Edited version of private ruling

Authorisation Number: 1011695523626

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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 includes the application, the financial reports for the year ended 30 April 2010 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 Club was formed and was later incorporated as a club. The Club emerged with Rugby League Football being the prominent sport. The Club purchased a few blocks of land and started to build the clubhouse. The Club started to have poker machines so that the profit can be used for various sporting bodies in the area. The following has been upgraded:

§ extending the poker machine area

§ new toilets

§ sports bet lounge and Keno area

Another major extension was undertaken with the following:

§ pool rooms

§ formal dining

§ meeting and larger eating areas

There is currently about X,000 members of the club varying between the different classes. The Club is broken into three areas - the normal Club with its trading activities, the Senior football club and the Junior football club. All of these operations are under the Club itself. The Club's main purpose is to encourage numerous sports in its day-to-day operations. It also promotes itself to the public as one encouraging sporting events and providing sporting facilities on its premises.

Objects

The Club's objects are listed in the Constitution:

a) The promotion of the game of Rugby League football at both senior and junior levels wherever that game is played.

b) To foster goodwill amongst the Club members.

c) To promote the welfare of the Club members.

d) To advance and promote sport generally.

e) To promote any other sporting bodies affiliated with the Club as determined from time to time by the Board of Directors

Non-profit

The Constitution contains the following non-profit clause:

The income and property of the organisation of the Club whencesoever derived shall be used and applied solely in promotion of its objects and in the exercise of its powers as set out herein and no portion thereof shall be distributed, paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to or amongst the members of the Club provided that nothing herein contained shall prevent the payment in good faith of interest to any such member in respect of moneys advanced by him to the Club or otherwise owing by the Club to him or of remuneration to any officers or servants of the Club or to any member of the Club or other person in return for any services actually rendered to the Club provided further that nothing herein contained shall be construed so as to prevent the payment or repayment to any member of out of pocket, expenses, money lent, reasonable and proper charges for goods hired by the Club or reasonable and proper rent for premises demised or let to the Club and no member shall receive any benefit from the Club beyond that available to any other member.

The Constitution contains the following dissolution clause:

If the Club shall be wound up in accordance with the provision of the Associations Incorporation Act 1984, and there remains, after satisfaction of all its debts and liabilities and the payment of any costs, charges and expenses of the winding-up, any assets whatsoever, the same shall not be paid to or distributed among the members of the Club but shall be given or transferred to another entity 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 to an extent at least as great as it imposed on the Club under or by virtue of Rule 24(9), such institution or institutions to be determined by the members of the Club.

Facilities of the Club

Around the grounds of the main building, there are numerous sporting fields. Most of the sporting fields are for rugby league and soccer. They are maintained by the Club for the use of the local sporting community in particular the Club's Junior and Senior football teams.

The Club currently holds gaming licences for gaming machines generating gross income of around $X.X million per year. There is also a large function room, a coffee shop, a sports bar and a dining rom. All these operations together generated total turnover of around $XX.X million in the 2009 financial year and $XX.X million in the 2008 financial year.

The Club also owns and operates a gym which was built originally for the benefit of the football players and members. This facility is now open to all the members for a fee. The 2010 financial statement record gym fees and merchandise sales of $XXX,XXX in 2009 and $XXX,XXX in 2010. There was a small profit in the 2010 year and a small loss in the 2009 year.

Activities of the Club

The Club's day to day sporting operations involve the following:

§ provision of administration support for the senior's and junior's football teams

§ provision of paid coaches and a full time manager

§ paid football employees and hobby players (senior teams)

§ pays for the running and maintenance costs of the football grounds

§ provision of funds to improve facilities such as shed facilities, storage rooms, dressing sheds, canteen, first aid depot and grandstands

The Club's Junior team has approximately XXX players in XX teams. The Club also provides services to anyone who wants to be involved in Rugby League, Cricket, Soccer, Basketball or any other sporting activities including spectators club at a senior and junior level.

The income of the Club is used to increase sporting facilities and encourage sporting activities and the remainder is used for capital improvements to the Club asset which are used to generate revenue to achieve those goals. The Club also provides support to schools, where annual requests are submitted to the board of directors for consideration and approval. Requests are received for donations and sponsorship from many areas of the community who are fundraising, such as preschools.

Members

The membership of the Club consists of Ordinary Members and Life Members. Any person of good repute and of the age of eighteen years old may be nominated as a member of the Club. A member may be elected as a Life Member in recognition of outstanding honorary services rendered to the Club. Each Life Member shall receive an appropriate medal with name and date thereon, and shall be entitled to enjoy all privileges of the Club. Each Life Member shall also be eligible for election to any office of the Club.

A table of membership by age and membership was provided. This indicated that most members were ordinary members falling mostly in the full member category and the pensioner category.

Management committee

As stated in the Club's Constitution, the Board of Directors consists of the following:

§ Chairman of Directors

§ Ordinary Directors

§ Rugby League Directors

§ President Elect of the Senior Management Committee

§ President Elect of the Junior Management Committee

Funds and financial support provided:

The applicant advised that in addition to the use of the surrounding fields, the Junior Rugby League Club received cash distributions from the Club as sponsorship of $XX,000 this year, $XX,000 for the 08/09 year and $XX,000 for the 08/09 year. The Senior Rugby League Club received $XXX,XXX this year, $XXX,000 for 08/09 year and $XXX,000 for 08/09 year. This is a significant portion of the Club's surplus funds used to encourage the game of rugby league.

