Edited version of private advice

Authorisation Number: 1052202361520

Date of advice: 12 December 2023

Ruling

Subject: Not for profit - exemption from tax

Question

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

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income Year ending 30 June 20XX

Income Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

XYZ Club (the Club) was incorporated as an Australian public company limited by guarantee.

The Club is not a charity.

The principal purpose of the Club is to encourage sports.

The Constitution of the Club contains the relevant clauses:

Clause 3 states the objects of the Club:

3. The objects for which the company is established are:

a)    to promote the benefits of sport,

b)    to enhance access to ....

...

The Company must pursue these Objectives only and must only apply its income in promoting those purposes on a not-for-profit basis.

Clause 6 deals with Income and property. It states:

6.   The income and property of the company whencesoever derived shall be applied solely towards the promotion of the objects of the company as set forth in this constitution and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever to members of the company.

Clause 10 deals with the winding up. It states:

10.      If upon the winding up or dissolution of the company there remains after satisfaction of all its debts and liabilities any property whatsoever, the same shall not be paid or distributed amongst the members of the company but shall be given or transferred to one or more other funds, authorities or institutions which or each of which:

a.    Has objects similar to the objects of the company; and

b.    Whose constitution shall prohibit the distribution of its income and property among its members to an extent at least as great as is imposed on the company under or by virtue of clause 6.

The members of the Club include anyone that comply with the objects of the Club.

The directors and members of the Club deliver sporting skills development and competition.

The activities of the Club align with the objects in their Constitution.

The Club's surplus funds have been retained for its future use as per their objectives.

The Club has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

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 1997 subsection 50-70(1)

Income Tax Assessment Act 1997 paragraph 50-70(1)(a)

Income Tax Assessment Act 1997 subsection 50-70(2)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

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

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)

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.

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 50-47 and section 50-70.

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.

Taxation Ruling TR 2022/2 Income tax: the games and sports exemption (TR 2022/2)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". A Club is defined as:

a group of persons organised for a social, literal, sporting political, or other purpose, regulated by rules agreed by its members.

Paragraph 8 of TR 2022/2 then explains:

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

The Club is registered as a public company limited by guaranteeand isbrought into existence by its members to pursue a common purpose, which is to promote sports. Therefore, it is considered that the Club is a society, association or club.

Main purpose - established for the encouragement of a 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.

TR 2022/2provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 50-45, which include the type of sport the Club is promoting. It is considered that the Club is connected with sport.

Paragraphs 30 and 31 of 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 provides:

The following factors 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.

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.

Based on information provided, it is considered that the Club 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.

Satisfying the special conditions

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 GCA'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.

As per subsection 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).

Subsection 50-70(2) states:

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.

The Club satisfies the requirements of subsection 50-70(1) as it has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally 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?'

Since the Club is established for the purpose of encouragement of sports and it has applied its income and assets solely for this purpose, it is considered that subsection 50-70(2) is satisfied.

As the Club 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 in accordance with section 50-45.