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Ruling
Subject: Income Tax Exemption - Sporting Body
Question:
Is the Association exempt from income tax in accordance within the provisions of item 9.1 of the table in section 50-45 of the ITAA 1997.
Answer: Yes.
Summary
The total ordinary income and statutory income of the Association is exempt from income tax as a sporting club pursuant to section 50-1 of the ITAA 1997 on the basis that it is a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of section 50-45 of the ITAA 1997.
Detailed reasoning
Item 9.1 of s50-45 of the ITAA 1997 exempts from income tax an entity that has been established for the encouragement of a game or sport.
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 condition detailed in section 50-70 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 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.
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'. The court stated at 4279:
Association or club are as often incorporated as they are unincorporated. Small bodies having few members tend perhaps to remain unincorporated whilst the larger groups tend to become incorporated. Incorporation may be achieved under the Companies Act 1961 or some other Act, e.g. the Co-operation Act 1923 as amended.
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.
Taxation Determination TD 95/56 refers to the definition of 'association' in paragraph 2 and states:
The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.
The members of the Association are members of the general public who wish to participate in sport or sporting activities. People only become members of the Association because of their desire to further their interest in participating and competing in the sporting activities. The members of the Association voluntarily associate together for this common purpose and common interest. Therefore, the Club is considered an 'association, society or club'.
Established for the encouragement of a game or sport
Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport.
Encouragement
Encouragement can occur directly or indirectly. Paragraph 11 of TR 97/22 provides the following examples of direct and indirect encouragement:
Direct
· forming, preparing and entering teams and competitors in competitions in the game or sport or in music;
· co-ordinating activities;
· organising and conducting tournaments/concerts and the like;
· improving the abilities of participants;
· improving the standard of trainers/teachers and coaches/conductors;
· providing purchased or leased facilities for the activities of the game or sport or auditoriums for the use of club members and visitors; or
· encouraging increased and wider participation and improved performance.
Indirect
· through marketing; or
· by initiating or facilitating research and development.
Game or sport
'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of TR97/22 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997. It is accepted that the activities conducted by the Club are considered to be a sport.
Main or dominant purpose
To be exempt pursuant to item 9.1(c) of section 50-45 of the ITAA 1997, it is essential that the main or dominant purpose of a club is the encouragement of a game or sport.
Where the club conducts other activities, particularly social or commercial activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may be that encouragement (Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215; (1990) 21 ATR 300).
The features considered to be highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport are listed in paragraph 15 of TR 97/22. These features are discussed in greater detail in paragraphs 51-56 of TR 97/22. Features that will be highly persuasive include:
· the club conducts activities in the relevant year that are directly related to the game or sport.
· the sporting activities encouraged by the club are extensive;
· the club uses a significant proportion of its surplus funds in encouraging the game or sport; and
· the club's constituent documents emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents.
Other relevant but less persuasive features are listed in paragraph 16 of TR 97/22. These features are discussed in greater detail in paragraphs 57-60 of TR 97/22. Other relevant features include:
· a high level of participation by members in the game or sport;
· the members of the committee, or persons who control the direction, of the club are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from day to day management of the club);
· voting rights in the club vest only in members involved in encouraging the game or sport, whether by personal participation or by encouraging participation by others; and
· the club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided.
A club's main purpose is determined having regard to the club's constitution, its activities, its history and its control (Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215; (1990) 21 ATR 300).
The Association directly encourages sport (as described in paragraph 11 of TR 97/22) and demonstrates features persuasive of the Association being for the encouragement of a game or sport (as listed in paragraphs 15 and 16 of TR 97/22).
The Association's constitution specifies that the main purpose of the Association is to encourage motor sports.
Special condition
Section 50-70 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 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
Paragraphs 9 and 21 to 23 of TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members.
Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement.
The constitution of the Association prevents distribution to members and it is a not carried on for the profit or gain of its individual members.
Accordingly, this requirement is satisfied.
Physical presence in Australia
The Association is a resident of Australia. The Association carries on its activities, pursues it objectives and incurs its expenditure in Australia and therefore satisfies this requirement.
The Association satisfies the special condition in section 50-70 of the ITAA 1997.
The Association is similar to those clubs and associations as described in the TR 97/22. Consequently, the Association is exempt from income tax in accordance within the provisions of item 9.1 of the table in section 50-45 of the ITAA 1997.