Edited version of private advice

Authorisation Number: 1012643471594

Ruling

Subject: Income tax exemption

Question:

Is the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of a game or sport under item 9.1(c) in section 50-45 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Club's objects, contained in its constitution, provide for the provision of social and sporting facilities for members and guests. The Club's constitution also contains a non-profit and winding up/dissolution clause.

The Club has various categories of membership including sporting and social club membership.

The Club's sporting facilities include a golf course and bowling green as well as social amenities such as bars and dining facilities.

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

Relevant Rules and Determinations:

Taxation Determination TD 95/56

Taxation Ruling TR 97/22

Relevant Cases:

AAT Case 8267 (1992) 24 ATR 1068

Cronulla Sutherland Leagues Club Limited v. FC of T 90ATC 4215 at 4225; (199) 21 ATR 300

South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265

Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087

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

Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)

Reasons for decision

To be an exempt entity under item 9.1(c) of the Income Tax Assessment Act 1997 (ITAA 1997) an entity must be a society, association or club established for the encouragement of a game or sport.

Society, association or club

The terms 'society', 'association' and 'club' are not defined in the ITAA 1997. In Pro-Campo Ltd v Commr. of Land Tax (NSW) 81 ATC 4270 Lee J said the following on the meaning of society, association and club:

The three words "society, club or association" are words in frequent use in our community and societies, clubs and associations are well known entities…

In Theosophical Foundation Pty Ltd v Commr. of Land Tax (1966-1967) 67 SR 70 … Sugerman JA stated at p.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.' (Oxford English Dictionary,…) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society."

…

The meaning of "society" as the Oxford English Dictionary 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 organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two… Although clubs can 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… (at 4728-4279)

The Club is a company limited by guarantee with approximately X members. It has a board of directors which are bound by the Club's constitution. It is considered that the Club is a society, club or association.

Established for the encouragement of a game or sport

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) states the Australian Taxation Office view on the circumstances under which a society, association or club is regarded as being established for the encouragement of a game or sport, and provides three (3) tests that must be satisfied for a society, association or club to be exempt (at paragraph 7):

• It cannot be carried on for the purposes of profit or gain to its individual members (non-profit requirement)

• It must be for the encouragement of a game or sport, and

• That encouragement must be the club's main purpose

If a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997.

Non-profit

Taxation Ruling TR 97/22 states the following on the non-profit requirement:

Non-profit requirement

9. A club must not be carried on for the purposes of profit or gain to its individual members.

10. A club's Memorandum and/or Articles of Association or other constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and on its winding-up. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition.

The ATO publication Income tax guide for non-profit organisations states:

A non-profit organisation can still make a profit, but this profit must be used to carry out its purposes. The profits must not be distributed to owners, members or other private people.

Clauses in the Club's constitution prevent the income and capital of the Club from being distributed to the benefit of its members both while the Club operates and when it winds up. The Club is not considered to be carried on for the profit or gain to its individual members.

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997. Accordingly, the words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 30-45 of the ITAA 1997, and includes (at paragraph 38):

played with ball or projectile:

badminton; baseball; basketball; bocce; bowling (ten-pin); bowls; cricket; croquet; football (all codes); golf; handball; hockey; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball;

The Club is involved with golf and bowls. We consider the Club to be concerned with a game or sport.

Encouragement

Paragraph 11 of TR 97/22 states that according to the Macquarie Dictionary, 'Encouragement' means 'stimulation by assistance'. 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 Club is considered to be for the encouragement of a game or sport.

Main purpose

The test to be applied to determine whether a society, association or club is established for the encouragement of a game or sport was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. 90 ATC 4215:

For a society, association or club to qualify for the exemption… it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object (at 4225).

TR 97/22 provides the following commentary regarding the 'main purpose' test:

41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. …

43. However, if the main purpose becomes the carrying out of those other activities, the club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes…

44. Therefore, the fact that a sporting club also encourages social and other activities does not, of itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

To determine whether a club is established for a game or sport in a particular year of income, Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T 90 ATC 4215 (supra) stated:

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control of the body seeking the exemption these may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely the year of income… (at 4225).

TR 97/22 lists features of a club that the ATO considers highly persuasive or relevant but less persuasive in identifying whether a club was/is established for the encouragement of a game or sport in an income year. Paragraph 15 of TR 97/22 identifies the following features as highly persuasive features that support the conclusion that a club has the main purpose of encouraging 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 Clubs constitution shows that the Club is established to provide a club facility and sporting facilities for use by its members.

The sporting activities of the Club may be distinguished from the circumstances in Cronulla Sutherland Leagues Club Ltd v F.C. of T 90 ATC 4215 (supra), and South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150 cases. In those cases, the clubs were not undertaking the major sporting activities they supported, the operations of their sporting sub or intra-clubs were considered minor and the provision of social amenities for members were extensive in comparison. In the present case, the Club is directly involved in encouraging the sports it was established to promote and the promotion of the sport of other entities is minor in comparison.

Paragraph 15 of TR 97/22 identifies the following features as relevant but less persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport:

• 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).

After weighing the features and operations it is accepted that the Club is an entity described as a club with a main purpose being the encouragement of a game or sport.

Special Requirement

Section 50-70(1) of the ITAA 1997 states that an entity covered by item 9.1 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 of the ITAA, 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

In addition to the requirements of section 50-70(1) of the ITAA 1997, section 50-70(2) also requires that in order to be exempt from tax an entity must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

It has already been determined that the Club is a society, association or club which is not carried on for the purpose of profit or gain of its individual members. As the Club is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia, the Club therefore satisfies the requirements of subsection 50-70(1)(a) of the ITAA 1997.

It is also considered that the Club complies with the substantive requirements of its governing rules and applies its income and assets solely for the purpose for which the entity is established, being the encouragement of a game or sport. Accordingly the Club meets the special requirements specified in section 50-70 of the ITAA 1997.