Edited version of private advice

Authorisation Number: 1051584402454

Date of advice: 01 October 2019

Ruling

Subject: Income tax exemption

Question

Is the taxpayer an entity covered by item 9.1 of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997), so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

01 July 20XX to 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

The taxpayer is an entity established in Australia that has at all relevant times undertaken its activities in Australia.

The taxpayer has multiple objects, including to promote a specific type of sport.

The taxpayer has different classes of members.

The governing document of the taxpayer prevents it from distributing profits or assets for the benefit of its members both while it is operating and when it winds up.

The taxpayer provides services and facilities of social, entertainment and commercial nature, it considers its first primary activity as operating as a social venue offering different activities of a varying nature.

The taxpayer also provides a venue for the specific sport, conducts relevant activities and events during the year in promotion of the sport.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 50

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Pursuant to section 50-1 and item 9.1(c) of the table in section 50-45, the ordinary income and statutory income of a society, association or club established for the encouragement of a sport is exempt from income tax provided the special conditions in section 50-70 are satisfied.

Subsection 50-70(1) requires that, to be exempt from income tax, an entity covered by item 9.1 of the table in section 50-45 must be a society, association or club that is not carried on for the purpose of profit or gain of its individual members (the non-profit requirement) and it either has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or meets the description and requirements in item 1 of the table in section 30-15; or is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident.

Subsection 50-70(2) provides that the entity must comply with all the substantive requirements in its governing rules (governing rules condition) and apply its income and assets solely for the purpose for which the entity is established (income and assets condition).

The threshold question in order to quality for exemption under section 50-1 as an entity covered by item 9.1(c) of the table in section 50-45 is whether the taxpayer is a society, association or club established for the encouragement of a sport.

Established

The meaning of the word 'established' in former subsection 23(g) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 (Cronulla case), where it was held that it referred not only to the circumstances surrounding the club's formation, but also to its subsequent activities and to the circumstances of the particular year under consideration.

This is noted in paragraph 24 of the Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), which states that the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity's constituent documents and the activities of the entity after its formation.

Encouragement of sport

The words 'encouragement' and 'sport' and the composite phrase 'encouragement of sport' are not defined in the ITAA 1997 or ITAA 1936, and for the purposes of section 50-45 the words take on their ordinary meaning.

Paragraph 28 of the Taxation Ruling 97/22 Income Tax: exempt sporting clubs (TR 97/22) refers to definition of 'sport' by Australian Sports Commission (ASC) as 'a human activity capable of achieving result requiring physical exertion and/or physical skill that, by its nature and organisation, is competitive and is generally accepted as being a sport'.

It follows from the examples of game and sports provided in paragraphs 38 to 40 of the TR 97/22 that bowls qualifies as a sport.

In paragraph 11 of the TR 97/22, Macquarie dictionary meaning of 'encouragement' is adopted, being 'stimulation by assistance'. Encouragement can occur directly by:

• forming, preparing and entering teams and competitors in competitions in the game or sport;
• co-ordinating activities;
• organising and conducting tournaments and the like;
• improving the abilities of participants;
• improving the standard of trainers and coaches;
• 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.

In this case, the taxpayer's governing document states multiple objects, including to promote a specific type of sport.

Since establishment, the taxpayer provides services and facilities of social, entertainment and commercial nature, it considers its first primary activity as operating as a social venue offering different activities of a varying nature.

The taxpayer also maintains and provides facilities for the sport, and conduct a number of activities of the sport and events during the year in promotion of the sport.

Main Purpose

Where a sporting club also conducts other activities, particularly social or commercial activities, paragraphs 42 and 43 of TR 97/22 further states that, where the other activities are merely ancillary or incidental, or secondary to the encouragement of the game or sport, it is accepted that the main purpose may be that encouragement. However, if the main purpose becomes carrying out of those other activities, the club is not exempt, nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes. As Lockhard J said at ATC 4225; ATR 312:

But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

An incidental or ancillary purpose is explained in paragraphs 26 to 28 of the TR 2015/1, it is to be contrasted with a purpose that is an end in itself, of substance in its own right or is not intended to further the purpose for which the entity is established. Incidental and ancillary purposes are merely aspects of the purpose for which the entity is established.

To determine a club's main purpose in the relevant year of income, paragraph 14 of the TR 97/22 states it can only be ascertained after objectively weighing all of the club's features.

Paragraph 15 of the TR 97/22 lists down the following features that are highly persuasive in supporting a conclusion that the main purpose of a club is to encourage a sport of game:

·         the club conducts activities in the relevant year that are directly related to the game or sport (further explanations in paragraph 51);

• the sporting activities encouraged by the club are extensive (further explanations in paragraph 53);
• 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 (further explanations in paragraph 56);
• the club uses a significant proportion of its surplus funds in encouraging the game or sport (further explanations in paragraph 54).

Evidence of the purpose which the club was originally set up is helpful, but paragraph 48 of the TR 97/22 requires that the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport.

In examining the activities that a club conducts, paragraphs 52 and 53 of the TR 97/22 stress the importance of the activities being directly related to the game or sport and extent of the sporting activities that are encouraged by a sporting club.

Paragraph 52 of the TR 97/22 made reference to the Cronulla case, where the Full Federal Court recognised that without the financial support of the leagues club, the football club could not have continued in the NSWRL. Substantial amounts of money were given to the football club by the leagues club. These were features highly supportive of the claim for exemption. However, when weighed against the club's other activities, it was considered that, notwithstanding the financial support, the main purpose of the leagues club was to provide licensed social facilities for its members and guests.

