Edited version of your written advice

Authorisation Number: 1012885934987

Date of advice: 29 September 2015

Ruling

Subject: Income tax exemption

Question 1

Is the Club considered to be exempt from income tax pursuant to item 9.1 of the table in Section 50-45 of the Income Tax Assessment Act (ITAA 1997) as a club established for the encouragement of a game or sport?

Answer

No

This ruling applies for the following periods:

1 July 2014 to 30 June 2017

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Club has applied for a private ruling on whether the Club is exempt from income tax as a society, association or club established for the encouragement of a game or sport in accordance with section 50-45 of the ITAA 1997.

The objects of the Club are stated in the Rules:

3 Objects

3.1 To provide for members and members' guests a sporting club with all the usual facilities of a club

3.2 To promote, foster, support and encourage the aims and objects of the sporting Club, the Junior Club, or any sporting club, community association, charitable organisation, and sporting, social or cultural activities that may be approved by the management committee of the Club for the benefit of the local or general community

3.3 To foster and promote the game

3.4 To do all such acts, deeds, matters and things and to enter into and make such agreements as are incidental to or conductive to the attainment of the objects of the club or any of them

The Club does not specifically form or enter any teams in competition.

It does provide and operate the venue for the sporting club and Junior sporting club.

The Club undertakes all the maintenance and repairs of the sports grounds, and has funded and constructed improvements to the clubhouse, car parks, seating at playing grounds, field lighting, and dressing sheds. The Clubhouse serves as a "home ground" for the sporting clubs.

The Club rules provide that only ordinary members or honorary life members are allowed to be on the board and management committee. Almost all members on the committee are either past players, coaches, or official for the game.

The Club has licensed premises with a bar and function room.

The majority of the Club's revenue is derived from bar, bistro and gaming activities

Renovations to clubhouse have commenced.

The Club has acquired gaming machines.

The Club has a number of employees trained and employed to operate both the gaming and bistro areas, plus the bar.

The only paid sporting role is a full time Development Officer,

Officeholders of the Club along with volunteers participate in sporting fixtures generally as match officials.

Relevant legislative provisions

Taxation Ruling TR 97/22

Other references (non ATO view)

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 at 2100

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

Reasons for decision

Section 50-1 of the 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. Item 9.1(c) in the table in section 50-45 of the ITAA 1997 describes a society, association or club established for the encouragement of a game or sport subject to the special condition contained in section 50-70 of the ITAA 1997.

An entity may therefore be exempt from income tax where it is a society, association or club established for the encouragement of a game or sport and it satisfies the special condition in section 50-70.

Society, association or club 

The term society, association or club is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words.

Taxation Determination TD 95/56 refers to the definition of 'association' in paragraph 2 and states:

The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose'. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose.

See also Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722; Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 at 4279 and Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW) at 82:

The members of the Club voluntarily associate together for this common purpose and interest. The Club is considered a 'society, association or club'.

Encouragement of a game or sport:

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1990 in the notes on clause 6 states in relation to 'encouragement' and 'game or sport':

The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support.

Similarly, there is no special definition of what constitutes a "game" or "sport". However, the words are intended to be given their wide natural meanings. They extend to non-athletic games such as chess and bridge; to sports such as motor racing in which machines facilitate the competition of people; and to non-competitive activities such as mountaineering. The activities of pony clubs are also within the meaning of the words.

The Macquarie Dictionary defines 'encouragement' as '1. the act of encouraging; 2. the state of being encouraged; 3. that which encourages' and defines 'encourage' to include 'stimulation by assistance'. Taxation Ruling TR 97/22 - Income tax: exempt sporting clubs - provides extensive examples of 'encouragement' and 'game or sport'.

The Leagues Club encourages the sport by financially assisting the sporting Club and Junior sporting Club through distributions, maintenance and repairs and constructing improvements.

