Edited version of private advice

Authorisation Number: 1051759377306

Date of advice: 01 October 2020

Ruling

Subject: Tax exempt status of a sporting club

Question

Is the Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a club established for the encouragement of sport under item 9.1 of the table in section 50-45 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods

Year ended 31 October 2021

Year ended 31 October 2022

Year ended 31 October 2023

Year ended 31 October 2024

Year ended 31 October 2025

The scheme commences on

1 November 2020

Relevant facts and circumstances

The Entity is a public company limited by guarantee and does not have share capital. The Entity is governed by a Constitution.

The Entity was previously issued with a private ruling confirming their tax exempt status.

Since that ruling was issued, the Entity continues to operate two sporting facilities where coaching, competitions and leisure play are undertaken.

The Entity runs venues where it provides social activities for its members and the community. The Entity continues to provide administrative support to the sporting clubs and such costs are absorbed by the Entity. The non-sporting facilities of the Entity continue to be utilised by the community for meetings, presentations, registrations and fund-raising activities. These costs are also absorbed by the Entity.

The commercial losses of the sporting facilities are significant. These continue to be absorbed by the Entity for the preservation and advancement of sport in the local community.

The Entity continues to apply its surplus funds from its social activities to encourage sports within the community.

The Entity's support of sporting groups within the community

In addition to the Entity's own sporting activities, the Entity's charter remains to support sport in the Entity's community with an emphasis on increasing participation in all sports for junior and senior players to encourage a healthy and active lifestyle.

The Entity continues to provide financial and in-kind assistance to a number of sporting clubs within the community.

Sporting Memorabilia display

The Entity continues to display trophies and memorabilia, along with perpetual trophies and honour boards.

Advertisements and Publicity

The Entity dedicates a section of the website to show monthly sports award winners, the latest sports news and information for registration days. Activities supported are displayed within venues in high traffic areas.

Funding is provided for newspaper advertisement of local sports round results, as well as to inform the community of details for registration days and key dates. Support of sport is found on the Entity's social media platforms, as well as sharing inspiring sports stories within the local community on the website and publications.

Sporting participation of the current Directors of The Entity

The directors of the Entity are passionate about supporting local sport. They participate in sport and participate in the management of the Entity to ensure activities and capital expenditure programs are aligned to the constitutional charter of the Entity.

Non-Sporting Activities

The Entity conducts social activities in the form of gaming, bars, restaurants and functions amenities. The Entity's social activities are profitable. Profits generated from social activities are applied to the encouragement of sport through operational support and to fund capital expenditure programs.

Membership

It is not possible for the Entity to identify between those members who participate in sport and the social members. It is a requirement of the sporting clubs that all members must be members of the Entity.

Sporting Grants

The Entity issued grants in 2017, 2018 and 2019. In-kind assistance is in addition to that figure.

Capital Expenditure Plans (current & future)

Recent capital expenditure included upgrades to and maintenance of sporting facilities and equipment. There is a capital expenditure plan into the future.

2019 Annual Report (the Report)

The Entity's annual report is distributed to all members and is a matter of public record. The Entity operated at a profit in 2019.

The Entity's Constitution

The Entity has a constitution that sets out its objectives. The Constitution also contains a non-profit clause and an appropriate non-profit dissolution clause.

Relevant legislative provisions

Income Tax Assessment Act 1997 (Cth) Section 50-1

Income Tax Assessment Act 1997(Cth) Section 50-45

Income Tax Assessment Act 1997(Cth) Section 50-47

Income Tax Assessment Act 1997(Cth) Section 50-70

Reasons for decision

Summary

The total ordinary income and statutory income of the Entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is a 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.

Detailed reasoning

Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of the ITAA 1997.

Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be an exempt entity, subject to special conditions in section 50-70 of the ITAA 1997.

Accordingly, to be an exempt entity described in item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must:

(a)  be a society, association or club;

(b)  be established for the encouragement of a game or sport; and

(c)   meet the special conditions specified in sections 50-47 and 50-70 of the ITAA 1997.

(a)  Society, Association or Club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Macquarie Dictionary defines 'club' as a 'group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'.

The Entity is a public company limited by guarantee and is governed by a constitution. The members pursue a common purpose and are governed by the rules outlined in the constitution.

The Entity is a society, association or club for the purposes of section 50-45 of the ITAA 1997.

(b)  Established for the encouragement of a Game or Sport

Game or sport

The terms 'game' or 'sport' for the purposes of section 50-45 of the ITAA 1997 are not defined in the ITAA 1997 and have their ordinary meanings.

Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) provides the Commissioner's view on what constitutes an exempt sporting club. 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 (at paragraph 38):

Played with a ball or projectile

badminton; baseball; basketball; bocce; bowling (ten-pin); bowls; cricket; croquet; football (all codes); golf; handball; hockey; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball;

The Entity is concerned with a game or sport.

Encouragement

Paragraph 11 of TR 97/22 refers to the meaning in the Macquarie Dictionary which defines 'encouragement' to mean 'stimulation by assistance' and provides that 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 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.

The Entity encourages sport through the following activities:

-   Forming, preparing and entering teams and competitors in competition;

-   Coordinating activities;

-   Organising and conducting tournaments;

-   Improving the ability of participants;

-   Improving the standards of trainers and coaches;

-   Providing facilities; and

-   Marketing.

In summary, the Entity's encouragement of sport is extensive.

Main purpose

Paragraph 41 of TR 97/22 provides that to be eligible for exemption, a club's main purpose must be to encourage a game or sport. The main purpose can only be ascertained after objectively weighing all of the club's features such as the constituent document, history, control and activities. A club's constituent documents will help identify the purpose for which the club was set up and should be consistent with the aim of encouraging a game or sport. The activities must then demonstrate that the club's main purpose is the encouragement of a game or sport.

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

Relevant but less persuasive factors are listed at paragraph 16 of TR 97/22 and 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 the day to day management of the club);

-   voting rights in the club vest only in members involved in the encouragement of the game or sport, whether by personal participation or y 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.

Paragraph 14 of TR 97/22 also states:

A club's main purpose can only be ascertained after objectively weighing all of the club's features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport.

It can be difficult to determine a club's main purpose when the club conducts other activities, particularly social or commercial activities.

The fact that a club also encourages social and other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225 (Cronulla), where a club conducts other activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, it can be accepted that the main purpose may be that of encouragement.

However, where the main purpose becomes the carrying out of those other activities, a 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 Lockhart J went on to state in Cronulla at 4225:

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.

The fact that a sporting club also encourages social and other activities does not, in itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. On the other hand, if the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply even if sport is extensively encouraged.

In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora), the club provided and promoted an extensive range of sporting activities including golf, bowls, tennis and other sports, games and pastimes. The club also had extensive social facilities that were used by the clubs members and also by a large number of non-members. In the most recent year reported in the case, 90.3% of the club's income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities.

The Court ruled in favour of the taxpayer and concluded that the main purpose of the Club was the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and the selling of time-share units. Hill J concluded that, while the social activities of the club were extensive and could be seen as an end in themselves, the activities were pursued as a means of financing the extensive sporting activities conducted by the Club. While the non-sporting activities were vital to the club's financial survival, they were neither equal nor predominant in importance to the sporting activities.

In St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528; 36 ATR 281 (St Mary's), Hill J found that the significant social activities of a sporting club were acceptable if the club was formed principally for sport and if the sport was financed by the social activities. It was acceptable in that case that only 20% of the funds earned by the social activities of the club were spent on football. Hill J emphasised the importance of the club's constitution which stated that the principal aim of the club was the support of local football and that a large amount of the club's activities were sport related. It was also important that the club's history was centred on the support of local football and that the club rules required a certain proportion of its funds to support local football.

Therefore, in order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to a sporting end. Where an association's main purpose is providing social amenities and licensed club facilities to its members, or if the other purposes become an end in themselves, the exemption does not apply.

Highly persuasive features

1.    Activities directly related to a game or sport

It has already been established that the activities of the Entity are directly related to the sport.

2.    The sporting activities encouraged by the club are extensive.

TR 97/22 provides that 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 sport.

The Entity organises and conducts many tournaments and events in which members compete. The entity promotes and advertises sports to its members and the general public on its website and social media platforms.

The Entity conducts a range of tournaments and competitions, as well as offering training and coaching services. The Entity also provides administrative support through a number of shared services, the provision of staff.

The Entity is also a sponsor of many sporting clubs and organisations, giving substantial monetary support as well as the provision of meeting rooms and presentation venues.

As such, the Entity conducts extensive sporting activities.

However, the Entity's social activities are also extensive. The Entity conducts a number of restaurants, cafes, bars and gambling options. Bar and catering sales in the 2019 financial year was substantial.

3.    The club uses a significant proportion of its funds to encourage the game or sport.

The Entity should use a significant proportion of its surplus funds in encouraging its game or sport. As Lockhart J noted in Cronulla it is a significant matter if a club has the potential to apply its surplus funds for purposes that have nothing to do with the encouragement of a game or sport.

In the 2019 Annual Report, a significant proportion of income was related to the social activities of the Entity.

The Entity granted substantial amounts to sporting organisations and activities. The current and future capital expenditure program is funded entirely from trading profits and projected trading profits for the next four years.

