Edited version of private ruling

Authorisation Number: 1011675434362

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Ruling

Subject: Exempt sporting club

Question:

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

Background

The Association was formed decades ago and was later incorporated as a club. There is currently over 10,000 members of the club varying between the different classes. The licensed Club now boasts a large number of members, being a mix of foundation and social members.

Objects

The Association's objects are listed in a Clause of the Constitution:

Powers

A Clause of the Constitution lists the Association's powers. In furtherance of the Association's objects, it has powers to buy, sell and deal in all kinds of articles, commodities and provisions, both liquid and solid, for the members of the Association or persons frequenting the Association's premises.

Non-profit

A Clause of the Constitution contains a non-profit clause.

A Clause of the Constitution contains the following dissolution clause.

Facilities of the Club

There are numerous sporting fields in play. All the fields are maintained by the Association for the use of the local sporting community. The sporting fields maintained and owed by the Association are in the thousands of hectares in size. Other facilities are evident.

The Association currently holds gaming licences. There is also other revenue producing facilities. Together all of these operations generate total turnover in the millions of dollars for the relevant financial years.

Activities of the Club

The Association involve the employment of grounds people who are charged with the maintenance of purpose built grounds throughout the surrounding area. It also provides equipment for use on these fields.

There administration staff that organise the draws, rosters, travel, accommodation, venues and training for particular competitions. The competitions normally attract many teams. The Association also provides other support.

Other Information

The following is provided in the information provided:

· All of the income is used to achieve the goals of the club as set out in the Constitution.

· The income is used to increase sporting facilities and encourage sporting activities in the surrounding area. The remainder is used for capital improvements to the club assets which are used to generate revenue to achieve those goals.

Members

The membership of the Association consist of a number of classes of members - social members, general members, delegate members life members and foundation members.

A Clause of the Constitution explains the different classes of members.

As stated in the relevant Clause - no social member shall be entitled to vote at any of the following meetings:

(a) general meeting;

(b) executive meeting;

(c) delegates meeting;

(d) special general meeting;

(e) annual general meeting; and

(f) any other meeting as held by the Association

Management committee

Membership of the Management Committee is covered a Clause of the constitution. This clause requires that the management committee shall consist of members of the Association. The election of office bearers and other members of the management committee take place at the AGM. Entitlement to vote at AGMs is outlined in a clause of the constitution.

Funds and financial support provided:

Direct expenses for grounds maintenance, cricket promotion and support have been provided for the relevant years. There is and will always be a continued commitment to the relevant game and support of local sports in the surrounding areas.

Over the past year, significant sums have been spent on affiliated sporting clubs.

Funds have been spent on non affiliated club as part of the operation of the Association.

Other community donations have been a sum per year for numerous past years. This is a part of the affiliate pool allocation that is paid as a reimbursement to local clubs that come and use the facilities throughout the years.

Operating revenue & profit

The detail of the licensed club sub-accounts operating revenue for the relevant year is stated in the financial statements.

The financial statements also disclose the income and expenses of the relevant sub-accounts.

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 5452 (1989) 20 ATR 4125 at 4133 (Grand United Port Macquarie West Bowling Club v. FC of T);

AAT Case 8267 (1992) 24 ATR 1068

Case W114 89 ATC 891 at 898

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 Association is exempt from income tax pursuant to 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) 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 Association currently has thousands of members varying between the different classes of membership and continuing to expand with the common purpose to promote, encourage and control the relevant game in the surrounding areas by providing any necessary support. Therefore, the Association 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 Association's Constitution contains an acceptable non-profit clause which prohibits distribution of income or property to its members. Another Clause 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 Association and prohibits distribution of income and property to its members. Therefore, the Association 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 Association conducts activities principally for the relevant game, which is listed as a game or sport under within TR 97/22. 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.

Some of the Association's objects are to observe the Rules of the relevant game; to promote, encourage and control the relevant game; and to arrange, regulate and control fixtures played in the surrounding area. The Association achieve these objects by maintaining the sporting fields, providing sporting equipment and coordinating juniors and seniors competitions which involves over many players. Therefore, the Association is considered to be encouraging a game or sport, but the main issue is whether such encouragement is the Association'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 Association's objects listed in its Constitution are surrounding the purpose to promote and encourage the relevant game such as maintaining affiliation with the relevant Association; observe the Rules; promote, encourage and control the relevant game; to arrange, regulate fixtures and to facilitate any matches promoted in the surrounding area. The Association's objects do not specifically refer to the provision of 'social' activities and facilities except to "do all such things as are incidental or conducive to the attainment of this object'. This can be distinguished from the Cronulla'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 Association suggest that it has extensive sporting activities given that it conducts competitions which normally attract multiple teams which involves hundreds players. The Association also has strong commitment to maintain the sporting fields throughout the surrounding area and provides necessary sporting equipment and support.

The Association provides social facilities which comprise most of the Association's operating revenue. However, the financial reports indicate that a significant amount of the surplus from the social facilities are used to directly support and facilitate its sporting activities and facilities.

The structure in which the Association 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 Association itself conducts its sporting activities and competitions directly as well as supporting to a lesser extent other sporting organisations.

Paragraphs 58 and 59 of TR 97/22 describes the following features that are "relevant but less persuasive" in supporting a main sporting purpose.

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 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.

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.

The Association's Constitution contains formal requirements under a Clause that social members are not entitled to vote at any meetings held by the Association. Therefore, the control of the Association given to the sport's members can support a conclusion that the Association's focus will mainly be for the encouragement of relevant games (St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281).

Paragraph 57 of TR 97/22 also notes:

57. A high level of participation by members in the sport or game encouraged by the club would also support the club's main purpose being the encouragement of the game or sport: Case W114 89 ATC 891 at 898; AAT Case 5452 (1989) 20 ATR 4125 at 4133 (Grand United Port Macquarie West Bowling Club v. FC of T); St Marys case ATC 4534, ATR 288. Where members are chiefly involved in the club's social activities and not in the sporting activities, it may indicate that its main purpose is not the encouragement of the game or sport.

The number of social members of the Association is much higher than its general members. No information has been provided however of the social members involvement in using other sporting facilities provided by the Association. As noted, this may indicate that the main purpose is not the encouragement of sport. However it is one of several features that must be considered.

In summary, the features which support a conclusion that the Association has a main purpose being the encouragement of sport are:

· it conducts games and competitions on its own sporting facilities

· the sporting facilities and the size and level of competition is extensive

· a significant portion of surplus funds from the non-sporting activities are applied to the relevant sports

· the objects in the constitution are restricted to purposes which directly encourage the relevant sport

· the persons running the club are persons with an interest in the relevant sport

· general members vote for the management committee, social members are not entitled to vote on most matters concerning the operation of the club

· those members who are entitled to vote at AGMs etc are chiefly involved in the club's sporting activities.

After taking into account of the Association's features and operation, its main purposes 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 Association 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 Association is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia. Therefore this requirement is met.