Edited version of private advice

Authorisation Number: 1052147007907

Date of advice: 26 July 2023

Ruling

Subject: Not for profit - encouragement of animal racing

Question

Is the total ordinary and statutory income of the Club exempt from income tax, in accordance with section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of animal racing under item 9.1(a) of the table in section 50-45 of ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ending 31 July 2024

Income year ending 31 July 2025

Income year ending 31 July 2026

Income year ending 31 July 2027

Income year ending 31 July 2028

The scheme commences on:

1 August 2023

Relevant facts and circumstances

Background

1.    The Club is an Australian public company limited by guarantee.

2.      The Club was registered with the Australian Securities Investments Commission (ASIC).

3.      The Club was formed in 20XX after the merger of two other Clubs. The Club undertakes animal racing activities.

4.      The Club is not registered with the Australian Charities and Not-for-profits Commission (ACNC).

5.      The Club has a financial year ending 31 July.

6.      The Club employs full-time and casual staff.

7.      The Club has members.

8.      The Club hosts race meetings.

9.      The Club derives income from various sources.

The Club's Governing documents

10.   Includes objects that promote and encourage sport.

11.   Includes non-profit and winding up clauses prohibiting distributions to members.

Management and control

12.   The day-to-day business affairs of the Club are managed and conducted by the Chief Executive Officer and the Board of Directors.

13.   All Director positions are filled by a vote of members at the Club's annual general meeting.

14.   All members are entitled to vote after 12 months of membership. That is, the Constitution does not require its members or committee members to be actively involved in animal racing.

15.   The current Committee members almost all have a long interest in various forms of animal racing.

16.   The Board may from time to time determine the rights and privileges attaching to different classes and sub-classes of membership of the Club to the extent not specified in the Constitution or Club Rules.

17.   The Board will determine from time to time the joining fee, subscription and any other fees payable by members of the Club. The Board may determine that the fees payable by different classes and sub-classes of members will differ.

18.   All members of the Board act in an honorary capacity and receive no remuneration or other benefits for their services. Board members may be reimbursed for expenditure incurred in the conduct of their official duties.

Membership

19.   Members are divided into classes and no person may be admitted to membership of the Club except as a member of one of the classes.

20.   Members automatically receive full voting rights following 12 months of membership.

21.   Members have reciprocal access to other national and international animal racing clubs.

22.   Members can attend all race days through the year, they are also invited to exclusive social and animal racing events throughout the year and receive reduced prices on food and beverage.

23.   Members receive reduced cost of membership based on the length of tenure.

24.   There is one voting membership class, every voting member is liable to contribute for the time they are a member, an amount not exceeding $X during the tenure of their membership or within one year after cessation of their membership toward the debts and liabilities in the event that the Club is wound up.

25.   Membership revenue is collected in advance and is recognised over time as member benefits are provided as per the membership agreement and as the membership year elapses. Membership revenue collected throughout the period is recognised equally in the remaining months of the year as the membership year elapses.

26.   During Covid-19, memberships were extended and annual subscriptions were frozen and increased benefits such as food and beverage credits for members.

27.   The Club introduced vouchers to support member renewals and impacts due to Covid-19 restrictions.

28.   The member portal was built which enabled members to access tickets, rewards and communications online. Further technology enhancements were introduced for renewals, a unified platform for payments to better service members and digital ticketing.

Activities

29.   The Club amalgamated with another Club as part of its development plan. Since amalgamation, the Club has undergone an extensive refurbishment to provide its customers with spacious, modern amenities. Facilities include a bistro restaurant, bars, bowling greens, tab facilities, car park and full keno as well as multiple spaces available for hire for private non-racing events.

