Edited version of private advice

Authorisation Number: 1051935306489

Date of advice: 20 December 2021

Ruling

Subject: Income tax exempt entity

Question

Is Club A exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 as a society, association or club established for the encouragement of a game or sport under item 9.1(c) in section 50-45 of the Income Tax Assessment Act 1997 for the 2021, 2022 and 2023 income years?

Answer

Yes

This ruling applies for the following period:

1 July 2020 to 30 June 2023

The scheme commences on:

1 July 2020

Relevant facts and circumstances

1.         Club A is an Australian public company limited by guarantee.

2.         Club A submit that they are well known throughout the Region C community for encouraging, sponsoring and promoting Sport B, and that they are arguably the largest Sport B community in Region C. Club A characterise their principal activities for the 2018, 2019 and 2020 income years as operating a Sport B Club, and licensed premises.

3.         Club A also operate five social venues, which offer facilities of a social and entertainment nature. Most of Club A's revenue is generated from these activities.

Club A's venues: five services clubs and one Sports Centre

4.         Club A have six venues in Region C: venues D, E, F, G, H, and a Sports Centre.

5.         Venue D was Club A's original club site. Club A acquired Venue E some decades ago because of concerns that a certain facility might threaten the Venue D site or limit expansion.

6.         Club A acquired Venues F, G and H through amalgamations. Club A have explained the amalgamations this way:

•           Venue F was a failing club with a rich Sport B history and Club A's board saw amalgamation as an opportunity to revitalise the club's history and support the local juniors and seniors programs.

•           Venue H was a failing Sport M club on the Sports Centre site acquired by Club A. The board of the Sport M club at the time elected to amalgamate with Club A as the best option for the longevity of the club. Venue H supports social Sport M and broader social sports, and hosts a number of social events following games held at the Sports Centre.

•           Venue G was a club with 3,500 members of which 1,600 were mutual to Club A. Venue G is one of the oldest sporting services clubs in Australia and was formed to cater to and support all branches of local sport. Venue G was a failing club. Club A saw this as an opportunity to save a club with a rich sporting history, because Venue G was the only club in Region C when it was established. Today, Venue G is only a food & beverage, gaming and social hub for Region C, including social sport. While it was previously the home base for the Region C District Sport B headquarters, it has never operated its own team.

Club A's membership and board

7.         Club A had roughly 24,000 members as at 30 June 2021, across all Club A venues. These members comprise several categories listed in Table 1.

Table 1: membership by category[1]

8.         All current directors on Club A's board have an interest in Sport B, either having been a player, coach, administrator or volunteer in the past, or a current passion for the sport. The current directors include:

•           the Chairperson - who was a former player, and former coach

•           the Deputy Chairperson - who was a former first grade player, and former Region C 'player of the year'

•           a former player

•           a former player, and former Junior Sport B Secretary

•           a former first grade coach

•           the current junior Sport B Secretary and registrar

•           a volunteer who has volunteered in weekend roles supporting the administration of the games for about 40 seasons

•           a social Sport I member.

9.         Some years ago, Club A received a private ruling to the effect that it wasn't a tax-exempt entity. It has reapplied because of subsequent changes to its operations and activities.

Club A's Sports Centre

10.      Club A purchased a Sports Centre for roughly $2M. Club A leased playing fields before the purchase. The Sports Centre is used as Club A's home ground. The Sports Centre includes a grandstand with seating for around 1,000 people, several corporate boxes, lighting towers, change rooms, and canteen facilities. The Sports Centre also includes a Sport J and Sport K centre.

11.      By around 2020, the Club had spent around $6M in capital additions and improvements to the Sports Centre, with around $5M of this being spent in the 2012 and 2013 income years.

12.      The Sports Centre has hosted many Sport B events and competitions with regional and national significance since at least 2015.

13.      See Table 2 for Club A's expenditure on the Sports Centre in the 2018, 2019 and 2020 income years.

Table 2: Sports Centre expenditure 2018-2020

Club A's Sport B activities

14.      Club A has entered teams in Junior Sport B competitions: roughly 30 in 2018, 2019 and 2020. Club A had roughly 500 players and about 40 senior players competing in the 2020 income year. Club A enters a first grade, reserve grade, and Under 18 team in Senior Sport B competitions.

15.      Club A also gives financial support to at least 200 junior players managed by a separate Venue F committee.

16.      Club A has around 75 coaches or trainers across the junior and senior leagues. The first grade, reserve grade, and under 18s coaches, the senior league coordinator, and trainers are employees. Other coaches are volunteers.

17.      Club A have about 200 employees. These include full time, part time, and casual staff. About ten positions are directly Sport B related: see Table 3 for details. The remaining positions are for hospitality, finance and administration staff. However, Club A submit that employees' roles may cross over to different areas of the club. For example, staff with roles which are not directly Sport B related may help prepare for Sport B events.

Table 3: employees directly engaged in Sport B activities

18.      Three of Club A's venues (D, F, and G) have displays (physical or digital) about history, past teams and significant players.

19.      See Table 4 for a summary of the club's income and expenses from sporting activities for the 2018 to 2021 income years. In Table 4, broadly:

•           'income' items for sporting activities include: canteen sales and ground hire, competition income, gate proceeds, sale of merchandise and 'social income'

•           'expense' items include sports centre depreciation, utility fees, insurance, repairs & maintenance, staff wages, cleaners, coach fees, presentation nights, medical expenses, player bonuses and sports gear.

