Regatta has been sponsored by the Club. The Club also hosts one round of the sailing state titles each year (including the Skates (for adults sailors) and the Jimmy Warriner Trophy (for junior sailors)).

(d)  providing referees, umpires or other officials for sailing events

The Club supplies rescue craft and volunteers for junior sailors going to the Open BIC for juniors. The Club also provides its Commodore, Vice Commodore and other Club members as officials for sailing events.

(e)  providing 'learn to sail' classes to encourage new participants/junior sailors and also for current sailors to maintain their skills (adult sailors)

In 201B, three of the Club's junior sailors attended the Open BIC National Titles in XXX.

In 201C, the Club's sailors participated in the Kurnell Cup (racing BIC class) and took out the first five positions in the silver fleet.

In 202D, the Club's sailors completed in the Kurnell Cup (open BIC class), NSW Championships (Open BIC class) and Australian Championships, with the Clubs' sailors gaining many places.

(f)    Club members taking part in sailing races and events

The Club's directors and a staff member were part of the sailing crew for a yacht in the XXX yacht race in December 201C. The Club also sailed a support vessel with sailors for the XXX yacht race in December 201A.

Further, the Club held a promotional night and a welcome-home event on their premises for the sailors participating in the 201C XXX yacht race.

The Club also hosts their Annual Sailing Presentation/s in the Clubhouse, where they also provide the entertainment and prizes to the Club's members.

(g)  encouraging club members to be spectators at, and to support sailing.

The Club always has its members at the Club premises to provide information about sailing and how to join the sailing events. The Club provides access, via the Clubhouse balcony overlooking the Z beach, for members and guests to view the junior sailors training and racing in the afternoons on a Sunday.

The Club also holds a 'sailors BBQ' in its Clubhouse for both sailors and the public on Sunday mornings during the Sailing season.

(h)  Supporting specific sailing events which the club's teams or competitors are involved in.

During both the 201A and 201C XXX Yacht races, the Club provided Club T-shirts and registered the sailors with Yachting Australia (with the Club bearing the registration fee).

Club's decoration and fit-out

9.    In the Club's entry foyer, there is housed the original Minutes Book from when sailing was first established at the Club (in 19FG) and the list of the foundation Club members. The Club also has a photo and information board showing the history of the Club and photos of the various stages of construction of the Clubhouse.

10.  In the Club's Auditorium, there are F Honour boards. Two of these show life members and previous presidents, with the remainder showing overall winners and point score winners over the years.

Club's non-sailing activities

11.  The non-sailing activities of the Club are:

·   entertainment events and charity fundraising events

·   functions rooms hired out to the general public

·   operation of a restaurant

·   operation of a Bistro

·   operation of a Kiosk

·   operation of a Bar

·   providing Snooker Tables, Keno (poker machines) and TAB Sportsbet.

Club's function venues

12.  The Club hires out facilities contained within the Club's premises. These include an Auditorium, a restaurant and the Bar.

13.  The events held in these function rooms are mainly birthday parties and wakes.

14.  The Club also hires out these facilities for holding presentation afternoons / nights for various sporting clubs, as well as presentations for sailing and/or sailing related events (for example, the Club's Birthday celebration).

Operation of food and beverage facilities

15.  The restaurant, Bistro and Kiosk are operated by an external caterer (third party). The income generated by the restaurant, Bistro and Kiosk is therefore not income of the Club.

16.  However, the Club charges a weekly fee of $H (GST exclusive) for the external caterer to provide food in the restaurant, Bistro and Kiosk (in summer). Out of this $H, the Club pays the electricity and telephone expenses of the external caterer.

17.  The revenue generated by the Bar is income of the Club and is included as part of the Club's bar sales income for the year.

Club's entertainment expenditure

18.  The approval sought for expenditure on the 'entertainment of special guests' in the financial years ended 30 June 201B and 30 June 201C was for:

·   X and Y, who had assisted the Club with advice on a Development Proposal;

·   a Christmas party on the Club's premises for life members and other Club members who had volunteered during the year (for approximately 20 - 24 people, including the X directors and their spouses).

