Edited version of your private ruling

Authorisation Number: 1012594581658

Ruling

Subject: Income tax exemption

Question 1

Is the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity as described in item 9.1(c) of section 50-45 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year 2014

Income year 2015

The scheme commences on:

During the 2014 income year

Relevant facts and circumstances

1. The Club is a not-for-profit incorporated association.

2. The Club has adopted the model constitution from the Department of Fair Trading.

3. The purposes of the club are:

• To instruct members in the Syllabus

• Members are to compete in interclub, zone and state competitions

• Members are to represent the Club with displays at local events

• To manage all other club related activities

4. The Club will have about four teachers who are paid employees.

5. The Club currently rents two studios out of a local studio and local halls for events.

6. Classes are held on weekday evenings and separated by age group. Students can compete individually or in age group teams.

7. The sport has various associations to which local clubs can join.

8. The Club expects to have 100 competitive members.

9. The sport is a unique competitive sport combining dance, floor and standing exercises. It is beneficial for physical fitness, coordination and posture and builds confidence through participation in competitive events.

10. Each year participants learn a new syllabus of routines which are refined and improved through regular classes and culminate in competitions for both individuals and teams of six. Grand finalists in individual competitions perform at a town venue each year.

11. Competitions are not compulsory but generate a feeling of togetherness and club spirit.

12. The sport has a panel of judges who compare a participant's performance against the syllabus and judging criteria. Members must adhere to grooming, fairness and association rules.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-45 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The Club is exempt from taxation under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 9.1(c) in the table in section 50-45 of the ITAA 1997.

Detailed reasoning

The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in sections 50-1 and 50-45 of the ITAA 1997 as follows:

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 the 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.

The matters to be satisfied under section 50-45 of the ITAA 1997 are:

• the organisation is a society, association or club

• it is established for the encouragement of a game or sport

• it is not carried on for the profit or gain of its individual members, and

• the special conditions have been met.

Society, association or club

The terms 'association' and 'society' are not defined and therefore take on their ordinary meaning. The Macquarie Dictionary defines 'association' 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 26 at 35). An association may be incorporated or unincorporated.

The Club is:

• an incorporated association

• an organised body of members governed by a constitution.

It is accepted that the Club is an association for the purposes of section 50-45 of the ITAA 1997.

Game or sport

There is no special definition of what constitutes a 'game' or 'sport' for the purposes of section 50-45 of the ITAA 1997. Accordingly, those words should be given their ordinary meanings.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a club is regarded as being established for the encouragement of a game or sport. In relation to dancing, paragraph 32 of TR 97/22 states:

32. Activities that could be games or sports may be merely a means to other ends. 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.

Further, paragraphs 38 and 40 of TR 97/22 state that dancing, if competitive, may be a sport; however if undertaken as a social activity will not be a sport.

As outlined in TR 97/22, the following features and indicators may assist in determining whether an activity is considered a game or sport:

• sporting or game-like activity

• intention

• rules and conventions

• competition

We will consider these various features to determine whether the sport can be accepted as a sport for the purposes of tax exemption.

The sport combines dance, floor and standing exercises. It is beneficial for physical fitness, coordination and posture and builds confidence through participation in competitive events.

Each year participants learn a new syllabus of routines which are refined and improved through regular classes and culminate in competitions for both individuals and teams of six. Grand finalists in individual competitions perform at a town venue each year.

The sport has a panel of judges who compares a participant's performance against the syllabus and judging criteria. Members must adhere to grooming, fairness and association rules.

It is noted that there is a social element involved in the sport. Classes are promoted as an opportunity to make friends and have fun, and participation in competitions is not compulsory but is encouraged.

Considering the various factors above, the sport is conducted in a sport-like way, it is competitive and follows a set of rules and conventions. The intentions of participants may vary, but the Club expects that the majority of members will be active participants in competitions and participate for fitness and to learn and improve skills rather than just for purely social reasons.

As such it is considered that the activities conducted by the Club are competitive rather than social in nature and therefore are accepted as a sport for the purposes of section 50-45 of the ITAA 1997.

Established for the encouragement of a game or sport

To qualify for exemption the club must be established for the encouragement of a game or sport. The encouragement of a game or sport must be the main purpose of the entity. Determining an organisation's main purpose involves an objective weighing of all its features, including its constitution, activities, policies, administration, finances, history and control.

Taxation Ruling TR 97/22 discusses the meaning of 'encouragement' as used in section 50-45 of the ITAA 1997. Paragraph 11 states the following:

11. 'Encouragement' means 'stimulation by assistance', according to the Macquarie Dictionary. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club. 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.

A club's main purpose can only be ascertained after objectively weighing all of the club's features. Paragraphs 15 and 16 of TR 97/22 outline a number of features to consider when determining purpose:

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).

Activities referred to in paragraph 51 of TR 97/22 include:

• participating in competitions or tournaments involving the game or sport;

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

• providing referees, umpires or other officials for the game or sport;

• coaching participants in the game or sport;

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

• fundraising, for specific events in the game or sport in which the club's teams or competitors are involved, such as organising raffles to fund a club member's participation in an overseas event.

From the facts provided, it is clear that the Club conducts activities as described above. It is accepted that the Club has been established for the encouragement of the sport.

Special conditions

Section 50-70 of the ITAA 1997 sets out the special conditions that need to be met to be exempt from income tax under item 9.1. The relevant conditions are:

• 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

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

Non-profit requirement

If an association is carried on for the profit or gain of its individual members, it will fail to be exempt for income tax under section 50-45 of the ITAA 1997.

TR 97/22 explains this requirement as follows:

21. Section 50-45 requires that a club is not to be carried on for the purposes of profit or gain of its individual members. Where members, in their individual capacity, are to receive benefits from a club, the club fails the non-profit test. However, benefits received by members communally as members (e.g., by using the club's facilities) and incidental to the pursuit of a club's objects do not prevent the club from passing the non-profit test nor does the payment of reasonable remuneration to members for services they provide to the club.

22. We accept a club as being non-profit where, by operation of law (for example, a statute governing a club's activities) or by its constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding-up. The club's actions must, of course, be consistent with the prohibition.

To meet the non-profit requirement firstly, an entity's constituent documents must display a non-profit character and secondly, the entity's actions must be consistent with this non-profit character.

The Club has adopted the as its governing rules the Model Constitution provided by the Department of Fair Trading for non-profit associations. These rules are subject to the provisions of the Associations Incorporation Act 2009. Under sections 40 and 65 of the Act an association must not conduct its affairs so as to provide pecuniary gain or benefit for its members during operation and upon winding up.

It is accepted that the Club is non-profit and meets this condition.

Physical presence in Australia

A non-profit society, association or club will not be exempt under section 50-45 of the ITAA 1997 unless it also has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

The Club is incorporated in Australia and operates in Australia.

It is accepted that the Club has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

The Club meets the special conditions of section 50-70 of the ITAA 1997.