Edited version of private advice

Authorisation Number: 1051934601249

Date of advice: 16 December 2021

Ruling

Subject: Exempt income

Question

If the arrangement is implemented, will the Club continue to be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 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?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 December 20XX

Year ended 31 December 20XX

Year ended 31 December 20XX

Year ended 31 December 20XX

Year ended 31 December 20XX

The scheme commences on:

January 20XX

Relevant facts and circumstances

The Club has self-assessed that it is income tax exempt under section 50-1 of the ITAA 1997 as a club established for the encouragement of a game or sport within item 9.1(c) of the table in section 50-45 of the ITAA 1997.

The Club's current object is the encouragement of a particular sport and other games or sports as determined by the Committee.

As part of this the Club provides sporting facilities and equipment which members and their guests can access to engage in various athletic games and sports. The Club also runs competitions for members and guests in various sports and games, co-ordinates games and sports days for members, provides training, and offers lessons.

The Club has a very high level of member participation in sport X and other sports that it is involved in, with a small percentage being non-playing members.

The Club is promoted publicly as a sporting club first and foremost.

The application of the Club's funds is predominantly for purposes of promotion of sport and games.

The Constitution requires that the Club keep registers of those who are members.

Members pay an annual subscription fee and the revenue from those fees is the Club's primary source of revenue.

The Club applies its retained surplus towards projects directly connected with the operation of the facilities. There are interim projects to which surplus funds are proposed to be applied in the coming years.

The Club has established a Sub-Committee to consider developing closer ties with the community in the Local Government Area (LGA).

The Club proposes to apply up to an amount as determined by the General Committee of the Club from year to year, of its annual subscriptions towards community-based initiatives within and benefitting the LGA community.

The Club must amend its Constitution to allow for this secondary purpose of supporting community service activities for the LGA and will obtain on an annual basis approval of the general meeting that annual expenditure is limited to a specified percentage.

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

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997)unless otherwise stated.

Summary

If the arrangement is implemented, the Club will continue to be exempt from income tax under section 50-1 as a club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45.

Detailed reasoning

The club has self-assessed that its ordinary and statutory income is exempt from income tax in accordance with section 50 on the basis that:

•                    it is a club established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45, and

•                    it meets the special conditions in section 50-47 and 50-70.

Section 50-45

Paragraphs 29 and 30 in Taxation Ruling TR 2021/D6 Income tax: the games and sports exemption (TR 2021/D6) state:

For a club to be established for the encouragement of a game or sport, the main purpose of the club in the relevant income year must be the encouragement of a game or sport. 'Encouragement' is not a defined term and takes its ordinary meaning. The ordinary meaning of encouragement (or the act of encouraging) has been described as stimulating by assistance or approval, including through direct or indirect means.

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.

Paragraph 36 of TR 2021/D6 notes that:

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

•                    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.

We concur with the opinion and reasoning provided in your application that the Club has been established for the encouragement of a game or sport and that the proposed additional purpose will not change this.

Section 50-47

Under this special condition:

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.

As the Club is not an ACNC type of entity, this requirement is satisfied, and this will not change once the Club implements the arrangement.

Section 50-70

50-70(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).

50-70(2)

The entity 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.

The Club currently satisfies the requirements of subsection 50-70(1) and this will not change once it implements the arrangement.

Paragraphs 22 and 23 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt note that:

The income and assets condition requires an entity to 'apply its income and assets solely for the purpose for which the entity is established'.

Two questions must be considered to determine whether an entity satisfies the income and assets condition:

•                    what is the 'purpose for which the entity is established', and

•                    has the entity applied its income and assets solely for the purpose for which the entity is established?

We concur with the opinion and reasoning provided in your application that the Club satisfies subsection 50-70(2) and that adding another purpose will not alter this if it continues to comply with the substantive requirements in its Constitution and applies its income to both of its purposes.