The Entity also incurs significant expenses operating sporting activities, including rates and taxes, provision of staff (and associated staffing entitlements and liabilities) and the provision of shared services including IT, marketing and HR. The sporting facilities operate at a collective loss.

The monetary figures show that the majority of The Entity's operating profit (and some pre-profit) is used to support sport, whether by direct grants to sporting organisations, or capital contributions to develop sporting facilities. The proportion is considered acceptable in light of the decisions in Terranora and St Marys.

It is therefore accepted that The Entity uses a significant portion of its funds to encourage sport.

4. The objects in the Club's constituent document

The constitution of the Entity should be consistent with the aim of encouraging a game or sport.

The objects of the Entity are set out in the Constitution and this constituent document emphasises that the main purpose of the Entity is to encourage a game or sport.

Less persuasive features

1.    High level of participation by members in the game or sport;

The Entity is unable to provide a breakdown of the number of members who participate in sport. However, it is requirement of the sporting clubs that their members must be members of the Entity. As the level of participation of members cannot be definitively ascertained, this feature is inconclusive.

2.    The members of the committee are predominantly participants in or concerned with the encouragement of the game or sport (as distinct to the day to day management of the club)

The Constitution prescribes that the Entity will be managed by the Board. While it has been stated that the directors participate in sport and in the management of the Entity it is not clear what the role of the directors is in the day to day running of the Entity. It is considered that this feature is inconclusive.

3.    Voting rights in the club vest only in members involved in the encouragement of the game or sport, whether by personal participation or by encouraging participation by others.

The Constitution sets out the voting rights of members of the Entity and their eligibility to attend general meetings. There is no requirement that voting members are either personally involved, or encourage participation, in sport. Therefore, voting rights do not vest only in members who encourage or are involved in sport.

4.    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.

The Entity's website promotes sport. The Entity displays sporting trophies and sporting memorabilia within its premises.

It is accepted that the Entity 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.

Conclusion - Main Purpose

After consideration of the features discussed above, it is considered that the Entity was formed principally for the encouragement of a game or sport. Although the social activities undertaken by the Entity are extensive, it is accepted that the social activities are undertaken as a means of financing the extensive sporting facilities that are provided by the Entity

Therefore, the Entity was established for the encouragement of a game or sport.

(c)  meet the special conditions specified in sections 50-47 and 50-70 of the ITAA 1997

Not an ACNC type Entity

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states that:

An entity that:

(a) is covered by any item; and

(b) 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.

Broadly, an entity capable of being a registered charity is an ACNC type of entity. Therefore, if the Club is capable of being a registered charity it will not be exempt from income tax unless it is registered as such under the Australian Charities and Not-for profits Commission Act 2012 (ACNC Act).

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. Paragraph 26 provides that an institution is charitable if it's main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes.

It has already been concluded above that the Entity was formed principally for the encouragement of a game or sport. As the Entity has a non-charitable purpose, it is not capable of being a registered charity. Therefore, the Entity is not an ACNC type of entity and section 50-47 does not apply.

Section 50-70 of the ITAA 1997 sets out the special conditions for item 9.1.

Subsection 50-70(1) of the ITAA 1997 states:

(1)  An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the Entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or

(c) 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.

and the Entity satisfies the conditions in subsection (2).

Not carried on for the profit or gain of its members

Subsection 50-70(1) of the ITAA 1997 requires that the club not be carried on for the purpose of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. A club usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. A club's actions must also be consistent with the non-profit requirement.

The Entity has the appropriate not for profit clause and dissolution clause in its constitution that prevent individual members from receiving benefits.

It is accepted that The Entity is not carried on for the profit or gain of its members.

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

For a club to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursue its objectives principally in Australia.

The Entity has a physical presence in Australia. It incurs its expenditure and pursues its purposes in Australia.

Governing rules and application of income and assets

Subsection 50-70(2) of the ITAA 1997 provides that the Association must:

(a)  comply with all the substantive requirements in its governing rules; and

(b)  apply its income and assets solely for the purpose for which the Entity is established.

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1)provides guidance in respect of the conditions in subsection 50-70(2). Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the Entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the Entity and include rules 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.

Based on a review of the Constitution, which incorporates the Entity's objects, it is accepted that the Entity complies with the substantive requirements set out in its constituent document.

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the Entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

As previously determined, the activities of the Entity demonstrate that the Entity is complying with the main purposes for which it was established. Therefore, it is accepted that the Entity applies its income and assets solely for the purpose for which it was established.

Accordingly, the Entity satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997.

Conclusion

Based on the above, the total ordinary income and statutory income of the Entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is a 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.