Edited version of private advice

Authorisation Number: 1051923629782

Date of advice: 17 November 2021

Ruling

Subject: Income tax - games and sports exemption

Question

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

The Club Inc is an incorporated Association.

The Objects of the Club are listed in the Constitution Rules.

The Club's actions are consistent with its Constitution Rules.

Non Profit and Winding Up Clause

The Club Constitution Rules include a clause prohibiting the distribution of funds to members.

There is also a clause prohibiting the distribution of funds and assets to the members of the Club upon winding up.

Activities undertaken by the Club

The Club maintains sporting grounds for the use of Club members and visiting players. The Club maintains lockers for the storage of sporting equipment for members and provision of equipment for visiting players and potential members. Administrative offices within the Clubhouse are used for the registration of players and the development of competitions and carnivals.

The sport is played at the Club six days a week. This runs to a weekly schedule. Social games of the sport are also available on specified days and by appointment with the Club. Social sporting events also occur throughout the year.

Competitions and carnivals are held at the Club including Club and District run competitions. These competitions often involve prize money. Members of the Club participate in local, district, regional and state competitions.

The majority of members participate in the sport.

The majority of the Management Committee of the Club are active participants in the sport.

Social activities

In the relevant year the Club had the following:

•                 function room

•                 dining

•                 bar

•                 Gaming machines

•                 Keno and TAB

The club conducts a number of social events throughout the year such as Fathers Day events, Melbourne Cup, Easter, trivia nights, ladies nights. etc. These events can involve entertainment, event specific dining options, incorporated sports events, raffles, etc. In addition, there is live entertainment some nights.

The club runs a free courtesy bus service.

For the relevant income year, approximately 95% of revenue was earned by these social activities.

The Club does not have a specific policy on the application of surplus funds. Historically, the Club has used these funds to reduce the debt of the Club, predominately the mortgage over the sporting facilities and Clubhouse. This non-formal policy of debt reduction will apply to the current year.

Approximately 65% of all Members participate in sport at the Club.

Decoration and fit out throughout the Club

Within the Clubhouse trophies and plaques are displayed in trophy cupboards. Current and historical team photos are displayed as well as honour boards. Current competition events are on display as well as Executives past and present. On electronic advertising boards upcoming events are displayed as well as current yearly winners.

Visitors

The facilities of the Club are intended for the use of members. Visitors are permitted to the Club with certain limitations.

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

Reasons for decision

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 not carried on for the purposes of its individual members' profit or gain, and

•                 is established for the main purpose of the encouragement of a game or sport,

•                 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. Based on the definitions provided in the Macquarie Dictionary a 'society, association or club' refers to a voluntary organisation of people associated together for a common or shared purpose. A society, association or club may be constituted as an unincorporated association or be formally recognised by incorporation.

Non-profit requirement

Draft Taxation Ruling 2021/D6 Income tax: the games and sports exemption (TR2021/D6) discusses in more detail the provisions around the games and sports tax exemption.

Paragraphs 10 - 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, either while it is operating or on its winding up.

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.

Established for the encouragement of a game or sport

TR 2021/D6 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 26 of TR 2021/D6 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997.

Elements that constitute whether an activity can be classified as a game or sport include the intention, the presence of rules and conventions and competition. Fishing can be considered a sport, rather than a leisure activity, provided it includes these elements. Paragraph 27 of TR 2021/D6 lists activities that are considered games.

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.

A number of factors must be taken into account when considering whether the encouragement of a game or sport is the club's main purpose. Paragraph 36 of TR 2021/D6 lists factors that have been identified by courts and tribunals as relevant when considering purpose. These include:

•                 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

•                 a high level of member participation in 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.

Other direct or indirect activities relevant in determining whether the main purpose of the club is the encouragement of a game or sport are listed at paragraph 42 of TR 2021/D6. These include:

•                 forming, preparing and entering teams and competitors in competitions in the game or sport

•                 coordinating 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.

Social Activities

TR 2021/D6 states at paragraph 33 that a club that has both sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is:

•                 merely ancillary and incidental to its sporting purpose (that is, a purpose that is related to carrying out its sporting purpose), or

•                 secondary to its sporting purpose (that is, a purpose that is independent to, but less important or less significant than, the sporting purpose).

TR 2021/D6 discusses 'Other Purposes' at paragraphs 33 and 34. In example 6 - incidental and secondary purpose, the ruling describes a Bowls Club that also has bar, dining and gaming facilities, the example concludes that in light of all the Bowls activities carried on by the Club, that the dining and gaming type activities are incidental and ancillary or secondary to its main purpose.

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.

APPLICATION TO YOUR CIRCUMSTANCES

Society association or club

The Club is a voluntary organisation of people, its members, associated together for the common purpose of enjoying and encouraging the sport and other games and sports. It is an incorporated association with a constitution outlining its purpose.

Non-profit requirement

The Constituent documents of the Club prevent distribution to members both while it is operating and upon winding up and dissolution.

The non-profit requirement is satisfied.

Main purpose established to encourage game or sport

The main purpose of the Club is the encouragement of a game or sport. This determination is based on the following factors:

•                 Members of the Club participate in competitions and tournaments;

•                 The Club organises and runs competitions and tournaments;

•                 The Club provides officials to preside over the competitions and tournaments;

•                 The Club conducts coaching sessions;

•                 The Club encourages members to be spectators and support the sport by advertising upcoming competitions and arranging social events such as dining and entertainment that align with competitions;

Other less persuasive but still relevant considerations include:

•                 xxx of the xxxx members of the Club participate in the sport;

•                 80% of committee members participate in the sport;

•                 The Club promotes itself to the public as a sport club and uses social media to advertise upcoming tournaments and events. It also encourages visitors to the local caravan park to participate in sport competitions and advertises its function room as having a view across the sporting facilities;

•                 The Club's sporting facilities are next to the social facilities; and

•                 The Decoration of the Club includes displays of notable achievements by Club members.

Social activities

Although the Club conducts activities other than sporting activities these are considered secondary to its main purpose to promote the sport and other sports.

In addition, the club uses its social events and facilities to promote the sport and other sports within the community. This includes advertising within the Club, the decoration of the Club and coordinating some social events with sporting events so to encourage spectators to the sport.

While the Club does generate approximately 95% of its revenue from its non-sporting activities, the surplus is used to repay the mortgage on the Clubhouse and sporting facilities.

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

Special Condition

The Club is physically present in Australia, it pursues its objectives in Australia and incurs expenditure principally in Australia.

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 its surplus funds in repaying loans on amounts used to provide sporting facilities and clubhouse.

•                 The Club's constituent documents state that The Club's purpose is to encourage the sport and healthy sports.

•                 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.

•                 The social activities of The Club provide facilities for members and an income stream to support the sporting activities of The Club.

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