19.  The approval sought for expenditure on the 'spending...for the professional development and education of directors' in the financial years ended 30 June 201B and 30 June 201C were for two of the Club's directors to attend the Clubs NSW branch meetings every quarter.

20.  During the 201B and 201C financial years, the Club also supported a canoe club by permitting them to store some canoes in and near the Club's shed.

21.  The Club's 'entertainment and promotions' expense figures (as per the Financial Statements for the years ended 30 April 201B and 30 April 201C) consists of expenditure incurred on live performers and entertainers, giveaways to the Club's members and a Club members draw for alcoholic beverages.

22.  Further, the Club sponsors a Football Club each year.

Club's expenditure on capital works

23.  In the 201B financial year, $KKK,KKK was spent on repairs and maintenance for the Clubhouse, which included:

·   replacing the roof over the Clubhouse foyer

·   repainting the Clubhouse foyer

·   installing a new security grill at the Clubhouse's front door

·   installing air conditioning in the restaurant and bar areas

·   replacement of L poker machines and ice machine

·   purchase of M new TVs in the TAB area

·   purchase of a new television for the Club's Auditorium

·   purchase of a new television for the Club's bar area

·   purchase of a new server for the Club's register

·   refurbishing the men and women's restrooms

·   repairing sewer blockages.

24.  In the 201C financial year, the following was spent on maintenance of the Club's assets:

·   updating five of the Club's poker machines

·   installing a new payout system for the poker machines.

Club's sailing membership

25.  The Club's Rules were provided in relation to Club membership:

Club's management

26.  The Club's Rules were provided in relation to the composition of the Club's Management Committee:

27.  Further, clause XX states that 'members of the Committee shall be elected annually at each Annual General Meeting of the Club and hold office until the next Annual General Meeting'.

28.  The Club's Rules also relevantly sets out the following powers of the Committee:

·         Clause xx

The Committee shall be responsible for the management of the business and affairs of the Club

·         Clause xx

...the Committee shall have power from time to time:

(b) To make such By-Laws not inconsistent with the [MAA] and these Rues as in the opinion of the Committee are necessary or desirable for the proper control, administration and management of the Club's finances, affairs, interests, effects and property...for:

(ii) The general management control and trading activities of the Club

(iii) The control and management of the Club premises...

Club's Board of Directors

29.  In 201B, x of the Club's x directors were actively involved in sailing and in 201C,x of the x directors were actively involved in sailing.

Club's funding

30.  The Club generates income from member subscriptions, services fees, event revenue, publications and grants from the Government.

Club's surplus funds

31.  The Club's surplus funds are used primarily for the following sailing related activities including, but not limited to:

(a)   the purchasing of sailing vessels, rescue boats and safety equipment;

(b)   incurring expenditure to upgrade and maintain boat ramps;

(c)   running local / state / national sailing competitions and regattas; and

(d)   providing 'learn to sail' classes to encourage new participants.

Club's public profile

32.  The Club promotes itself through its internet website and Facebook page as being involved in the sport of sailing. The website contains a calendar of events, pictures and Club history. A majority of the Club's website is dedicated to promoting the Club's social activities (including the restaurant and advertising function rooms for hire).

33.  Most of the 'sports promotion' for sailing occurs via the Club's Facebook page, which is updated regularly with details about sailing events, photos and sailing results.

Development Proposal

34.  Z is one of two locations currently being considered for a Development Proposal.

35.  If this Development Proposal was to be constructed at Z, the Club has stated that it would not be able to continue to sail at Z.

36.  It is expected that there will be a decision on the Development Proposal by the end of 202E and the Club will be in operation in accordance with its usual activities until such time.

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

Australian Charities and Not-for profits Commission Act 2012 Division 25

Charities Act 2013 section 12

Reasons for decision

Summary

The Club is a society, club or association established for the encouragement of a game or sport in accordance with section 50-45 of the ITAA 1997 and meets the special conditions in section 50-47 and section 50-70 of the ITAA 1997. Therefore, the Club will continue to maintain its tax-exempt status under section 50-1 of the ITAA 1997.

