Edited version of private ruling

Authorisation Number: 1011649842734

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Ruling

Subject: Income tax exemption

Question 1

Is the income of the entity exempt from income tax pursuant to section 50-1 on the basis that it falls under item 9.1(a) of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Facts

The entity is a company limited by guarantee.

The objects of the entity are listed in its constitution.

The principal object for which the entity is established is the encouragement and promotion of animal racing by, amongst other things, establishing and constructing a service business to the industry.

The entity conducts activities which are both directly and indirectly related to animal racing in accordance with its objects.

The entity's constitution contains suitable non-profit and winding-up clauses to prohibit distribution of any surplus assets to its members whilst in operation and on winding-up.

The entity currently only has one member (the organisation).

The entity's constitution states that a proportion of any surplus shall be paid to the entities which are the members of the organisation upon winding up.

Relevant legislative provisions

Income Tax Assessment Act 1997 50-1.

Income Tax Assessment Act 1997 50-5.

Income Tax Assessment Act 1997 50-45.

Income Tax Assessment Act 1997 50-70.

Reasons for decision

An entity is exempt from income tax as a society, association or club established for the encouragement of animal racing under item 9.1(a) of the table in section 50-45 of the ITAA 1997 if it:

§ is a society, association or club,

§ is established for the encouragement of a game or sport, and

§ satisfies the special conditions under section 50-70 of the ITAA 1997.

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.  

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 entity currently only has one member. Therefore, the entity is not considered to be a body or persons who voluntarily associate for a common purpose and interest.

Accordingly, this requirement is not satisfied as the entity is not deemed to be an 'association, society or club'.

Established for the encouragement of animal racing 

In this case, the primary object for which the entity is established is the promotion of animal racing, by, amongst other things, establishing a service business to the industry.

The entity conducts activities which are both directly and indirectly related to animal racing in accordance with its objects.

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 has a physical presence in Australia and, to that extent, it pursues its objects and incurs its expenditure principally in Australia.

The entity's constitution contains suitable non-profit and winding-up clauses to prohibit distribution of any surpluses to its members whilst in operation and on winding-up.

The entity only has one member (the organisation). It is accepted that the entity does not operate for the profit or gain of the organisation.

Accordingly, it is accepted that the entity operates on a non-profit basis.

However, it must be noted that if a look through approach could be taken to the members of the organisation, the allocation of 'surpluses' as described in the constitution might be considered as a distribution of profit or gain to the members.

The constitution allows the entity to allocate a proportion of any surplus to the members of the organisation on winding up in accordance with a schedule.

The schedule lists the allocation of a percentage of any surplus without referring to the requirement 'for the purposes of encouraging and promoting animal racing' as stated in the objects.

In such circumstances, an entity such as this with standard non-profit clauses which allocates surpluses on the basis of equity and not on the basis of criteria is open to consideration that it is carried on for the profit or gain of its members.

This view is supported by Taxation Ruling TR 93/39 Income tax: friendly society education funds which states at paragraph 23 that personal benefits to members will not have the character of gain or profit to the members individually where the benefits are provided on the basis of criteria other than mere equity participation through contributions.

Accordingly, the entity does not satisfy the special condition in section 50-70 of the ITAA 1997.

Conclusion 

The entity is not exempt from income tax pursuant to section 50-1 on the basis that it falls under item 9.1(a) of the table in section 50-45 of the ITAA 1997.