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Ruling

Subject: Income tax exemption for the encouragement of sport

Question 1

Will the attainment of a new lease cause the Entity to lose its status as an exempt entity under item 9.1 (c) of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) established for the encouragement of sport?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2012

Relevant facts and circumstances

The Entity is a public company limited by guarantee.

The Entity has previously applied for private binding rulings confirming it is an entity exempt from income tax on the basis it is established for the encouragement of sport.

The Entity has sought a new private binding ruling to confirm it will still be an entity established for the encouragement of sport should it, obtain a new lease for property and grant sub-leases and/or the undertaking of all other associated steps to facilitate these arrangements.

The Entity relies on the facts relating to the previous rulings as it submitted that there has been no change to the terms of its Constitution or its principal objects of encouraging the game or sport.

The objects of the Entity's constitution provide that it is to encourage, promote and further the game or sport

The principal activities of the Entity' since its inception has been to provide activities associated with a game or sport and other services to members. It organises and participates in a significant number of competitive activities.

The constitution of the Entity provides that no portion of its income or property can be distributed by way of profit to its members; and also provides that any surplus on winding up or dissolution cannot be distributed to members but must be transferred to similar organisations with similar prohibitions.

The Entity has various classes of memberships.

Any income derived by the Entity due to new lease arrangements will be applied to support and encourage the game or sport.

Relevant legislative provisions

Income Tax Assessment Act 1997 50-1

Income Tax Assessment Act 1997 50-5

Income Tax Assessment Act 1997 50-45

Income Tax Assessment Act 1997 50-70

Income Tax Assessment Act 1997 995-1

References

St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281

Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294

Tweed Heads Bowls Club v. FC of T 92 ATC 2087; AAT Case 8267 (1992) 24 ATR 1068.

Case X25 90 ATC 251; (1990) 21 ATR 3257.

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

'The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.'

(* as defined in section 995-1 of the ITAA 1997)

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for the encouragement of a game or sport is listed at item 9.1 (c) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special condition detailed in section 50-70 of the ITAA 1997.

An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport if it:

o is a society, association or club,

o is established for the encouragement of a game or sport, and

o satisfies the special conditions.

Society, association or club

The term 'society, association or club' is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words.

In Douglas v Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)…Sugerman JA stated 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 organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two…Although clubs can in some respects and 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…

Taxation Determination TD 95/56 refers to the definition of 'association':

2. …. 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 members of the Entity voluntarily associate together for a common purpose and common interest. The Entity has a management committee and rules of association. The Entity is an 'association, society or club'.

Established for the encouragement of a game or sport

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport.

Game or sport

'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of TR97/22 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997.

The constituent documents of the Entity reference its association with sports.

It is accepted that the Entity is an organisation associated with a game or sport.

Encouragement

A society, association or club will only be exempt from income tax if it has as a main purpose the encouragement of a game or sport. Encouragement can occur directly or indirectly.

TR 97/22 details features considered to be persuasive of supporting a conclusion that the main purpose of a club is to encourage a game or sport.

Paragraph 15 of TR 97/22 describes highly persuasive features which are present when a club is for the encouragement a game or sport:

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

o the sporting activities encouraged by the club are extensive;

o the club uses a significant proportion of its surplus funds in encouraging the game or sport; and

o 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.

Taxation ruling TR 97/22 also lists other features considered relevant at paragraph 16:

· a high level of participation by members in the game or sport;

· 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);

· 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; 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.

The Entity conducts activities associated with sport. It organises and participates in a significant number of competitive competitions. It also operates courses that are available for members and non members.

The objects and activities of the Entity demonstrate that it is actively involved in encouraging and promoting sport.

