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Ruling

Subject: Income tax exemption as a sporting body

Question

Will the Company be exempt from income tax under Item 9.1(c) of the table in section 50-45 of the Income Tax Assessment Act 1997 as an organisation established for the encouragement of a game of sport?

Answer

No.

This ruling applies for the following periods:

1 November 2010 to 31 October 2011

1 November 2011 to 31 October 2012

The scheme commences on:

1 November 2010

Relevant facts and circumstances

The Company has applied for a private ruling seeking to confirm its status as an income tax exempt entity pursuant to item 9.1(c) of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997).

The period for which the ruling is requested is from 2010 to 2014. The Company previously received a private ruling on this subject for an earlier period and was found to be an income tax exempt entity pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.

The Company has an ABN.

The Company is an Australian public company limited by guarantee.

The Constitution contains clauses indicating it is a non-profit organisation, with objectives related to the development of a game and appropriate winding up clauses.

The Company is responsible for organising tournaments and competitions

The Company office is located in Australia.

The Company does not have any direct employees. It has a board that approves all major decisions. There are Board members from various nations.

The Company has the responsibility of encouraging the development of its game. The majority of expenditure of the Company is incurred in the form of financial grants made to foreign countries for developmental purposes.

As noted above, the Company previously applied for and was granted tax exemption. The majority of its expenditure was incurred in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-45

Income Tax Assessment Act 1997 section 50-70.

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.

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 conditions 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 is a society, association or club;

· it is established for the encouragement of a game or sport (and this is its main or dominant purpose); and

· it satisfies the special conditions.

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 TD 95/56, 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 Macquarie Dictionary defines 'club' as a 'group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'.

The interpretations of 'society', 'association' or 'club' as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'.

The Company is registered as a public company limited by guarantee and is an organised body of members instituted for the objects as per its constitution.

It is accepted that the Company 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' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of TR 97/22 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997. Football (all codes) is considered to be sport. Accordingly, rugby league is a sport.

The encouragement of a game or sport can occur directly or indirectly. Paragraph 11 of TR 97/22 provides the following examples of direct and indirect encouragement:

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.

Several of these factors support the contention that the Company is an association that exists to encourage sport. For instance, it co-ordinates activities. It also organises and conducts tournaments.

The Company is accepted as having been established for the encouragement of a sport.

Main or dominant purpose

To be exempt pursuant to item 9.1(c) of section 50-45 of the ITAA 1997, it is essential that the main or dominant purpose of a club (i.e. a society, association or club) is the encouragement of a game or sport. 

A club's main purpose is determined having regard to the club's constitution, its activities, its history and its control (Cronulla Sutherland Leagues Club Limited v. FC of T 89 ATC 4936; (1989) 20 ATR 1404 and on appeal in 90 ATC 4215; (1990) 21 ATR 300 (Cronulla Sutherland)).

The features considered to be highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport are listed in paragraph 15 of TR 97/22 and discussed in paragraphs 51-56 of TR 97/22. Features that will be highly persuasive include:

· participating in competitions involving the game or sport;

· bringing into existence, organising and running such competitions or tournaments;

· coaching participants in the game or sport;

· encouraging club members to be spectators at and to support the game or sport;

· fundraising for specific events in the game or sport in which the club's teams or competitors are involved.

In St Mary's Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281 (St Mary's) the club was formed with objects that included the conduct and promotion of rugby league, the financial support of clubs playing rugby league and the provision of sporting, social and recreational facilities to its members. It was largely controlled by current or former rugby league players. In addition to its revenue raising activities (i.e. bar, hairdressing salon, restaurant, TAB area, auditoriums and poker machines), it fielded 32 teams involving 450 players, fielding a first grade team and reserve team in the Metropolitan Cup competition. Hill J suggested that it was necessary to weigh the relative intensiveness of effort that the club applied to the categories of activity:

There is no doubt that the financial information and an analysis of it will be relevant in determining the character of a club but statistics do not necessarily tell the whole story. It is obvious that the majority of the profit of the club came from poker machines. It requires little space and even less effort on the part of the club to derive this profit. It takes a great deal more time and effort to put on the field week after week some 32 rugby league teams involving some 450 players, not to mention fielding a first grade team and a reserve grade team in the Metropolitan Cup competition [at ATC 4533].

The social activities of the club are significant, both financially and in number. They cannot be ignored. But the evidence persuades me that while the social and gambling activities of the club are significant in their own right, they are nevertheless subordinate to the activities of the club in encouraging and promoting rugby league football[at ATC 4533-4].

The main objective of the Company, relates to the encouragement and development of a sport. Its activities are predominantly geared towards this objective and include the organisation and running of tournaments. It is clear that the Company has the encouragement of a sport as its main or dominant purpose.

Special conditions

Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt unless it is not carried on for the purposes or gain of its individual members (the 'non-profit requirement'), 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.

Paragraphs 9 and 21-23 of TR 97/22 discuss the 'non-profit requirement'. Clauses within the constitution prevent distribution to members and provide for the transfer of property on dissolution to another association with similar objects to the Company. These clauses are essentially similar to the example clauses provided at paragraph 22 of TR 97/22. The non-profit requirement of section 50-70 of the ITAA 1997 is thus satisfied.

The Company is not a deductible gift recipient, is not prescribed by law and is not located outside Australia. Paragraphs (b) and (c) of section 50-70 of the ITAA 1997 are therefore not met. Consequently, paragraph (a) must be examined to determine if the Company satisfies the special conditions and therefore qualifies for income tax exemption.

To meet special condition (a) an association must meet two requirements:

It must have a physical presence in Australia.

To the extent it has a physical presence in Australia, it must incur its expenditure and pursue its objectives principally in Australia.

1. The Company office is located in Australia.

It therefore maintains a physical presence in Australia.

2. To meet this part of the condition, the incurring of expenditure and pursuit of objectives must be principally in Australia. The term 'principally' is not defined in tax law, but less than 50% would not meet this requirement.

In the Company's case it has stated - and provided financial information to verify - that the major expenditure item is the making of grants to other nations.

The Company will incur its expenditure principally outside of Australia for the timeframe in question, as indicated by its submission and financial statement. The ATO considers that the principal objective pursued in incurring these expenses is to develop the game internationally.

In short, the Company is not incurring its expenditure and pursuing its objectives principally in Australia for the period in question. As a result it does not meet paragraph 50-70(a) of the ITAA 1997. Nor does it meet paragraphs (b) or (c). Therefore it does not satisfy any of the special conditions of section 50-70 of the ITAA 1997.

Conclusion

The Company is a non-profit association established for the encouragement of sport. However it does not satisfy the special conditions required of such an association in order to qualify for income tax exemption for the years in question. Consequently, for those years, the Company is not exempt from income tax under Item 9.1(c) of the table in section 50-45 of the Income Tax Assessment Act 1997 as an organisation established for the encouragement of a game of sport.