Edited version of private advice

Authorisation Number: 1051861996915

Date of advice: 7 July 2021

Ruling

Subject: Income tax exemption

Question

Is the entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club described under item 9.1 of section 50-45 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The entity was established in Australia and has at all times operated in Australia, is physically present in Australia and incurs its expenditure and pursues its objectives principally in Australia.

The objects of the entity in its governing document are to enable, promote and support a particular activity.

The governing document of the entity prevent it from distributing assets and income directly or indirectly to its members while operating and on winding up.

From establishment, the entity has complied with all the substantive requirements of its governing document and has applied its income and assets solely for the purpose for which it is established.

Activities conducted by the entity provide direct and indirect encouragement of the particular activity.

The entity is not registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012.

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

Income Tax Assessment Act 1997 Subsection 50-70(1)

Income Tax Assessment Act 1997 Subsection 50-70(2)

Reasons for decision

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

Section 50-1 exempts from income tax the ordinary and statutory income of entities specified in Subdivision 50-A.

To be exempt from income tax pursuant to item 9.1 of the table in section 50-45, an entity must:

1. be a society, association or club
2. be established for the encouragement of the activity
3. satisfy the special conditions in section 50-70.

Association

The term association is not defined in the ITAA 1997 therefore should be interpreted according to its ordinary meaning.

The Macquarie Dictionary defines 'association' as 'an organisation of people with a common purpose and having a formal structure'.

The entity is considered to be an association.

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, where it was held that it referred not only to the circumstances existing when the entity was initially formed 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. Other factors include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity.

Encouragement

The word 'encouragement' is not defined in the ITAA 1997 or ITAA 1936 so, for the purposes of section 50-45, the word takes on its ordinary meaning.

In paragraph 11 of Taxation Ruling 97/22 Income Tax: exempt sporting clubs (TR 97/22), the Macquarie dictionary meaning of 'encouragement' is adopted, being 'stimulation by assistance'. The paragraph lists ways that encouragement can occur directly and indirectly.

In this case, the entity is established for the encouragement and promotion of the particular activity as stated in its objects. Since formation, the activities the entity has conducted provide direct and indirect encouragement of the particular activity.

It is accepted that the entity is established for encouragement of that activity.

Special Conditions

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 relevantly in the entity's case, has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

Subsection 50-70(2) requires 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).

Non-profit requirement

The non-profit requirement is explained in paragraphs 21 to 23 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22). Paragraph 22 advises that we accept a club (an association in this case) as being non-profit where, by operation of law or by its constituent document, it is prevented from distributing its profits or assets among members while the association is operating, and on its winding-up. The association's actions must be consistent with the prohibition.

Paragraph 23 of TR 97/22 states that where the law or the constituent documents do not prohibit distributions, it is a question of fact in each case as to whether the club is not carried on for purposes of profit or gain to the individual members. Factors that we consider relevant include whether distributions have been made, whether there is a stated or demonstrated policy to make or not to make such distributions and whether winding-up is contemplated. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non-profit test has been satisfied.

In this case, the entity's governing document prevents it from distributing assets and income directly or indirectly to its members, while operating and on winding up. As the entity was established in Australia, is physically present in Australia and incurs its expenditure and pursues its objectives principally in Australia, the special condition in subsection 50-70(1) is satisfied.

Governing rules condition

The governing rules condition requires an entity to 'comply with all the substantive requirements in its governing rules'.

The entity's particular governing document is its governing rules. The substantive rules that define the entity's rights and duties are contained in those governing rules. On the facts provided, nothing indicates or suggests that the entity does not comply with all the substantive requirements in its governing rules.

It is therefore accepted that the entity meets the governing rule condition in subsection 50-70(2).

Income and assets condition

The income and assets condition requires that an entity apply its income and assets solely for the purpose for which it was established.

Paragraph 24 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) states that the purpose for which the entity is established is determined by a consideration of all of the features of the entity. The main factors being the objects in the entity's constituent documents and the activities of the entity after its formation, up to the time at which the income and assets condition is applied.

In this case, the objects of the entity are to enable, promote and support a particular activity and its activities since formation have directly aligned to these objects. These objects are accepted as the purpose for which the entity is established.

Meaning of 'solely'

Paragraph 33 of TR 2015/1 explains that 'solely' means that an entity must exclusively or only apply its income and assets for the purpose for which the entity is established. Paragraph 36 explains that the income and assets condition is applied continuously throughout the income year. To be exempt from income tax for all of an income year, an entity (among other things) must satisfy the income and assets condition at all times during that year.

Since formation, the entity has applied its income and assets solely to enable, promote and support the particular activity. Therefore, the income and asset condition in subsection 50-70(2) is satisfied.

Conclusion

The entity satisfies the requirements of section 50-45 and is exempt from income tax under section 50-1.