Edited version of private ruling

Authorisation Number: 1011638478135

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Ruling

Subject: exempt sporting club

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 ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances:

The Club has applied for a private binding ruling on whether the Commissioner considers the Club is an exempt sporting club in accordance with section 50-45 of the ITAA 1997. The information provided in the application includes the annual reports for year ended 30 September ×××× and other relevant facts and circumstances of the arrangement upon which this ruling is provided. A summary of the arrangement is provided below.

The Club is a limited company which previously received favourable ruling which determined that the Club was exempt from income tax while it is conducted according to its Constitution at the time of application, or until the law changes.

Since the previous ruling, the Club has under gone substantial expansion to its club house and adjoining fields and facilities. However, the Club's Constitution and activities have not in any way changed since 1994, although on a larger scale where the Club has introduced more social members and generated greater income from poker machines and entertainment.

Objects

The Club's objects are listed in the Constitution:

§ to provide for members and for members' guests a sporting club with all the usual facilities of a club;

§ to promote, foster, support and encourage the aims and objects of the club and all matters pertaining to those objects;

§ to render aid, either financial or by other means to clubs or associations in the area or elsewhere that are playing or conducting football played in accordance with the Rules of the football league;

§ to carry on all such activities as may be necessary or convenient for the purposes of the Club or any of them; and

§ to do all acts and other things incidental or conductive to the attainment of the objects of the Club.

Non-profit

The Constitution also contains the following non-profit clause:

6.1 No portion of the income or property of the Club may be paid directly or indirectly, by way of dividend, bonus or otherwise to the members of the Club

6.2 Rule 6.1 does not prevent:

1. the payment in good faith of remuneration to any officer, servant or member of the Club in return for any services actually rendered to the Club or for goods supplied in the ordinary and usual way of business;

2. the payment of interest at a rate not exceeding 12% per annum on money borrowed from any member of the Club; or

3. the payment of reasonable and proper rent by the Club to a member of the Club for premises leased by the member to the Club; or

4. the reimbursement of expenses incurred by any member on behalf of the Club

Clause 121.1 and 121.3 contains the following winding up clauses:

If upon the winding up or dissolution of the Club any property remains, after satisfaction of all its debts and liabilities, that property must not be paid to or distributed among the members of the Club but must be given or transferred to some other institution or institutions determined by the members of the Club at or before the time of dissolution.

No institution is eligible to receive property under this Rule 121 unless:

1. it has objects similar to the objects of the Club;

2. its constitution prohibits the distribution of its or their income and property among its or their members to an extent at lease as great as is imposed on the Club under Rule 5 and 6 and this Rule 121; and

3. its income is exempt under Division 50 of the Income Tax Assessment Act 1997.

Facilities of the Club

The Club comprises of a main club house which houses:

§ bistro/restaurant, coffee shop, gaming area, bar area & sports lounge; bingo hall, function room, administration

Current renovations have included:

§ bottle shop;

§ an expanded entrance;

§ an increase in the gaming areas and lounges; and

§ a refit and relocation of the existing facilities in a more efficient manner.

The club house adjoins Rugby League fields which are owned and utilised by the club. The fields are fully lit, irrigated, fenced and maintained.

Recent sporting capital works include:

§ a separate building to provide spectator toilets and team change rooms;

§ buildings to provide both the senior and junior clubs with administration offices, equipment, storage rooms and gymnasium (weights training for footballers only);

§ a five tier grandstand with bucket seats and permanent shade structure along with additional seating structures; and

§ lighting has been upgraded on some fields.

Activities of the Club

The Club provides for xx junior and x senior Rugby League teams, comprising of xxx players, making it the largest club in the state. The Club provides the fully paid services of a Rugby League development officer. The fields are used by the teams for training, home games and additionally, provide the grounds and facilities throughout the year for the other competitions, championships and trainings.

The Club has a clubhouse which provides basic social facilities such as poker machines, keno, bar and dining. The provision of these facilities was to generate income for the objects of the Club, namely rugby league. The Club provides extensive playing fields and facilities to players and supporters which are supported by the Club's news letter and advertising materials.

Other Information

The following is provided in the correspondence requesting for private ruling:

§ the Club merely provides to its social members the basic facilities of a leagues club such as gambling, dining and bar facilities. These facilities are provided to generate income that is applied towards the objects of the Club

§ the Club is very much a rugby league club, with the club prominently displaying rugby league memorabilia through out the building. The club's newsletters, AGM reports, and the chairman's message feature on the field success of the club's Rugby League teams

Funds and financial support provided

For the financial year ending 30 September ××××, the Club provided direct support for its rugby league sporting sub-committees and other sporting bodies which equated to 76% of the Club's net profit.