In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 (Terranora), Hill J, held that in that case, the provision of extensive social activities to visitors to the club did not prevent a finding that the entity was for the encouragement of the sport undertaken by a majority of the ordinary members:

"The attraction the club has for persons living as far away as Brisbane was made apparent by the evidence. Numerous buses arrive at regular intervals during the morning carrying visitors to the club, many of whom are elderly pensioners. Presumably these visitors are attracted, or were attracted in the year of income, by the poker machines not then available in Queensland. The evidence indicates that of the approximately 1,000 visitors per day to the club, 65-70% of them arrive by bus. In addition to the poker machines, the visitors enjoy the special social promotions in the club.

In the year of income, there were 4,076 ordinary members of the club, 226 junior members and 130 social members. A social member is entitled to utilise all the facilities of the club, sporting or recreational, but is not entitled to vote or become an office bearer of the club." (at ATC 4082; ATR 300).

"…in the present case, I have reached the conclusion that, while the social activities (by which I include the gambling, entertainment, dining and accommodation activities) were very extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were, I am satisfied, pursued as a means of financing the extensive sporting activities conducted by the club." (at ATC 4086-4087; ATR 304)

In St Marys Rugby League Club Limited v FC of T 97 ATC 4528 (St Marys), Hill J listed at 4534 a combination of factors which are also present in this Club as being in favour of that club's claim to exemption:

In the present case each of the matters said by Lockhart J in Cronulla-Sutherland to be significant, namely ``constitution, activities, history and control'' point to the characterisation of the Club as one having as its main object or purpose ``the encouragement or promotion'' of rugby league within the meaning of s 23(g)(iii) of the Act. The Memorandum of Association records the significance of rugby league as the major object of the Club. The Articles of Association, both in the membership categories and in the conferring of control upon Football Members (or Life Members), point to the significance of the football activities over the social activities. The activities of the Club involve both social and football activities. Were this not so then, no doubt, the case would not be before the Court. But, although income is derived from the social activities and the football activities constitute an outgoing, there is an intensity of activity directed towards football which tips the balance in favour of the applicant. The history of the Club is one of close association with rugby league from its inception and again points to the correct characterisation as being one for ``the encouragement or promotion'' or rugby league.

Finally, the control of the Club rests in the hands of former footballers (or Life Members) whose task it is not merely to run the Club but also to promote the competitions in which the Club participates in the rugby league season.

The Entity constitution allows for several memberships including Social membership however Social members may not vote at meetings. Therefore only sporting members vote and may be elected as directors of the Entity.

Tribunal decisions which also support the Squadron's claim are Tweed Heads Bowls Club v. FC of T 92 ATC 2087; AAT Case 8267 (1992) 24 ATR 1068 and Case X25 90 ATC 251; (1990) 21 ATR 3257.

The derivation of passive income such as rents and/or trust distributions does not alter the main purpose of the Entity as any income derived by the Entity will applied toward the encouragement of the Entity's sporting activities consistent with the terms of its Constitution.
Consideration of these factors leads to the conclusion that should the Entity pursue a new lease agreement it would still be considered as established for the encouragement of a game or sport.

Special condition

Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members and:

· it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or

· it is a deductible gift recipient; or

· it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Non-profit requirement

Paragraphs 9 and 21 - 23 of Taxation Ruling TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members.

Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement.

The Constitution of the Entity prevents distribution to members. The Entity is not carried on for the profit or gain of its individual members.

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

The Entity is located in Australia and carries on its activities in Australia. It pursues it objectives and incurs its expenditure in Australia and therefore satisfies this requirement.

The Entity satisfies the special condition in section 50-70 of the ITAA 1997.

Conclusion

Section 50-1 of the ITAA 1997 provides that the income of entities covered by the tables in sections 50-5 to 50-45 of the ITAA 1997 are exempt from income tax.

An entity is exempt from income tax as a society, association or club 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 if it:

· is a society, association or club,

· is established for the encouragement of a game or sport, and

· satisfies the special condition.

The Entity is a society, association or club and is established for the encouragement of a game or sport. In addition, it satisfies the special condition and is therefore exempt from income tax for the year ended 30 June 2012.