Edited version of private advice

Authorisation Number: 1052200715477

Date of advice: 19 January 2024

Ruling

Subject: Not-for-profit - exemption from tax

Question 1

Is the Club exempt from income tax on the basis that it is a club established for the encouragement of a game or sport under item 9.1 of the table in section 50-45 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Is the Club exempt from the requirement to lodge income tax returns under section 161 of the of the Income Tax Assessment Act 1936?

Answer

Yes, unless the Club is specially required by the Commissioner to lodge an income tax return.

This ruling applies for the following periods:

Income year ending DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Background

1.      The Club is a not-for-profit incorporated association.

2.      It is located in a rural township and has been established to promote and control sport.

3.      The Club operates on a substituted accounting period.

Purpose

4.      The Club's constitution (the Constitution) provides the following key clauses:

Objects

5.      The objects of the Club as set out in clause X of the Constitution are as follows:

a.      To promote and control the game of sport for players and to foster and advance the sport in the district.

b.      To arrange, manage and control all matches played under its auspices.

c.      To attempt to provide and maintain grounds and play areas in the town and surrounding districts.

d.      The funds of the Club shall be devoted only towards carrying out its objects.

Powers

6.      The Constitution at clause X sets out the powers of the Club.

Not-for-Profit

7.      The Constitution has a not-for-profit clause.

Dissolution clause

8. The Constitution has a dissolution clause.

Club Membership

9.      The Constitution provides ordinary members and life members are the only classes of membership. The number of ordinary members is unlimited.

10.   Normally there is approximately XXX children signed up to play the sport. Their parents and guardians are also eligible to be involved as a club member.

Membership fees

11.   There is only one form of membership fee which is currently $XXX per year.

Management committee

12.   The Constitution provides that there is a Management Committee that consists of a President, Senior and Junior Vice-president, Secretary and Treasurer.

13.   All members of the Management Committee are also members of the Club.

14.   The committee members are all volunteers.

Activities

15.   The Club has provided the following information in support of their application:

Sporting involvement

16.   The Club is directly involved in the sport.

17.   The Club enters multiple teams in the regional competition.

18.   The Club also runs training sessions twice per week at the local town oval.

19.   The Club provides coaches and training for coaches.

20.   The Club trains players to be referees, sports first aid officers, water runners, club managers and other roles that are a necessary part of running the Club.

Non-Sporting activities

21.   Apart from competition and training for competitions, the Club runs social activities from time to time, like movie nights and organises raffles as a fundraiser.

22.   During home games at the local oval a temporary food stall is sometimes organised to provide food and refreshments for purchase. Any funds raised go towards the Club.

23.   There are no formal clubrooms, restaurants, or pokies.

24.   The Club has a Facebook page where they post promotional material about the Club.

Sporting facilities

25.   The Club does not own any physical facilities.

26.   The home ground is used for training and competitions is shared with another sporting club who lease the grounds from the government.

27.   The costs of maintaining and running the facilities are shared equally between the two clubs.

Funds

28.   Financial information was provided.

29.   Figures of the turnover of the Club for the financial years for the period from October 20XX to September 20XX were provided.

Physical presence

30.   The Club is established and operated in Australia.

31.   The Club 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.

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

Income Tax Assessment Act 1936 section 161

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Question 1

Summary

The Club is exempt from income tax under section 50-1 of the ITAA 1997 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 ITAA1997.

Detailed reasoning

A society, association or club which has been established for the encouragement of a game or sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1.

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.

Additionally, section 50-47 provides a special condition for all entities covered by section 50-1, 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.

The Club is an incorporated association. The Constitution outlines its purpose at clause X as follows:

a.      To promote and control the game of sport and to foster and advance the Club in the district.

b.      To arrange, manage and control all matches played under its auspices.

c.      To attempt to provide and maintain the sporting grounds and play areas in the surrounding districts.

d.      The funds of the Club shall be devoted only towards carrying out its objects.

The Club has a management committee and a class of members who are governed by the Constitution.

It is accepted that the Club is a society, association, or club for the purposes of section 50-45.

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 not-for-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.

The Club is a not-for-profit entity as the Constitution prevents distributions to members both while it is operating and upon winding up and dissolution.

Established for the encouragement of 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. Football (all codes) forms part of this list.

The Club is directly involved in a sporting activity which is listed at paragraph 27 of TR 2022/2 as a game or sport.

As such, the Club satisfies the requirement for the activity to be a game or sport for the purposes of item 9.1(c) of the table in section 50-45.

The encouragement of sport must be the main purpose

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

For the 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 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.

It is the main purpose of the Club in the year under examination rather than at the time of formation.

A club with both a sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is merely ancillary and incidental or secondary to its sporting 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.

The fact that a club undertakes 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, where an association conducts other 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 the undertaking of these other activities, the exemption does not apply.

This is expressed in TR 2022/2 that states, at paragraph 34, that a club that has both sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is:

• merely ancillary and incidental to its sporting purpose (that is, a purpose that is related to carrying out its sporting purpose), or
• secondary to its sporting purpose (that is, a purpose that is independent to, but less important or less significant than the sporting purpose).

In order for an entity to be exempt as a club established for the encouragement of a game of sport, revenue raising purposes must remain only a means to a sporting end. 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.

The Club's main objectives as stated in the Constitution is as follows:

a.    To promote and control the game of sport and to foster and advance the Club in the district.

b.    To arrange, manage and control all matches played under its auspices.

c.     To attempt to provide and maintain the sporting grounds and play areas in the town and surrounding districts.

d.    The funds of the Club shall be devoted only towards carrying out its objects.

These objects and their emphasis on sport support a characterisation of the Club as an association established for the encouragement of a game or sport.

The main activities undertaken by the Club are directly related to sport. The Club enters multiple teams in the regional competition. The activities of the Club include running training sessions twice per week, recruiting new players, together with providing and training coaches, referees, and all of the supporting roles necessary for the smooth running of a sporting organisation.

In furtherance of the Club's objects the Club also undertakes very limited activities with a non-sporting purpose. These activities consist of running a food stall at home matches for food and refreshments and conducting other fund-raising activities like movie nights and raffles to raise funds for the Club.

Based on the features of the arrangement discussed above, it is considered that the Club's main purpose is the encouragement of a sport.

Special conditions

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

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

Question 2

Summary

As the Club is exempt from income tax under section 50-1 of the ITAA 1997 it is not required to lodge an income tax return for the relevant years as per the relevant legislative instrument determination.

Detailed reasoning

Subsection 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) requires that every person must, if required by the Commissioner by legislative instrument, give to the Commissioner a return for a year of income.

Pursuant to subsection 161(1A) of the ITAA 1936, particular classes of persons may be exempted by the Commissioner in that instrument from lodging an annual return, unless the Commissioner requires the person to do so.

There are legislative instrument determinations for each of the years ended 30 June 20XX, 20XX, 20XX, 20XX and 20XX.

Under each legislative instrument determination, a person described in Table L is not required to lodge an income tax return. Table L includes an entity whose income is exempt from income tax under Division 50.

As the income of the Club is exempt from income tax under section 50-1, the Club will not be required to lodge an income tax return for the income years ended DDMMYYYY to DDMMYYYY.

Legislative instruments are published each year. For future years you can access the legislative instrument determination titled: Notice of Requirement to Lodge a Return for the relevant income year from the ATO website at www.ato.gov.au.