Edited version of private advice

Authorisation Number: 1052197517694

Date of advice: 28 November 2023

Ruling

Subject: Income tax exempt - encouragement of sport

Question 1

Is Entity A an income tax exempt entity pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) by virtue of being an association for the encouragement of a game or sport pursuant to section 50-45 of the ITAA 1997?

Answer

Yes.

Question 2

Will Entity A continue to be exempt from income tax pursuant to section 50-1 of the ITAA 1997 by virtue of being an association for the encouragement of a game or sport pursuant to section 50-45 of the ITAA 1997, following the Proposed Transaction?

Answer

Yes.

This ruling applies for the following periods:

20XU

20XV

20XW

20XX

20XY

20XZ

The scheme commences on:

Date in 20XU

Relevant facts and circumstances

Entity A is involved in a sport in Australia.

It has provided its Constitution, and details of its activities.

Entity A uses its income and assets for its purposes and its surplus funds are not distributed to members.

Entity A will be involved in a Proposed Transaction, which includes some amendments to its Constitution, to improve outcomes within the sport.

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.

Question 1

Summary

Entity A is an income tax exempt entity pursuant to section 50-1 of the by virtue of being an association for the encouragement of a game or sport pursuant to section 50-45.

Detailed reasoning

Entity A's ordinary and statutory income is exempt from income tax in accordance with section 50-1 if:

• it is 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, and
• it meets the special conditions in sections 50-47 and 50-70.

Section 50-45

The phrase 'society, association or club' refers to a voluntary organisation of people associated together for a common or shared purpose. This description is consistent with the Macquarie Dictionary definition of each word:

• Society '... an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic or other purposes'
• Association '... an organisation of people with a common purpose and having a formal structure'.
• Club '... a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'.

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

Based on the facts Entity A is an association.

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.

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.

In considering activities and purpose, paragraph 43 of TR 2022/2 explains that:

Direct or indirect activities that indicate the encouragement of a game or sport can 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 listed in this paragraph by making a financial or in-kind contribution to an organisation that performs them.

The emphasis in Entity A's constituent document is that its main purpose is to encourage the relevant sport Australia. Its activities are consistent with this.

We consider that Entity A 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 Entity A'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.

Entity A 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?

Entity A has been encouraging the relevant sport in Australia.

Entity A has used its income and assets for its purposes and its surplus funds are not distributed to members. It is considered that subsection 50-70(2) is satisfied.

As Entity A 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 pursuant to section 50-1

Question 2

Summary

Entity A will continue to be exempt from income tax pursuant to section 50-1 by virtue of being an association for the encouragement of a game or sport pursuant to section 50-45, following the Proposed Transaction.

Detailed reasoning

Entity A's ordinary and statutory income will continue to be exempt from income tax in accordance with section 50-1 if:

• it continues to be 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, and
• it continues to meet the special conditions in sections 50-47 and 50-70.

Section 50-45

The aim of the Proposed Transaction is to achieve improvements in the relevant sport, which is consistent with the purpose of the encouragement of that sport.

The Proposed Transaction will lead to changes in Entity A's Constitution.

The activities that Entity A will be the same after the Proposed Transaction and this will be consistent with its purpose of encouraging the sport.

In relation to the non-profit requirements, there are no indicators that this would be compromised.

We consider that Entity A will continue to be 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

As the changes to Entity A's objects will not lead to it having a charitable purpose, it will not be an ACNC type of entity, therefore it does not need to be registered under the ACNC Act.

Section 50-70

Entity A will continue to satisfy the requirements of subsection 50-70(1) as its Constitution will still prohibit it from distributing income to its members and it will still be in Australia.

Entity A will continue to encourage sport in Australia.

Entity A will continue to use its income and assets for its purposes and its surplus funds will not distributed to members. It is considered that subsection 50-70(2) will be satisfied.

As Entity A has been established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45 and will meet the special conditions in section 50-47 and 50-70, its ordinary and statutory income will continue to be exempt from income tax pursuant to section 50-1 after the Proposed Transaction.