Detailed reasoning

Relevant legislative provisions

1.    Section 50-1 of the ITAA 1997 states that:

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.

Note 1:

Ordinary and statutory income that is exempt from income tax is called exempt income: see section 6-20 [of ITAA 1997]. The note to subsection 6-15(2) [of ITAA 1997] describes some of the other consequences of it being exempt income.

Note 2:

Even if you are an exempt entity, the Commissioner can still require you to lodge an income tax return or information under section 161 of the Income Tax Assessment Act 1936.

Note 3:

In all cases the exemption is subject to the special condition in section 50-47 [of ITAA 1997] (about an entity that is an ACNC type of entity).

2.    According to item 9.1 in the table at section 50-45 of the ITAA 1997, an exempt entity is:

a society, association or club established for the encouragement of:

(a) animal racing; or

(b) art; or

(c) a game or sport; or

(d) literature; or

(e) music:

3.    However, exempt entities in item 9.1 of the table in section 50-45 of ITAA 1997 are subject to the special conditions outlined at section 50-47 and section 50-70 of the ITAA 1997.

4.    Section 50-47 of the ITAA 1997 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.

5.    Section 50-70 of the ITAA 1997 provides that:

50-70(1)

An entity covered by item...9.1... 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...

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

Note:

Certain distributions may be disregarded: see section 50-75 of ITAA 1997.

50-70(2)

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.

Society, association or club

6.    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.

7.    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.

8.    In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association' and 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 organizations 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...

9.    Paragraph 2 of Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government, be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? (TD 95/56) considered 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.

10.  The meaning of society, association or club as described above, emphasise a 'body of persons' and 'an organisation of people' with a 'common purpose'.

11.  Further, in Douglas v. Federal Commissioner of Taxation (1997) 77 FCR 112 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.

Game or sport

12.  The terms 'game' or 'sport' for the purposes of section 50-45 of the ITAA 1997 are not defined in the ITAA 1997 and therefore have their ordinary meanings.

13.  Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) provides the Commissioner's view on what constitutes an exempt sporting club.

14.  Paragraph 38 of TR 97/22 provides a non-exhaustive list of activities that are considered to be a 'sport' for the purposes of section 50-45 of the ITAA 1997, and includes:

using equipment to achieve mobility: canoeing; cycling;

dragon boat racing; drag racing; go-kart racing; hang-gliding;

kayaking; motor-car racing (circuit, rally); motor cross;

motorcycle racing; mountain bicycle riding; rowing; yachting;

For the encouragement of a game or sport

15.  Paragraph 11 of TR 97/22 states that encouragement (according to the Macquarie Dictionary) means 'stimulation by assistance.'

16.  Paragraph 11 of TR 97/22 also provides that encouragement can occur directly by:

·         forming, preparing and entering teams and competitors in competitions in the game or sport;

·         co-ordinating activities;

·         organising and conducting tournaments and the like;

·         improving the abilities of participants;

·         improving the standard 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.

17.  Paragraph 11 of TR 97/22 also provides that encouragement can occur indirectly:

·         through marketing; or

·         by initiating or facilitating research and development.

Encouragement must be the main purpose

18.  Paragraph 11 of TR 97/22 states that that '[i]t is essential that the encouragement of a game or sport is the main or dominant purpose of a club.'

19.  Paragraph 42 of TR 97/22 refers to Justice Lockhart in Cronulla Sutherland Leagues Club Limited v. FC of T (1990) 21 ATR 300 at 312:

[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.'

20.  Further, paragraph 44 of TR 97/22 provides that:

...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.

Highly persuasive features

21.  Paragraph 15 of TR 97/22 lists the following highly persuasive features which support a conclusion that the main purpose of the club is to encourage a game or sport:

·         the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51);

·         the sporting activities encouraged by the club are extensive (see paragraph 53);

·         the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); 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 (see paragraph 56).

22.  Paragraph 53 of TR 97/22, quotes the authority from Terranora Lakes Country Club Limited v. FC of T (1993) 25 ATR 294 that 'where the sporting activities encouraged by the sporting club are very extensive, it is highly persuasive that the club's main purpose is the encouragement of a game or sport.'

