Edited version of your written advice

Authorisation Number: 1051341739121

Date of advice: 7 March 2018

Ruling

Subject: Income Tax Exemption

Question

Is the ordinary and statutory income of the Trust exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (the ITAA 1997) on the basis that the Trust was established for the encouragement of a game or sport pursuant to item 9.1(c) in section 50-45 of the ITAA 1997?

Answer

No

Relevant facts and circumstances

A member of a sporting organization, the Association left a legacy to the Association. A trust fund was formed, namely the Trust.

The recital to the trust deed sets out the purpose of the Trust which is the encouragement, preservation, advancement, development and benefit of a particular sport.

The objects of the trust deed states that the object of the Trust is to provide and administer funds for several purposes of the Association which include

● to recruit, develop, train and maintain the skills of the Association’s members so as to improve the standard for that sport within the Association’s district.

● To develop and improve courses of instruction for that sport’s participants;

● To ensure the highest professional standards and qualifications of that sport’s participants within the Association’s district

● to provide assistance to members and / or relatives of the Association in certain circumstances:

The trust deed contains a suitable non-profit clause and winding up clause for income tax exempt entities.

In accordance with the trust deed, the trustees of the Trust are a combination of officeholders of the Association and members of the Association

The trust deed requires that the trust fund be invested only in authorised investments (as defined). The income from the investments should be applied towards the purposes for which the Trust was established, being the encouragement of a particular sport.

Activities of the Trust

The Trust’s activities consist of investing the trust fund and funding the purchase of certain sports related items and other sports related expenditure of the Association, either through reimbursing the Association or paying for the expense.

Additionally, the Trust made donations to other non-profit organizations on an ad hoc basis.

The Trust also has provided financial assistance to the Association’s members also on an ad hoc basis.

The Trust have advised that they are not sure as to whether they will be able to meet the special conditions in subsection 50-70(2) of the Income Tax Assessment Act 1997 at all times during income years covered by the ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 50-1.

Income Tax Assessment Act 1997, section 50-45.

Income Tax Assessment Act 1997, subsection 50-70(1)

Income Tax Assessment Act 1997, subsection 50-70(2)

Income Tax Assessment Act 1997, subdivision 50-A

Income Tax Assessment Act 1936, Division 6.

Charities and Not-for-profits Commission Act 2012, subsection 25-5(5)

Reasons for decision

A non-profit society, association or club established for the encouragement of a game or sport under item 9.1(c) of section 50-45 of the ITAA 1997 is exempt from income tax pursuant to section 50-1 of the ITAA 1997 subject to meeting the special condition of paragraph 50-70(1)(a) of the ITAA 1997 of having a physical presence in Australia and incurring its expenditure and pursuing its objectives principally in Australia.

Further, for income years commencing on or after 30 June 2014, an exempt entity must comply with all the substantive requirements in its governing rules and apply its income and assets solely for the purpose for which it is established (refer to subsection 50-70(2) of the ITAA 1997).

Additionally, an entity which qualifies as an ACNC type of entity (i.e essentially a charity) is not entitled to exemption unless registered with the Australian Charities and Not-for-Profits Commission.

Therefore to be exempt from income tax the Foundation must satisfy all of the following requirements:

● be a society, association or club;

● be established for the encouragement of a game or sport;

● it cannot be carried on for the gain or benefit of its individual members – see subsection 50-70(1);

● satisfies the conditions paragraph 50-70(1)(a) of the ITAA 1997 and subsection 50-70(2); and

● not be an ACNC type of entity

At issue here is whether the Foundation, which was established as a trust, qualifies as a society, association or club.

Society, association, or club

The terms, ‘society, association or club’ in item 9.1 of section 50-45 are not defined in the income taxation legislation, and therefore take on their ordinary meaning.

Paragraph 2 of 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? considers the definition of 'association' as follows:

‘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’.