Table 4: income and expenses from sporting activities

20.      Club A's records included an item described as club grants. This item is gaming revenue that has been directed to junior Sport B expenses as part of the Club Grants program. This is treated as a contra expense in Club A's internal accounts.

21.      Club A submit that contributing factors to reduced spending on senior Sport B in 2020 and 2021 include:

•           a salary cap being introduced for the 2020 and following seasons

•           COVID 19 restrictions causing a reduced season in the 2020 year, and the 2021 season being completely abandoned.

Club A's net profit, income, expenses

22.      We summarise financial information which Club A have given in their application, supporting documents, and responses to questions. We've presented some details about net profit, income and expenses in Tables 5, 6 and 7.

Table 5: Club A's (including its subsidiaries) total income and expenses

Table 6: Details of specific income items

Table 7: Details of specific expense items - in $ and as a percentage of total expenses, excluding depreciation and amortisation

23.      Club A spent part of its salary and wages expenditure on remuneration for positions described as 'key management personnel', see Table 8. None of the key management personnel are board members. All managers have full time roles, and manage all five club sites.

24.      The CEO's contract is approved by the Board. All other management remuneration is determined by the CEO.

25.      The CFO was made redundant in 2021, so the figure includes a termination payment.

Table 8: remuneration for key management personnel

Club A's Non-Sport B activities

26.      All venues, apart from the Sports Centre, have dining, bar facilities, electronic gaming machines, TAB, Keno and Bingo facilities.

27.      Venue H has facilities for social and competitive Sport M activities. Venue H wound up competitive Sport M activities in 2019 due to lack of players. Venue H continues to offer social Sport M activities. Club A maintains the Venue H venue predominantly as a social hub, including for a venue for post-match and post-training social events.

28.      Broadly, services club activities conducted at Venues D and E are profitable, but Venues F, G, and H are loss-making. Club A's budget projections show these trends are expected to continue for the 2022 to 2025 income years. We summarise these trends in Tables 9 and 10.

Table 9: net budged profit for Club A's services clubs and sporting activities

Table 10: net cash flow projections for Club A's services clubs and sporting activities

29.      Club A owns a butcher shop near one of its venues. The butcher shop supplies meat products for Club A's catering facilities and social raffles. It also supplies meat products to the public, but the majority of its supplies go to Club A. Club A submit that the butcher acquisition allows them to:

•         become their own supplier of product and manager supplier costs

•         increase their purchasing power to supply their venues and fundraising activities.

See Table 11 for the butcher shop's net profit for the 2018 to 2021 income years.

Table 11: The butcher shop's net profit for the 2018 to 2021 income years

30.      Club A operates three social Sport I clubs based at Venues D, G, and F. They are social groups for people mainly over the age of fifty, that play fortnightly games subsidised by the club. They use a variety of facilities throughout Region C: they do not own any Sport I facilities.

31.      Club A has a Club Grants Scheme through which it supports community and sporting groups, charities and charitable events in the Region C community. Grant recipients have included organisations which support homeless or disadvantaged people, and local sporting clubs in other sports.

Club A's Constitution

32.      Club A have given a copy of their current Constitution.[2] It lists Club A's objects as including:

•           To allow people to play and support Sport B

•           To promote Sport B

•           To participate in Sport B competitions

•           To promote and participate in other sports and pastimes

•           To provide a clubhouse, social amenities and other facilities to members

•           To hold a licensed club registration

•           To employ coaches and other assistants to help run Sports B events

•           To contribute to religious, charitable, or sporting organisations

•           To amalgamate with other registered clubs.

33.      Other objects include purchasing/dealing in properties, building/repairing buildings or playing fields, paying costs and expenses, raising money, dealing in securities, instruments or properties, employing officers or employees, granting pensions, entering insurance contracts, or indemnifying officers.

34.      It contains a 'non-profit' clause.

35.      One of the clauses says that Club members (including board and committee members) shall not directly or indirectly derive any profit, benefit or advantage, unless it is either offered equally to all members, or it derives from dealings or contracts made in the ordinary course of its business.

36.      Categories of club members include:

•           Sport B Members - broadly, to be eligible members need to satisfy the board that they give substantial support to Sport B (eg, attending matches, coaching or organisational duties etc)

•           Club Members - must pay membership fees, wish to use Club A's facilities and amenities, and be over 18 years

•           Junior Members - under 18 years, participate in Club A's sporting activities

•           Life Members - broadly, to be eligible, the Board must nominate a member, they must have ten years standing, and have rendered meritorious service to the club

37.      One of the clauses says that the Board shall comprise nine directors, comprising a President, Vice President, and Treasurer, and six other directors:

•           a minimum of five directors who must be Life Members or Sport B Member

•           a maximum of four directors being either Life Members or from any class of Ordinary Members except Junior Members

38.      If there are casual vacancies so that the Board is comprised of seven or eight members, a majority of Board members must still be Life Members or Sport B Members.

39.      No employee can be elected to the Board.

40.      The positions of President, Vice President and Treasurer must be Life Members or Sport B Members.

41.      Members must have been a continuous member of the Club for two successive years to be nominated, elected, or appointed to the Board.

Club A's annual reports

42.      Club A supported their application with Annual Reports for the 2018, 2019 and 2020 income years. The Annual Report for the 2021 income year became available online sometime after Club A submitted their application. These reports contain President's Reports, reports for Sport B, notices of meetings and resolutions, and Financial Statements.

43.      Broadly, the senior and junior reports give highlights from competitions, and movements in coaches or administrative support positions.

44.      The annual reports give details of current directors, including years of service. Several current or recent directors have significant longevity. For example, according to the 2021 Annual Report, one director had around 60 years of service. Three others had 20 or more years of service.

