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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

Yes

This ruling applies for the following periods:

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

Income year ended 30 June 2015

The scheme commences on:

Income year ended 30 June 2012

Relevant facts and circumstances

· The entity is registered as a private company limited by shares.

· The entity was initially set up as a for-profit company and made private distributions.

· In the relevant year, the entity repealed and replaced its constitution and became a non-profit company. There are appropriate non-profit and winding clauses in the constitution.

· There are X trustees that are members of the entity and they make all decisions in relation to the management of the entity.

· The objects listed in the constitution, state that the entity is established to further a sport in Australia and provide support to the instructors and students.

· The sport is one that requires athletic ability.

· The entity's current activities include furthering the teachings of a particular sport by developing and funding training camps, offering bursaries to young students to attend training camps and other activities directed at teaching and training the particular sport.

· The members of the entity are highly ranked in the sport. The members are directly involved in the management of the company and take an active role in leading, instructing and developing the sport.

· The entity funds Australian instructors travelling throughout Australia and occasionally sends them overseas. Instructors are not paid for their services but have costs reimbursed.

· The entity will also fund projects which focus on the teachings of the sport through books and other media. These activities indirectly promote the sport. In addition, the proceeds will be funnelled back into teaching and training the sport.

· The entity has reimbursed its members with incidental expenses spent outside Australia.

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

Section 50-1 of the 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 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 entity is registered as a company limited by shares and was initially established as a for-profit company. In the relevant year, the constitution of the company was repealed and replaced to reflect its new purpose of being a non-profit company. The new constitution included objects directed at the promotion of a particular sport in Australia. It is considered that from the date of the new constitution, the entity comprised a group of persons organised for a common purpose of promoting and furthering a sport.

It is considered that the entity is a society, association or club.

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

Game or sport

The terms 'game' or 'sport' for the purposes of section 50-45 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. TR 97/22 provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 50-45, and includes (at paragraph 38):

athletic activity:

aerobics, if competitive; amateur wrestling; athletics including hurdling, jumping, running and walking; boxing; dancing, such as ballroom dancing, if competitive; 'field games', including discus, javelin, shot putt and hammer throwing; martial arts such as judo, kung fu, ju jitsu and karate; mountaineering; orienteering; rogaining; water-based sports including diving, swimming, surfing, surf life-saving, synchronised swimming and water polo;

The objects of the entity as stated in its constitution are directed at promoting and furthering a sport in Australia. The sport is one that requires athletic activity and would fit within the meaning of a game or sport.

It is accepted that the entity is concerned with 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:

· through marketing; or

· by initiating or facilitating research and development

The entity encourages a sport to be practiced through the following activities:

· Organising and funding training camps

· Supporting and funding instructors to teach the sport

· Organising training courses

· Offering bursaries to young students

· Fund projects which focus on teachings of the sport through books and other media

It is considered that the entity's activities directly and indirectly encourage sport.

Main purpose

Paragraph 41 of the TR 97/22 provides that to be eligible for the exemption, an association's main purpose must be to encourage a game or sport. Difficulties can arise where the association conducts other activities, particularly social or commercial activities.

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

Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting a conclusion that the main purpose of the association is to encourage a game or sport:

· 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 emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents

The fact that an association also encourages social and other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225 (Cronulla), where an association conducts other activities, particularly social or commercial activities which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may be that of encouragement. In contrast, where an association's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

In order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to the sporting ends. If they become an end in themselves, it will be difficult for a club to demonstrate that it is predominantly for the encouragement of a game or sport.

To determine whether the entity displays features that support a main purpose of encouraging a game or sport, its constitution, activities, history and control will be examined:

Constitution

The constitution of the entity was repealed and replaced in the relevant year, to include objects and non-profit clauses.

From the objects of the entity it is evident that the entity is directed at the encouragement and promotion of a sport. There are no independent objects in the constitution directed at social or recreational purposes.

Activities

The activities of the entity include providing training and instruction in the sport, funding and support of instructors, organising training camps and bursaries to students. Theses activities demonstrate that the entity conducts activities that directly encourage a sport.

The entity will also fund projects that focus on promoting the sport through books and other media. These activities indirectly promote the sport. In addition, the proceeds will be funnelled back into teaching and training the sport.

History & Control

The entity was established in Y and registered as a company limited by shares. It was initially set up as a for-profit company. However, in the relevant year, the entity became non-profit and inserted objects directed at promoting the sport.

Paragraph 58 of 97/22 states:

The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports a conclusion that it is established for the encouragement of the game or sport…

Control of the entity is vested in its members. The members take an active role in leading, instructing, developing and promulgating the sport in Australia.

In summary, the entity directly encourages the sport and demonstrates features persuasive of it being for the encouragement of 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.

(i) Not carried on for the profit or gain of its members

Section 50-45 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents.

In the relevant year, the entity included suitable clauses in its constitution which prevent distributions to members during the company's operations and upon winding-up. From this date, no distributions have been made to members.

It is also necessary that an association's actions are consistent with their constituent documents.

The entity's purpose is to further the sport in Australia, in doing so, the members of the company benefit from the activities undertaken. The members are senior practitioners of the sport and listed in the objects, as recipients of the company's funds for the purpose of instructing the sport. Instructors are not paid for their services, but rather have their costs reimbursed. This is not inconsistent with the non-profit requirement, as it allows bona fide compensation for services rendered or expenses incurred on behalf of the organisation.

It is accepted that the entity operates in a non-profit manner.

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

For the entity to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

From the information provided, the entity has a physical presence in Australia. Although, instructors and students may be sent overseas to further their training in the sport, and therefore incur expenses outside Australia, it is evident that funds are principally incurred in Australia and the entity's objectives are to further the sport 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 exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is 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.