Edited version of private ruling

Authorisation Number: 1011785510497

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Ruling

Subject: Income Tax Exemption

Subject

Income Tax Exemption

Issue 1

Question 1

Is the Entity entitled to income tax exemption 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 pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2008

Relevant facts

The Entity is incorporated as a company limited by guarantee.

The Entity's constitution contains an acceptable non-profit and dissolution clause.

The Entity's constitution included clauses supporting purposes of sporting, games, recreations, pastimes and entertainments.

The Entity's constitution states the Club shall consist of the specified classes or designations of membership. Only members who are present or past employees of an associated entity have the right to elect the officers and committee to manage the business and affairs of the Entity. There is no requirement for the officers and committee to be participants in or concerned with the encouragement of the game or sport.

The Entity's constitution restricts access by the public to its sporting and game facilities.

The Entity has provided information regarding the sports and games that it undertakes and the sporting and game facilities it owns.

The Entity provided financial information from its annual reports.

The Entity has provided information regarding the entertainment and social that it undertakes and the entertainment and social facilities it owns.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-45

Income Tax Assessment Act 1997 section 50-70

Reasons for decision

Detailed reasoning

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, covers the circumstances under which a club is regarded as being established for the encouragement of a game or sport. For a club to fall within item 9.1(c) of section 50-45 of the ITAA 1997, it needs to satisfy the following three requirements:

· It must be a society, association or club;

· Meet the requirements of section 50-70 (special conditions); and

· Its main purpose must be for the encouragement of a game or sport.

1. Society, Association or Club

The Entity was incorporated as a company limited by guarantee and has been conducting activities permissible under its objects.

The requirement that it is a club is therefore satisfied.

2. Section 50-70 of the ITAA 1997

Item 9.1(c) in the table in section 50-45 of the ITAA 1997 states that there are special conditions under section 50-70 of the ITAA 1997 which must be satisfied. Section 50-70 of the ITAA 1997 states:

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

An entity covered by item 1.7, 2.1, 9.1 or 9.2 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; 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.

The constitution of the Entity contains suitable following non profit and winding up clauses.

It has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It satisfies item 50-70(a).

The requirements of section 50-70 are therefore satisfied.

3. Main Purpose of Encouraging a Sport or Game

To satisfy item 9.1(c) in section 50-45 of the ITAA 1997, the club must be established for a main or dominant purpose of the encouragement of a game or sport.

In Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner Of Taxation (1990) 90 ATC 4215; 21 ATR 300 (Cronulla-Sutherland case), which was a case where the Leagues Club sought income tax exemption as a club established for the encouragement of a sport, Lockhart J examined in detail the judgment of the High Court in the Royal Australasian College of Surgeons v FCT (1943) 68 CLR 436 and a later High Court case, Stratton v Simpson (1970) 125 CLR 138 and said at ATC 4225; ATR 312:

In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities.

For a society, association or club to qualify for the exemption granted by s 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.

The question is therefore whether in all the circumstances of this case the main purpose for which the appellant was established during the income tax years in question was the encouragement or promotion of rugby league football.

Accordingly the Entity must demonstrate that in the years for which it is requesting a ruling, being the years ending 30 June 2009, 30 June 2010 and 30 June 2011 - the relevant years of income - it is established for a main or dominant purpose of the encouragement of a game or sport.

3.1 Encouragement of a game or sport

Paragraph 11 of TR 97/22 states:

11. 'Encouragement' means 'stimulation by assistance', according to the Macquarie Dictionary. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club. Encouragement can occur directly by:

· forming, preparing and entering teams and competitors in competitions in the game or sport;

· co-ordinating activities;

· organising and conducting tournaments and the like;

· improving the abilities of participants;

· improving the standard of trainers and coaches;

· 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:

· through marketing; or

· by initiating or facilitating research and development

The Notes on Clauses of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 state:

The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support.

The Entity encourages participation of a game or sport through the provision of facilities and an annual sporting competition with an associated Entity.

It is accepted the Entity meets the requirement of encouragement of a game or sport.

3.2 Main Purpose

To be eligible for exemption under item 9.1(c) of section 50-45, The Entity's main purpose must be to encourage a game or sport.

As stated above difficulties in determining main purpose can arise where a club conducts other activities, particularly social or commercial activities.

TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all the club's features and lists the following features in paragraphs 15 and 16 as indicating a club's main purpose.

15. Features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include:

· the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51);

· the sporting activities encouraged by the club are extensive (see paragraph 53);

· the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); 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 (see paragraph 56).

16. Other features that are relevant but less persuasive include:

· a high level of participation by members in the game or sport (see paragraph 57);

· 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) (see paragraph 58);

· 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 (see paragraph 59); 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 (see paragraph 60).

Highly persuasive features

As recommended by TR 97/22 the highly persuasive features listed in paragraph 15 above have been considered below in the context of the Entity

1. The club conducts activities in the relevant year that are directly related to the game or sport

TR 97/22 states that:

51. A highly persuasive feature that supports a conclusion that a club has a main purpose of encouraging a game or sport is that the club conducts activities in the relevant year that are directly related to the game or sport. Examples of such activities include:

· participating in competitions or tournaments involving the game or sport;

· bringing into existence, organising and running such competitions or tournaments;

· providing referees, umpires or other officials for the game or sport;

· coaching participants in the game or sport;

· encouraging club members to be spectators at and to support the game or sport; and

· fundraising, for specific events in the game or sport in which the club's teams or competitors are involved, such as organising raffles to fund a club member's participation in an overseas event.

