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Ruling

Subject: Income Tax Exemption

Entitlement to Income Tax Exemption as an entity established for the promotion of a game or sport.

Question 1

Is the Rulee entitled to Income Tax Exemption item 9.1 (c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997), as an entity established for the promotion of a game or sport and has its physical presence in Australia, and to that extent incurs its expenditure and pursues its objectives principally in Australia?

Advice/Answers

Question 1

Yes

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

On or after 1 January 2012

Relevant facts

The Rulee is a company limited by guarantee which was incorporated in Australia.

The company was established as a special purpose entity by a sporting organisation in Australia for the purpose of organising and staging a sporting event in Australia.

The company will be responsible for organising and managing all operational elements of the competition, including hiring venues, engaging contractors, media and broadcasting coverage, travel arrangements, insurance coverage, logo development, marketing, IT requirements, ancillary functions and other activities and obligations related to the event in Australia.

A comprehensive list of objects and activities are listed at clause 5 of its adopted constitution.

Under clause 6 of its adopted constitution, the company must apply its assets and income in furtherance of its objects and no portion shall be paid or transferred, directly or indirectly to any members, other than per clause 6.2 for compensation for services or goods supplied in the ordinary course of business, interest on money borrowed, rent charged, reasonable out of pocket expenses incurred on behalf of the company.

It is located in Australia and will incur its expenditure and pursue its activities principally in Australia.

The Rulee has an ABN.

The Rulee claims that it was established and to operate as a not for profit organisation and claims its main purpose is the encouragement of a game or sport, with the main objective to do all things necessary to organise, stage the described sporting event to be held in Australia.

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

Issue 1

Question 1

Is the Rulee entitled to Income Tax Exemption item 9.1 (c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997), as an entity established for the promotion of a game or sport and has its physical presence in Australia, and to that extent incurs its expenditure and pursues its objectives principally in Australia?

Eligibility for income tax exemption.

Taxation Ruling 97/22. (TR 97/22 Income tax: exempt sporting clubs) states at paragraph 7 and 8 that:

7. For a club to be exempt from income tax under section 50-45, it needs to satisfy three tests. It cannot be carried on for the purposes of profit or gain to its individual members. It must be for the encouragement of a game or sport. That encouragement must be the club's main purpose.

8. Where the entity/club, does not satisfy all three requirements, it is not exempt from income tax under section 50-45. However, in calculating its assessable income it is subject to the 'mutuality principle'. Broadly, this means that member receipts (which include members' subscriptions and trading income relating to members) are not included in the club's assessable income for tax purposes.

It is essential that the encouragement of a game or sport is the main or dominant purpose of the entity/club as per paragraph 13 of TR 97/22.

Paragraphs 11 to 14 of TR 97/22 state:

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.

Game or sport.

12 There is no special definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meaning.

Main purpose

To be exempt, the main purpose of the club must be the encouragement of the relevant game or sport.

A club's main purpose can only be ascertained after objectively weighing all of the club's features.

The presence or absence of a feature may not conclusively determine that the entity's/club's main purpose is or is not the encouragement of a game or sport.

Highly persuasive and less persuasive features per TR 97/22 are:

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).

Whether the Rulee is established and to operate as a not for profit entity:

The Rulee in its submission claims that it was established not to be carried on for the purposes of profit to its individual members and refers clause 6.1 of its adopted constitution, to support its claim.

Clause 6.1 of the Rulee's constitution reads:

"The assets and income of the Company must be applied in furtherance of the Company's objects and no portion shall be paid or transferred, directly or indirectly, to any member, except in the circumstances described in clause 6.2.

Clause 6.2 limits the allowance for payment to any member, officer, director, or employees, for bona fide payments relating to:

· Compensation for services rendered or goods supplied to the Company in the ordinary course of business, by any member, officer, director, or employee, subject to a determination made by a general meeting in accordance with and as required under the Corporations Act 2001 (Cth).