Paragraph 53 of the TR 97/22 referred to the case of Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora case), where the sporting activities encouraged by the sporting club are very extensive, it is highly persuasive that the club's main purpose is the encouragement of a game or sport. In the Terranora case, the club had a membership of nearly 4,100 and provided and promoted an extensive range of sporting activities. Its sporting facilities included: an 18 hole golf course; three bowling greens; three clay-shooting ranges; one 50 metre swimming pool; five tennis courts; three hockey/touch football fields; a turf cricket wicket; a synthetic cricket wicket; and a football field. Within its structure, its sporting clubs included: a cricket club; a clay target shooting club; a hockey club; a tennis club; junior, ladies, veterans and members' golf clubs; men's and ladies bowls clubs; a touch football club; a softball club; a bluewater boat club; and an equestrian club. All of these features were highly supportive of the country club being exempt. The club also had extensive social facilities that were used by members and by the large number of visitors. Hill J concluded that:

... while the social activities ... were very extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were ... pursued as a means of financing the extensive sporting activities conducted by the club.

In addition to the constitution and founding documents of a club that should be consistent with the aim of encouraging a game or sport, paragraph 56 of the TR 97/22 states that, the club's history should also characterise it as one that was established, originally or after its foundation, by people with an interest in the game or sport and one that has in fact continued to encourage a game or sport.

A club must use a significant proportion of its surplus funds in encouraging its game or sport, as stated in paragraphs 54 and 55 of the TR 97/22. What is important is the way such funds are used and the activities that are financed by the club. In St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281 (St Marys Rugby case), the Club's liquidity had increased to a point where it had almost $2.5m of funds on deposit or short term investment, and Hill J said (ATC 4534; ATR 288):

That evidence suggests that the funds accumulated were being kept liquid for the purpose of developing a football oval, a circumstance which would be favourable to the Club's claim. The other possibility, however, is that the Club was accumulating funds for a possible motel development. I do not think that the evidence permits me to reach a conclusion, one way or the other, as to the proposed use of the funds. I should say, however, that if the Club were to proceed with the building of a motel ... the conclusion that it was established for the purpose of "the promotion or encouragement" of rugby league would become progressively more difficult to arrive at.

Other relevant but less persuasive features are provided in paragraph 16 of the TR 97/22 as follows:

• a high level of participation by members in the game or sport (further explanations in paragraph 57);
• 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) (further explanations in paragraph 58);
• 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 (further explanations in paragraph 59); 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 (further explanations in paragraph 60).

In particular to the level of participation, paragraph 57 of the TR 97/22 explains that, where members are chiefly involved in the club's social activities and not in the sporting activities, it may indicate that its main purpose is not the encouragement of the game or sport.

The taxpayer has conducted activities that are directly to the specific sport; however, on the facts, they are not extensive.

Out of the multiple objects of the taxpayer, there is no emphasis on a main purpose for encouragement of the sport, some of these objects are of social and commercial nature and are outside the scope of income tax exemption.

Over the years, the taxpayer has utilised more of its surplus funds on its social and commercial facilities, revenue from these social and commercial facilities has subsequently been utilised to strengthen its first primary activity as a social venue. This indicates that, the taxpayer's activities of the specific sport are subordinate to the provision of social and commercial facilities.

After weighing all the features and factors in this case, it is considered that, the taxpayer is not a society, association or club established for the encouragement of the specific sport, nor its main purpose is to encourage the sport. Accordingly, the taxpayer does not quality as an exempt entity covered by item 9.1(c) of the table in section 50-45.

Special Conditions

The taxpayer was established in Australia and has at all relevant times operated in Australia. Accordingly, the special conditions in section 50-70 will be satisfied if the non-profit requirement, governing rules condition and income and assets condition are satisfied.

The non-profit requirement is explained in TR 97/22. In accordance with this explanation, a club will be accepted as being non-profit where it is prevented by its constituent or governing documents from distributing its profits or assets for the benefit of its members, both while it is operating and upon winding up; its actions must be consistent with this prohibition.

In this case, the taxpayer is required by its governing document to use and apply its income and property solely towards the promotion of its objects, and is prohibited by its governing document from paying or transferring any portion of its income or property to its members during the course of its operation and upon winding up or dissolution. Accordingly, the non-profit requirement is satisfied.

The governing rules condition is considered in paragraph 8 of the Taxation Ruling TR 2015/1Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), which lists down the following three questions to be asked:

·         what are the governing rules of the entity? (further explanations in paragraphs 9 to 16 of the TR 2015/1)

·         what are the substantive requirements in the governing rules? (further explanations in paragraphs 17 to 20 of the TR 2015/1)

·         at what time must the Association comply with all of the substantive requirements in its governing rules? (further explanations in paragraph 21).

The income and assets condition is considered in paragraph 23 of the TR 2015/1, which requires the following two questions to be asked:

·         what is the 'purpose for which the entity is established'? (further explanations in paragraphs 24 to 29 of the TR 2015/1)

·         has the entity applied its income and assets solely for the purpose for which the entity is established? (further explanations in paragraphs 30 to 36 of the TR 2015/1).

Despite that the taxpayer is a non-profit entity, it does not qualify for exemption under section 50-1 as an entity covered by item 9.1(c) of the table in section 50-45, there is no need to further discuss and consider if the taxpayer meets the requirements under the governing rules condition and the income and assets condition in subsection 50-70(2).