We summarise the President's Reports for the 2018, 2019 and 2020 income years in Table 12.

Table 12: President's Reports for the 2018, 2019 and 2020 income years

Club A's cash reserves

45.      Club A's Financial Statements show cash reserves - see Table 13.

Table 13: Club A's cash and cash equivalents - 2018 to 2021

46.      Club A submit that they have a policy to maintain cash reserves. This is because Club A:

•         think maintaining cash reserves is prudent management, having learnt from a history of reckless spending, which almost caused Club A to go under some decades ago

•         consider that gaming activities have political risk - the government might impose restrictions or introduce taxes

•         need to refresh food and beverage facilities to maintain and attract customers

•         allow it to support and advance Sport B and social sport in Region C.

47.      Club A also submit that COVID-19 conditions have affected their cash reserves:

•         Club A submit the increase in their cash reserves in 2021 was unexpected, because COVID-19 caused unusual spending on gaming activities

•         cash reserves had reduced to approximately $4 to $4.5M by November 2021, as venues closed in the second half of the calendar year

•         Club A think it is appropriate to maintain a cautious cash flow management approach in COVID-19 conditions: there may be more lockdowns.

Club A's strategy

48.      Club A submitted a document about their strategy for the next decade.

49.      Club A submit that their immediate focus is surviving COVID-19 conditions. This is because COVI9-19 has had a negative impact on the club early in the 2022 financial year:

•         All premises were closed from late June 2021 to early October 2021.

•         In October 2021, only two club premises (Venues D and E) had enough staff to operate, because only half of employees were fully vaccinated and ready to commence. Some staff resigned or did not meet vaccination requirements.

•         Club A expects Venues G and F to open in early 2022.

50.      Club A has two proposed developments for their main club site:

•         An approved development application to develop a car park and deck extension for about $4M.

•         A submitted expression of interest to buy adjacent land for $4M. The club intends to redesign the club, move the entry, add club, food offerings and gym facilities. The club is considering shared work space opportunities, and developing an 80 room boutique hotel. Club A submit these are just proposals which may not materialise.

51.      Club A have been approached by developers for Venue G. Club A are considering selling the site to a developer, under an agreement where the developer develops a unit and office site, and returns some space in that site to Club A. The plan is to replace the current premises at a net zero cost.

52.      Club A plans to operate and develop Sport B by maintaining cash reserves, diversifying away from gaming by developing facilities and becoming a landlord.

Assumptions

Club A will comply with its Constitution during the 2021 to 2023 income years.

Club A will not make any substantive[3] (as opposed to procedural) amendments to its Constitution during the 2021 to 2023 income years.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-45 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Section 50-70 of the Income Tax Assessment Act 1997

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless another act is mentioned.

Question

Is Club A exempt from income tax under section 50-1 as a society, association or club established for the encouragement of a game or sport, under item 9.1(c) in section 50-45 for the 2021, 2022 and 2023 income years?

Summary

53.      Yes. Club A is exempt from income tax for the 2021, 2022 and 2023 income years, because it is a club established for the encouragement of a game or sport. It meets the requirements to be eligible under item 9.1(c) in section 50-45.

•           While Club A has multiple purposes, we think encouraging Sport B is its main purpose. While Club A runs substantial services club activities, we think it does this to fund Sport B.

•           Club A is a non-profit body which complies with its rules and carries out its activities principally in Australia.

Detailed reasoning

54.      Section 50-1 says:

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.

55.      The relevant table is section 50-45, which is about 'sports, culture and recreation'.

56.      Item 9.1(c) in section 50-45 says that 'a society, association or club established for the encouragement of a game or sport' is an exempt entity. The special condition for Item 9.1(c) is in section 50-70. Section 50-47 is a 'special condition' applying to all entities.

57.      Therefore, to be exempt under Item 9.1(c), an entity must:

•           be a society, association or club established for the encouragement of a game or sport ('the first condition').

•           comply with section 50-47 ('the second condition')

•           comply with section 50-70 ('the third condition').

58.      Therefore, Club A will only be exempt under Item 9.1(c) if it meets all three of these requirements. We consider each in turn.

The first condition: is Club A a society, association or club established for the encouragement of a game or sport?

59.      Taxation Ruling TR 2021/D6 Income tax: the games and sports exemption is the Commissioner's preliminary view on the 'game or sport' requirement in Item 9.1(c) in section 50-45. TR 2021/D6 replaces Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, which contained similar views.

60.      Paragraph 6 of TR 2021/D6 says that a club is a voluntary organisation of people associated together for a common or shared purpose.

61.      Club A is a club, because it has voluntary members who associate to play Sport B and participate in licensed club activities. Sport B is both a game and a sport.[4] Is Club A established for encouragement of Sport B and other sports? If so, is that encouragement its main purpose?

A club with multiple purposes will only meet the 'main purpose' test if any non-exempt purposes are incidental to an exempt purpose.

