Edited version of private advice

Authorisation Number: 1051805123367

Date of advice: 15 February 2021

Ruling

Subject: Income tax exemption

Question 1

Will the Club be exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') by virtue of being an association for the encouragement of a game or sport pursuant to section 50-45 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods

1 July 20XX to 30 June 20YY

Relevant facts and circumstances

Background information

The Club is an Australian incorporated Association, registered with Australian Securities and Investments Commission ('ASIC') on x XX 19XX.

A previous successful private ruling application was issued for this entity by the ATO on x XX 20XY - the authorisation number of the previous ruling was xyzxyzxyz. The previous ruling was for the same purpose (income tax exemption - sporting club) and had substantially the same facts and circumstances as this application.

The Statement of Purposes and Rules of the Club lists the purposes and objects for which the club was established as including the following:

(a)    To promote sports and pastimes and manage the property of the Club comprising the sporting facilities at Location X.

(b)    To purchase, hire, make or provide and maintain all kinds of tractors, mowers, furniture, implements, tools, utensils, plate, glass, linen, books, papers, periodicals, stationery, cards, games and other things required or which may be conveniently used in connection with the grounds, clubhouses and other premises leased and managed by the Club and persons frequenting the same whether member of the Club or not.

...

(h) To promote and hold either alone or jointly with any other associations, clubs or persons meetings, competitions and matches and to offer, give or contribute towards prizes, medals and awards and to promote give or support dinners, balls concerts and other entertainments.

(i) To establish, promote encourage or assist in establishing or promoting community involvement and or subscription to or become a member of any other association or club whose purpose or objects are similar or in part similar to the purpose of the Club or the establishment or promotion of which may be beneficial to the Club.

...

(m) The income and property of the Club whencesoever derived shall be applied solely towards the promotion of the purposes of the Club as set forth in the said Statement of Purposes and no part thereof shall be paid or transferred directly or indirectly by way of dividend, bonus, gratuity or otherwise howsoever by way of profit to the members of the Club.

Non Profit and Winding Up Clause

Clause xx of the Statement of Purposes and Rules of the Club prohibits the distribution of profits to members, as follows:

The income and property of the Club whencesoever derived shall be applied solely towards the promotion of the objects of the Club as set forth in this Statement and no portion thereof shall be paid or transferred directly or indirectly by way of profit to any persons who at any time are or have been members of the Club.

Exceptions under this clause include:

(a) Payments in good faith of remuneration to any officers or servants of the Club; or

(b) To any other person in return for any services actually rendered to the Club; or

(c) Payments of interest and repayments of principal on money advanced by a member to or for the purposes of the Club.

The following outlines the Club's Winding up or Cancellation clauses:

41.1.1 The Members at a General Meeting may, by simple majority of the Members present, pass a resolution for the dissolution of the Club.

41.1.2 Such resolution shall have no effect unless:

41.2.1 the resolution is confirmed by a special resolution at a Special General Meeting held not less than one month after the meeting referred to in the previous rule 41.1;

41.2.2 not less than one-half of the Members of the Club are present and voting at a special General Meeting; and

41.2.3 not less than three-quarters of those present and voting at the special General Meeting vote in favour of the resolution.

41.3 if the conditions set out in the previous rule 41.2 are met the Club shall be wound up in accordance with the relevant legislation, and after realisation of the property of the Club and the discharge of all liabilities all moneys shall be allocated to local charitable organisation or organisations with similar purposes to those of the Club as specified by a special resolution of Members at the Special General Meeting referred to the rule 41.2.1, and after completion of distribution the Club shall be dissolved.

Activities undertaken by the Club

Sport 1

Activities are co-ordinated through a 'Match Committee' which comprises the following - Members who are dedicated to the promotion of men's sport at the Club: President, Vice-Captain, Captain, Social Rep, Secretary, Matchplay, Treasurer, Monitor, Pennant Managers and Coordinators, General Manager and Superintendent.

A 'Match Committee' is also responsible for the promotion of women's sport at the Club including a President, Vice President, Captain, Vice-Captain, Secretary, Treasurer- and other committee members.

The Club is affiliated with the Sport Association of State X.

A number of Pennant teams are currently entered into competitions by the Club including a senior Pennant team.

There are dedicated trainers who provide regular training clinics and personal training for members. In order to promote junior membership, a trainer also provides training and development to junior members.

The sessions provided by external contractors hired by the Club includes Junior Clinics, Women's Beginners Clinics, Women's Intermediate Clinics, Private individual lessons and practical playing lessons.

Sport 2

Sport 2 is coordinated by an extensive committee dedicated only to promoting this sporting activity. There is a separate committee for each of the men's and women's teams. The committees include the following positions: President, Vice President, Secretary, Assistant Secretary, Treasurer, Match Committee, Pennant Selection, Social Committee, Director, Deputy Director and Publicity Officer.

There are a number of open teams for a weekday pennant and a number of teams of the State X Saturday pennant.

Training is conducted by dedicated club coaches who are approved as coaches by the Sport 2 Association of State X. There are currently two accredited coaches that provide training and coaching assistance on a continuous basis to members in accordance with appointments and bookings. The coaches are encouraged to attend training sessions offered by the Sport 2 Association of State X to ensure that there is a continual encouragement of improved standards throughout this sporting activity.

The Club has lady Members and maIe Members that are qualified as National Umpires. These members are rostered to act as umpires for the Pennant Rounds and may volunteer to umpire for extended Sport 2 Association of State X championship rounds. Members are also requested to volunteer as markers for the Sport 2 Association of State X championship rounds.

The season runs from month x to month y and includes a significant number of tournaments and competitions entered into by the sporting teams.

There is external sponsorship and promotion of the Sporting competition at the Club.

Sport 3

Sport 3 is provided to members all year round and is a social activity.

