Edited version of private advice

Authorisation Number: 1052118695762

Date of advice: 26 May 2023

Ruling

Subject: Not-for-profit - tax exempt game or sport

Question

Is the Applicant 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 under item 9.1(c) of section 50-45 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

year ending 30 June 20XX

year ending 30 June 20XX

year ending 30 June 20XX

year ending 30 June 20XX

year ending 30 June 20XX

year ending 30 June 20XX

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background

The Applicant is a company limited by guarantee which was established on DDMMYYYY.

The Applicant has a board of directors, a class of members and exists for a defined purpose with the objects specified in their constitution.

The Applicant was established to encourage a particular sport. The Applicant will advance this principal object by providing money, property or benefits (including both financial and in-kind contributions) to not-for-profit organisations which encourage, grow and develop this sport.

Purpose

The constitution provides the following key clauses:

Principal objects

The constitution provides the following principal objects:

The principal object of the Company is the encouragement of sport, including without limitation by providing money, property or benefits (including both financial and in-kind contributions) to not-for-profit organisations which encourage, grow and develop the sport...

Ancillary objects

The constitution also provides the ancillary objects are as follows:

For the purpose of achieving the principal objects set out in clause XX, the Company may:

(a)   provide money or benefits (including both financial and in-kind contributions) to the sporting club to assist with:

(i)   the development and/or maintenance of all facilities;

(ii)  the growth and development of the Club; and

(iii) research and development initiatives that contribute to the growth, development and innovation of the sport.

(b)   organise functions, events or entertainment of any kind to raise funds for the Company;

(c)   implement and market materials to promote awareness and knowledge of the purposes and activities of the Company;

(d)   administer one or more funds into which all gifts, contributions, donations and bequests to the Company for the purposes of the Company will be credited;

(e)   conduct public programs including education programs, social and community programs and research programs;

(f)    disseminate information relating to education and community programs and to produce, edit, publish, issue, sell, circulate and preserve such papers, periodicals, books, circulars and other literary matters as are conducive to the objects of the Company;

(g)   establish and maintain relationships and close communications with corporations, entities, associations, foundations, institutions, organisations and groups including Federal, State and Local Government instrumentalities, authorities and professionals that may have related interests to the Company and utilise their resources and facilities to provide and achieve the objects of the Company;

(h)   seek and co-ordinate funding from Federal, State and Local Government and the private sector in the form of grants, gifts, donations and bequests committed to the objects of the Company;

(i)    encourage and promote and generally seek to create greater community awareness in the knowledge and understanding of the objects of the Company;

(j)    provide or attract funds for the facilitation of any of the objects of the Company; and do all such other things as are incidental or conducive to the attainment of the objects and aims of the Company and its Members.

Activities

The day-to-day activities of the Applicant are sourcing donations from benefactors together with investing the funds to generate income to distribute to the club. A fundraising executive has been appointed with administrative support being available. Sources of fundraising will include bequests, canvassing for gifts of shares, property and interest free loans from donors.

The Applicant uses all its funds for its key activities and projects.

The Applicant will incur all of its expenditure and pursue its objectives principally in a particular region.

The constitution contains a not-for -profit clause.

The constitution contains a winding up clause.

The Applicant will comply with all substantive requirements in its governing documents.

The Applicant will provide money, property and/or benefits (including both financial and in-kind contributions) in furtherance of their objects, to not-for profit organisations which encourage, grow and develop the sport and not for the profit or gain of its individual members.

Membership

The constitution sets out the membership and eligibility. It provides the following:

4.1 First Members

Each person who has consented to become a Member on registration of the Company under the Corporations Act is a Member on registration of the Company and their name must be entered on the Register.

4.2 Number and classes of Membership

(a) Subject to this Constitution and the Corporations Act, there must be at least X Member.

(b) Subject to clause X, a person may hold office as a Director only if the person is a Member of the Company...

4.3 Admission to Membership

(a) Only a Director of the Company will be eligible to be admitted to Membership as a Member...

4.4 Subscription

(a) Subject to the following provisions of this clause X, the Board will determine the Subscription payable by Members in each Membership Year and that Subscription can vary between Members and classes of Members.

(b) If the first Membership Year applicable to the person seeking admission to Membership is comprised of less than 365 days, the first year's Subscription payable by that person is to be apportioned according to the number of days remaining in that Membership Year.

(c) Until the Board makes its first determination in relation to Subscriptions the Subscription is set at $X.

(d) The Subscription must be paid annually in advance and is due to be paid on or before the first day of each Membership Year.

(e) The Subscription must be paid by delivery to the Secretary, or to such other person or in such other manner as the Board determines and advises the Members, from time to time.

