Edited version of your written advice

Authorisation Number: 1051286075155

Date of advice: 25 September 2017

Ruling

Subject: Income tax exemption

Question 1

Is the Entity a society, association or club established for the encouragement of a game or sport within the meaning of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

● The Entity upon incorporation with the Australian Securities and Investments Commission will be a company limited by guarantee

● The Entity will be a controlled entity of X, a charitable institution

● The Entity will principally pursue its primary objective and supporting objectives in Australia in connection with X

● Rule AA of the Entity’s Constitution states the objectives within Australia are:

● To help, foster and encourage games and sport by X;

● To provide sporting opportunities for X:

● Rule AA of the Constitution states they will support their objectives within Australia by:

● Promoting the benefits of healthy exercise via games and sport through the use of sporting facilities on X’s sites and elsewhere

● Promoting awareness of the importance of games and sport to physical and psychological wellbeing

● Advising and assisting X in providing and improving facilities and resources for games and sports by determining and prioritising games, sport and related recreation projects

● Providing strategic overview and direction to X in relation to games, sport and related recreation facilities and activities

● Seeking and facilitating funding opportunities for games and sporting facilities

● Encouraging stakeholder communication with a view to improving the range of games, sport and related recreation facilities on offer

● Considering and developing proposals for strategic sporting partnerships and collaborations involving X and/or the Entity

● Rule BB of the Constitution states the Entity will be a non-profit entity where all funds received must be applied to furtherance of its objects and it shall not distribute to its members any of the assets or income of the entity except:

● Where members are Charitable Non-profit entities that have similar objects; or

● As bonafide compensation for services rendered or expenses incurred on behalf of the entity

● Rule CC of the Constitution states that in the event of Winding Up the surplus assets of the entity can only be applied to entities within the meaning of Division 50 of ITAA 1997

● Rule 5 deals with membership of the Entity. There are four classes of members; ordinary, associate, honorary and life members. Voting rights are only available to ordinary and life members

● Rule DD of the Constitution states when registered the first Directors will be the people specified in the application to register the Company

● The Entity will have a Board of Directors. Rule EE of the Constitution states that the number of Directors will not be less than two or more than ten. The Directors are to include X representatives, community representatives and Additional Directors as needed, in consultation with X.

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

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Issue 1

Income Tax ~ Exempt entities

Question 1

Is the Entity a society, association or club established for the encouragement of a game or sport within the meaning of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The total ordinary income and statutory income of the Entity is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis it is an entity described in item 9.1 of section 50-45 of the ITAA1997.

Detailed reasoning

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.

(* as defined in section 995-1 of the ITAA 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.

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.

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)…Sugerman JA stated at 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'…"

…

The meaning of "society" as the Oxford English Dictionary definition 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 organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two…Although clubs can in some respects and 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…

Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? (TD 95/56) refers to the definition of 'association':

2. …. 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 members of the Entity voluntarily associate together for a common purpose and common interest. The Entity has a management board and rules of association.

The Entity is an 'association, society or club'.

Established for the encouragement of a game or sport

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

Game or sport

'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of TR 97/22 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997. The constituent documents of the Entity reference its association with games and sport. The Entity will promote the benefits of healthy exercise, including physical and psychological wellbeing, via games and sport through the use of sporting facilities on X sites and elsewhere. It will advise and assist X in providing and improving facilities and resources for games and sports in addition to providing strategic overview and direction to in relation to games, sport and related recreation facilities and activities.

It is accepted that the Entity is an organisation associated with a game or sport.

Encouragement

A society, association or club will only be exempt from income tax if it has as a main purpose the encouragement of a game or sport. Encouragement can occur directly or indirectly.

TR 97/22 details features considered to be persuasive of supporting a conclusion that the main purpose of a club is to encourage a game or sport. Paragraph 15 of TR 97/22 describes highly persuasive features which are present when a club is for the encouragement 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 Entity’s objectives are to help, foster and encourage games and sport by X’s members, affiliated sporting club members, and community members. Further they will provide sporting opportunities for these groups of people. Therefore it will conduct activities that are directly related to sport.

The Entity’s objects contained its constitution clearly state a main purpose being sport.

Taxation ruling TR 97/22 also lists other features considered relevant at paragraph 16:

● 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.

In St Marys Rugby League Club Limited v FC of T 97 ATC 4528 (St Marys), Hill J listed at 4534 a combination of factors which are also present as being in favour of that club’s claim to exemption:

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 as its main object or purpose ``the encouragement or promotion'' of rugby league within the meaning of s 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 as being one for ``the encouragement or promotion'' or rugby league.

Finally, the control of the Club rests in the hands of former footballers (or Life Members) whose task it is not merely to run the Club but also to promote the competitions in which the Club participates in the rugby league season.

The Entity will be a newly incorporated entity and will be a controlled entity of X. At this time the entity has not been incorporated however the Constitution states it is being established for the purpose of advancing a game or sport by members and affiliates of X. The Entity’s constitution allows for several membership categories – ordinary, associate, honorary and life members. Consideration of the Constitution, the objects, board structure, membership categories and voting rights leads to the conclusion that the Entity is established for the encouragement of a game or sport.

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 – 23 of Taxation Ruling 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 Entity’s constitution prevents distribution to members. The Entity is not carried on for the profit or gain of its individual members.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

The Entity will be incorporated in Australia, will be located in Australia and will carry on its activities in Australia. It will pursue its objectives and will incur its expenditure in Australia and therefore satisfies this requirement.

The Entity satisfies the special condition in section 50-70 of the ITAA 1997.

Conclusion

Section 50-1 of the ITAA 1997 provides that the incomes of the entities covered by the tables in sections 50-5 to 50-45 of the ITAA 1997 are exempt from income tax.

An entity is exempt from income tax as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997 if it:

● is a society, association or club,

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

● satisfies the special condition.

The Entity is a society, association or club and will be established for the encouragement of a game or sport. In addition, it satisfies the special condition and is therefore exempt from income tax for the years ended 30 June 2018 until the requested date.