30.   Activities of the Club include:

•                     conducting race meetings

•                     provide training facilities at its training venues

•                     maintain its racecourses and venues to deliver its animal racing, training and events programs

•                     commence and complete construction of one of its development projects

•                     invest in and deliver Covid-19 safe product and experiences for members

•                     host diverse non-raceday events annually across venues

•                     continue to work effectively with Government, business, industry and community organisations

•                     enhance community engagement and charitable programs through donations and fundraising activities

•                     continue with investment in new technology and smart systems including the customer relationship management (CRM) system and digital ticketing projects

•                     act on masterplans including track refurbishment and refreshments

•                     identify key consumer segments and build new membership categories to drive acquisition

•                     continue to progress the masterplans, including stakeholder engagement for its property developments and complete essential upgrades to some facilities

•                     complete capital works projects

•                     continue to develop social media presence.

31.   Activities that generate revenue may be directly related to animal racing, but other activities may not be related to animal racing and are referred to as 'non-raceday' activities. Other sources of revenue may be from the realisation of assets whereby the capital proceeds from the sale of the land from the project is intended to be realised and recognised in the Club's financial accounts over a period of time and recognised as the disposal of a non-core asset.

32.   Multiple hospitality, events and functions occurred during the period:

•                     renovation of members areas

•                     a digital campaign for racegoers saw audiences tune in remotely during Covid-19

•                     a dedicated sales and marketing program

•                     sold out raceday events

•                     successful media launches were held.

33.   There are various levels of commercial partnership.

34.   Contributions were made to causes including drought relief, children's health, social support services, mental health and youth, domestic violence, education, homelessness, health and disability support.

35.   During the period the Club provided administrative services to a charity for no charge.

36.   Within the industry there were contributions made by the Club's Foundation.

Property development projects

•                     Hotel, with club and various room sizes and facilities including restaurant, bar, lounge, gym and pool deck and conference facilities. The hotel is currently undergoing consultation and planning. Expected commencement date is December 20XX, with potential indicative timing of delivery in November 20XX.

•                     Whole of site development of land for mixed uses including a carpark, construction and selling of property lots. A Project Delivery Agreement has been signed with finalisation of the Master Plan scheduled for late 20XX and delivery of the project to be implemented via a series of stages over a 1X year period from late 20XX onwards.

•                     Mixed use development (including residential, retail and entertainment uses) with this Master Plan currently in consultation with local planning department. The project expected to commence late 20XX onwards via a series of stages to be implemented over a 2X year period.

37.  The Club is progressing is currently awaiting local government development approval on one of the developments.

38.   The Club has not entered into any new Property Development agreements during the years ended 31 July 2020 to 31 July 2022.

39.   The Club is reviewing the possibilities regarding potential non-raceday activities. These non-raceday activities have not been agreed and are currently undergoing consultation and planning. The Club states that to the extent the Club enters into a finalised agreement for the planned developments, any surpluses from these non-raceday activities will be reinvested in new projects for the encouragement of animal racing.

Infrastructure investment

40.   The Club forecasts to reinvest $XX in animal racing venue refurbishments, rebuilds and renovations for the income years 31 July 2023 to 31 July 2028.

41.   There have been various other animal racing related property projects undertaken recently.

Financial position

42.   Although the total turnover of the Club has increased over the years ended 31 July 20XX and 31 July 20XX, the revenue generated from non-race day use of facilities has decreased from XX% of total turnover in the year ended on 31 July 20XX to XX% of total turnover in the year ended 31 July 20XX due to the reduction of non-raceday events and meetings.

43.   During the 20XX financial year, the Club extended its agreement with local animal racing organisation, whereby it committed to expend an amount equal to its entitlements on capital works to improve the public precinct areas, the course and potentially other capital improvements.

44.   The Club has finance facilities with two banking organisations.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-45

Income Tax Assessment Act 1997 Item 9.1(a) in section 50-45

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-70

Charities Act 2013 section 12

Reasons for decision

Summary

The Club will continue to be exempt from income tax under section 50-1 of the ITAA 1997 as a club established for the encouragement of animal racing under item 9.1(a) in section 50-45 of the ITAA 1997.

Detailed reasoning

A society, association or club which has been established for the encouragement of animal racing under section 50-45 item 9.1(a) is exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 50-1 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 are contained in sections 50-5 to 50-45. A society, association or club established for the encouragement of animal racing is listed at item 9.1(a) in the table in section 50-45. The society, association or club must meet the special condition detailed in section 50-70.

