Edited version of private ruling

Authorisation Number: 1011806531123

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income tax exemption

What this ruling is about:

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 game or sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Ruling:

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

The scheme that is subject to the ruling:

The Entity is incorporated as a company limited by guarantee.

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

The Entity is established for the dual purpose, that of being a licensed club and for the encouragement of sport.

The Entity's constitution states the Club shall consist of the specified classes or designations of membership.

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

The Entity has provided detailed information regarding the various social activities that it undertakes and the social facilities it owns/leases.

The Entity provided financial information from its annual reports.

Reasons for decision

Issue 1

Question 1

Is the Entity entitled to income tax exemption under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Detailed reasoning

The Entity has requested a private ruling on whether it is exempt from income tax under section 50-1 of the 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.

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

1. It must be a society, association or club;

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

3. 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.

This requirement 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 clause:

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. Established for Main Purpose of Encouraging a Sport or Game

3.1 Encouragement of a game or sport

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

The case Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner Of Taxation (1990) 21 ATR 300 at 312 (Cronulla-Sutherland) examines the word 'established' and the context in which it appears in item 9.1(c) of the table in section 50-45 of the ITAA 1997. At 90 ATC 4220, Lockhart J stated:

The question on appeal is whether the appellant is a society, association or club established for the encouragement or promotion of rugby league football. At first glance it might be thought that the use of the past tense ''established'', indeed, perhaps the use of ''establish'' in any tense, makes it necessary to look only to circumstances existing at the time of the incorporation or establishment of the body concerned to determine this question. This is not correct. Two criteria must be satisfied before the exemption from income tax is available: first, that the income is derived by a body that is not carried on for the purposes of profit or gain to its individual members, which necessarily looks to the circumstances existing in the relevant year of income; and secondly, that the body is a society, association or club established for the encouragement or promotion of the specified athletic game or athletic sport…

…The syntax of the subparagraph and the choice of the word ''established'' are less than happy; but it is, I think, reasonably clear that the subparagraph looks to the year of income to determine whether each of its elements is satisfied.

In Terranora Lakes Country Club v FC of T 93 ATC 4078, Hill J also examined the word 'established' and stated at 93 ATC 4087:

The words 'established for' clearly enough look to the purpose for which the club is established in the year of income. There is no doubt that the purpose is to be found, at least principally, in the activities which the club carries on in that year.

Consequently it is the purpose for which the Entity is principally established in the relevant year of income that we need to examine to determine its exempt status. The purpose for which it is established is determined by an examination of its activities in the relevant years of income.

Whilst an examination of the Entity's activities is required during the relevant years of income (not at the time it was incorporated) it is also accepted that its constitution, history and activities since its incorporation are all relevant considerations.

In Cronulla-Sutherland 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.

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 sporting fields (leased) for the use of the local sporting community; and

· support of affiliated clubs that undertake a variety of sports

It is accepted the Entity encourages 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.

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 its features. It 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).

The highly persuasive features listed in paragraph 15 above were considered in relation to the Entity.

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

Analysis

TR 97/22 states that a clubs main purpose can only be ascertained after objectively weighing all of the club's 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 paragraph 14 that:

14. A club's main purpose can only be ascertained after objectively weighing all of the club's features, including those features described in paragraphs 15 and 16. 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.

The Entity undertakes encouragement of sport and games through the maintenance and provision of the seven sporting grounds and its assistance to affiliated sports clubs.

However the Entity also concurrently encourages considerable social and recreational activities and while the Entity's sporting activities are supported by revenue generated from the social activities, it equally subsidises some of it social facilities. It has not been demonstrated by the applicant that the provision and encouragement of sporting activities have precedence over the provision and encouragement of social activities.

The Entity was originally established for the dual purpose of operating as a licensed club and as an instrument to acquire the land upon which a licensed club and sports grounds could be established. The objects within the Entity's' constituent document provides for a purpose of providing a sporting club with the usual privileges, advantages, conveniences and accommodation of a club along with a purpose of supporting the an associated Sporting organisation and rendering aid to affiliated sporting associations. However the Directors report in the 2010 Annual Report describes the Entity's' present principal activities as the provision of licensed club facilities and activities for members.

The history of the Entity, its objects and Annual Report 'Statement of principal activities' indicate that in the relevant years it has a dual purpose, that of being established to be both a licensed club and for the encouragement of sport, with a stronger emphasis towards the provision of social licensed club facilities.

In regards to the application of surplus funds the applicant advised the Entity are currently undertaking a multi million dollar expansion and refurbishment to their club house. These undertakings include a new bar area, a dedicated cashiers office and an improved coffee lounge.

The applicant also advised of recent upgrades to the sporting facilities.