Sport 4

The Club has sporting grounds within its premises which are provided for the use and benefit of its members.

Social activities

For the 20XX income year, the Club had the following:

•         X function rooms

•         X seat capacity restaurant

•         Members lounge

•         Sports bar

•         X Gaming machines.

For the 20XX income year, approximately xy% of revenue was earned by these social activities, compared to yz% in June 20XY.

On a year to date basis, a loss was made by the sporting activities represented by:

The total profit and loss earned by the Club in the previous five years is as follows:

The Club's expenditure on Property Plant and Equipment Acquisition for the period between 20VV and 20XX is as follows:

Categories of memberships

There a number of different membership categories at the Club.

The membership types, as of 30 June 20XX, are as follows:

Approximately x% of all Members participate in sport.

The Voting and Controlling Members of the Club are Members A, B, C and D. All other Members, specifically Members F do not have voting rights and are unable to determine the overall administration and operation of the Club.

Decoration and Fit out throughout the Club

Sports Bar

•         Trophies and plaques are displayed on the walls recognising the champions for various annual sporting events

Members' Bar

•         Competition Premier Flags

•         Honour Boards

•         Pennant flags

•         Trophy cabinet

•         Photos of premier teams

Bistro Room

•         Framed pictures

Garden Room

•         Used for sporting presentations

•         Framed pictures

•         Live Music Venue

Information provided

You have provided several documents containing detailed information in relation to the Club, including:

a.      Private Binding Ruling ('PBR') Application, dated x XX 20XX

b.      Document with additional information, dated y YY 20XX

We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70

Further issues for you to consider

Not applicable

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Question 1:

Will the Club be exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') by virtue of being an association for the encouragement of a game or sport pursuant to section 50-45 of the ITAA 1997?

Summary

The Club satisfies the conditions to have income tax exempt status as a society, association or club established for the encouragement of a game or sport.

Detailed reasoning

Section 50-1 of the Income Tax Assessment Act 1997 (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...

The members of the Club voluntarily associate together for a common purpose and common interest. The Club has directors and a constitution. 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 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 namely, to promote athletic sports and pastimes.

Sport 1 is co-ordinated through a match committee, for the promotion of that sport at the Club and affiliated with the Sport 1 Association of State X.

The Club has dedicated trainers who provide regular training clinics and personal training for members. In order to promote junior membership, a trainer also provides training and development to junior members.

The training provided by external contractors hired by the Club includes Junior Clinics, Women's Beginners Clinics, Women's Intermediate Clinics, Private individual lessons and hands on playing lessons.

There are a significant number of tournament and competitions in which members (and other non-members) of the Club can compete that are organised and operated by the Club.

Sport 2 "is co-ordinated by an extensive committee dedicated only to promoting this sporting activity".

There are open teams for weekday pennants and teams of the Sport 2 Association of State X weekend pennant.

Training is conducted by dedicated club coaches who are approved as coaches by Sport 2 Association of State X.

The Club has one Lady Member and two MaIe Members that are qualified as National Umpires.

The season runs from month x to month y and includes a significant number of tournaments and competitions entered into by the sporting teams.

Sport 3 is provided all year round and is administered by a committee.

The Club has sporting fields within its premises which are provided for the use andbenefit of its members.

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

The encouragement of sport must be the Club's main purpose

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.

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.

TR 97/22 also lists other features considered relevant but less persuasive features 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.

Social Activities

Taxation Ruling 97/22 states at paragraphs 41 and 42 that:

41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities.

42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 said:

"It [the club] may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption."

Application to your circumstances

Application to the Club

The Club conducts activities directly related to sport. It does this by participating in competitions, hosting competitions, maintaining facilities to pennant and international standards, providing registered coaches and accredited umpires. It devotes a significant portion of its resources to promoting its sporting activities.

The sporting activities conducted by the Club are extensive although only xx% of the total membership participated in the sports promoted by the Club. In previous years the percentage of the total membership participating in sport was significantly higher. It is accepted that the events of 20XX would have impacted on the ability of members to participate in sporting activities.

In the 20XX financial year a $xy loss was made from sporting activities, but the total loss of the Club in that year was $yz.

The Club has made losses from sporting activities every year since 20VV totalling $xyz but made a total profit over the same period of $zzz.

The Club has spent $xy on property plant and equipment during the 20VV to 20YY income years.

While the Club does generate xx% of its revenue from its social activities, the surplus is used to finance the Clubhouse and sporting activities.

There is no specific requirement that participation in the management of the Club including standing for office and electing committee members is limited to sporting members. However, the Club only provides voting rights to sporting members, committee members are also members of the Club thus control of the Club rests in the hands of sporting members.

The social activities of the Club while significant provide a means for the Club to finance its sporting activities which is the main purpose of the Club.

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.

The Club has a physical presence in Australia, and it pursues its objectives and incurs its expenditure principally in Australia.

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 Constituent documents of the Club prevent distribution to members while it is operating (clause xx) and clause xyz relates to winding up and dissolution.

The non-profit requirement is satisfied.

Conclusion

Based on the information provided, we accept that the main purpose of the Club is the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.

The features of The Club leading to this conclusion are summarised as follows:

•         The Club conducts activities in the relevant years that are directly related to a game or sport.

•         The Sporting activities conducted by the Club are extensive.

•         The Club uses a significant portion of its surplus funds in encouraging sport.

•         The Club's constituent documents state that The Club's main purpose is to encourage sport.

•         A majority of the Members of The Club participate in the sports promoted by The Club.

•         The Members of the Committee, who control The Club, are participants in the sports promoted by The Club.

We consider that the Club is non-profit and pursues its objects in principally Australia and incurs its expenditure in principally Australia.

As such, the Club is exempt from income tax under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport.