Edited version of private advice

Authorisation Number: 1052178856063

Date of advice: 11 October 2023

Ruling

Subject: Income tax exemption

Question

Is the Applicant a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s)

Year ending DD MM 20YY to DD MM 20YY

The scheme commences on

DD MM 20YY

Relevant facts and circumstances

1.    The Applicant was incorporated in 20YY and is exempt from income tax under section 50-1 of the ITAA 1997. The Applicant is a Public Company for the purposes of the Corporations Act 2001, being a company limited by guarantee.

2.    The incorporation of the Applicant was promoted jointly between 2 sporting organisations.

3.    The sporting organisations are non-profit associations that are peak bodies in an Australian state for the promotion and running of sport.

4.    The Applicant's Constitution contains Objects that encourage sport and to make distributions in the furtherance of sport. The Constitution contains appropriate non-profit, wind-up and dissolution clauses.

5.    In 20YY, the sporting organisations and the Applicant entered into a 'Agreement' to record the arrangements agreed between them concerning the governance and operation of the Applicant, the rights of each of the sporting organisations and the Applicant to a sporting precinct and matters associated therewith.

6.    The Agreement provides that the principal business of the Applicant will be to promote, control and manage an area for the conduct of sporting, entertainment and recreational events and functions.

7.    The Applicant is responsible for the day-to-day management, operation and control of the area.

8.    The Applicant is responsible for maintenance, repair, capital replacements and upgrades.

9.    The sporting organisations have unrestricted and exclusive access to and priority use of the area during each seasonal period.

10.  In excess of 80% of the area has been utilised for sporting events since 20YY.

11.  In the income years ending 20YY and 20YY, the percentage of income stream derived from sporting events was 10%. For the forthcoming income years it is estimated that this percentage will be above 60%.

12.  The Applicant is required to maintain a fund which is to be used for non-recurrent expenditure. In the year ended DD MM 20YY the Applicant expended $XX of the fund on capital repairs and maintenance of the area.

13.  The current directors are also on the board of the sporting 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 section 50-70

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question

Is the Applicant a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 and therefore exempt from income tax under section 50-1?

Summary

The Applicant is exempt from income tax pursuant to section 50-1 as it is an association established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45.

Detailed reasoning

1.    Section 50-1 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45.

2.    Item 9.1(c) of the table in section 50-45 provides that a society, association or club established for the encouragement of a game or sport shall be exempt from income tax, subject to the special conditions in section 50-70.

3.    Accordingly, to be exempt from income tax under item 9.1(c) of the table in section 50-45, an entity must:

•                     be a society, association or club

•                     be established for the encouragement of a game or sport, and

•                     meet the special conditions specified in section 50-70.

Society, Association or Club

4.    Taxation Ruling TR 2022/2 Income tax: the games and sports exemption applies to societies, associations or clubs (referred to collectively as 'clubs') seeking to determine whether they are exempt from income tax under table item 9.1(c) of section 50-45. At paragraph 7 it references the Macquarie Dictionary definition of Association as:

an organisation of people with a common purpose and having a formal structure.

5.    Paragraph 8 of TR 2022/2 then explains:

A society, association or club may be constituted as an unincorporated association4 or be formally recognised by incorporation.

6.    The Applicant is registered as a public company limited by guaranteeand isbrought into existence by its members to pursue a common purpose. It is considered that the Applicant is a society, association or club.

Established for the encouragement of a Game or Sport

Game or sport

7.    The terms 'game' or 'sport' for the purposes of section 50-45 are not defined in the ITAA 1997 and have their ordinary meanings.

8.    TR 2022/2provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 50-45.

9.    The objects of the Applicant, as stated in its constitution, are directed at promoting, controlling and managing games listed as sports in TR 2022/2.