23.  Further, at paragraph 53 of TR 97/22, Justice Hill states at ATR 304 in Terranora Lakes Country Club Limited v. FC of T (1993) 25 ATR 294 that:

... while the social activities... were very extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were... pursued as a means of financing the extensive sporting activities conducted by the club.

24.  Paragraph 54 of TR 97/22 provides that:

The club should use a significant proportion of its surplus funds in encouraging its game or sport. As noted by Lockhart J in Cronulla Sutherland at ATC 4226; ATR 313, '...the potential of [a club] to apply its surplus funds for purposes having nothing to do with the encouragement or promotion of [a sport or game] is a significant matter'. What is important is the way such funds are used and the activities that are financed by the club.

25.  Paragraph 56 of TR 97/22 states that:

...the constitution and founding documents of an exempt organisation should be consistent with the aim of encouraging a game or sport. The club's history should also characterise it as one that was established, originally or after its foundation, by people with an interest in the game or sport and one that has in fact continued to encourage a game or sport: St Marys case ATC 4534, ATR 288; Case G53 (1956) 7 TBRD 301 at 309; Case T52 (1968) 18 TBRD 271 at 276...

Relevant but less persuasive features

26.  Paragraph 16 of TR 97/22 lists the relevant but less persuasive features which support a conclusion that the main purpose of the club is to encourage a game or sport:

·         a high level of participation by members in the game or sport (see paragraph 57);

·         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 day to day management of the club) (see paragraph 58);

·         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 (see paragraph 59); 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 (see paragraph 60).

27.  Paragraphs 58 - 61 of TR 97/22 states that:

    58. The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports conclusion that it is established for the encouragement of the game or sport: Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100; AAT Case 8267 (1992) 24 ATR 1068; St Marys case ATC 4534, ATR 288.

    59. A situation in which only members participating in the game or sport have voting rights, and only participants in the game or sport have a direct say in the running and direction of the club, would be indicative but not conclusive of a club's main purpose being encouraging a sport; for example, a club for golfers or bowlers that is controlled, by the golf committee or the bowls committee, respectively, of the club: see Tweed Heads at ATC 2100; ATR 1083; St Marys case ATC 4534, ATR 288.

    60. An exempt club should promote itself to patrons and the public as on encouraging a game or sport, and its advertisements and publicity, including the organisation's annual report, should emphasise the game or sport it encourages.

    61. Other factors that may be supportive of a conclusion that a club's main purpose is to encourage a game or sport include:

    ·         the proximity of the club's social facilities to its sporting facilities; and

    ·         the decoration and fit out of the club so as to reflect its game or sporting nature, e.g., the display of trophies, honour rolls or boards, pictures or statues of outstanding sporting achievers, displays of sporting equipment, etc., along with the actual game or sporting facilities.

Special condition in section 50-70 of ITAA 1997

28.  To satisfy subsection 50-70(1) of the ITAA 1997; an entity must not be carried on for the profit or gain of its individual members, must have a physical presence in Australia and incur its expenditure and pursue its objectives principally in Australia.

29.  To satisfy subsection 50-70(2) of the ITAA 1997, an entity must comply with the 'governing rules condition' and the 'income and assets condition'.

Non-profit requirement

30.  Paragraph 22 of TR 97/22 allows for a club to be viewed as being non-profit where:

...by operation of law (for example, a statute governing a club's activities) or by its

constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding-up. The club's actions must, of course, be consistent with the prohibition.

Governing rules condition

31.  According to paragraph 9 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), the 'governing rules' of an entity are those rules that authorise the policy, actions and affairs of the entity and consist of the rules that direct:

·         what the entity is required and permitted to do, and

·         what those, who control the entity, are required and permitted to do in respect of the entity.

32.  According to paragraph 17 of TR 2015/1, an entity's governing rules include 'substantive' requirements (those rules that define the rights and duties of the entity) and procedural requirements (those rules which prescribe the method or manner in which the rights and duties of the entity are carried into effect, and where applicable, enforced).

33.  Paragraph 10 of TR 2015/1 provides that an entity may have governing rules from more than one source. To determine what constitutes the governing rules of an entity, you need to consider all the various sources in which governing rules may be found.