The Macquarie Dictionary [online] www.macquariedictionary.com.au defines the terms ‘society’ and ‘club’ as follows:

Society: an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic, or other purposes.

Club: a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members.

In Pro Campo Ltd v. Commr. of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26, which concerned exemption from New South Wales land tax, Lee J said at 4278 to 4279 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 definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists 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... ‘

All these references indicate that a society, association or club is a number of persons who come together for common purposes. There is formality and structure.

Mere Trust

In contrast, a trust is defined in Underhill (Law of Trusts and Trustees, 12th ed, p 3) as follows as an:

‘equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust ) of whom he may himself be one, and any of whom may enforce the obligation’.

In Harmer & Ors v. Federal Commissioner of Taxation 89 ATC 5180, French J stated that a trust ‘is notably a definition of a relationship by reference to obligations’.

The issue of whether trustees of a trust were a society association or club was considered in Douglas & Ors v FC of T (1997) 77 FCR 112; (1997) 36 ATR 532; 97 ATC 4722. In that particular case, a trust was established to manage a hall which was let to community groups and such other bodies approved of by the trustees. After referring to the ordinary definition of the words ‘society, association or club’, the court held that the trustees whose only functions were to hold property and administer it in accordance with the terms of the trust deed did not qualify as a society, association or club. It was not a voluntary organisation having members associated together for a common purpose.

In Commr of Land Tax (NSW) v Joyce (1974) 48 ALJR 432, the owners of land were four trustees who were to hold the land for charitable purposes, preferably as a meeting place for Christians. The trustees were themselves, members of the Christian sect known as the Brethren and the land and halls on it were used for religious purposes of the Brethren.

All members of the High Court held that the trustees were not an ‘institution’. Stephen J, with whom Gibbs and Mason JJ agreed, said at 436:

‘The trustees' only function is the management of the trust property consistently with the trust deed and with the wish it expresses that the trust property should primarily be devoted to providing a meeting place for Christians. The performance of this function cannot, in my view, confer upon these four trustees the quality of an 'institution', however widely that term may be construed.’

That function involved ordinary administrative operations only:

‘They do meet from time to time; make decisions and keep minutes of their proceedings but these proceedings relate exclusively to the management of the trust property and not to the general affairs of the Brethren. They have no standing in relation to the religious practices of any congregation and control neither the general funds of the Brethren in New South Wales or in Sydney nor even those of the Ashfield congregation... ‘

The above court cases show that there is a clear distinction between the obligations and functions of mere trustees to that of being an association or an ‘institution’. Where trustees are connected in their common undertaking solely by their trust obligation to administer property, they will not constitute an association.

In contrast, in Manor Foundation Ltd v Commr of Land Tax (NSW) (1983) 14 ATR 676 (Manor Case) the court accepted that trustees which were more than mere trustees could in certain circumstances be accepted as a society.

In the Manor Foundation case, house and land (the Manor) were transferred to the Secretary of the Esoteric School of Theosophy, as trustee. Clause 3 of the deed of settlement establishing the trust provided that the trustee should ‘establish, carry on and conduct’ a spiritual centre and community based on Theosophical ideals. Later, the trustee company was formed to carry out the trusts and deed of settlement and to act as permanent trustee of the property. Ownership of the property was accordingly transferred to the trustee company. The property was used as a residence by Esoteric School of Theosophy which was a distinct entity of the Theosophical Society. The trustee company’s membership was made up of members of the Esoteric School of Theosophy.

In finding that the trustee company was not mere trustee, but was a religious society itself, Yeldham J said that:

‘In my view the plaintiff was and is at the present time a religious society (using that word in the charitable sense of being concerned with the advancement and promotion of theosophy) because it is not merely a trustee for the Community or its members but has active duties under the deed and in fact manages and conducts the centre and the educational community at the Manor....