Board of Directors

Appointment and responsibilities of directors are set out in the constitution and include the following:

•         the number of directors of the company will be at least X directors with the maximum number currently fixed at X directors.

•         directors are appointed for a period of X years and are eligible for re-appointment in accordance with the Constitution.

•         the board of directors will from time to time appoint a chairperson from among the directors for a period of X years.

•         The company must not pay fees to a director for acting as a director.

•         The business of the company will be managed by the board.

Physical presence

The Applicant is established and operated in Australia.

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

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Issue

Not for profit - exemption from tax - encouragement of sports - section 50-45 of the Income Tax Assessment Act 1997.

Question 1

Summary

The Applicant is exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as it is an association established for the main purpose of games and sport under item 9.1(c) of section 50-45 of the ITAA 1997.

The Applicant is not for the profit or gain of its individual members and operates principally in Australia.

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.

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.

Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be an exempt entity, subject to special conditions 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 under item 9.1(c) of the table in section 50-45 of the ITAA 1997 if:

•         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.

Not-for-profit requirement

Taxation Ruling 2022/2 Income tax: the games and sports exemption (TR 2022/2) discusses in more detail the provisions around the games and sports tax exemption.

Paragraphs 11 - 16 of TR 2022/2 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is not-for-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 not-for-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 2022/2 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 27 of TR 2022/2 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997.

Encouragement

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.

Paragraph 30 of TR 2022/2 provides guidance on the term 'encouragement'. '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.

Direct or indirect activities relevant in determining whether the main purpose of the entity is the encouragement of a game or sport are listed at paragraph 43 of TR 2022/2. 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.

Main purpose

Paragraph 31 of TR 2022/2 states that determining the main purpose of an entity requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of an entity to determine its main purpose.

Paragraph 37 of TR 2022/2 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.

This is further explained in paragraphs 38 to 42 of TR 2022/2;

38. The activities undertaken by a club are an important consideration in determining whether it qualifies for the games and sports exemption. However, activities considered in isolation do not demonstrate the purpose of a club.

39. Activities are commonly a means to an end. Activities can serve the purpose of encouraging a game or sport and other independent non-sporting purposes. All of the club's activities must be objectively weighed against the objects, history and control of the club to determine the main purpose for which it is established in a particular year.

40. An activity like the organisation of, or participation in, sporting competitions can be readily understood as advancing a purpose of encouraging a game or sport.

41. Where a club derives its revenue from commercial operations, the club needs to objectively determine the extent to which commercial operations are a means to the end of advancing the sporting purpose, or are advancing some other purpose.

42. A club can demonstrate a purpose of encouraging a game or sport where it provides financial and in-kind contributions to other organisations that directly conduct those activities. To demonstrate a main purpose of encouraging a game or sport, a club that does not directly conduct any games or sports will need to objectively show that the activities it carries out are a means to that end.

Special conditions

Subsection 50-70(1) of the ITAA 1997 states:

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).

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

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.

Application to your circumstances

Society association or club

The Applicant is registered under the Corporations Act 2001 as a company limited by guarantee. The constitution outlines its purpose at clause X as the encouragement of sport.

The Applicant has a board of directors, a class of members who pursue a common purpose and are governed by the rules outlined in the constitution.

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

Not-for-profit requirement

The constituent documents of the Applicant prevent distribution to members both while it is operating and upon winding up and dissolution.

The not-for-profit requirement is satisfied.

Main purpose established to encourage game or sport

Game or sport

The Applicant will be indirectly involved in a sporting activity.

This activity is a game or sport for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997.

Main purpose

The Applicant's main objective as stated above in the constitution is supported by the Ancillary objects.

These objects and their emphasis on sport support a characterisation of the Applicant as an association established for the encouragement of a game or sport. In furtherance of the Applicant's principal object, the Applicant will provide money, property and/or benefits (including both financial and in-kind contributions) to not-for-profit organisations which encourage, grow and develop the sport.

The Applicant will carry out the day-to-day activities of sourcing donations from benefactors together with investing the funds to generate income to distribute to the sport.

A fundraising executive has been appointed with administrative support being available from the club. Other sources of fundraising will include bequests, canvassing for gifts of shares, property and interest free loans from donors.

The Applicant will advance this principal object by providing money, property or benefits (including both financial and in-kind contributions) to not-for-profit organisations which encourage, grow and develop the sport.

The Applicant uses all its funds for its key activities and projects.

After consideration of the features discussed above, it is considered that the Applicant's main purpose is the encouragement of a game or sport.

Special Condition

The Applicant'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. The Applicant is physically present in Australia, it pursues its objectives in Australia and incurs expenditure principally in Australia.

The Applicant will comply with any substantive requirements in the constitution and will apply its income and assets solely for the purposes for which it is established.

Conclusion

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