Established for the encouragement of a game or sport

Taxation Ruling 97/22 Income tax: exempt sporting clubs states that a club's main purpose can only be ascertained after objectively weighing all of the club's features. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

Highly persuasive features

51. A highly persuasive feature that supports a conclusion that a club has a main purpose of encouraging a game or sport is that the club conducts activities in the relevant year that are directly related to the game or sport. Examples of such activities 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.

…

Relevant but less persuasive features (paragraphs 57 to 61 of TR 97/22)

These include:

• a high level of participation by members in the game or sport

• 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)

• 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, 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.

A number of cases have considered the position of sporting clubs which also provide social facilities for members.

Lockhart J in the Full Federal Court in Cronulla-Sutherland Leagues Club Ltd v Federal Commissioner of Taxation 90 ATC 4215 (Cronulla) stated at 4226 in relation to the provision in the 1936 Income Tax Assessment Act exempting the income of an entity established for the encouragement of sport:

For a society, association or club to qualify for the exemption granted by sec. 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. ..

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. ….

The Cronulla decision involved a leagues club whose objects included:

(a) (i) To establish equip furnish and maintain a Club for the benefit of members and to promote social sporting and educational undertakings for the advancement and benefit of members.

(ii) To provide any or all of the facilities necessary to further the aims of the Cronulla-Sutherland District Rugby League Football Club and the Cronulla-Caringbah Junior Rugby League Football Club and give whatever assistance the General Committee may consider convenient for this purpose.

The Cronulla leagues club ran a substantial social club for its 13,000 members the profits of which were applied in accordance with these objects to an associated rugby league football club. The football club was entirely dependent upon the leagues club for financial assistance, the provision of facilities (a stadium and two other ovals) and guarantees of expenditure. The club had facilities overlooking the stadium available to the use of football club members on days when the football club played. The leagues club also provided assistance to its associated junior rugby league as well as supporting the sporting activities of its member 'intra clubs'. Lockhart J accepted that the encouragement of sport included financial and other indirect support, but found in relation to the leagues club, at 4227:

In my opinion the encouragement and promotion of rugby league football and the provision of the amenities of a social club for its members are two objects or purposes of the appellant. Neither is correctly described as ancillary or incidental to the other or as necessarily independent of the other. The two objects and purpose overlap to some degree. The main object or purpose is the provision of the social amenities to its members, not the encouragement or promotion of rugby league football.

It is unreal to regard the appellant's clubhouse and its social activities as being undertaken for the purpose of encouraging or promoting rugby league football and supporting the football club. This is a secondary purpose.

Application to the facts

The Club is similar to the Cronulla leagues club in that it provides clubhouses with social facilities including a wedding venue, dining facilities, bars, gaming, and other entertainment for its members It provides funding, ovals and facilities for the two rugby league clubs.

The Club's Rules state that its objects are:

• To provide for members and for members' guests a sporting Club with all the usual facilities of a Club.

• To promote, foster, support and encourage the aims and objects of the League Club and Junior Club, or any other sporting club, community association, charitable association, and sporting, social or cultural that may be approved by the management committee of the Club for the benefit of the local or general community.

• To foster and promote the game

• To do all such acts, deeds, matters and things and to enter and make such agreements as are incidental to or conducive to the attainment of the objects of the club or any of them

As in Cronulla these objects display two purposes - a sporting purpose and a social purpose.

The Club's financial reports state the principal activities of the Club as the operation of a sporting club. They also indicate that the Club's predominant activity since 20XX to have been so. Revenue from this activity for these years increased mostly from bar and gaming activities and the Club's expenditure has been incurred in the main at generating this revenue including not insignificant amounts allocated to acquiring gaming machines and club house renovations.

