Edited version of private advice

Authorisation Number: 1052191475557

Date of advice: 13 November 2023

Ruling

Subject: NFP entity

Question

Is the NFP entity covered under item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

The NFP entity is incorporated.

The objects of the NFP entity were adopted into the Constitution.

In furtherance of the Objects in its constitution, the NFP entity will provide funding generally for the benefit for the identified target group in a sports program.

The Members of the NFP entity are limited by the Constitution.

The NFP entity will not provide any services to its "Members". The NFP entity's Members undertake the role voluntarily.

In the event that the NFP entity is wound up, the assets remaining after all liabilities are paid are not to be distributed amongst Members. Instead, they must be distributed to any other incorporated body with identical or similar aims or objects, subject to any requirements of law to the contrary, as per the Constitution.

The income and property of the NFP entity are to be applied solely towards the promotion of its objects in the Constitution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-45

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Section 50-1 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45. Additionally, section 50-47 provides a special condition for all entities covered by section 50-1.

An entity is 'an ACNC type of entity' if it has a charitable purpose. Paragraph 57 of Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities explains that recreational or sporting purposes are not charitable, regardless of the motivation or the benefits to the community that can result from the NFP entity. Therefore, the NFP entity is not required to be registered with the Australian Charities and Not-for-Profits Commission to be exempt from income tax.

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 an exempt entity, subject to special conditions in section 50-70.

Accordingly, to be an exempt entity described in item 9.1(c) of the table in section 50-45, an entity must:

(a)        be a society, association or club;

(b)        be established for the encouragement of a game or sport; and

(c)        meet the special conditions specified in sections 50-47 and 50-70.

Society, association, or club

The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning.

The Macquarie Dictionary defines 'club' as a 'group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'.

The NFP entity is a society, association or club for the purposes of section 50-45.

Established for the encouragement of a game or sport

Game or sport

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

Taxation Ruling TR 2022/2 Income Tax: the games and sports exemption provides the Commissioner's view on what constitutes an exempt sporting club. TR 2022/2 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 (at paragraph 27).

The 'sport activity' is a sport for the purposes of item 9.1(c) of the table in section 50-45.

Encouragement

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.

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

The NFP entity's objects describe the activities it will undertake which are related to and actively encourage the sport. Therefore, the second test is satisfied.

Main purpose

Paragraph 31 of TR 2022/2 states that 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 37 of TR 2022/2 lists a number of factors that have been identified by courts and tribunals as relevant when considering purpose.

After consideration of these features, it is considered that the NFP entity is formed principally for the encouragement of the game or sport.

Meet the special conditions specified in sections 50-47 and 50-70

Non-profit requirement

Subsection 50-70(1) requires that the NFP entity not be carried on for the purpose 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 entity usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. An entity's actions must also be consistent with the non-profit requirement.

The NFP entity satisfies the non-profit requirement.

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

For an entity to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursue its objectives principally in Australia.

The NFP entity will satisfy the physical presence in Australia requirement.

Governing rules

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt provides guidance in respect of the conditions in subsection 50-70(2).

Paragraph 9 of 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.

Based on a review of the Constitution, it is accepted that the NFP entity complies with the substantive requirements as set out in its constituent document.

Application of income and assets

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.

It is accepted that the NFP entity will apply its income and assets solely for the purpose for which it was established.

Accordingly, the NFP entity satisfies the 'Special Conditions' specified in section 50-70.

Conclusion

In conclusion, as the NFP entity has been established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45, and 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 50-1.