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Ruling

Subject: Income tax exemption

Question 1

Is the entity a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

No

Question 2

Is the entity a society, association or club established for community service purposes (except political or lobbying purposes) under item 2.1 of the table in section 50-10 of the ITAA 1997 and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

No

Relevant facts:

· The entity is non-profit association.

· The entity is established to promote a recreational activity and organises events and activities to promote the recreational activity.

· The events and activities organised are non-competitive.

· The events and activities do not have rules or conventions.

· The events and activities are advertised through newspapers, articles, flyers and on the entity's website.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-10

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70

Reasons for decision

Question 1

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of ITAA 1997. 

Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must:

(a) be a society, association or club;

(b) be established for the encouragement of a game or sport; and

(c) meet the special conditions specified in section 50-70 of the ITAA 1997.

(a) Society, Association or Club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning (Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35).

This approach is also confirmed in Taxation Determination TD95/56, which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

The entity is an incorporated entity and is brought into existence by its members to pursue a common purpose as stated in its constitution.

It is accepted that the entity is an association.

(b) Established for the encouragement of a Game or Sport

Game or sport

The terms 'game' or 'sport' for the purposes of section 50-40 are not defined in the ITAA 1997 and have their ordinary meanings.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides the Commissioner's view on what constitutes as exempt sporting clubs.

Paragraph 32 of TR 97/22 contrasts games and sports from activities that are merely a means too some other end. This is so where the activities themselves are not organised in a sport- or game-like way, and some other purpose is predominant. For example, while the activity of dancing could be organised in a game or sport-like way, it is commonly a means of promoting sociability, participation and relaxation. In such cases it does not constitute a game or sport.

Paragraphs 35 and 36 of TR 97/22 discuss common features of a game or sport:

35. A common feature of a game or sport is a set of conventions, expectations and rules. This contributes to the element of organisation that is commonly indicative of a game or sport. While written or defined rules are not essential, the imposition of such rules and conventions in an organised group of participants can convert an otherwise ordinary leisure activity into a game or sport (e.g., hunting, fishing, walking).

36. Competition is a very common feature although not essential. Competition is an important indicator where the activity is not obviously a game or sport.

The object of the entity is to promote a recreational activity by organising events and activities.

The events are not competitive in nature however participants receive a certificate for participating in the event.

There is also a lack of rules and conventions associated with the event which is ordinarily associated with a game or sport.

We consider that while participants may compete in a friendly way with each other, the event is held as part of a broader purpose which is to encourage people to undertake a particular recreational activity rather than as a game or sport. Further, the event is organised is such a way that would suggest participants are taking part in a personal challenge or endeavour.

The activity is not a game or sport.

Encouragement

Paragraph 11 of TR 97/22 refers to the meaning in the Macquarie Dictionary which defines 'encouragement' to mean 'stimulation by assistance' and provides that 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

The entity promotes its events and associated activities by advertising though a range of marketing activities including newspaper articles, flyers and on its website.

However, the entity is promoting a recreational activity that can not be described as encouraging a game or sport.

Main purpose

Paragraph 41 of the TR 97/22 provides that to be eligible for the exemption, an entity'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.

The main purpose can only be ascertained after objectively weighing all of an entity's features such as the constituent document, history, control and activities.

Paragraph 15 of the TR 97/22 lists the features that are highly persuasive in supporting a conclusion that the main purpose of an association is to encourage a game or sport, i.e.:

· 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.

It is considered that the main purpose of the entity is to promote a recreational activity. Therefore, the entity does not have a main purpose of encouraging a game or sport.

(c) Special Conditions

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.

Not carried on for the profit or gain of its members

The entity has acceptable non-profit and dissolution clauses that ensure the entity operates in a non-profit manner during its operation and upon its winding up.

Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia

The entity has a physical presence in Australia. It incurs its expenditure and pursues its purposes principally in Australia.

Accordingly, the entity satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the entity is not exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is not an association established for the encouragement of a game or sport, pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.

Question 2.

Item 2.1 of the table in section 50-10 of the ITAA 1997 provides that a society, association or club established for community service purposes (except political or lobbying purposes) shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be exempt from income tax under item 2.1 of the table in section 50-10 of the ITAA 1997, an entity must:

(a) be a society, association or club;

(b) be established for community service purposes; and

(c) meet the special conditions specified in section 50-70 of the ITAA 1997.

It is accepted that the entity is an association that meets the special conditions specified in section 50-70 of the ITAA 1997. Accordingly, consideration shall be given as to whether the entity has been established for community service purposes pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997.

Community service purposes

For an organisation to exist for community service purposes its purposes must be altruistic. Taxation Determination 93/190 -'Income tax: what is the scope of the exemption from income tax provided by subparagraph 23(g)(v) of the Income Tax Assessment Act 1936?' (TD 93/190) considers the meaning of a community service purpose and states at paragraphs 3 to 5:

"3. ... The Explanatory Memorandum to section 23(g)(v) of the Act confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes which are not otherwise charitable, such as promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances.

4. However, the provision does not give exemption from income tax to a broad range of organisations that are established within the community, but whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes.'

5. It is not accepted that common association as such is altruistic. Neither the purposes of members, nor the purposes of their organisation, are altruistic merely because the members form a non-profit association to advance their common interests. Members who seek to advance their common interests are not therefore motivated by an unselfish regard for others, and neither is their organisation. It follows that an organisation established for the purposes of its members is not therefore established for community service purposes. Only when the purposes of the organisation are altruistic can they be community service purposes.

Therefore, to be considered an organisation established for community service purposes, the organisation's activities must be directed to altruistic purposes. Altruistic purposes are directed for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances.

TD 93/190 provides the following examples of organisations that are not considered to be exempt as community service organisations:

· clubs that promote public speaking or debating

· clubs that provide a social forum for retired and semi-retired business people senior public servants and the like

· clubs that provide a social forum for expatriates of a particular country

· bodies established to promote tourism

· military service unit organisation

· social clubs for newcomers to a particular area

These organisations have a common social purpose that is not altruistic in nature.

The entity's purpose is not altruistic in nature as its purpose is to essentially encourage an activity that is recreational and social in nature by promoting an annual event and associated activities. It could not be described as having altruistic purpose for the benefit or welfare of the community or for members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, social or economic circumstances.

The purposes of the entity are akin to those organisations described above in TD 93/190 which promote social and recreational activities for a common purpose which are not accepted as community service organisations for the purposes of section 50-10 of the ITAA 1997.

Therefore, the entity has not been established for community service purposes.

Conclusion

Based on the above, the total ordinary income and statutory income of the entity is not exempt from income tax pursuant to section 50-1 of ITAA 1997 as it has not been established for community service purposes pursuant to item 2.1 of the table in section 50-10 of the ITAA 1997.