62.      A club with multiple purposes will only pass the 'main' purpose test if non-exempt purposes can be characterised as incidental to the exempt purpose. Cronulla Sutherland Leagues v Federal Commissioner of Taxation[5] is accepted as a leading authority on the 'game or sport' condition. Broadly, Cronulla Sutherland shows that where a club has multiple purposes, only one of which is eligible for the exemption, it is necessary to characterise the taxpayer, considering its objects, purposes, and activities. A club may qualify if the non-exempt purpose is merely incidental or ancillary to the exempt purpose, but won't if the two purposes are 'coordinate'.[6]

63.      Clubs like Club A often provide amenities (eg, dining and gaming/gambling activities) to members and visitors through a 'services club' type arrangement. Are these 'services club' type activities incidental to promoting sport? Here, Club A carries out Sport B activities, but also carries on a substantial services club operation. It also supports other community groups. The question is whether:

•           Sport B is its main purpose, and other activities (such as carrying on a services club) is merely incidental to Sport B, or

•           any of the other activities have become ends in themselves,[7] or are so significant that it should be characterised as a 'co-ordinate' object?[8]

If the former, then Sport B is the club's main purpose. If the latter, then Sport B is not the club's main purpose, and Club A is not exempt under Item 9.1(c).

64.      Federal Court and Australian Administrative Appeals ('AAT') decisions give other examples of how clubs with multiple purposes have been characterised for the sporting club exemption. We list a few which we have used as comparisons:

•           Terranora Lakes Country Club v Federal Commissioner of Taxation[9]

•           St Mary's Rugby League Club Limited v Federal Commissioner of Taxation[10]

•           AAT Case 1068 (Re Tweed Heads Bowls Club and Federal Commissioner of Taxation)[11]

•           Re South Sydney Junior Rugby League Club Ltd v Federal Commissioner of Taxation[12]

We summarise these cases in the Annexure.

65.      TR 2021/D6 explains the Commissioner's view about how the 'main' purpose test should apply to clubs relying on the 'game or sport'. To summarise a few points made in TR 2021/D6:

•           the club's main purpose in the relevant income year must be the encouragement of a game or sport (paragraph 29)[13]

•           encouragement isn't defined, and takes its ordinary meaning: to stimulate by assistance or approval (paragraph 29)

•           determining the club's main purpose requires objectively weighing all material facts and circumstances - there is no set formula (paragraph 30)

•           the club's stated purpose, and the subjective motives or intentions of the club's founders/members are relevant but not decisive (paragraph 31)

•           the club's main purpose must be determined in the income year, not when it is formed (paragraph 32)

66.      At paragraph 33, TR 2021/D6 says a club that has both sporting and non-sporting purposes will not qualify unless the non-sporting purpose is:

•           merely incidental to its sporting purposes, or

•           secondary but of less importance than its sporting purposes.

67.      Paragraph 35 of TR 2021/D6 says that determining a club's main purpose requires objectively weighing all the club's features. TR 2021/D6 lists factors at paragraph 36 which have been identified as relevant when considering a club's purpose.

We apply the features listed in paragraph 36 of TR 2021/D6 to Club A in Table 11.

68.      TR 2021/D6 explains some of these factors in other paragraphs. For example:

•           A club's activities are important, but can't be considered in isolation. Activities can be a means to an end. All of a club's activities must be weighed against the club's objects, history, and control to determine the main purpose (paragraphs 37-38).

•           Where a club derives revenue from commercial operations, it is necessary to objectively determine whether they are a means to advancing a sporting purpose, or some other purpose (paragraph 40).

•           A club can demonstrate a purpose of encouraging a game or sport where it provides contributions to other organisations that directly conduct those activities (paragraph 41).

69.      Paragraph 42 of TR 2021/D6 lists examples of direct or indirect activities that indicate encouragement of a game or sport.

•           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 other activities in this list by making a financial or in-kind contribution to an organisation that performs them directly.

70.      TR 2021/D6 says that how surplus funds are used, or retained for future use, is an important factor in determining the club's main purpose.

•           A club that uses surplus funds from commercial activities to support sporting activities will not necessarily have the main purpose of encouraging a game or sport (paragraph 44).

•           The extent of the activities and any other ends they achieve may result in a different characterisation of purpose (paragraphs 43 and 44).

•           If surplus funds are used for other commercial activities, or contingency funds, this factor is neutral (paragraphs 45 and 46).

71.      TR 2021/D6 at paragraphs 60 and 61 says the club's main purpose can change over time. But isolated events do not necessarily mean that purpose has changed.

72.      We apply some of the points made in TR 2021/D6 to Club A in Table 14.

Table 14: features listed in paragraph 36 of TR 2021/D6

Club A's uses its funds consistently with Sport B being its main purpose

73.      While Club A generates substantial revenue from services club activities, this is arguably incidental to promoting Sport B. Their financial information shows that most (around 90%) of their income comes from services club type activities (bar, catering, gambling and similar), and also incurred most of its expenditure on those activities. However, the decisions in Terranora, St Mary's, and Tweed Heads show that merely generating substantial revenue from other activities doesn't prevent encouragement of a game or sport being the club's main purpose. Nevertheless, the other activities should serve to generate profits to fund the club's sporting activities.

74.      We compare Club A's gross Sport B expenditure to its total revenue, total expenses, and net profit in Table 15.

Table 15: Gross Sport B expenditure (excluding depreciation) - % of total revenue, total expenses, and net profit

75.      While Club A's expenditure on Sport B activity is small compared to its total operations (revenue and expenditure), it exceeds its net profit. That is, the total amount spent on Sport B activity (including the Sports Centre) is greater than Club A's net profit or loss for the year. This is consistent with the characterisation that the services club activities are carried on to fund its Sport B activities.

76.      However, accumulating surplus funds without spending them on sport, might compromise a club's claim that sport is its main purpose. We discuss this at paragraphs 77 to 85.

Cash reserves, developments and club strategy: is Club A accumulating funds for a hotel development?