The Club has retained some profits in recent years as part of its ongoing capital works program. The ongoing expansion of the Club is to ensure the growth of rugby league and in particular the rugby league teams. The provision of additional facilities is seen as means to generate more revenue from poker machines, bingo, TAB, keno, drinks and meals which in turn will be used to pursue the objects of the Club namely to promote and foster rugby league.

Members

The private ruling application has provided detailed information regarding the Club's membership as below:

The club has undergone a rapid growth in membership, coinciding with the growth in the area and junior league…The club has not analysed the membership to determine what members are social members verse members because of their sporting affiliation ie past and present players, coaches, managers, parents, family members and supporters. However, whilst it is believed a clear majority of members will feel an affiliation to the game of rugby league…it cannot be said that every member will have an affiliation with the sport.

The constitution [Clause 11.1] states that the categories of membership are:

§ ordinary members

§ life members

§ and honorary members

There are no restrictions on who can be a member of the club [Clause 12], life members can also be ordinary members who have made significant contributions to the club [Clause 16]. Honorary members [Clause 17] are generally visiting Rugby League club members, and reciprocal right members. Under the club's constitution, all applications for membership need to be endorsed by the Board of Directors.

Relevant legislative provisions:

Section 50-1 Income Tax Assessment Act 1997

Item 9.1(c), Section 50-45 Income Tax Assessment Act 1997

Section 50-70 Income Tax Assessment Act 1997

Relevant Rules and Determinations:

Taxation Determination TD 95/56

Taxation Ruling TR 97/22

Relevant Cases:

AAT Case 8267 (1992) 24 ATR 1068

Cronulla Sutherland Leagues Club Limited v. FC of T 90ATC 4215 at 4225; (199) 21 ATR 300

Quinton v. South Australian Psychological Board (1985) 38 SASR 523

Re South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265

Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100

St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281

Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)

Reasons for decision:

Summary

The Club is exempt from income tax pursuant to section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport under item 9.1(c) of s50-45.

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 of the ITAA 1997.

The encouragement of sport is not only the participation in sporting activities. It also includes the direct involvement by the club in coaching, player development, player payments, providing team equipment, involvement in sport administration bodies, organising teams and providing referees or umpires and having awards for champion players.

For a club to be exempt from income tax under section 50-45 of the ITAA 1997, it need to satisfy three tests, and also the special conditions of section 50-70 of the ITAA 1997. The three tests are covered in Taxation Ruling TR 97/22 Income tax: exempt sporting clubs:

§ it cannot be carried on for the purposes of profit or gain to its individual members

§ it must be for the encouragement of a game or sport, and

§ that encouragement must be the club's main purpose

The Ruling states at paragraph 8 that where a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997.

Society, association or club

The term society, association or club is not defined in ITAA 1997. The term is therefore construed according to its ordinary meaning.

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW), Sugerman JA defines society 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.

Paragraph 2 of Taxation Determination TD 95/56 considers 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.

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.

The interpretations of society, association or club as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'. The Club is a limited company which currently has over 20,000 members and continuing to expand. Its objective is to provide for its members and guests a sporting club with the common purpose to promote, foster, support and encourage rugby league football. Therefore, the Club is considered to be a society, association or club.

Non-profit

Page 6 of the Income tax guide for non-profit organisations (the Guide) provides the following in relation to non-profit requirements:

The basic premise of a non-profit organisation is that it is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up.

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. The organisation's actions must be consistent with this requirement.

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. The profits must not be distributed to owners, members or other private people.

The Club's Constitution contains an acceptable non-profit clause in Clause 6 which prohibits distribution of income or property to its members. Clause 121.1 and 121.3 also contains an acceptable winding up clause which requires that any surplus property on winding up to be transferred to another institution(s) that has or have similar objects to the Club, prohibits distribution of income and property to its members and its income is exempt under Division 50 of ITAA 1997. The Club meets the non-profit requirements.

Encouragement of a game or sport as main purpose

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides the Commissioner's view on what constitutes as exempt sporting clubs. In particular, paragraph 11 states that it is essential that the encouragement of a game or sport is the main or dominant purpose of a club.

Game of sport

There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997, hence, those words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that would be considered as 'sport'

The Club conducts activities in relation to the rugby football league, which is listed as a game or sport under paragraph 38 of the TR 97/22 under 'played with ball or projectile'. Therefore, this requirement is satisfied.

