Edited version of private advice

Authorisation Number: 1051941623464

Date of advice: 20 January 2022

Ruling

Subject: Not for profit - income tax exempt status

Question

Will the ordinary and statutory income of the Event Entity be exempt from income tax under sections 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis the Event Entity is a society, association or club established for the encouragement of sport pursuant to sections 50-45 item 9(c) and 50-70 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

In 20XX, the Commissioner issued Private Ruling Authorisation Number 1051220148191 on the following facts:

Prior Application

The Event Entity has been established in Australia as a company limited by guarantee.

The head office is located in Australia.

The Event Entity is being established as the management company for a specific sporting event to be held in Australia.

Upon winding up, all surplus funds will be distributed to an association Company (Company A) as specified in the Event Entity's constitution.

Company A is an Australian tax exempt company for the promotion of sport.

The entity will derive income from the Event and various sources.

New Application

Due to the COVID-19 pandemic, the Event did not go ahead as planned and is now planned to be finalised at a later date.

The Event Entity applied for a further private ruling for the year ended 30 June 20xx.

The Event Entity advises that the facts remain unchanged.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 50-1

section 50-45

section 50-70

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ordinary income and statutory income of entities covered by subdivision 50-A of the ITAA 1997 is exempt from income tax.

If a society, association or club established for the encouragement of a game or sport falls under item 9.1 of the table in section 50-45 of the ITAA 1997, its income is exempt from income tax.

The exemption is subject to the special conditions outlined in section 50-70 of the ITAA 1997. The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it:

(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 deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; 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 a resident.

Draft Taxation Ruling TR 2021/D6 Income tax: the games and sports exemption describes the circumstances under which a society, association or club is regarded as being exempt from income tax under item 9.1(c) of section 50-45 of the ITAA 1997.

Society, club or association

The phrase 'society, association or club' refers to a voluntary organisation of people associated together for a common or shared purpose.

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

Non-profit

To qualify for the games and sports exemption, the association must not be carried on for the purposes of profit or gain to its individual members. It is preferable that the governing document of the association contain a prohibition against a distribution of profits and assets among members while the association is functional and on its winding up.

Main purpose established for the encouragement of a game or sport

For an association to be established for the encouragement of a game or sport, the main purpose of the association in the relevant income year must be the encouragement of a game or sport. As encouragement is not a defined term, it takes its ordinary meaning. According to the Macquarie Dictionary, 'encouragement' means 'stimulation by assistance or approval, including through direct and indirect means'.

Determining the main purpose of a club requires an objection evaluation of all material facts and circumstances. No one factor on its own will determine the main purpose of an association. A weighing up of all the factors is needed.

Paragraph 42 of TR 2021/D6 provides the following list of direct and indirect activities which may indicate the 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 activities above by making a financial or in-kind contribution to an organisation that performs them.

The main purpose of an association can change over time. It is the main purpose of the association in the year under examination that is the relevant consideration. It is not enough to examine the purpose of an association at the time of formation. Therefore, there is an ongoing requirement to make an object evaluation of all the facts and circumstances when changes occur.

Special conditions

For a sporting organisation to be exempt from income tax, it must pass one of the following tests from section 50-70 of the ITAA 1997:

•         physical presence in Australia

•         deductible gift recipient test; or

•         prescribed by law test.

In your circumstances

The Event Entity, being a company limited by guarantee formed with a number of members for a common purpose, is considered to be an association.

The constitution of the Event Entity contains provisions that prevent it from providing benefits to members and stipulate that surplus assets are to go to Company A upon winding up.

The Event Entities non-profit rule is considered acceptable in that members are not entitled to benefits other than bona fide compensation for services rendered or expenses incurred on behalf of the entity.

The Event Entity's constitution provides that the purpose of the Event Entity is the promotion and encouragement of sport in Australia.

The Event Entity was established to organise, stage and host the Event. It is the vehicle by which Company A will run the Event with the ultimate aim of promoting and encouraging sport Australia.

The purposes of the Event Entity have not changed since it was established.

Given that the Event is a tournament organised for the promotion of sport and given the scale of the Event, it is accepted that the main purpose of the Event Entity is the encouragement of sport.

The Event Entity is not a deductible gift recipient, nor seeking to be prescribed by law so it must meet the physical presence in Australia test.

The physical presence in Australia test has two elements. Firstly, that the organisation has a physical presence in Australia and secondly, that it must pursue its objectives and incur its expenditure principally in Australia.

The Event Entity was established in Australia and its head office is in Australia. It is accepted that the Event Entity has a physical presence in Australia.

All of the games played as part of the tournament will be held in Australia and as such, the majority of the expenses are expected to be incurred in Australia. 100% of any surplus generated by the Event will be provided to Company A to promote sport in Australia.

The information provided confirms the Event Entity will pursue its objectives and incur its expenditure principally in Australia.