The information supplied describes the sporting activity undertaken by some of the Club's members, organising and running matches, acting as match officials on game days, the Club's Management Committee were either players, coaches or officials on other sporting committees prior to being on the Club's management committee. These members also currently assist as match officials on game day. Facilities are provided for the use of the sporting teams. The Club also provides funds to these entities. The Club has advised it has extensive memorabilia, trophies, jerseys, awards and information provided throughout the Clubhouse. However, there are similarities with Cronulla; in 1982 the Cronulla leagues club provided $390,000 in sports funding from a net income of $2.9 million. The Club's financial statements disclose distributions to teams and for field lighting towers in sports funding from a significant net income. In Cronulla the club's directors were also members of its affiliated rugby league club. This was not a formal requirement in Cronulla. The Club likewise has no formal requirement for a member or a director to have or have had any involvement in rugby league or other sport. Only ordinary members and honorary life members have voting rights and are eligible for election to the Club's management committee.

The 'sheer size and intensity' of the social activities in Cronulla were referred to by Hill J in St Marys Rugby League Club Limited v. FC of T 97 ATC 4528 (1997) (St Marys) in comparison to that club. However, in Cronulla, Lockhart J at 4219 noted that size and intensity are not necessarily important:

In recent years the appellant has derived revenue from poker machines, bar trading and the like in excess of $2m., income which is generated from the provision of social activities for its members, and its expenditure is geared in large part to the production of this income. The appellant carries on very substantial business activities independently of any support it gives to football. However, this fact is not necessarily decisive since, as accepted by the primary Judge, the legislature did not intend to exclude from exemption income which might be described as income from a business where the body deriving that income otherwise met the statutory description in sec. 23(g)(iii). Furthermore, this business activity must be carried on so that the appellant may donate the sums needed to further football.

Other case decisions

South Sydney Junior Rugby League Club Limited v FC of T [2006] AATA 265; 2006 ATC 2150 involved a club which conducted a licensed club in South Sydney, larger than that in Cronulla, the profits of which were applied to junior rugby league and also to a football club competing in a national rugby league competition. The club's objects were:

(a) To provide for members and members guests a social and sporting Club with all the usual facilities of a Club, including a residential and other accommodation, liquid and other refreshments, libraries and provision for sporting, musical and educational activities and other social amenities.

(b) (i) To assist generally in the promotion conduct and propagation of Junior Rugby League Football in the Rugby League Football District of South Sydney or elsewhere and to provide or assist in the provision of training and conditioning and teaching facilities for junior football played in accordance with the rules of the New South Wales Rugby Football League.

(ii) To assist generally all Sporting Associations in the South Sydney …

The AAT found that the club's case was not as strong as was the case for Cronulla-Sutherland which also failed in its attempt to obtain an exemption.

In St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528; 36 ATR 281 (St Mary's), Hill J observed several differences between that football club and the leagues club in Cronulla at 97 ATC 4533 - 34:

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 in the St Mary's area, particularly among children.

The present case differs from the Cronulla-Sutherland case in a number of respects. It will be recalled that there were two clubs in the Cronulla-Sutherland area. One devoted to the pursuit of football and the other, the Cronulla-Sutherland Leagues Club which assisted in financing the football club but which, in all the circumstances was found to be a members or social club rather than a club existing primarily to support or encourage football. The appellant in Cronulla-Sutherland had no football team. It organised no competitive football at all. It's only connection to football were the grants which it made to the football club and the provision of facilities to that club.

…

In the present case each of the matters said by Lockhart J in Cronulla-Sutherland to be significant, namely "constitution, activities, history and control" point to the characterisation of the club as one having its main object or purpose "the encouragement or promotion" of rugby league within the meaning of section 23(g)(iii) of the Act. The Memorandum of Association records the significance of rugby league as the major object of the Club. The Articles of Association both in the membership categories and in the conferring of control upon football members or (life members), point to the significance of the football activities over the social activities. The activities of the club involve both social and football activities. Were this not so then, no doubt, the case would not be before the Court. But, although income is derived from the social activities and the football activities constitute an outgoing, there is an intensity of activity directed towards football which tips the balance in favour of the applicant. The history of the club is one of close association with rugby league from its inception and again points to the correct characterisation of as being one for the "encouragement or promotion" of rugby league.

Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora) involved a club whose objects included:

(a) To promote the game of golf, bowls, tennis and other sports, games and pastimes, indoor and outdoor, as the Club may deem expedient.

(b) To purchase, lease or otherwise acquire land with all accessories necessary for golf links, bowling greens, tennis courts and other such grounds to be used or recreation purposes

(c) …

(d) To construct, establish, provide, maintain and conduct such golf links, bowling greens, tennis courts, playing areas and grounds as the Club may determine and to construct, provide, establish, furnish and maintain club houses, pavilions and other buildings and conveniences in connection therewith….

The club had extensive social facilities that were used by the members and a large number of visitors. It owned a clubhouse, playing fields, a sports ground and sporting complex, and it held a controlling interest in a time share resort. In the most recent year reported in the case, 90.3% of the club's income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities.

The club had approximately 4,000 members, approximately 2,800 of whom were active in the club's sporting sub clubs. However the club also promoted its extensive social activities, attracting approximately 1000 visitors per day. Hill J at 93 ATC 4086 stated:

Clearly each case will depend upon its own facts. If the social activities have become and end in themselves, as was the case in Cronulla Sutherland, it will be necessary to see whether that end has become the predominant purpose for which the Club is established in the year of income. However, in the present case, I have reached the conclusion that, while the social activities (by which I include the gambling, entertainment, dining and accommodation activities) were very extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were, I am satisfied, pursued as a means of financing the extensive sporting activities of the club. Thus, I am of the view that, having regard to the activities of the Club as conducted in the year of income, the Club was in that year, one established for the promotion of athletic sport and not one for established for the purpose of carrying on a business, or business of gambling, provision of entertainment, selling of time share

In Tweed Heads Bowls Club v FC of T 92 ATC 2087 (Tweed Heads), the taxpayer was a bowls club which had one indoor and four outdoor bowling greens. The club participated in and organised a large number of tournaments each year. The club building was substantial and the catering and entertainment facilities were extensive. The membership breakup of the club was 830 bowlers, 170 non-bowlers and 4 life members. The club's main source of revenue was derived from poker machines which were used predominantly by the 400,000 visitors to the club each year. The Tribunal member, Dr P Gerber at 2099 stated:

…I am satisfied that the club, from its very inception, has been and is dedicated to a very substantial degree to the promotion of lawn bowls and, latterly, to indoor bowls. True it is that some elements of the Club's activities - leaving the poker machines aside for the moment - are social and cannot, as such, be characterised as "promoting the athletic game of bowls", but that is true of virtually all sports clubs. Be that as it may, I am left in no doubt that the Club has, as its main or dominant purpose, the promotion and encouragement of the bowling.

That leaves the issue of the poker machines, which earn substantial revenue, only a relatively small proportion of which was, in the years before me, used for bowling. In the Vernacular, the club has money pouring out of its ears and doesn't know what to do with it all. So what? Provided its main object is the promotion of bowls, the fact it also produces repetitive strain injury (RSI) in some 400,000 non bowling poker machine players while at the same time emptying their pockets seems to me to be utterly irrelevant.

However in Cronulla the Full Federal Court (one judge dissenting) found that the 'business' of providing social amenities for the leagues club members was the main purpose of the leagues club; not the encouragement of sport.

Conclusion

It is difficult, on the facts provided, to separate the Club's circumstances from those in Cronulla. Both clubs mainly provided social amenities for their members and applied profits from this activity to the encouragement of sport.