The plaintiff is not merely a trustee for the Community or its members but has active duties to perform under the deed in connection with the conduct of the Centre and the educational Community. The plaintiff's membership is entirely composed of members of the Esoteric School, some of whom reside in the Community.’ [emphasis added]

Therefore, it is considered that trustee/s that are more than merely performing actions of trustees i.e. administering of property in terms of the trust, can be an association if actively involved in the operation of an entity and are bound not merely by their duty as trustees under the trust deed.

Taxpayer’s circumstances

In the present circumstances, the purpose of the Trust as set in its objects is confined to providing and administering funds.

The uses to which the funds can be put are listed in the following clauses, the majority of which are sports related. The other clause, which is non-sports related, is directed to providing assistance and benefits to members and /or relatives in certain circumstances of the Association.

Although the current trustees are linked to the Association, the duties of the trustees are not similar to those described of the duties of the trustee company in the Manor Foundation case.

Under the terms of the deed, the trustees of the Trust are not required to ‘establish carry on or conduct’ any of the sports related activities to which the funds of the Foundation can be put (contra Manor Case).

Instead, the trustees of the Foundation provide funds for the purchase of certain items and other expenditure of the Association. The Foundation also makes distributions to the Association’s members and /or relatives on an ad hoc basis.

As such, it is considered the trustees of the Trust do no more than merely administer the property of the trust for the benefit of the Association or its members as required of them under the provisions of the trust deed. They are not required by the terms of the Trust’s trust deed to be actively involved in the operation of the Association.

Accordingly, the trustees of the Trust do not fall within the description of a ‘society, association or club’ for the purposes of section 50-45. Therefore, the Trust is not exempt from income tax under section 50-1.

Whilst it is not necessary to address each of the other requirements for exemption as the Trust fails to satisfy the first requirement, for the sake of completeness, the other requirements will be briefly addressed.

Non-profit requirement

In Taxation Ruling TR 97/22 at paragraph 9, the non-profit requirement for the purposes of section 50-45 is discussed. An organization is accepted as meeting the non-profit requirement where, by its constituent documents, an organization is prevented from distributing its profits or assets among members while the club is functional and on its winding up. The organization’s actions must be consistent with the prohibition.

The trust deed of the Trust contains an appropriate non-profit clause and winding up clause which ensures it operates in non-profit manner at all times. Furthermore, the Trust’s financial statements show that the Trust has acted in accordance with its non-profit clause during these income years.

Accordingly, it is accepted that the Trust meets the non-profit requirement in section 50-45.

Encouragement of sport

There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997 hence, those words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that would be considered as ‘sport’ at paragraph 38.

It is considered that the Trust is concerned with a game or sport.

The word ‘encouragement’ is not defined and therefore takes on its ordinary meaning. 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

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.

However, where the other activities are merely ancillary or incidental, or secondary, to the encouragement of sport, we accept that the main purpose may be that of encouragement.

The main purpose of an entity can only be ascertained after objectively weighing all of the association’s features such as the constituent document, history, control and activities.

In furtherance of its objects, the Trust mainly funds the purchase of sports related items and other sports related expenses of the Association (either by way reimbursement or payment for).

It is considered that these activities support the training and improving the standards of that sport’s participants; and therefore these objects and activities are related to the encouragement of sport.

The Trust also conducts other activities which are unrelated to its main object of training and developing the sports participants. These activities are undertaken on an ad hoc basis as demonstrated by the irregular pattern of expenditure on these activities in the Trust’s financial statements.

In contrast, the Trust has consistently expended amounts in relation to the sport in the above mentioned financial statements.

Consequently, it is considered that the additional activities undertaken by the Trust are incidental to the main purpose of the Trust which is the encouragement of the sport.

Accordingly, the Trust meets the requirement in section 50-45 about it being established for the encouragement of sport.

Subsection 50-70(2)

As mentioned previously in this report, subsection 50-70(2) requires that an exempt entity:

● must comply with all the substantive requirements in its governing rules (‘governing rules condition’); and

● apply its income and assets (‘income and assets condition’) solely for the purpose for which it is established.