34.  Paragraph 14 of TR 2015/1 also states that the mere fact that an entity enters into an agreement such as a contract, lease, or licence does not mean that such an agreement forms part of the entity's governing rules.

35.  According to paragraph 21 of TR 2015/1, the governing rules condition must be satisfied by an entity at all times during an income year in which the entity wants to be able to claim the income tax exemption under section 50-45 of ITAA 1997.

Income and assets condition

36.  According to paragraph 23 of TR 2015/1, to satisfy the income and assets condition, you must give consideration to:

·         the purpose for which the entity was established, and

·         whether the entity has applied its income and assets solely for the purpose for which it was established.

37.  Paragraph 26 of TR 2015/1 states that a purpose is incidental or ancillary to the purpose for which the entity is established if it tends to assist, or naturally goes with, the achievement of that purpose. Further, paragraph 28 of TR 2015/1 provides that the income and assets condition will not be breached merely due to an entity having an incidental or ancillary purpose.

38.  According to paragraph 29 of TR 2015/1, for an entity to be 'exempt from income tax for all of an income year, it must (among other things) satisfy the income and assets condition at all times during that year.'

39.  Paragraph 31 of TR 2015/1 provides that the income of an entity may still be 'applied' for the purpose for which the entity is established if some of the entity's income is accumulated, provided the accumulation is consistent with the purpose for which the entity is established. An entity may use some of its income to acquire assets which, in future, will produce income for its purpose or purposes, and may accumulate some of its income for later distribution.

40.  Further, paragraph 32 of TR 2015/1 states that to satisfy the income and assets condition, an entity that accumulates most of its income over a number of years will need to show on a year by year basis that the accumulation is consistent with the purpose for which the entity is established.

41.  In relation to income and assets applying 'solely' for the purpose for which an entity was established, TR 2015/1 states that:

    33. 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.

    34. A strict standard of compliance is required under the 'solely' test. Nevertheless, the Commissioner accepts that misapplications of an entity's income and assets of an insignificant nature will not result in a breach of the condition. Relevant considerations include the amount

of the misapplication and how often the misapplication occurs.

    35. The income and assets condition will still be satisfied where:

    ·   the misapplication or misapplications are immaterial in amount, and

    ·   there is a one-off misapplication or occasional, unrelated misapplications of part of the income or assets of an entity for a purpose other than the purpose for which the entity is established.

Interaction of requirements in subsection 50-70(2) of ITAA 1997

42.         The governing rules condition and the income and assets condition are independent special conditions that must be satisfied for the income tax exemption under section 50-45 of ITAA 1997 to apply.

43.         In accordance with paragraph 38 of TR 2015/1, a breach of either or both of the governing rules condition or income or assets condition mean that an entity's ordinary and statutory income will not be exempt from income tax.

Applying the law to your circumstances

44.         To be an exempt entity described in item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must:

(a) be a society, association or club;

(b) be established for the encouragement of a game or sport; and

(c) meet the special conditions specified in section 50-70 of the ITAA 1997.

Society, association or club

45.         The Club is an Australian Public Company Limited by Guarantee and has a number of members, all of whom are governed by the MAA and Rules. The Club is managed by a 'Committee of Management' (who are responsible for the management and day-to-day operations of the Club).

46.         Clause 2 of the MAA describes the Club's objectives, amongst other things, as:

(b) To participate in Interstate and State Championships, regattas, and all other sailing competitions organised by the New South Wales 16ft Skiff Association, the Australian 16ft Skiff Association, the New South Wales VJ and VS Association and the New South Wales Skate Association

...

(f)   to subscribe to become a member of and co-operate with any other club association or organisation whether incorporated or not whose objects are altogether or in part similar to those of the Club...

...

(u) In furtherance of the objects of the Club to amalgamate with any companies institutions societies or associations having objects altogether or in part similar to those of the Club...

47.         According to the above, the Club's members associate together and pursue the common purpose of engaging in or encouraging sailing. Therefore, the Club is considered to be a society, association or club for the purposes of section 50-45 of the ITAA 1997.