· Interest on money lent to the Company by any member, officer, director, or employee,

· Rent for premises leased to the Company by any member, officer, director, or employee,

· Out of pocket expenses reasonable incurred by a member, officer, director, or employee,

In addition clauses 7.4 and 7.5 of its adopted constitution require the rulee to transfer any surplus up on winding up, to a specified sporting organisation, which is an Australian company and which is also endorsed as an income tax exempt entity with similar purposes, being the encouragement and promotion of a game or sport.

Where the transfer to the specified organisation cannot be effected, any surplus must be transferred to another organisation with similar purposes and which is not carried on for profit or gain of its members.

It is accepted the Rulee is established to operate as a not for profit entity:

Whether the Rulee's activities and main objective is the encouragement of a game or sport.

The Rulee in its submission claims to be a special purpose entity which was established an Australian sporting organisation for the sole purpose to organise stage and deliver a specific sporting event which is to be held in Australia.

This is also reflected in clause 5.1 of its adopted constitution, which requires the Rulee to do all things necessary to organise, stage and host the sporting event in Australia.

In addition the Rulee claims that it will only operate up to 31 December 2015 for the sole purpose of delivering, completing and finalising all matters relating to the event. After that, the Company will be wound up and any surplus will be transferred in accordance with the requirements of clauses 7.4 and 7.5.

Sub paragraphs (i) to (xviii) of Clause 5.1 of the Rulee's adopted constitution, state the various activities and obligations that are necessary for the organisation and staging of the event in Australia. All stated activities, responsibilities and obligations are accepted to be features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include:

Other less persuasive features indicting the rulee is established to operate for the purpose of promoting a game or sport, is the appointment and composition of its management board which includes active members of the main sporting organisation with business knowledge and experience in the game the event relates to.

It is accepted the Rulee is established to operate for the sole purpose of the encouragement of a game or sport.

Whether the Rulee satisfies the conditions of section 50-70 of the ITAA 1997

This section requires the following conditions to be satisfied.

· Firstly, the entity must not to be carried on for the purpose of profit or gain of its individual members. As determined above this requirement is satisfied.

· Secondly it must have its physical presence in Australia; and incurs its expenditure and pursues its objectives principally in Australia.

· The Rulee is a registered Company with ASIC in Australia and has applied for and been provided with an ABN by the Australian Taxation Office.

· It has a registered office in Australia and operates from Australia. The registered office and principal place of business is in Australia. Its business activities will involve the managing of all operational elements of the sporting event to be held in Australia.

· The company's management team is located in Australia, and the current directors are located in Australia. As for the appointment of any additional directors, from the total twelve to be appointed nine must be located in Australia.

The rulee claims the vast majority of its costs will be incurred in Australia to Australian recipients as the event will be organised in Australia and will take place in Australia.

The Rulee claims that it may incur an insignificant amount of expenditure overseas in relation to some activities such as reimbursement of costs to a related party in connection to the Australian event, associated travel costs relating to visits to the headquarters overseas, and other overseas destinations to observe majors international events.

It is accepted the Rulee does not carry on any activities for the purpose of profit or gain for its individual members, has its physical presence in Australia; and incurs its expenditure and pursues its objectives principally in Australia.

Conclusion:

On the basis of the rulee's submission and as reflected in its adopted constitution, it is evident the entity is:

· Not carried on for the purposes of profit or gain to its individual members.

· It has been established for the encouragement of a game or sport.

· Its main objective and purpose is the encouragement of sport and to do all things and actions, necessary to organise, stage and host the sporting event, to be held in Australia.

Therefore the Rulee can be accepted to be an entity (Institution) which is established and will operate during its tenure, for the main purpose being the encouragement and promotion of a game or sport in Australia.

As such the rulee is accepted to be an institution which is established and operates for the encouragement and promotion of a game or sport, and therefore eligible for income tax exemption under item 9.1 (c) of section 50-45 of the ITAA 1997.

ATO view documents

Taxation Ruling TR 97/22

GiftPack NAT 3132-04.2011

Tax Basics for Non Profit Organisations NAT 7966.05.2007

Income tax guide for non-profit organisations NAT 7967-03.2007