An entity is exempt from income tax as a society, association or club established for the encouragement of animal racing if it:

•                     is a society, association or club

•                     is established for the encouragement of animal racing, and

•                     satisfies the special conditions.

The special conditions in section 50-70 state 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:

•                     it 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.

Further, section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, being that if it is an 'ACNC type of entity', it is not income tax exempt unless it is registered under the Australian Charities and Not-for-profits Commission Act 2012.

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.

In Douglas v Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

A society, association or club may be constituted as an unincorporated association or be formerly recognised by incorporation.

The Club is a company limited by guarantee which has members. The Constitution states the activities of the Club as being:

•                     the encouragement of animal racing, and

•                     enhance, promote or protect the interests of the Company

The Club is managed by a Board, has a constitution, and its members voluntarily associate together for a common purpose and a common interest. Therefore, the Club is a society, association or club.

Animal racing

Taxation Ruling TR 2022/2 Income tax: games and sports exemption (TR 2022/2), although directed at sporting club exemption, provides guidelines which are also applicable to animal racing clubs when determining income tax exemption.

Animal racing includes horse racing, trotting and greyhound racing, and the racing of other animals.

The Club operates racecourses which it uses to run racing competitions. The purposes and activities of the Club are concerned with animal racing.

Established for the encouragement of animal racing

For a club to be established for the encouragement of animal racing, the main purpose of the club in the relevant income year must be the encouragement of animal racing (Cronulla Sutherland Leagues Club v. Commissioner of Taxation [1990] FCA 108 (Cronulla Sutherland), per Lockhart J.)

'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 (South Sydney Junior Rugby League Club Limited and Commissioner of Taxation [2006] AATA 265 (South Sydney) at [4]).

The Club operates racecourses and has continuously hosted race meetings since the early 1800s prior to the merger.

It is considered that the Club is encouraging animal racing.

Main purpose

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.

The subjective motives or intentions of the founders or members of the club are relevant but do not necessarily determine the main purpose of the club. The stated purpose of a club is also significant but not decisive. Other important considerations include the activities and history of the club and how the club is controlled (Cronulla Sutherland, as per Lockhart J at 23 FCR 95-96).

It is the main purpose of the club in the year under examination that is the relevant consideration. It is not enough to examine the purpose of a club at the time of formation (or in past years), as its main purpose may change from year to year.

Other purposes

A club that has both animal racing and non-animal racing purposes will not qualify for the animal racing exemption unless the non-animal racing purpose is:

•                     merely ancillary and incidental to its animal racing purpose (that is, a purpose that is related to carrying out its animal racing purpose), or

•                     secondary to its animal racing purpose (that is, a purpose that is independent to, but less important or less significant than, the animal racing purpose).

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

Factors to be considered for determining main purpose

No one factor on its own will determine the main purpose of a club. A weighing of all the factors is needed. When considering the factors together, an objective conclusion must be reached that a club has a main purpose of animal racing. 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 animal racing (Terranora Lakes Country Club Limited v. Commissioner of Taxation [1993] FCA 80 (Terranora Lakes); Re Tweed Heads Bowls Club c FC of T 92 ATC 2087 (Tweed Heads); St Marys Rugby League Club Ltd v Commissioner of Taxation [1997] FCA 581 (St Marys)

•                     extent of animal racing activities (Terranora Lakes; Tweed Heads; St Marys)

•                     the conduct of activities directly related to animal racing (Terranora Lakes; Tweed Heads; St Marys)

•                     a high level of member participation in animal racing (Case W114 89 ATC 891, at [894]; AAT Case 5452 (1989) 20 ATR 4125 at [4133]; Terranora Lakes; Tweed Heads; St Marys)

•                     promotion of the organisation to patrons and the public as one that encourages animal racing (Terranora Lakes; Tweed Heads; St Marys)

•                     involvement of the committee of management in the promotion of animal racing (AAT Case 8267 (1992) 24 ATR 1068; Tweed Heads; St Marys)

•                     the use of surplus funds for encouraging animal racing (Cronulla Sutherland; Tweed Heads; St Marys)

•                     the provision of financial and in-kind support for encouraging animal racing (Cronulla Sutherland).