In the circumstances of the leagues club in the Cronulla case, the Full Federal Court found that that club's main purpose was not the encouragement of sport but the provision of social amenities for its members. Beaumont J summarised his finding at ATC 4244 as:

It is true that a significant proportion of the profits generated from that activity are given to the football club to be used for its purposes. But, as Rich J. pointed out in the College of Surgeons case, the fact that benefits may result for others (in that case, surgeons; in this case, footballers) does not detract from the intrinsic character of the object sought to be promoted by the taxpayer. In Forrest's case, the main or predominant object of the institution was the promotion of science and this was its intrinsic character, notwithstanding that professional engineers may have received some incidental benefit from its activities. In the College of Surgeons case, the main or predominant object of the College was the promotion of science, notwithstanding that practising surgeons may have received some incidental benefits. In the present case, the main or predominant object of the taxpayer was to provide for its members, and others, the facilities of a licensed club. This was the true character of the object or purpose for which it was and is established, notwithstanding that footballers may have received same incidental benefits in the form of the grants made to the football club. Although these benefits may have resulted from transactions entered into by the taxpayer, as Rich J. put it, ``the inclusion of [the taxpayer] in the exemption clause depended upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions''.

Lockhart J in Cronulla at ATC 4226 noted that "established'' involves an examination of the purposes and activities over a number of prior years to support the tax exempt status of the body and that the blend of objects and purposes and powers of the leagues club threw little light upon the question as to whether the club was established for the encouragement of sport.

The social activities of the Club have generated substantial net profits. Significant capital expenditure has been spent on modernising non-sporting club facilities and the only planned capital expenditure is for renovation of the non-sporting club facilities. While the Club has stated that it plans to acquire a second playing field for a sports team to use for training and game days after the renovations for the clubhouse are completed this is only a future possibility. The Club does fund its sporting activities from the profits generated by its clubhouse activities but at a significantly lower rate than in Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 or St Marys Rugby League Club Limited v FC of T 97 ATC 4528. For example in Terranora, see 93 ATC 4077-4078, the social/non-sporting income in 1989, 1990 and 1991 was $1,104,000, $1,493,000 and $2,178,000 respectively. The amount sporting activities were subsided in 1989, 1990 and 1991 were $1,060,000, $1,101,000 and $1,375, 000 respectively. This amounts to 96%, 74% and 63% of social/non-sporting profits being used in 1989, 1990 and 1991 respectively to fund sport activities. In comparison, in the period 2011 to 2014 the applicant Club only comparatively small amounts of its retained social/non sporting profits to fund sporting activities. In St Marys, see 97 TATC 4533, in 1992, 1993, 1994 and 1995 the percentage of non-sporting profits used for funding football was 23%, 35%, 39% and 28% respectively.

Furthermore in the St Marys Rugby League Club Limited (Supra) case it was emphasised that significantly more time and effort was taken to field the rugby league teams than to undertake the social activities. In that case from 1992-1995 the wages spent on rugby league significantly exceeded wages spent on undertaking the social activities.

In comparison the applicant Club has only one employee dedicated to promoting or engaging in sporting activities but has 12 employees engaged to operate the gaming and bistro areas plus the bar.

The participation of the Club's members in the promotion of the game or sport is also quite small. It is recognised that older members may not be able to play the game given its physical demands and it is accepted that the majority of club members are players, ex-players or supporters. However, of the Club's members, there were a significant number of social members and kid's members and a relatively small number of active supporters (ie regularly attend match days as spectators and/or have family members who are players) and players of the sporting teams.

It is considered that the main purpose of the Club is the provision of social amenities for its members.

For the above reasons it is considered that the Club does not satisfy exemption under item 9.1(c) of section 50-45 for the period of this ruling.

Non-profit requirement

Paragraphs 9 and 21 to 23 of TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members.

Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement.

The Club Rules prevent distributions to members on winding up, however, the Rules do not contain a suitable non-profit clause to cover the Club while it is operating.

An example of a suitable clause is:

'The assets and income of the organisation shall be applied solely in furtherance of its above-mentioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.'

The Club does not satisfy the non-profit requirement.

Special conditions

Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members 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.

The Club is a resident of and is located in Australia. The Club carries on its activities, pursues it objectives and incurs its expenditure in Australia and therefore satisfies the special condition in section 50-70 of the ITAA 1997.

CONCLUSION

The Club is not exempt from income tax under section 50-1 of the ITAA 1997 as it does not operate principally for the encouragement of a game or sport.