Edited version of private advice

Authorisation Number: 1051979406208

Date of advice: 4 May 2022

Ruling

Subject: Exempt entities - not for profit and mutual organisations

Question

Is the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an exempt entity under 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 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Club is an Australian Public Company limited by guarantee.

The Club operates both sporting and recreational facilities.

The Club is located in Australia and pursues its objects at that location.

The Club is governed by its Memorandum and Articles of Association (Governing Documents).

The Club's Governing Documents include:

•         objects that promote and encourage sport, and

•         non-profit and winding-up clauses.

The Club runs sporting competitions and social sporting activities each week.

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

The Club has sports members and social members.

The Club encourages its players and other sports groups and clubs in the sport.

The Club employs a sports development officer dedicated to the sport.

The Club actively promotes the sport, including running a youth sporting program.

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

The Club uses its surplus funds generated from its non-sporting activities to maintain and improve the sporting facilities and the services it provides to its members and guests.

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

Income Tax Assessment Act 1997 section 30-15

Reasons for decision

Summary

The Club is exempt from income tax under section 50-1 of the ITAA 1997 as it is 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.

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.

(* 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.

Additionally, 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.

An entity is 'an ACNC type of entity' if it has a charitable purpose. An entity that does not have a charitable purpose, per the ATO Commissioner's view in Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities, is not required to be registered with the Australian Charities and Not-for-profits Commission (ACNC) to be exempt from income tax.

The society, association or club must also 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 in sections 50-47 and 50-70 of the ITAA 1997.

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 TR 2021/D6 Income tax: the games and sports exemption 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.

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 and later contains several examples including incidental and secondary purposes.

Special conditions

Section 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 profit or gain of its members and:

•         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.

And the entity satisfies the conditions in subsection (2).

Subsection 50-70(2) of the ITAA 1997 states:

The entity must:

a)    comply with all the substantive requirements in its governing rules;

b)    apply its income and assets solely for the purpose for which the entity is established.

APPLICATION TO YOUR CIRCUMSTANCES

Society association or club

The Club is a public company limited by guarantee. The Club is managed by its board. Its members pursue a common purpose and are governed by the rules outlined in its Governing Documents.

The Club is a society, association or club for the purposes of section 50-45 of the ITAA 1997.

Non-profit requirement

The Club is a non-profit entity as it isprevented from distributing its profits or assets among members while operating and on winding up.

Main purpose established to encourage game or sport

The Governing Documents detail the Clubs primary object or purpose being the encouragement of sport.

The Club actively encourages the sport. Sporting activities conducted and the extent of these activities are significant.

Secondary non-sporting activities

In this case, the facts indicate the surplus funds the Club generates from its non-sporting and social activities are used, or retained for future use, in line with the Clubs primary object of supporting the encouragement of games of sport.

Special Conditions

The Club's main purpose is the encouragement of participation in a game or sport, as such this is not an ACNC type of entity as defined in section 25-5(5) of the Australian Charities and Not-for profits Commission Act 2012 and therefore section 50-47 does not apply.

Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities explains 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).

The Club has assets (such as club premises and the sporting facilities) and carries out operations in Australia. There is no information to suggest it applies its assets or incurs expenditure outside Australia to any significant extent, if at all. Therefore, the Club satisfies the physical presence test in paragraph 50-70(1)(a).

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt 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).

The Club's governing documents include its Memorandum and Articles. The Memorandum and Articles 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 are 'substantive' requirements.

There is no information suggesting that the Club does not comply with its substantive requirements in its governing rules. Therefore, the Club satisfies the governing rules condition in paragraph 50-70(2)(a).

Conclusion

The Club is not for the profit or gain of its individual members and operates principally in Australia. The Club's ordinary and statutory income is exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997, as it is established for the main purpose of encouragement of a game or sport.