For the encouragement of a game or sport

Game or sport

48.         The non-exhaustive list of activities in paragraph 38 of TR 97/22 includes activities which are similar to sailing (for example, yachting and rowing).

49.         As sailing also meets the features outlined at paragraphs 31 - 37 of TR 97/22 (concerning sporting or game like activity, competition, rules and conventions), sailing can be considered a 'sport' for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997.

Encouragement

50.         It is considered that the Club encourages sailing through the following activities:

·         provision of sailing facilities and sailing boats for members;

·         running and sponsoring sailing competitions and regattas;

·         entering Club members in sailing competitions;

·         conducting learn to sail programs (for children and adults);

·         supporting Club teams in various sailing events.

51.         The objects in the Club's MAA, outlined above in paragraph 5 (of the 'Relevant facts and circumstances'), shows the Club encouraging and promoting sailing through direct and indirect means.

52.         The Club has the following highly persuasive features which support the conclusion that the main purpose of the Club is the encouragement of sailing:

·         sponsoring the Australia Day Regatta, the Anzac Day Regatta, specific class Regatta/s and the Christmas Fun Day Regatta

·         hosting one round of the sailing state titles each year (including the Skates (for adults sailors) and the Jimmy Warriner Trophy (for junior sailors))

·         supplying rescue craft and volunteers for sailing events

·         providing access via the Clubhouse balcony overlooking the beach for members and guests to view the junior sailors training and racing in the afternoons on a Sunday.

·         supporting the Club's members and competitors in sailing events (such as the 201A and 201C XXX yacht races)

·         the Club's history also characterises it as one that was originally established, and continues to remain, with people having an interest in sailing and who in fact sail

·         the Club's MAA and Rules outline that the Club was established for encouraging sailing.

53.         The Club has the following relevant, but less persuasive, features which support the conclusion that the main purpose of the Club is the encouragement of sailing:

·         a majority of the Club's x directors are involved in sailing, with several of the Club's directors usually being coaches for the children and adults 'learn to sail program(s)';

·         only Financial Ordinary members and Honorary Life members can attend and vote at any Club meeting. These membership categories must conform to the terms in the MAA, which include the Club's objects pertaining to the encouragement of sailing. Honorary members (that is, those members who do not have to abide by the Club's objects in the MAA) are not entitled to attend or vote at any Club meeting, and cannot be part of the Management Committee;

·         the Clubhouse is within close proximity to the Club sailing course and sailing vessels;

·         the Clubhouse displays the original Minutes Book (from when the Club was first established), honour boards, a photo and information board (showing the Club's and stages of construction of the Clubhouse);

·         on its Facebook page, the Club promotes and advertises itself to the public as an entity that encourages sailing. However, on the Club's website the promotion of sailing appears to be secondary or ancillary to its profile as a social or events venue.

54.         We note that the Club has expended $120,000 (in the 201B financial year) on refurbishments and improvements to the Clubhouse and its social amenities, which are not directly related to sailing.

55.         However, upon a consideration of all the elements outlined above, it may be considered that the Club promotes the sport of sailing and demonstrates features persuasive of the Club encouraging a game or sport.

Special condition in section 50-47 of the ITAA 1997

56.         Due to the operation of section 50-47 of the ITAA 1997, an entity will not be exempt from income tax under section 50-45 of the ITAA 1997 if it is an 'ACNC type of entity'.

57.         According to Division 25 of the Australian Charities and Not-for profits Commission Act 2012, an 'ACNC type of entity' is a not-for-profit entity with a charitable purpose that can be registered with the Australian Charities and Not-for-profit Commission (ACNC).

58.         Section 12 of the Charities Act 2013 (CA) determines what is a 'charitable purpose'. The promotion of sport amongst members of a sporting club is not a charitable purpose.

59.         Therefore, the Club does not have a charitable purpose. As such, the Club is not an 'ACNC type of entity'.

60.         Section 50-47 of the ITAA 1997 does not prevent the Club from being exempt from income tax as an entity covered by section 50-45 of the ITAA 1997.

