Edited version of your written advice

Authorisation Number: 1012780718523

Ruling

Subject: Except entity - encouragement of sport

Question 1

If the company adopts a new constitution will it be an exempt entity for the purposes of item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) as an organisation established for the encouragement of a game of sport?

Answer

Yes

This ruling applies for the following periods:

04 March 2015 - 30 June 2015

01 July 2015 - 30 June 2016

01 July 2016 - 30 June 2017

01 July 2017 - 30 June 2018

1 July 2018 - 30 June 2019

The scheme commences on

04 March 2015

Relevant facts and circumstances

The company is seeking confirmation that it will be exempt from income tax when it adopts a new constitution.

Since commencement its principal activities have been the promotion of sports.

The company is a registered Australian proprietary company limited by shares.

The company is governed by the Corporations Act 2001 (CA) and its constitution which was adopted on its incorporation. 

The company has on issue X ordinary shares and Y redeemable preference shares. The redeemable preference shares were initially issued on the basis of 1 preference for each $1.00.

A replacement constitution was drafted to convert the company to a not for profit company. The company did not adopt the constitution at this time.

The Company has never declared or paid a dividend on its shares. 

The replacement constitution contains the following clauses:

Basic Object

Clause 2.1 

The basic object for which the company is established is to promote, support and encourage. xxx sports and associated activities. 

Clause 3

Income and property 

The income and property of the Company must be applied solely towards the promotion of the objects of the Company stated in this Constitution and not paid or transferred directly or indirectly by way of dividend, bonus or by any other means by way of profit to the Members, save that the Company may accept loans from Members on terms including the payment of interest by the Company provided that such interest may not exceed the Australian Financial Markets Association Bank 90 day Bill Swap Reference Rate.

Clause 18

Winding Up

If, on the winding up of the Company, whether voluntary or otherwise, a surplus remains, after the satisfaction of all debts and liabilities, the surplus must be paid or transferred to another body or other bodies that have similar objects to the Company and that prohibit(s) the distribution of income, profits or assets to their members, and must not be paid to members unless the member is a body meeting the criteria outlined in this article.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-45.

Income Tax Assessment Act 1997 Section 50-70

Income Tax Assessment Act 1997 Section 50-1.

Reasons for decision

Detailed reasoning

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.

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 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, place emphasis on a 'body of persons' and 'an organisation of people' with a 'common purpose'.

If the company adopts the replacement constitution and converts the company to a non-profit company that is brought into existence by its members to pursue a common purpose, it will be considered that it 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 (TR 97/22) 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):

using equipment to achieve mobility:

 canoeing; cycling; dragon boat racing; drag racing; go-kart racing; hang-gliding; kayaking; motor-car racing (circuit, rally); motor cross; motorcycle racing; mountain bicycle riding; rowing; yachting;

The objects of the company, as stated in the replacement constitution, are to promote, support and encourage sports and associated activities. The company currently organises and runs sporting events. The financial statements indicate that the organisation's principal sources of revenue are from sports and associated activities.

It is considered that the company is directly connected with activities using equipment to achieve mobility.

It is accepted that the company 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

From the information provided in the private ruling application, the company conducts activities that are connected with sport:

From the above activities, it is evident that the company is directly involved in the encouragement of 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.

The company displays features that support a main purpose of encouraging a game or sport, its constitution outlines the basic object for which the company is established is to promote, support and encourage sports and associated activities. The company's financial statements show that the income and expenses of the company are from sporting activities.

The above supports the company's claim that it is encouraging 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.

The company has the following non-profit clause and dissolution clause in its proposed constitution:

Clause 3

Income and property 

The income and property of the Company must be applied solely towards the promotion of the objects of the Company stated in this Constitution and not paid or transferred directly or indirectly by way of dividend, bonus or by any other means by way of profit to the Members, save that the Company may accept loans from Members on terms including the payment of interest by the Company provided that such interest may not exceed the Australian Financial Markets Association Bank 90 day Bill Swap Reference Rate.

Clause 18

Winding Up

If, on the winding up of the Company, whether voluntary or otherwise, a surplus remains, after the satisfaction of all debts and liabilities, the surplus must be paid or transferred to another body or other bodies that have similar objects to the Company and that prohibit(s) the distribution of income, profits or assets to their members, and must not be paid to members unless the member is a body meeting the criteria outlined in this article.

From the above clauses, it is evident that the company will have appropriate clauses in its constitution that prevents members from receiving benefits during its operation and upon its winding-up.

It is accepted that the company will operate 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 company 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 company has a physical presence in Australia as it carries out all activities in Australia. Therefore, the company will incur its expenditure and pursues its purposes principally in Australia.

Accordingly, the company satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the above information if the company adopts a new constitution it will it be an exempt entity for the purposes of item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) as an organisation established for the encouragement of a game of sport from the date the amended constitution is adopted.