77.      While Club A has accumulated significant cash reserves, this factor doesn't necessarily prevent Sport B being their main purpose. Club A had approximately $8M in cash reserves in its 2021 financial statements. These reserves significantly exceed their annual gross Sport B expenditure. Club A haven't made any submissions that they are retaining funds for Sport B expenditure. However, paragraph 45 of TR 2021/D6 suggests putting aside surpluses as a contingency fund can be a neutral factor if the club has a reasonable need for it. Club A submit retaining surplus cash is a cautious risk management approach, developed partly in response to historical reckless spending, and maintained in COVID-19 conditions.

78.      We think it appropriate to scrutinise Club A submissions to determine if their cash surplus strategy is consistent with Sport B being its main purpose. We discuss some considerations in paragraphs 79 and 80.

79.      Some factors which could suggest that Club A cash fund may be a reasonable contingency fund include:

•           Ongoing or renewed COVID-19 related restrictions could threaten revenue.[15] Club A's may need the contingency fund to survive (by continuing to maintain venues, including the sports centre, and Sport B activities) in the short to medium term.

•           Actual recent fluctuations in cash. The first half of the 2022 income year (second half of the 2021 calendar year) has seen Club A's cash reserves reduced to $4-4.5M. This appears to vindicate Club A's cash management strategy to the extent the reduction was caused by COVID-19 conditions.

•           The need to renew services club equipment to maintain services club revenue.

•           Heavy reliance on gambling revenue exposing Club A to regulatory risk. Club A receives most of its revenue from gambling activities. Gambling activities are known to attract media and political attention.[16] Future government regulation or other political events may diminish Club A's ability to raise revenue from gambling activities.

•           History of reckless spending by Club A. We think it reasonable to question whether events from some decades ago would have a significant impact on current policies. However, we note that Club A's current board has significant institutional memory, with a current board member and former treasurer having served at the club for over 60 years.

80.      However, we need to consider whether the cash reserve is being maintained for non-Sport B projects. Club A is considering significant developments at Venues D and G, which don't directly relate to Sport B. The Venue G proposal is expected to be cash neutral. However, Club A have submitted an expression of interest for a Venue D land purchase at $4M. It is considering using the new site to redesign the club, and develop shared work spaces and an 80 room boutique hotel. There's no suggestion the hotel will be reserved for Sport B related purposes (for example, accommodation for touring Sport B teams). The development is a significant proposal requiring substantial funds. We note that the developments are simply proposals - they may not go ahead. Nevertheless, they are arguably a factor pointing against Club A's main purpose being Sport B.

81.      Redevelopment to modernise the Venue G premises suggests providing services club facilities to members is a significant club purpose. Venue G is a loss-making services club with no direct links to Sport B activity. While it was the former headquarters for the Region C District Sports B administration, it has never run a Sport B team. It doesn't appear to have attached playing fields. If Club A is considering major redevelopments to this venue, including dealing with developers, that suggests maintaining it has become an end in itself. In other words, it isn't just a means to make profits to channel into sporting activity. Providing high quality services club facilities to members through venues like Venue G may have become a stand-alone purpose for Club A.

82.      The proposed development at Venue D is a substantial operation which also undermines Club A's claim that Sport B is its main purpose.

•           Broadly, encouraging sport can still be a club's main purpose if other activities (such as fundraising) are incidental to encouraging that sport.

•           The more significant the activity or operation, the less likely it is that they are incidental.

•           In St Mary's,[17] Hill J commented that he was concerned about a proposed motel development. The decision in that case was that rugby league was that club's main purpose, because of its rugby league intensity. (Much like Club A, it ran over 30 teams, including a first grade team and a reserve grade team in the local competition). However, Hill J said that if the club built a motel, it would be more difficult to reach that conclusion. We've included an extract from this judgment in the Annexure.

•           Acquiring land for over $4M and building an 80 room hotel is a large-scale operation which would be very unusual for a sporting club.

•           The scale of Club A's non-Sport B activities may drown out its Sport B activities. If Club A develops shared work and hotel accommodation alongside its existing services clubs, it would become a substantial and diversified commercial operation. The scale of those activities alone might disqualify them as being incidental to supporting Sport B, unless there was (at least) a corresponding increase in sporting activity.

83.      Nevertheless, we think that the proposed developments aren't necessarily fatal to Sport B being Club A's main purpose:

•           Some of the developments are simply proposals at this point - they may not go ahead. For example, Club A might abandon either proposal if wasn't affordable or wouldn't achieve their objectives.

•           While the $4M carpark and deck extension has been approved, this seems more routine. It might increase venue capacity and convenience, allowing Club A to generate more profits to fund Sport B.

•           The Venue G development is expected to be cash neutral for Club A. If that turns out to be the case, it won't drain resources away from Sport B. Further, modernising the venue might attract new customers and allow it to turn a profit.

•           Developing the Venue D site may lead to new and diversified sources of revenue. Shared work and hotel accommodation might allow Club A to become less dependent on gaming activities. This could be a rational long-term strategy to make the club viable if changes to gambling regulation or social behaviour make gambling less profitable.

84.      On balance, we think that the proposed developments (based on the information available at this point) are neutral to determining Club A's main purpose.

85.      However, we might reach a different conclusion in future, depending on how any developments (if they go ahead) affect Club A's operations. Just for example, Sport B would be unlikely to be Club A's main purpose if it:

•           went ahead with development without plans to generate income from that development (in which case the development may be an end in itself)

•           generated revenue through diversified operations, while maintaining loss-making services club operations (in which case the development would subsidise loss-making services club activities)

•           decreased Sport B activities or expenditure while pursuing development

•           substantially expanded its scale (through development or new operations) without increasing Sport B activities or expenditure.