Special condition in section 50-70 of the ITAA 1997

Not for profit

61.  As noted above, Clause 3 of the MAA relevantly that:

The income and property of the Club whencesoever derived shall be applied solely towards the promotion of the objects of the Club as set forth in this [MAA]; and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to the members of the Club.

62.         Clause 8 of the MAA also relevantly provides that:

If upon the winding up or dissolution of the Club there remains after satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed among the members of the Club but shall be given or transferred to some institution or institutions having objects similar to the objects of the Club and which shall prohibit the distribution of its or their income and property among its or their members...

63.         Therefore, the Club's MAA prevents the distribution of Club profits or assets among members while the Club is functional or upon its winding up.

Located in Australia

64.         The Club is located in New South Wales and incurs its expenditure and pursues its purposes principally in Australia. Consequently, the Club has a physical presence in Australia.

65.         Therefore, the Club has satisfied the requirements of subsection 50-70(1) in the ITAA 1997.

Governing rules condition

66.         The governing rules of the Club (including both the substantive and procedural requirements) are found in the MAA and Rules.

67.         In accordance with paragraph 14 of TR 2015/1, the lease over the Clubhouse land does not form part of the Club's governing rules.

68.         According to information provided by the Club, it appears that the Club is currently abiding by the substantive requirements of its governing rules.

Income and assets condition

69.         In relation to determining whether the Club has complied with the income and assets condition, the following incidental or ancillary (non-sailing) activities must be considered:

·         functions rooms (the Auditorium and Bar) which may be hired out to the general public for a fee

·         operation of the restaurant on the Club's premises

·         operation of a Bistro

·         operation of a Kiosk

·         operation of a Bar

·         provision Snooker Tables, Keno (poker machines) and TAB Sportsbet.

70.         As noted above at paragraph 16 above (in the 'Relevant facts and circumstances'), the Club charges a fee from a third party to operate the restaurant, Bistro and Kiosk (as the income generated by these activities does not form part of the Clubhouse's income).

71.         The Club hires out its function rooms and has Snooker Tables, Keno (poker machines) and TAB Sportsbet on Club premises. The income generated by these non-sailing activities forms the majority of revenue that is generated by the Club.

72.         As outlined above in paragraphs 23 and 24 (in the 'Relevant facts and circumstances'), we note that the income which has been expended by the Club has included a refurbishment of the Clubhouse and its social and event facilities that is not directly related to sailing. Further, the recurring annual expenditure noted above at paragraphs 18 and 19 (in the 'Relevant facts and circumstances'), is also not directly related to sailing.

73.         As such, it may be argued that the Club has failed to apply its income and assets solely for the purposes of sailing. However, for the period that the current is being sought, this would not appear to be the better view given the weight of information demonstrating that the Club has applied its income and assets solely for the purposes of encouraging sailing.

74.         If a trend occurred (which we do not consider is the case currently) whereby sailing was only an adjunct to other activities that the Club carries on (such as a gaming and entertainment venue), then the argument that the Club has not applied its income and assets solely for the purposes of encouraging sailing may be stronger.

75.         However, as it appears that the expenditures mentioned at paragraph 72 (above) are consistent with clause (l) part of the Club's MAA, it may be concluded on balance that the Club has applied its income and assets for the purposes of sailing.

Conclusion

76.         The Club is an exempt entity pursuant to section 50-1 of the ITAA 1997 as:

·         it is a Club established for the encouragement of a game or sport according to item 9.1(c) of the table in section 50-45 of the ITAA 1997;

·         it satisfies subsection 50-70(1) of the ITAA 1997; and

·         it satisfies subsection 50-70(2) of the ITAA 1997.

77.         Where the conduct or actions of the Club are such as to bring doubt about compliance with paragraph 50-70(2)(b) of the ITAA 1997, the Club must re-engage with the ATO to consider its tax-exempt status.

78.         Also, given the uncertain circumstances surrounding the Development Proposal, the Club will need to ensure that it will continue to comply with all of the substantive requirements in its governing rules, as well as the income and assets condition, at all times leading up to a decision on this issue to enable it to maintain the income tax exemption under section 50-45 of ITAA 1997.

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