Edited version of private advice

Authorisation Number: 1052044191097

Date of advice: 14 October 2022

Ruling

Subject: Exempt income - encouragement of sport

Question

Are you exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an exempt entity under section 50-45 (item 9.1(c)) 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 has premises with various sporting facilities.

Under its Constitution, it is prevented from distributing its profits or assets among members while it is operating and on winding up.

Its primary object is to encourage, foster and promote sports.

It has other objects including providing other facilities for members and members' guests including refreshments, gaming facilities and social amenities.

The Club applies its surpluses to improve the facilities and services provided to members and guests to support sporting activities. All the lease payments the Club receives from properties are set aside for its sporting facilities.

The Club's sporting facilities are used for competitions, tournaments, practice, and socially, by members and non-members including schools.

There are various types of membership, only sporting and honorary life members are entitled to vote at general meetings, to vote for the election of the board, to be nominated for, elected to, and hold office on the board.

The current directors of the Club all play and are involved with the sporting activities of the Club.

The Club's website promotes the various sporting facilities, including the competitions and programs.

The Club sponsors various local sporting bodies.

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

The income of the Club is exempt from income tax under section 50-1 as it is an entity covered by item 9.1(c) of section 50-45.

Detailed reasoning

The Club's ordinary and statutory income is exempt from income tax in accordance with section 50-1 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 sections 50-47 and 50-70.

Section 50-45

Paragraphs 30 and 31 in Taxation Ruling TR 2022/2 Income tax: the games and sports exemption (TR 2022/2) 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.

Paragraphs 34 and 35 in TR 2022/2 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.

Paragraph 37 of TR 2022/2 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 consider that the Club is established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45 based on its objects and activities.

Section 50-47

Section 50-47 provides a further condition that if an entity that is covered by one of the items in Subdivision 50-A is an ACNC type of entity, they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012 (ACNC Act).

Broadly, an entity that can be registered as a charity is an ACNC type of entity. As the Club's objects indicate that it does not have charitable purposes, it is not an ACNC type of entity therefore it does not need to be registered under the ACNC Act.

Section 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).

(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 satisfies the requirements of subsection 50-70(1) as its Constitution prohibits it from distributing income to its members and it is in Australia.

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?

The Club has been encouraging sport by providing sporting facilities, hosting sporting competitions and supporting local sporting teams. It has also provided a social club for the use of members and member's guests.

The Club has used its income and assets for the purposes of undertaking the Club's activities, both sporting and social. Its surplus funds are not distributed to members but are to be used to improve its facilities and services. It is considered that subsection 50-70(2) is satisfied.

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.