Edited version of private advice

Authorisation Number: 1051907144640

Date of advice: 08 October 2021

Ruling

Subject: Income tax: exempt entities: encouragement of a sport

Question

Does the Club remain exempt from income tax pursuant to section 50-45 Item 9.1(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2021

Income year ending 30 June 2022

Income year ending 30 June 2023

Income year ending 30 June 2024

Income year ending 30 June 2025

The scheme commences on:

30 June 2020

Relevant facts and circumstances

The Club is an Australian Public Company limited by guarantee and is registered with the Australian Securities and Investments Commission (ASIC).

The Club operates both sporting and recreational facilities.

The Club is in Australia.

The Club's constitution:

•         Includes objects that promote and encourage sport.

•         Includes non-profit and winding-up clauses.

•         Provides that only sporting members can be elected to the Board.

The Club runs sporting competitions each week during the season, and social sporting activities each week.

The Club fields sport teams in various sport competitions and tournaments.

The Club has sports members and social members.

The Club sponsors it's players and other sports groups and clubs.

The Club employs sports administrators, maintenance staff and other staff dedicated to the sport.

The Club has accredited coaches actively involved in coaching at the Club, including running a schools' program.

The Club expends profit each year on sporting activities and infrastructure.

The Club intends to use some of its surplus to build a non-sporting facility.

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 50-47

Income Tax Assessment Act 1997 Section 50-70

Reasons for decision

Summary

The Club is considered a society, association or club established for the encouragement of a game or sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. As such, the income of the Club is exempt from income tax under section 50-1 of the ITAA 1997.

Detailed reasoning

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.

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 conditions detailed in section 50-70 of the ITAA 1997, and the special condition in section 50-47 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 establishing 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 organisations 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 meaning of society, association or club as described above, emphasises a 'body of persons' and an 'organisation of people' with a 'common purpose'.

The Club is a company established under a constitution for the common purpose of its members. The Club is a society, association or club.

Established for the encouragement of a game or sport

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. Taxation Ruling TR 2021/D6 Income tax: the games and sports exemption (TR 2021/D6) describes the circumstances in which the Commissioner will consider a society, association or club to be established for the encouragement of a game or sport. Paragraphs 26-28 provide a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997 and includes the sport.

The objects and activities of the Club are concerned with a sport.

Encouragement

'Encouragement' is not a defined term in ITAA 1997 and takes its ordinary meaning. In South Sydney Junior Rugby League Club Limited and Commissioner of Taxation (2006) AATA 265, the ordinary meaning of encouragement (or the act of encouraging) was described as stimulating by assistance or approval, including through direct or indirect means. Encouragement of a game or sport must be the main purpose of the club in the relevant income year for the club to be established for the encouragement of a game or sport.

Paragraph 42 of TR 2021/D6 states that direct or indirect activities that indicate the encouragement of a game or sport can include:

• Forming, preparing and entering teams and competitors in competitions in the game or sport
• Co-ordinating activities
• Organising and conducting tournaments
• 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
• Encouraging increased and wider participation and improved performance
• Marketing
• Initiating or facilitating research and development and
• Facilitating the activities above by making a financial or in-kind contribution to an organisation that performs them

The Club undertakes the following activities to encourage sport:

• Owns sport facilities which are used for sport competitions and tournaments and social sport.
• Runs sport competitions and tournaments.
• Fields teams in sport competitions and tournaments
• Sponsors other sporting clubs.
• Financially supports its sporting staff to attend coaching and administrative courses e.g. diploma level of Advanced Coaching is being undertaken to provide international level coaching.
• Employs trainers and coaches to enhance the abilities of participants.
• Employs people to maintain the facilities.
• Encourages increased participation through its modified formats and schools' program.

The Club encourages the game or sport.

Main or dominant purpose

To be exempt pursuant to item 9.1(c) of section 50-45 of the ITAA 1997, the main or dominant purpose of the Club must be the encouragement of a game or sport.