The Club's Constitution states the Club is established for the encouragement of racing and other incidental related purposes and to carry on any other activity which is calculated directly or indirectly to enhance or further the interests of animal racing. The Club may undertake such other activities not inconsistent with this. That is, the Constitution emphasises that the principal activity is the encouragement of animal racing.

The Club has been holding race meetings since the merger of two Clubs, and these clubs had held race meetings dating back to the early 1800s. The Club's animal racing activities are extensive.

The Club has members which are divided into a various number of classes. Membership is accessible to any adult member of the public. Members have reciprocal access to other national and international animal racing clubs. Members can attend all race day events throughout the year, they are also invited to exclusive social and animal racing events and receive reduced prices on food and beverage. The members of the Club are not required to actively participate in animal racing, however, all members can spectate the animal racing.

The Club promotes itself to patrons and the public as a club that encourages animal racing.

The day-to-day business affairs of the Club are managed and conducted by the Chief Executive Officer and the Board of Directors. The Board of Directors currently consists of XX members. All Director positions are filled by a vote of members at the Club's annual general meeting. All members are entitled to vote after 12 months of membership. That is, the Constitution does not require its members or committee members to be actively involved in animal racing. However, the current committee members almost all have a long interest (in various forms) in animal racing.

The Club provides financial and in-kind support for encouraging animal racing through the support of the charity's activities.

When considering purpose, it is how the surplus funds are used, or retained for future use, in line with the objects, activities and other characteristics of the club that matters.

The Club has experienced both operating profits and losses since 20XX but has significant reserves/accumulated funds. Recently, funds have been used to further refurbish and renovate some parts of all racecourse facilities. There is also an intention to spend in excess of $XX on animal racing related infrastructure over the period of this ruling.

The Club is considering a number of property developments.

Activities and purpose

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

Activities are commonly a means to an end. Activities can serve the purpose of encouraging animal racing and other independent non-animal racing purposes. All 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.

An activity like the organisation of, or participation in, animal racing competitions can be readily understood as advancing a purpose of encouraging animal racing.

Where a club derives its revenue from commercial operations, the club needs to objectively determine the extent to which the commercial operations are a means to the end of advancing the animal racing purpose or are advancing some other purpose (Commissioner of Taxation of the Commonwealth of Australia v Word Investments Limited [2008] HCA 55 (Word Investments; Terranora Lakes).

Direct or indirect activities that indicate the encouragement of animal racing can include:

•                     forming, preparing and entering teams and competitors in competitions

•                     co-ordinating activities

•                     organising and conducting races

•                     improving the abilities of participants

•                     improving the standard of trainers and coaches

•                     providing purchased or leased facilities for the activities of animal racing 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.

Nonetheless, a club can have both animal racing and independent non-animal racing purposes and still qualify for the animal racing exemption. For example, a club that provides secondary non-animal racing related services or facilities to members will not automatically be disqualified for the animal racing exemption. What is critical is that the non-animal racing purpose is:

•                     merely ancillary and incidental to its animal racing purpose (that is, a purpose that is related to carrying out its animal racing purpose), or

•                     secondary to its animal racing purpose (that is, a purpose that is independent to, but less important or less significant than, the animal racing purpose) (Lockhart J in Cronulla Sutherland at 4225).

Where the main purpose becomes the carrying out of those other activities, a club is not exempt. Nor is it exempt if it continues to be involved in the animal racing to a substantial degree but is equally involved with another purpose or purposes. As Lockhart J said in Cronulla Sutherland at ATC 4225; ATR 312:

But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.