While several venues are running at a loss, we think this is compatible with Sport B being their main purpose

86.      Providing club facilities and amenities to members may sometimes become an end in itself, of comparable significance to Sport B. Club A has several services club venues. While overall they run a profit, some of the venues (Venues H, F, and G) run at a loss. Moreover, budgets for the 2022 to 2025 years suggest that these losses are expected to continue for the near future. If Club A merely conducts services club activities to fund Sport B activities, why is it running services clubs at a loss? Arguably, this suggests the services club activities conducted by these loss making venues are ends in themselves. If so, Club A will fail the main purpose test.

87.      To evaluate this argument, we need to scrutinise Club A's submissions about its rationale for acquiring loss making clubs. Venues H, F, and G amalgamated with Club A. Why would Club A choose to acquire loss-making clubs? This would reduce its profits, and reduce the funds available to support Sport B. Arguably, this suggests that running services clubs has become an end in itself. However, we also need to consider whether running non-Sport B loss making activities could have indirect or long term benefits for Sport B. If there are significant indirect or long term benefits, the loss making activities might still be part of a strategy to promote Sport B. In that case, Sport B could still be Club A's main purpose.

88.      We think that Club A's decision to continue to run these venues at a loss can be explained without concluding that running services clubs is a non-incidental purpose.

•           Club A's annual reports evaluate each services club venue on financial performance, and suggest they aim to reverse loss-making trends

•           Club A may hope amalgamating with less viable clubs might reduce costs through economies of scale. For example, administration costs for each venue might be lower if they benefit from Club A's existing staff and structure. This could help loss making venues to run a profit in the medium term.

•           Venues F and G amalgamated with Club A recently, and it might take some years for Club A to turn them into profitable entities.

•           COVID-19 restrictions will have disrupted Club A's plans, operations and financial performance in 2020 and 2021.

•           Venue F and Venue G have significant Sport B heritage: if the venues closed that may damage Sport B's reputation in the community.

•           Club A gives financial support to 250 junior players managed by a separate Venue F committee: this arrangement might not have happened if Club A hadn't amalgamated with Venue F.

•           Amalgamating with non-viable Sport B affiliated clubs might promote the Club A brand and help it to promote Sport B.

89.      Nevertheless, it is possible Sport B wouldn't be Club A's main purpose if some venues consistently reported losses for many years. This would tie up funds and resources which could have been redirected to Sport B. If 'Sport B' was really the main purpose, Club A would regard the funds and resources invested in the loss-making venues as wasted. Maintaining the loss-making venues indefinitely would be inconsistent with a strategy to generate profits to fund Sport B activities. Even if Club A was able to maintain the failing clubs without compromising Sport B, maintaining the failing clubs wouldn't help it to promote Sport B. In that case, running services clubs would have become a stand-alone purpose, which would cause Club A to fail the main purpose test.

Does the butcher shop demonstrate Sport B isn't Club A's main purpose?

90.      We have also considered whether Club A's butcher operation is a factor suggesting Sport B isn't its main purpose. While the butcher represents a small proportion of Club A's total operations, we think it's unusual for a sporting club to run a separate business selling meat products.

91.      While the butcher acquisition is small, it may suggest that Club A's services club operations are a significant purpose. The acquisition supplies Club A's services club venues. Club A submit it helps the club manage supply costs for their venues and fundraising activities. Club A's focus is on providing high quality meals for its services club catering. The services club catering objective might become an end in itself - no longer merely incidental to generating profits for Sport B.

92.      Here, we think the butcher is neutral to characterising Club A's main purpose. It's incidental to Club A's services club operations. We've concluded that the services club operations are themselves incidental to generating profits to channel into Sport B. We don't think the butcher is significant enough to change our characterisation or assessment. Controlling catering costs may be part of a strategy to increase Club A's total profits, and allow it to devote more funds to supporting Sport B.

93.      However, we might reach a different conclusion if there was evidence that Club A catering operations went beyond a profit-making activity to fund Sport B. This could happen if Club A (for example):

•           was running catering operations in an uncommercial, loss-making manner

•           was investing substantial resources (disproportionate to its Sport B activities) to achieve culinary excellence[18]

•           promoted its catering activities and achievements (eg, catering industry awards) to an equal or greater extent than its Sport B activities and achievements.

Club A's other activities are best characterised as incidental to promoting Sport B

94.      We also need to decide whether Club A has any other purposes which cause it to fail the main purpose test. Club A spends significant amounts on community grants, and management compensation expenditure. These activities aren't directly related to Sport B activities. It could be suggested that these other items are so significant, compared to Sport B expenditure, that they are of similar or equal importance, and have become ends in themselves. If so, then Sport B would not be Club A's 'main' purpose.

95.      We compare Sport B expenditure to management compensation and community grants in Tables 16, 17 and 18.

Table 16: Club A's expenditure on Sport B, management remuneration, and grants in $

Table 17: Club A's expenditure on Sport B, management remuneration, and grants, as a % of total expenditure (excluding depreciation)[19]

Table 18: Club A's expenditure on Sport B, management remuneration, and grants, as a % of net profit (loss)[20]

96.      Management compensation could become an end in itself, but we don't suspect this for Club A. Some clubs might remunerate club or board members or their associates. If salaries exceed the value of services reasonably performed by the relevant employees, they might disguise profit extraction. However, here, key management personnel aren't board members, and don't appear to be connected to board members. The CEO receives about $350K, with the CFO and Food & Beverage manager's salaries reaching about $150,000 in the 2020 and 2021 years. While the CFO's remuneration rose to over $300,000 in 2021, this included a redundancy payment. Five other management positions are each paid about $100,000. The position titles include managing food preparation, food and beverages, gaming, operations, and marketing. These are significant functions, relevant to Club A's services. The salaries don't seem excessive or obviously inflated given the scale of Club A's operations. The management compensation doesn't suggest remunerating club members or their associates (through salaries) is a significant purpose for the club.