In relation to the governing rules condition, paragraphs 18 and 19 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) explain that an entity’s substantive requirements are those rules that define the rights and duties of the entity, such as those that:

● give effect to the object or purpose of the entity

● relate to the non-profit status of the entity

● set out the powers and duties of directors and officers of the entity

● require financial statements to be prepared and retained

● set out the criteria for admission as a member of an entity

● require an entity to maintain a register of members, and

● relate to the winding-up of the entity.

The governing rules condition requires that an entity complies with all of the substantive requirements in its governing rules throughout the income year. The substantive requirements in an entity’s governing rules are distinct from the procedural requirements, for example administrative processes.

For instance, where the Trust applies payments on activities in pursuit of a purpose which are outside the scope of its existing objects, it may breach the governing rules condition in that income year – see also Example 6 of TR 2015/1 where the entity changed its object clause in its constituent document before commencing activities in pursuit of a new purpose.

The income and assets condition requires that an entity applies its income and assets solely for the purpose for which it is established. This requirement is applied continuously throughout the income year. In relation to the term ‘solely’, paragraphs 34 and 35 of TR 2015/1 explain that a strict standard of compliance is required under the ‘solely’ test. Nevertheless, the Commissioner accepts that the income and assets condition will still be satisfied where:

● the misapplication or misapplications are immaterial in amount, and

● there is a one-off misapplication or occasional, unrelated misapplications of part of the income or assets of an entity for a purpose other than the purpose for which the entity is established.

The governing rules and income and assets condition are independent special conditions that must be satisfied operate independently each of other. While an entity is in breach of the governing rules condition and / or the income and assets condition, its income will not be exempt from income tax.

For the income years which are the subject of this ruling, the trustees of the Trust have advised that they are unsure as to whether the Trust will be able to comply with special conditions in 50-70(2).

Therefore, as it is uncertain that the Trust will be able to meet the conditions in subsection 50-70(2) on an ongoing basis, this requirement for exemption is not met.

ACNC type of entity

Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and is an ACNC type of entity is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (‘ACNC Act’).

The expression ‘ACNC type of entity’ is defined in section 995-1 of the ITAA 1997 to mean an entity which meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the ACNC Act.

Relevantly, column 1 of the table in subsection 25-5(5) refers to entities which are charities as the purpose of these entities falls under the four heads of charity as traditionally recognised by the courts.

In Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities (TR 2011/4) sets out the Commissioner’s views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions for charities. The Ruling considers the meaning of both of those terms for the purposes of determining the income tax exempt status of entities as a ‘registered charity’ under item 1.1 of section 50-5 of the ITAA 1997.

It provides at paragraph 265 that a recreational or sporting purpose is not a charitable purpose, even if it may result in some benefit to the community. Examples of where a purpose has not been accepted as charitable includes a cup to encourage the sport of yacht racing, associations for rowing, swimming and amateur athletics, and cricket.

It is considered that the Trust’s purpose is a sporting purpose, and therefore not a charitable purpose. In this regard, the Trust’s objects and activities are mainly directed to providing funds which are used to support the participants in a particular sport in the local district.

Therefore, as the Trust is not considered to be a 'fund established for public charitable purposes' in line with TR 2011/4. Hence, the condition in section 50-47 does not apply.

Conclusion

The Trust does not meet all of the requirements for income tax exemption as set out item 9.1(c) of section 50-45. It is not a ‘society, association or club’ within the meaning of those terms. Further, it is uncertain that the Trust will comply at all times with the conditions set down in subsection 50-70(2).

Consequently, the ordinary and statutory income of the Trust is not exempt from income tax under section 50-1. As a result, the income derived by the Trust will be assessed under the trust provisions in Division 6 of the Income Tax Assessment Act 1936. The Foundation will also be required to lodge income tax returns.

Information about the taxation and reporting obligations of trusts of can be downloaded from the ATO website at www.ato.gov.