The Entity contributed to affiliated clubs in the 2008,2009 and 2010 years.

For the two years that profit and loss statements were provided, being the 2009 and 2010 years the Entity has also subsidised some of its social facilities.

As can been seen from the above the Entity subsidies both its social and its sporting activities. However the Entity has plans to apply a significant amount of its surplus funds to the running, improvement and expansion of its licensed club facilities. As noted in paragraph 54 of TR 97/22:

The club should use a significant proportion of its surplus funds in encouraging its game or sport. As noted by Lockhart J in Cronulla Sutherland at ATC 4226; ATR 313, '…the potential of [a club] to apply its surplus funds for purposes having nothing to do with the encouragement or promotion of [a sport or game] is a significant matter'…

The Entity's' present subsidies and its planned multi-million application of surplus funds towards social facilities supports a finding that the club's main purpose is providing social amenities and licensed club facilities to its members.

In considering the less persuasive features listed in TR 97/22 the membership details show that the majority of the members, approximately 90% are social members. The information on The Entity's website indicates membership is encouraged on the basis of access to the social and recreational facilities provided by the Club.

The applicant has advised that it is compulsory for members of affiliated clubs to be members of the Entity but advised they have not yet developed a reporting system to identify these persons.

Of further note is that 5% of the Entity's members are Foundation members. There is no evidence to suggest that the Foundation members are required to have an interest in sport.

The Entity's high percentage of members who are chiefly involved in the club's social activities does not support a finding of a purpose of encouragement of sport.

The Entity's' constitution states that no person can be a director unless that person is an Ordinary member, Foundation member, Life member, Honorary member or a nominated representative of a Corporate Member.

Social members cannot vote or be elected to the Board.

While it is accepted that the present board is made up of a majority of members who are interested or involved in sport under the constitution control of the Entity could be held by directors not interested in the encouragement of a sport or game.

A club established for the encouragement of sport would be expected to promote itself to patrons and the public as one encouraging a game or sport. The Entity's promotional material does not do this. On its advertising the Entity promotes itself to the public as a club that provides 'entertainment to functions, dinners and gaming rooms'. In its 2010 Annual Report the Entity describes itself as a club that provides licensed club facilities and activities to members.

In the weighing of all the above features it is determined that the Entity's involvement in the provision of a licensed club is at least equal too or greater than its involvement in the encouragement of sport. This determination is supported by the highly pervasive features considered such as the Entity's objects, history and present activities that all evidence an equal dual purpose, and its application of surplus funds that indicate an emphasis on the provision of social facilities and activities. Further in considering the less pervasive features the strength of the Entity's social purpose is demonstrated through the low sporting involvement of membership and the promotion of itself as a social club the public.

TR 97/22 states:

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 as it has been found that the Entity's purpose of the provision of a licensed club is at least equal to or greater that its purpose of the encouragement of a game or sport it follows that the Entity cannot be found to have a main purpose of the encouragement of a sport or game.

Further, in considering case law the Entity has many similarities with Cronulla Sutherland. Like the Entity, the Cronulla Sutherland Leagues Club Limited (Cronulla) was set up to provide facilities and support to affiliated sporting clubs and to maintain a social club for the benefit of members. Cronulla maximised its surplus to enable it to support the football club although it was under no legal obligation to do so. It carried on a substantial business as a social club with 13,000 members. The control of Cronulla was also in the hands of persons interested in promoting the football club. Although in Cronulla this interest was historical and not formalised. However the directors of Cronulla became directors of the football club. Cronulla's potential to apply surplus funds for purposes other than the encouragement of Rugby league was considered significant. Cronulla was found to have a main purpose of carrying on a social club, Lockhart J stating:

In my opinion the encouragement and promotion of rugby league football and the provision of the amenities of a social club for its members are two objects or purposes of the appellant. Neither is correctly described as ancillary or incidental to the other or as necessarily independent of the other. The two objects and purpose overlap to some degree. The main object or purpose is the provision of the social amenities to its members, not the encouragement or promotion of rugby league football.

Considering the similarities between the two clubs it is considered that the finding by Lockhart J in Cronulla Sutherland supports the determination that the Entity has a main purpose of carrying on a social club.

Based on a consideration of the features recommended by TR 97/22 and with reference to case law the Entity is found to have two purposes in the relevant years, of which the provision of a licensed club is determined to be the equal or greater purpose.

Therefore the Entity is found not to meet the requirement of a main purpose of the encouragement of a game or sport.

Conclusion:

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

Disclaimer

You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you (or to someone acting on your behalf).

The Register of private binding rulings is a public record of private rulings issued by the Tax Office. The Register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies.

The rulings in the Register have been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict Tax Office policy or decisions.