97.      Supporting community activities could also be an end in itself, but we don't think it is here. Club A makes grants to community groups: some are other sporting clubs, others are charities. However, there may be indirect benefits to sport from sponsoring charities. Just for example, sponsorship or public support for other organisations may improve or maintain Sport B's reputation in Region C. This may indirectly lead to more people joining Club A, attending the club, playing, entering, or supporting Sport B activities. Therefore, while Club A's grants to other community groups are substantial, we don't characterise these grants as an end in itself, which has equal importance to Sport B activities.

98.      For completeness, we don't think that Club A's non-Sport B sporting activities affect our analysis. One of Club A venues (Venue H) is a Sport M club, operating some social Sport M activities. Club A has three social Sport I clubs. The sports centre contains Sport K and Sport J facilities. These activities form a minor part of Club A's total operations. In an event, they are consistent with the encouragement of sport being Club A's main purpose.

Conclusion on the first condition: we think Club A's main purpose is Sport B, because the intensity of their Sport B activities outweigh other factors pointing against that conclusion.

99.      While we are concerned about several factors, we think that Club A's main purpose is encouraging Sport B.

•           Club A's carries out substantial Sport B activities directly, and also gives financial support to other Sport B activities. It fields over 30 teams, with over 450 players, including a first grade team and reserve grade team in the local competition. It also supports 250 players from a related club, maintains a sports complex, and hosts Sport B competitions and events. Echoing Hill J's comments from St Mary's, we think it has a high level of sporting intensity.

•           Sport B expenditure usually exceeds Club A's net profit, suggesting the services clubs are carried on for the purpose of supporting Sport B activities.

•           While Club A plans to develop venues (including by building a hotel), we think the proposals may be intended to diversify revenue sources. This is arguably consistent with a strategy to fund Sport B. However, we would be concerned if the way the developments were carried out didn't achieve that purpose (for example, if any profits were directed to other activities).

•           While several services club venues are running at a loss, we think this is consistent with a broader strategy to fund Sport B activities. However, we might form a different view if some services club venues keep making losses indefinitely.

•           Similarly, we think Club A's butcher operation is consistent with a strategy to fund Sport B activities. However, we might form a different view if Club A's catering operations became more prominent or were obviously uncommercial.

•           While significant amounts are spent on other activities (like management remuneration and community activities) we don't think they have become ends in themselves.

•           Club A is run by a board, and most board members are former Sport B players, coaches or administrators.

•           Club A's reports, displays and reputation show it is promoted as a club which encourages Sport B.

•           While only about 2% of members are players, we think this is outweighed by the intensity of Club A's Sport B activities.

We think that Sport B is Club A's main purpose because their Sport B activities are extensive: other activities are best characterised as supporting Sport B.

The second condition: does Club A comply with section 50-47?

100.    Section 50-47 applies an extra condition to entities which are an 'ACNC type of entity.' An ACNC type of entity will not be exempt from income tax unless it is registered under the Australian Charities and Not-for-profits Commission Act 2012. Broadly, an 'ACNC type of entity' is a charity.[21] There is nothing to suggest that Club A is a charity, so this special condition is not relevant.

The third condition: does Club A comply with section 50-70?

101.    Section 50-70 imposes conditions relevant to an entity covered by Item 9.1. We list and apply them in Table 19.

Table 19: conditions in section 50-70

Club A carries out its activities principally in Australia

102.    As mentioned in Table 16, one condition is that the relevant entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities explains the Commissioner's view on how the physical presence requirement applies to entities seeking exempt entity status under Division 50.

103.    TR 2019/6 says that:

•           an entity has a physical presence in a place where it employ assets or people to conduct physical operations (paragraph 53)

•           where an entity has a physical presence in Australia only, it must incur its expenditure, and pursue its objectives, principally in Australia (paragraph 56)

•           where an entity has a physical presence in Australia and also overseas, only the expenditures incurred and objectives pursued which are attributable to that entity's physical presence in Australia are examined (paragraph 57).

104.    Here, Club A has assets (such as club premises and the Sports Complex) and carries out operations (Sport B and services club activity) in Region C in Australia. There is no information to suggest it applies its assets or incurs expenditure outside Australia to any significant extent, if at all. Club A meets the physical presence requirement in paragraph 50-70(1)(a).

Club A complies with its governing rules

105.    Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt is the Commissioner's view on the requirements that the entity:

•           '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'.

106.    TR 2015/1 makes statements about the governing rules condition to the effect that:

•           the governing rules of an entity are rules that direct what the entity and its controllers are required and permitted to do (paragraph 9)

•           the written documents under which an entity was formed are usually the main source of governing rules, although those may be supplemented by other sources of rules (paragraphs 10-16)

•           'substantive requirements' mean rules that define rights and duties (eg, the entity's purpose, non-profit status, directors' powers, admission of members, winding-up), as opposed to mere procedural requirements (paragraphs 17-20)

•           the governing rules condition is applied continuously throughout an income year (paragraph 21)

107.    Here, Club A's governing documents would include its Constitution. That Constitution sets out both substantive and procedural requirements about how the entity will be conducted. The objects and non-profits clauses about the use of assets, clauses governing the admission of members, and the board's composition would be 'substantive' requirements.