The applicant also advised that over the past year, $XXX,XXX has been spent on affiliated sporting clubs and $XXX,XXX has been spent on non affiliated clubs as part of the Club's operations. These figures are reported in the Club's Community Benefit Statement for the financial year ended 30 June 2009 a copy of which was provided with the application.

Operating revenue & profit

The details of the Club's operating revenue for the most recent two years are stated in the financial statements for the year ended 30 June 2010:

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

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 needs 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 currently has X,000 members and continuing to expand with the common purpose to promote, encourage and control the game of football in the surrounding areas by providing any necessary support. 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 which prohibits distribution of income or property to its members. A clause 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 and prohibits distribution of income and property to its members. 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 principally for the game of football, 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 the game of Rugby League football at both senior and junior levels. The Club achieves this object by

§ providing paid coaches and a full time manager,

§ operating a senior rugby league squad of paid football employees and hobby players,

§ operating a junior program with XXX players in XX teams,

§ maintaining sporting fields,

§ providing administration support and

§ providing other sporting facilities.

The Club also provides services to anyone who wants to be involved in Rugby League, Cricket, Soccer, Basketball or any other sporting activities including a spectators club at a senior and junior level

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 promote the game of rugby league football and to foster goodwill and to promote the welfare of the Club members. Although the phrase 'goodwill' and 'welfare' 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 its strong commitment to own and maintain sporting fields. The Club also provides administration support, coaches, and other sporting facilities for its Junior and Senior football teams.

The Club does provide social activities and facilities such as gaming machines, function room, a coffee shop, a sports bar and a dining room. As with many football clubs, the provision of social activities may be accepted in part as the incidental use of a sporting club's social facilities to assist the financing of the Club's sporting activities. This can be supported by the financial reports that a significant amount of its funds are used to directly support and facilitate its sporting activities. The applicant did not provide an explanation of the basis of the allocation of poker machine payouts to the junior and senior rugby league committees that are recorded in the financial statements. It does however indicate that rugby league is important to the Club. The financial statements for the 2009 and 2010 year also indicate that sporting losses are merely regarded as expenditure. The Club did not provide any other details of grounds capital and maintenance expenditures. However the combined losses and poker machine payouts to the senior and junior league committees formed a significant part of operating profit in those years.

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 maintains the sporting fields for the encouragement of its sport.

Despite the fact that the Club provides social activities and facilities, it also has strong commitment to encourage the sport of rugby league football which is evident by its commitment to own and maintain a large area of sporting fields and to provide other support for sporting activities.

Paragraph 16 of TR 97/22 also consider other relevant, but less persuasive features such as participation by members in sport, members of committee and voting rights in the club. The Club has advised that it operates more than XX rugby league teams with over XXX players to which can be added volunteers, spectators and also parents and grand parents of players who may be drawn to the Club because of their children's involvement. Given the Club's extensive commitment for the encouragement of sport, it can be satisfied that significant amounts of the people participating are sporting members and their supporters.

The Club's Constitution requires that the Board of Directors shall be elected at the Annual General Meeting by a simple majority vote. It lists the Board of Directors as:

1 Chairman of Directors

2, Ordinary Directors

3. Rugby League Directors

4. President Elect of the Senior Management Committee

5. President Elect of the Junior Management Committee.

The Club is a rugby league club and a comparison with decision in St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281 (St Mary's) assists in determining its purpose. St Marys objects included:

§ the management and promotion of rugby league football in the St Mary's district

§ assisting other rugby league clubs, and

§ providing clubhouse and playing facilities for members.

At the time St Marys fielded 32 teams involving 450 players in Junior League, Reserve Grade and Metropolitan Cup competitions and leased several playing fields. Football grants were between 10% and 20% of total expenditure and roughly 20% of net income. Membership was 6,500, the majority of whom fell under the following membership categories:

§ life members

§ football members - existing or past players in the Penrith competition

§ supporting members - existing or past players in other rugby league competitions. Persons who have been supporting members for two years were eligible to become football members

§ associate members - consistent match attendees and football club volunteers.

Only life members and football members could be on the board. Clubhouse facilities included two auditoriums, restaurant and bar facilities, club keno and 90 poker machines.

The court decided that the club was exempt. It noted:

§ Rugby league was the major object in the club's rules.

§ The membership categories and control given to football members in the rules pointed to significance of football.

§ The intensity of activity directed towards football tipped the

§ Balance in favour of exemption.

§ The history was of close association with rugby league.

The following differences from Cronulla were also noted:

§ Cronulla involved a football club and a leagues club.

§ Cronulla's only connection with football was the grants and facilities provided to the football club.

§ The membership structure of Cronulla did not give emphasis and importance to footballers or supporters. Control of Cronulla was not formalised.

§ The sheer size and intensity of the social activities of Cronulla led to the conclusion that the social activity was of such great significance that it was impossible to conclude that the main purpose of the club was the encouragement of rugby league.

The Club's facts have many similarities with the facts in St Marys. In contrast to the club in Re South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265 it is considered that that Club's social activities have not reached a point where they have subsumed its sporting purposes.

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 1997, 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.