10.  It is considered that the Applicant is directly connected with sport.

Main purpose established for the encouragement of a game or sport

11.  Paragraph 30 of TR 2022/2 states that 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. Paragraph 43 of TR 2022/2 lists the direct or indirect activities that indicate the encouragement of a game or sport:

•                     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 listed in this paragraph by making a financial or in-kind contribution to an organisation that performs them.

12.  The Applicant conducts activities that are connected with sport.

13.  It is evident that the Applicant is directly involved in the encouragement of sport, as they provide facilities and is responsible for the day-to-day management, operation and control of the area. This includes maintenance, repairs and upgrades of the facilities.

14.  It is considered that the Applicant encourages sport. The extent to which it is the Applicant's main purpose must now be examined.

15.  Paragraph 37 of TR 2022/2 lists the following factors that 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, and

•                     the provision of financial and in-kind support for encouraging the game or sport.

16.  The main purpose can only be ascertained after objectively weighing all of the association's features such as the constituent document, activities, history and control.

Constitution and activities

17.  The fact that an association also encourages social and other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225 (Cronulla), where an association conducts other activities, particularly social or commercial activities which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may be that of encouragement. In contrast, where an association's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply.

18.  The Applicant's objects are set out in its Constitution, which includes mixed objects which are directed at both sport and recreational purposes. In addition to the activities connected with the encouragement of sport listed at paragraph 13, the Core Area will also be used for the following activities:

•                     concerts,

•                     special events

•                     hiring out of function rooms for weddings and corporate events

•                     provision of food and beverage catering services.

19.  Therefore, the Applicant will provide activities of a social and recreational nature in addition to its activities that are directed at the encouragement of sport. Following the decision in Cronulla, the provision of social activities will not disqualify an entity from exemption if the activities were incidental, ancillary or secondary to its main purpose.

20.  From the information provided, it is estimated that concerts and other ad-hoc events will be held less than X% of the time. Consequently, it is evident that the Applicant does not have extensive social or recreational activities and they can be considered as a secondary purpose to the encouragement of sport.

21.  In order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to the sporting ends. If they become an end in themselves, it will be difficult for a club to demonstrate that it is predominantly for the encouragement of a game or sport.

22.  The area has become increasingly popular as a site for hosting non-sporting events, leading to revenue from non-sporting events rising to XX% of total revenue and projected to increase over the coming period. Nonetheless the majority of revenue will continue to be derived from hosting sporting events.

23.  The Applicant is required to maintain a fund which is to be used for non-recurrent expenditure associated with the Sub-Lease. In the year ended DD MM 20YY, the Applicant expended X from the fund on capital repairs and maintenance of the area.

24.  The Applicant's use of the fund supports the furtherance of sporting activities and is consistent with the conclusion that the Applicant's main purpose is the encouragement of sport.

History and Control

25.  Control of the Applicant is vested in its board of directors. The current directors listed in the Application are all on the board of the sporting organisations. It is considered that the board are involved themselves in the promotion of sport.

26.  It is accepted that the Applicant's main purpose is to encourage sport.

Special Conditions

27.  Section 50-70 states:

50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2

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.

Not carried on for the profit or gain of its members

28.  Section 50-45 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents.

29.  The Applicant has a non-profit clause and dissolution clause in its Constitution.

30.  From these clauses it is evident that the Applicant has appropriate clauses in its Constitution that prevents members from receiving benefits during its operation and upon its winding-up.

31.  It is accepted that the Applicant operates in a non-profit manner.

Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia

32.  To meet this condition, the Applicant must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia.

33.  From the information provided, the Applicant has a physical presence in Australia as it carries out all activities in Australia. Therefore, the Applicant will incur its expenditure and pursues its purposes principally in Australia.

34.  Accordingly, the Applicant satisfies the 'Special Conditions' specified in section 50-70.

Conclusion

35.  Based on the above, the total ordinary income and statutory income of the Applicant is exempt from income tax pursuant to section 50-1, as it is an association established for the encouragement of a game or sport, pursuant to item 9.1(c) of the table in section 50-45.