108.    We have no information suggesting that Club A doesn't comply with its substantive requirements in its governing rules. Club A meets the governing rules condition in paragraph 50-70(2)(a).

Club A uses its income and assets for its purposes

109.    TR 2015/1 makes statements about the income and assets condition to the effect that:

•           when determining the entity's purpose, key factors include:

o   the objects in the entity's constituent documents

o   its activities from formation up to the time the test is applied

o   policies, plan, administration, finances, history and control (paragraph 24).

•           where entities are established for more than one purpose, this condition tests whether the income and assets have been applied solely for the purposes for which the entity was established (paragraph 25)

•           the word 'solely' means exclusively - however, incidental or ancillary purposes can be permitted (paragraphs 26-28,33-35).

110.    Example 9 in TR 2015/1 illustrates the Commissioner's view about how the income and assets condition would apply to a club with multiple purposes. The club's objects include encouraging a sport in the local area, and providing social and recreational facilities for members. The team conducts extensive sporting activities (coaching, teams, tournaments), and also provides facilities to members and visitors which generate income. It directs the majority of its profits to sporting activities, and the remainder to improve social facilities. TR 2015/1 concludes the income and assets condition is met because its income and assets have been supplied solely for the two purposes for which it was established.

111.    Here, Club A's objects include:

•           promoting, and participating in Sport B

•           promoting, staging and encouraging other sports and pastimes

•           providing a clubhouse, sporting, social amenities and other facilities for the benefit of members

•           contributing or aiding religious, charitable, benevolent and sporting organisations

112.    Similar to Example 9 in TR 2015/1, Club A conducts extensive sporting activities, and also conduct a substantial services club operation providing amenities to members and visitors. It also supports other community organisations. A substantial amount of its total expenditure is directed to conducting services club activities. However, amounts comparable to its profits are directed into sporting and community activities. All of these activities are consistent with its objects/purposes. We have no information to suggest that Club A applies income or assets to any purposes which aren't permitted under its constituent documents. Paragraph 50-70(2)(b) is met.

Conclusion on the third condition

113.    Club A meets all requirements in section 50-70.

Conclusion: Club A is an exempt entity under the 'game and sport' exemption

114.    Club A meets all requirements to be exempt under Item 9.1(c) in section 50-45.

•           It meets the first condition because it is established for the 'main' purpose of Sport B. While it runs services clubs, we think these clubs are carried on to fund Sport B activities.

•           The second condition is only relevant to charities: Club A isn't a charity.

•           Club A meets the third condition because it's a non-profit organisation which carries out its activities principally in Australia.

115.    Therefore, Club A is exempt from income tax under section 50-1.

Appendix - summary of selected cases

1. Cronulla Sutherland

2. Terranora

3. St Mary's

4. Tweed Heads

5. South Sydney

[1] Figures in all Tables have been approximated for this edited version. Approximations may have caused errors or inconsistencies in totals and percentages.

[2] This edited version has heavily paraphrased the relevant clauses.

[3] For the difference between 'substantive' and 'procedural' rules, see Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt at paragraphs 17 to 20.

[4] For completeness, TR 2021/D6 says that the words 'game or sport' should be given their ordinary meaning (shaped by the statutory context): paragraph 16. TR 2021/D6 explains (at paragraphs 16 to 28) some general features of games and sports (intention to participate, rules and conventions, competitive element). Paragraph 26 lists Sports B, M, I, K and J are all listed.

[5] (1990) 23 FCR 82; (1990) 21 ATR 300; (1990) 90 ATC 4215.

[6] Cronulla Sutherland (1990) 23 FCR 82 at page 95 (per Lockhart J), and page 117 (per Beaumont J).

[7] See for example, Terranora Lakes Country Club v Federal Commissioner of Taxation (1993) 25 ATR 294 at page 304 (per Hill J).

[8] Cronulla Sutherland (1990) 23 FCR 82 at page 95 (per Lockhart J).

[9] (1993) 25 ATR 294; (1993) 93 ATC 4079.

[10] (1997) 36 ATR 281; (1997) 97 ATC 4528;

[11] (1992) 24 ATR 1068; (1992) 92 ATC 2087.

[12] [2006] AATA 265; (2006) 62 ATR 1123 (2006) ATC 2150.

[13] The interpretation that the encouragement be the 'main purpose' was adopted by the Full Federal Court in Cronulla Sutherland Services Club Limited v Federal Commissioner of Taxation (1990) 23 FCR 82 at pages 92-95 (per Lockhart J), and page 117 (per Beaumont J).

[14] Compared to total income, total expenses, and net profit (loss) - see Table 5.

[15] Club A had several venues close during COVID-19 conditions, which is a threat to Club A's revenue. COVID-19 restrictions caused two of Club A's venues to close for over 5 months in the second half of the 2021 calendar year.

[16] Just for example, see Smith A, 'Casino regulator for NSW as government looks at pokie boost for Star', Sydney Morning Herald, 18 August 2021, published online at www.smh.com.au, accessed 8 December 2021; Smith A, 'NSW cabinet to consider an extra 1000 pokies for Star casino', Sydney Morning Herald, 12 August 2021, published online at www.smh.com.au, accessed 8 December 2021.

[17] 1997) 36 ATR 281; (1997) 97 ATC 4528.

[18] Examples might be hiring highly paid, high profile chefs, or systematically acquiring food or beverage suppliers.

[19] Compared to total expenses excluding depreciation - see Table 5.

[20] Compared to net profit (loss) - see Table 5.

[21] See section 995-1, read with subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012.