The test to be applied was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C of T. 90 ATC 4215 (Cronulla):

For a society, association or club to qualify for the exemption...It must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. It 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. 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 (at 4225).

To determine whether a club is established for the encouragement of a game or sport in a particular year of income, Lockhart J in Cronulla stated:

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely the year of income... (at 4225).

TR 2021/D6 provides the following commentary regarding 'main purpose':

30. Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of a club to determine its main purpose.

31. The subjective motives or intentions of the founders or members of the club are relevant but do not necessarily determine the main purpose of the club. The stated purpose of a club is also significant but not decisive. Other important considerations include the activities and history of the club and how the club is controlled.

35. No one factor on its own will determine the main purpose of a club. A weighing of all the factors id needed. When considering the factors together, an objective conclusion must be reached that a club has a main purpose of encouraging a game or sport.

36. The following factors have been identified by courts and tribunals as relevant when considering purpose:

•                emphasis in the club's constituent documents that the main purpose is to encourage a game or sport

•                extent of sporting activities

•                the conduct of activities directly related to the game or sport

•                promotion of the organisation to patrons and the public as one that encourages a game or sport

•                involvement of the committee of management in the promotion of sport

•                the use of surplus funds for encouraging the game or sport

•                the provision of financial and in-kind support for encouraging the game or sport.

The objects of the Club promote and encourage sport.

To give effect to its objects the Club operates sport facilities, a social facility and a recreational facility.

Historically, the Club hosts sport competitions and tournaments at its facilities and offers social sport. It fields teams in competitions and tournaments.

The Club has dedicated accredited coaching staff engaged actively to assist with player capability and provides a modified social format and a schools' program.

The Club provides sponsorships and grants to other sporting clubs and funding to players from the Club to travel to participate in tournaments and competitions. They also provide funding and professional development to their staff.

The Club will develop further infrastructure which will assist in the overall aims of the Club.

The Board of Directors (the Board) is controlled by sports members.

Based on the analysis, the Club's main purpose is considered to be the encouragement of sport; its objects are to promote and encourage sport, it has sport facilities it uses for competitions and social sport, it fields teams in sport competitions, it is controlled by sport members, it uses its funds to encourage sport and has historically been active in sport. It does have social and recreational facilities, however, historically profits made from the recreational facilities are used to support the sport activities of the Club.

Provided that the Club continues to promote and encourage sport as discussed above, the Club will be established for the main purpose of encouraging sport in the relevant periods.

Special conditions

Section 50-47 of the ITAA 1997

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:

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 that can be registered as a charity with the Australian Charities and Not-for-profits Commission Act 2012 (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are 'charitable purpose' and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose.

The Club has a sporting purpose which is a non-charitable purpose. As such, the Club is not capable of being a registered charity and is not an ACNC type of entity.

Section 50-47 of the ITAA 1997 does not apply to the Club.

Section 50-70

Subsection 50-70(1) 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 purpose of profit or gain of its members (Non-profit requirements) 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 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.

Non-profit requirement

Paragraphs 10 to 15 of TR 2021/D6 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 also has the requisite winding up clause. The supporting evidence shows that the Club applies its profits and assets only for its purposes. As such, the Club is not carried on for the profit or gain of its individual members.

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

• comply with all the substantive requirements in its governing rules; and
• apply its income and assets solely for the purpose for which the entity is established

Taxation Ruling 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 states that an entity's 'governing rules' are those that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 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

The supporting evidence shows that the Club complies with the substantive requirements set out in its governing 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.

The earlier discussion shows that the Club applies its income and assets solely for the purpose for which it was established.

The Club satisfies the special conditions in section 50-70 and section 50-47 of the ITAA 1997.

Conclusion

The Club is considered to be a society, association or club established for the encouragement of a game or sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. As such, the income of the Club is exempt from income tax under section 50-1 of the ITAA 1997.