Edited version of private ruling

Authorisation Number: 1011794982592

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Ruling

Subject: Income tax exemption

Is the Trustee for the Trust (the Trust) 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 ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Facts

The Club established the Trust to manage money received by the Club from the sale of property

The terms of the trust show that the Club is the sole unit-holder of the Trust.

The trust will be amended to change the purpose of the trust to be for the promotion of a game or sport, and to include clauses that prevent distribution of trust funds to the unit-holder.

The deed of variation does not remove existing clauses dealing with distribution of trust property to the unit-holder.

The Trust provides money and property for the Club, and the Club runs the sporting activities.

The Club self-assesses its income tax exemption as a club established for the encouragement of a game or sport.

Assumptions

1. The Club is entitled to exemption from income tax as a society, association or club established for the encouragement of a game or sport.

2. The deed of variation will be executed as provided

Reasons for decision

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.

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 Pro-Campo Ltd v Commr. of Land Tax (NSW) 81 ATC 4270 Lee J said the following on the meaning of society, association and club:

:

The three words "society, club or association" are words in frequent use in our community and societies, clubs and associations are well known entities…

In Theosophical Foundation Pty Ltd v Commr. of Land Tax (1966-1967) 67 SR 70 … Sugerman JA stated at p.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.' (Oxford English Dictionary,…) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society."

…

The meaning of "society" as the Oxford English Dictionary 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… Although clubs can in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects… (at 4279)

The Trust was established by the Club to hold money received from the Club from the sale of property. The proposed amendments to the trust show that the money will be held on trust for the purpose of the encouragement of a sport.

In Douglas and Ors v FC of T 97 ATC 4722 Olney J stated that the meaning of society, association and club do not include trustees managing a trust: (at 4726):

It would be stretching the ordinary usage of these terms [(society, association, and club)} to include a group of persons whose only function are … to administer the property in accordance with the terms of a deed of trust.

Managing trust property in accordance with a deed of trust is not enough for an entity to be considered a society, association or club.

The Trust is managing trust property in accordance with a deed of trust and is not considered to be society, association or club.

Non-profit

To be eligible for exemption from income tax as a society, association or club which has been established for the encouragement of a game or sport section 50-70 of the ITAA requires that the society, association or club is not carried on for the profit or gain of its individual members (non-profit requirement).

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs states the following on the non-profit requirement:

Non-profit requirement

9. A club must not be carried on for the purposes of profit or gain to its individual members.

10. A club's Memorandum and/or Articles of Association or other constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and on its winding-up. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition.

The proposed amendments state that the purpose of the trust is the encouragement of a sport and not for the purposes of profit or gain of the unit-holders. The proposed amendments will also prevent the money and property of the trust from being used for the benefit of the unit-holder. However, clauses in the original trust instrument allow for the money and property of the trust to be applied for the benefit of the unit-holders, and are not removed from the trust instrument under the proposed amendment.

There is ambiguity in the proposed clauses and existing clauses over whether the trust will be used for the gain of the unit-holders. As such we do not consider the non-profit requirement to be met.

Encouragement of a game or sport

Game or 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 trust is concerned with sport. We consider the trust to be concerned with a game or sport.

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:

· through marketing; or

· by initiating or facilitating research and development

Under the proposed amendment to clause 2 the sole purpose of the trust is the encouragement of sport. The trust will be used to build a facility for use by the Club, and to provide funding for use by the Club.

The trust is considered to be established for the promotion of a game or sport. As the trust, under the proposed amendment, will have no other purpose, it is considered that the promotion of a game or sport is the Trusts main purpose.

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

It has already been determined that the non-profit requirement is not satisfied.

Therefore this requirement is not met.