Encouragement

Paragraph 11 of TR 97/22 states that according to the Macquarie Dictionary, 'Encouragement' means 'stimulation by assistance'. Encouragement can occur directly by:

§ 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 coachers

§ 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

and can occur indirectly by:

§ through marketing; or

§ by initiating or facilitating research and development

One of the Club's objects is to promote, foster, support and encourage the aims of the Rugby League Football Club. The Club achieves this object by providing facilities such as playing fields, change rooms, equipment, storage rooms etcetera. The Club also conducts training, home games and competition throughout the year. Therefore, the Club is considered to be encouraging a game or sport, but the main issue is whether such encouragement is the Club's main purposes, which will be discussed below.

Main purpose

Paragraph 41 of the TR 97/22 stated that to be eligible for exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

Paragraph 42 to 44 provides the following explanation:

42. Where the other activities 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. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90ATC 4215 at 4225; (199) 21 ATR 300 at 312 (Cronulla's case) said:

'It [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 of purpose without disqualifying the body from the exemption.'

43. However, if the main purpose becomes the carrying out of those other activities, the club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose of purposes…

44. Therefore, 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.

The main purpose can only be ascertained after objectively weighing all of the club's features such as the constituent document, history, control and activities. Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting 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

§ 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 emphasis that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents

The Club's objects listed in its Constitution seem to have two main objects - to provide for members and guests a sporting club with all the usual facilities of a club and to promote, foster, support and encourage rugby league football. Although the phrase 'sporting club' can be interpreted broadly, the Club's objects do not specifically refers to the provision of 'social' activities and facilities. This can be distinguished from the Cronullla's case and Re South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265 (South's case) where they both had an at least equal object to provide social activities to members. Both of the above cases were not exempt because it was evident that both clubs placed great emphasis on its provision of social amenities to its social members. On the other hand, the activities of the Club suggest that it has extensive sporting activities given that it conducts xx junior and x senior Rugby League teams, comprising of xxx players. The Club also provide its sporting fields to be used for extensive training, home games, competitions and championships throughout the year.

The Club does provide social activities and facilities such as restaurant, coffee shop, gaming area, bar area, sports lounge, bingo hall etcetera which comprise most of the Club's operating revenue in 2009. However, the social activities are accepted in part as the incidental use of a sporting club's social facilities (bar, good, gaming and function room facilities) to assist the financing of the Club's sporting activities. This can be supported by the fact that 76% of net profit is used to directly support the rugby league sporting sub-committees and other sporting bodies. The Club uses a significant proportion of its surplus funds in encouraging its game or sport while retaining some profits of the Club's ongoing capital work program.

The Club has also put forward the Word Investments case (Commissioner of Taxation v. Word Investments Limited [2008] HCA 55) as a relevant argument. However, the Word Investments' case is not considered in this ruling as it does not apply to the Club.

The structure in which the Club is set up can also be distinguished from the Cronulla and South's case. Both the Cronulla and South's case had a separate football club as a separate legal entity which conducted the sporting activities. For both cases, the main purpose was to provide facilities and entertainment to their members. In this case, the Club itself conducts its sporting activities and competitions directly for the encouragement of sport.

Another relevant, but less persuasive features to consider is whether the Club is run and controlled by sporting members or social members as discussed in paragraph 57 of the TR 97/22. Paragraph 58 provides the following explanation:

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 a 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.

The Club's Constitution contains formal requirements regarding the nomination of directors and their qualifications under Clause 32 and 33. The Senior and Junior directors must be a member of the Club's two rugby league football club subcommittees. As stated in the application, the Sub-Committees are made up of past players, coaches, parents and active rugby league supporters, therefore, the majority of the Club's board of directors are designed to be sporting members under the nomination requirements. Formal nomination requirements were noted as significant in the St Mary's case which also had formal requirements giving control of the club to its football members. This can be distinguished with the Cronulla's case where the membership structure did not give emphasis and importance to footballers or supporters and the control of the club was not formalised.

The ruling application explained the Club's sporting operations and indicates that the social operations do not have the character of those in, for example, the South's case where the constitution required four of the seven directors to be nominated by the Junior Football League. Since the business of the Club is to be managed by or under the direction of sporting directors, it is accepted that the focus of the Club is to promote its sporting activities - rugby league.

After taking into account of the Club's features and operation, its main purpose is considered to be for the encouragement of a game or sport.

Special Requirement

Section 50-70 of the ITAA 1997 provides that an entity covered by item 9.1 of section 50-45 of the ITAA 1997, 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 of the ITAA, 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

As discussed above, it has already been considered that the Club is a society, association or club which is not carried on for the purpose of profit or gain of its individual members.

In this case, the relevant test is a) - the entity must have a physical presence in Australia. The Club is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia. Therefore this requirement is met.