Edited version of private advice

Authorisation Number: 1051992049818

Date of advice: 7 June 2022

Ruling

Subject: Income tax exempt

Question

Is the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or 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 30 June 20XW

Year ended 30 June 20XX

Year ended 30 June 20XY

Year ended 30 June 20XZ

The scheme commences on:

20XW

Relevant facts and circumstances

The Club's facilities include:

• Sporting and games facilities
• Club rooms and meeting facilities
• Social facilities.

The Club hosts the following numerous sporting activities.

The Club provides free boardroom hire for the many local sporting organisations.

The Club also provides free boardroom hire to not-for-profit groups, which can also use its sporting facilities free of charge.

The Club is seeking to increase its sporting facilities.

The objects of the Club are contained in its constitution, which has been provided.

The Club's constitution contains clauses that do not allow the distribution of income or property to members, including at winding up.

The Club has several membership categories, which includes members of the sporting clubs that use the Club's sporting facilities.

The Club hosts practice games, internal competitions, carnivals, and social sport throughout the year.

The Club has coaches available to assist those using the sporting facilities.

The Club is responsible for the capital development and maintenance of the sporting facilities.

Details of expenditure and Board membership have been provided.

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

This is to explain how we reached our decision. This is not part of the private ruling.

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

The Club's ordinary and statutory income is exempt from income tax in accordance with section 50 if:

• 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.

Paragraphs 33 and 34 in TR 2021/D6 explain 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).

A club can have both sporting and independent non-sporting purposes and still qualify for the games and sports exemption. For example, a club that provides secondary non-sporting related services or facilities to members will not automatically be disqualified for the games and sports exemption.

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.

Based on its constitution and its activities, the Club has dual purposes, however there are many factors that indicate that the Club's main purpose is to encourage sporting activity.

Therefore, the Club is established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45.

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.

The Club is not an ACNC type of entity therefore it does not need to be registered under the Australian Charities and Not-for-profits Commission Act 2012.

Section 50-70

Subsection 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).

The Club meets the requirements of subsection 50-70(1).

Subsection 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.

Paragraph 8 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt,explains that:

Three questions must be considered to determine whether an entity satisfies the governing rules condition:

•         What are the 'governing rules' of the entity?

•         What are the 'substantive' requirements in the entity's governing rules?

•         At what time must the entity comply with all of the substantive requirements in its governing rules?

The substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity.

The Club is complying with its objects as outlined in its constitution.

Paragraphs 22 and 23 of Taxation Ruling TR 2015/1 explain 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?

The Club has used its income and assets for the purposes of undertaking the Club's activities. The Club's surplus funds are being retained and not distributed to members consistent with its non-profit requirement.

As the Club has been 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, its ordinary and statutory income is exempt from income tax in accordance with section 50.