In Tweed Heads, the taxpayer was a lawn bowls club which had indoor and four outdoor bowling greens. The club participated in and organised large number of tournaments each year. The club building was substantial and the catering and entertainment facilities were extensive. The club's main source of revenue was derived from poker machines which were used predominantly by the 400,000 annual visitors to the club. In a judgement by Dr P Gerber at 92 ATC 2099 he stated:

...I am satisfied that the club, from its very inception, has been and is dedicated to a very substantial degree to the promotion of lawn bowls and, latterly, to indoor bowls. True it is that some elements of the Club's activities - leaving the poker machines aside for the moment - are social and cannot, as such, be characterised as "promoting the athletic game of bowls", but that is true of virtually all sports clubs. Be that as it may, I am left in no doubt that the Club has its main or dominant purpose, the promotion and encouragement of the bowling.

Whilst the Club undertakes activities that encourage animal racing, it also undertakes non-animal racing activities by providing food and beverage facilities to members and the public.

As was noted, the Club has also continuously hosted race meets at its tracks. It encourages animal racing on its website and currently hosts X race meets a year. The Club also provides training facilities. The Club's animal racing activities are extensive.

The Club also operates multiple hospitality venues and hosts events and functions on race-days and non-race days. The Club employs both full-time and casual staff, some of whom are involved in animal racing related activities and some who are employed for non-animal racing activities.

Further, the Club continues to pursue the development, as per the previously issued private ruling. It is also considering further developments, the details of which are currently not determined.

The Commissioner is satisfied that at this current stage of development the non-animal racing activities are not the main purpose of the Club. The Commissioner accepts that the main purpose of the Club is to encourage animal racing.

Section 50-70

Non-profit

To qualify for the animal racing exemption, a club must not be carried on for the purposes of individual members' profit or gain, either while the club is operating or on its winding up. Club members may receive communal membership benefits, such as the use of the facilities, that are incidental to the club's objects. This will not prevent the club meeting the not-for-profit requirement. The club may also pay members reasonable remuneration for services they perform for the club. Clubs can use various mechanisms to ensure they meet the not-for-profit requirement. 'Not-for-profit' clauses in governing documents are the most common way. These prevent the distribution of profits or assets for the benefit of particular persons while the club is operating and on winding up. To meet the not-for-profit requirement, a club's actions must also be consistent with its non-profit clauses which prohibit distributions for the private benefit of its members.

The Constitution prevents distribution to members while the Club is operating and on winding up. There is nothing to indicate that the Club does not operate in accordance with this prohibition. The Club is not carried on for the profit or gain of its individual members.

In Australia

The Club is a resident of, and is located in, Australia. The Club carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfied this requirement (Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities).

Comply with all the substantive requirements in its governing rules

Paragraph 9 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•                     give effect to the object or purpose of the entity

•                     relate to the non-profit status of the entity

•                     set out the powers and duties of directors and officers of the entity

•                     require financial statements to be prepared and retained

•                     set out the criteria for admission as a member of an entity

•                     require an entity to maintain a register of members, and

•                     relate to the winding-up of the entity.

From the supporting evidence provided, there is nothing to suggest that the Club does not comply with the substantive requirements set out in its current Constitution.

Apply its income and assets solely for the purpose for which it is established

Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied.

The earlier discussion shows that the Club applies its income and assets solely for the purpose for which it was established.

The Club satisfies the special conditions in section 50-70 of the ITAA 1997.

Section 50-47 of the ITAA 1997

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.

Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 sets out the requirements to be a charity. Section 12 of the Charities Act provides purposes that are a 'charitable purpose' and includes purposes such as advancing education and advancing health. The encouragement of animal racing is not a charitable purpose.

The Club has a purpose of encouraging animal racing which is a non-charitable purpose. As such, the Club is not capable of being a registered charity and is not an ACNC type of entity.

Section 50-47 of the ITAA 1997 does not apply to the Club.

Conclusion

The Club is a society, association or club established for the encouragement of animal racing as it is:

•                     established for the main purpose of the encouragement of animal racing, and

•                     meets the special conditions in section 50-70 and section 50-47 of the ITAA 1997.

Therefore, the Club's ordinary and statutory income is exempt from income tax by virtue of section 50-1 of the ITAA 1997.