Edited version of your written advice

Authorisation Number: 1012980750203

Date of advice: 10 March 2016

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 sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The objects of the Club are stated in the Constitution.

Non-profit requirement

The Constitution of the Club includes clauses which prevent it from distributing profits or assets for the benefits of particular people.

Activities

The primary focus of the Club members is social interaction around their common interest.

The Club does organise and coordinate some entertainment.

A small number of sub branches hold a swap meet where members and the public convene to share their common interest. An entry fee is charged at these meetings for the public but the majority of attendees are members of the Club.

Reasons for Decision

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 sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997?

Summary

The Club is not entitled to income tax exemption 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 sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997.

Detailed reasoning

Item 9.1(c) of s50-45 of the ITAA 1997 exempts from income tax an entity that has been established for the encouragement of a game or sport.

Section 50-1 of the ITAA

some cases, the exemption is subject to special conditions. 

* as defined in section 995-1 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 1997 

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. A society, association or club established for the encouragement of a game or sport is listed at item 9.1(c) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special condition detailed in section 50-70 of the ITAA 1997. 

An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport if it:

• is a society, association or club,

• is established for the encouragement of a game or sport, and

• satisfies the special conditions.

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.

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.  

In Douglas v. Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

The members of the Club are members of the general public who wish to participate in the restoration, preservation, use and retention within a state of vehicles and organise and participate and encourage rallies, exhibitions and other events. People become members of the Club because of their desire to further their interest in these activities. The members of the Club voluntarily associate together for this common purpose and common interest. Therefore, the Club is considered an 'association, society or club'.

Established for the encouragement of a game or sport 

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport.

Encouragement

Encouragement can occur directly or indirectly. Paragraph 11 of TR 97/22 provides the following examples of direct and indirect encouragement:

Direct 

• forming, preparing and entering teams and competitors in competitions in the game or sport or in music;

• co-ordinating activities;

• organising and conducting tournaments/concerts and the like;

• improving the abilities of participants;

• improving the standard of trainers/teachers and coaches/conductors;

• providing purchased or leased facilities for the activities of the game or sport or auditoriums for the use of club members and visitors; or

• encouraging increased and wider participation and improved performance.

Indirect

• through marketing; or

• by initiating or facilitating research and development.

Game or sport

'There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the Income Tax Assessment Act 1997. Accordingly, the words should be given their ordinary meaning.'

Examples of games and sports

Paragraph 38 of TR 97/22 provides a non-exhaustive list of examples of activities that would be considered a 'sport' for the purposes of section 50-45 provided they satisfy the features outlined above and includes:

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;

However in paragraph 31 of TR 97/22 it states that 'Games and sports can be contrasted with endeavours where a thing, object or animal is the essential focus, or where the activities are merely a means to some other end.

For example, the activities of participants in car owner clubs do not meet the requirements of participation in sports for similar reasons; the participants' focus is on their common interest in a type or make of motor vehicle and not on any sport or game-like activity.'

The proposed new clause to promote some racing activities would mean that some of the activities of the club may promote racing to a minor extent.

Main or dominant purpose

To be exempt pursuant to item 9.1(c) of section 50-45 of the ITAA 1997, it is essential that the main or dominant purpose of a club is the encouragement of a game or sport. 

Where the club 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 encouragement (Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215; (1990) 21 ATR 300). 

The features considered to be highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport are listed in paragraph 15 of TR 97/22. These features are discussed in greater detail in paragraphs 51-56 of TR 97/22. Features that will be highly persuasive include:

• 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.

Other relevant but less persuasive features listed in paragraph 16 of TR 97/22 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.

There is a proposal to amend the Club's constitution to an object to promote the sport.

However, the club's main purpose is determined having regard to the club's constitution, its activities, its history and its control (Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215; (1990) 21 ATR 300). The intention in the proposed amendment to the Constitution's objects is not reflected in the Club's current predominant activities.

The Club is established to primarily to provide members with social interaction around their common interest. While the activities of the Club may include some competitive sport its main activities do not fall under the examples of direct encouragement of sport (as described in paragraph 11 of TR 97/22).

The Club does not demonstrate highly persuasive features of being for the encouragement of sport (as listed in paragraph 15 of TR 97/22).

Further in relation to the other relevant but less persuasive features of being for the encouragement of sport (as per paragraph 16 of TR 97/22). The Club does not promote itself to patrons and the public as one encouraging sport. There is not a high level of participation by members in such activities but rather a focus on various forms of social interaction.

Special condition 

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.

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 operating and on winding up.

The constitution of the Club prevents distribution to members and it is not carried on for the profit or gain of its individual members. This requirement is satisfied.

Physical presence in Australia

The Club is a resident of and is located in Australia. The Club carries on its activities, pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70