Edited version of your written advice

Authorisation Number: 1051361816656

Date of advice: 17 April 2018

Ruling

Subject: Income Tax exempt status

Question

Will the Club be an exempt entity under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) after establishing and making initial contributions to the Trust and deriving income from the Trust?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

1 July 2017

Relevant facts and circumstances

● The Club is a company limited by guarantee and has several locations.

● The Club encourages sport.

● The Club’s objectives are to foster and promote the sport in the community; to promote enjoyment of Australian culture and to foster friendship; to provide a range of social and recreational amenities; and to support sporting, cultural, charitable and other community groups in their contributions to society.

● The Constitution outlines how the Club applies its income and assets for the sole purpose it was established.

● A winding up clause is set out in the Constitution.

● The Club financially supports over 45 sporting groups in addition to providing free room hire and function facilities to over 85 community groups.

● The Club enters teams in competitions.

● The Club has 5 categories of members.

● Social members are required to pay a nominal annual membership fee. The membership fee is greater for ordinary members. The life and perpetual membership groups do not pay annual membership fees.

● Social members cannot hold the office of a Director, request a general meeting or vote at a general meeting.

● The Club spends funds on sporting activities and facilities.

● The Club operates clubhouses with gaming and social facilities.

● The Club does not own the sporting grounds.

● The majority of a New Clubhouse will be operated as a registered club to be used as social and recreational amenities by its members and guests.

● To meet increasing costs of supporting the sporting teams, the Club proposes to open a business from part of the New Clubhouse that will be open to the public.

● The Trust will operate the business, employing persons to undertake the necessary services in the conduct of the business.

● The Trustee is a company limited by shares.

● The Club will be making a cash contribution to the Trust to allow the business to fund its initial costs. The directors of the Club do not expect any additional cash contributions will be required after the initial contributions have been made.

● The Trust’s deed (the Deed) provides, that the sole Member of the Trust is the Club.

● The Deed provides that the funds of the Trust are held on trust for the Member. The Member is entitled to the Trust Fund in its entirety.

The Deed states the trustee has, in addition to, all the specific powers provided in the Deed:

● all the powers, authorities and discretions of a natural person,

● all powers, authorities and discretions conferred by the common law, equity and by legislation on trustee, and

● will not be restricted or obligated by provisions relating to trustees contained in any legislation of the Commonwealth of Australia or any of its States or Territories.

● Under the Deed the Member has both the power to remove a Trustee in addition to appointing a new Trustee.

● The Trustee has the power to vary the Deed and to declare new or other trusts, powers or discretions concerning the Trust Fund, or any part it, subject to the consent of the Member (clause 19).

● The Club has advised that the reason for establishing the Trust and operating the business is to raise additional revenue to meet the increased costs of operating the sporting teams.

Relevant legislative provisions

Gaming Machine Act 2004 (ACT)

Income Tax Assessment Act 1936, section 102R

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

Question 1

Will the Club Limited be an exempt entity under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) after establishing and making initial contributions to the Trust and deriving income from the Trust?

Exempt Entities

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 Club voluntarily associate together for a common purpose and common interest. The Club has a management committee and rules of association.

The Club 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 Club reference its association with sports.

It is accepted that the Club 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 Club promotes itself as a sports club and supports activities that are directly related to sport. The Club directly encourages sport by entering teams in competitions. The clubhouses provide social amenities for members and guests.

The Club’s objects in its constitution clearly state a main purpose being sport while membership categories also indicate a sporting purpose. The club provides facilities for both sporting and social purposes. Gaming proceeds account for a significant portion of the Club’s revenue, however the proceeds from the conduct of gaming are used in a way that promotes the objects of the Club. Therefore, as the objects of the Club are to foster and promote sport in the community, gaming operation revenue also promotes 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 Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 (Terranora), Hill J, held that in that case, the provision of extensive social activities to visitors to the club did not prevent a finding that the entity was for the encouragement of the sport undertaken by a majority of the ordinary members:

The attraction the club has for persons living as far away as Brisbane was made apparent by the evidence. Numerous buses arrive at regular intervals during the morning carrying visitors to the club, many of whom are elderly pensioners. Presumably these visitors are attracted, or were attracted in the year of income, by the poker machines not then available in Queensland. The evidence indicates that of the approximately 1,000 visitors per day to the club, 65-70% of them arrive by bus. In addition to the poker machines, the visitors enjoy the special social promotions in the club.

In the year of income, there were 4,076 ordinary members of the club, 226 junior members and 130 social members. A social member is entitled to utilise all the facilities of the club, sporting or recreational, but is not entitled to vote or become an office bearer of the club.” (at ATC 4082; ATR 300).

“…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 conducted by the club. (at ATC 4086-4087; ATR 304)

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 in this Club 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 Club is controlled by voting members and many of these are members are current or recent participants in the sport. The other member categories with voting rights include past players and administrators and those with a strong interest in sports. This indicates a high level of participation in the administration of the Club by members associated with sport.

The Club’s annual report states that the Club is committed to supporting the community and are involved in the ongoing financial support of over 45 different sporting groups. In addition, the Club supports 85 community groups. Further, the Club allows community groups to use of its auditorium. The Club spends funds on sporting activities and facilities.

The Club will be providing a financial contribution to the Trust. The Trust has a purpose to hold its capital and income on trust for the Club. The Trust will also be running a business. The Club will be entitled to all the profits derived from the business. The Club decided to set up the Trust and to open the business in order to create additional revenue to meet the increased costs of operating the sporting teams.

All the income and assets of the Trust will be used solely for the purpose that the Club was established. The establishment of the Trust and the financial contribution to be made to the Trust supports the Club’s objects and furthers its purpose. Taking into consideration of all the factors discussed above, particularly the level of control of the Club by sporting members, the number of members participating in teams operated by the Club, and the level of expenditure on sporting operations, as well as the history of the Club, it is concluded that the Club is established for the encouragement of a game or sport.

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.

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 Club’s constitution prevents distribution to members. The Club 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 Club is a resident of, and is located in, Australia. The Club carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement.

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

Conclusion

The Club is a society, association or club and is established for the encouragement of a game or sport. In addition, it satisfies the special conditions and is therefore exempt from income tax.

Establishing, making initial contributions to, and deriving income from the Trust will not compromise the Club’s Income Tax exempt status.