Based on the information provided it is determined that the Entity provides both sporting and social activities and facilities.

2. The sporting activities encouraged by the club are extensive

As stated above the Entity provides encouragement of sport through the provision of sporting and game facilities to its members.

However the Entity's sporting facilities are limited, and the number of sporting members who take advantage of these facilities is very low comparative to the total number of members.

It is therefore not accepted that the sporting activities encouraged by the Entity is extensive.

3. The club uses a significant proportion of its surplus funds in encouraging the game or sport

No details were provided of the application of funds to the Entity's sporting activities. The financial reports do not show any specific sporting expenses. No information has been provided to suggest that the Entity has undertaken, or intends to undertake any capital works or applied a significant proportion of its surplus funds (including any of its retained profits) to sporting or game purposes in the years ruled on.

The financial information presented does not therefore support a conclusion of a club which uses a significant proportion of its surplus funds for the encouragement of sport or game.

4. 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

The purposes stated in the Entity's constitution and Annual Report support a finding that its purpose is the provision of social as well as sporting facilities for its members. There is no emphasis on a sporting purpose above that of a social purpose within these documents.

This factor does not support a main purpose of being established for the encouragement of a sport of game.

Each of the relevant but less persuasive features listed in TR 97/22 are also examined below in the context of the Entity

1. A high level of participation by members in the game or sport

The applicant provided the following details in regards to numbers of participating members in the sports and games it supports. Less than 3% of members participated in sport in the years ending 2009 and 2010. This does not support a finding that a high level of membership participates in sport.

2. 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)

And

3. 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

Only members drawn who are present or past employees of an associated entity have the right to elect the officers and committee to manage the business and affairs of the Entity. There is no requirement for the officers and committee to be participants in or concerned with the encouragement of the game or sport.

4. 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.

The applicant provided copies of the information available on the Entity's present website. This website promotes the Entity's social facilities but not its sporting or game activities and facilities.

The Entity's constitution restricts access by the public to it's sporting and game facilities.

The information provided by the applicant regarding the manner the Entity promotes itself to the public does not support a conclusion that it promotes itself to patrons and the public as an association established for the encouragement of a sport or game.

Finally in considering factors that help determine the purpose of a club TR 97/22 further notes that:

61. Other factors that may be supportive of a conclusion that a club's main purpose is to encourage a game or sport include:

· the proximity of the club's social facilities to its sporting facilities; and

· the decoration and fit out of the club so as to reflect its game or sporting nature, e.g., the display of trophies, honour rolls or boards, pictures or statues of outstanding sporting achievers, displays of sporting equipment, etc., along with the actual game or sporting facilities.

The Entity's facilities are all located adjacent to or inside the club house.

Analysis

TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all of its features stating in paragraph 47 that:

47. The determination of a club's main purpose in the relevant year of income is a matter of fact and degree. In Cronulla Sutherland, Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312:

'The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.'

And further in paragraphs 41, 43 and 44 that:

41. To be eligible for the 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.

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 or purposes. As Lockhart J said at ATC 4225; ATR 312:

'But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.'

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.

Accordingly to determine the Entity's main purpose it is necessary to weigh all the features described in paragraph 15 and 16 of TR 97/22 and considered above. In so doing paragraph 14 of TR 97/22 notes that the presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

Further as stated earlier, it is necessary to look to the relevant years of income, in the Entity's case being the financial years ending 30 June 2009, 30 June 2010 and 30 June 2011, to determine if each of the elements are satisfied, paragraph 48 of TR 97/22 stating:

48. Section 50-45 looks to the year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport.

In weighing the highly persuasive features the Entity is consistently found to demonstrate an equal or greater emphasis towards its social purpose in the relevant years of income as evidenced by:

· its objects and history evidencing dual social and sporting purposes rather than a main sporting purpose;

· its limited range of sporting activities and facilities, including the restrictions on the use of its sporting facilities by the public and the lack of organised coaching or training which do not support a main sporting purpose;

· its substantial range of social activities and facilities (compared to its sporting activities and facilities) which includes functions, gaming, bar facilities and regular monthly world class entertainment acts; and

· the lack of evidence of any significant proportion of the Entity's surplus funds being applied towards sporting purposes.

Further in considering the less persuasive features in the relevant years of income the predominance of the Entity's social purpose is also demonstrated through:

· the very low sporting involvement of its membership;

· the lack of any requirement for persons who control the club to be participants in or concerned with the encouragement of sport;

· the fact that voting rights is not vested with members involved in encouraging sport; and

· the promotion of itself as a social club to the public.

As stated above, consideration of these persuasive features listed in TR 97/22 lead to a conclusion that in the relevant years of income the Entity's purpose of the provision of social facilities and activities is greater than its purpose of the encouragement of a game or sport. Accordingly it follows that the Entity cannot be found to have a main purpose of the encouragement of a sport or game.

Conclusion:

The Entity does not meet the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 in the relevant years of income and is therefore not entitled to income tax exemption under section 50-1 of the ITAA 1997.