Edited version of private advice

Authorisation Number: 1052204469132

Date of advice: 19 December 2023

Ruling

Subject: Income tax exempt entities - encouragement of a game or sport

Question 1

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

Answer

Yes.

This ruling applies for the following periods:

Income year ending 31 March 20XX

Income year ending 31 March 20XX

Income year ending 31 March 20XX

Income year ending 31 March 20XX

Income year ending 31 March 20XX

The scheme commenced on:

1 April 20XX

Relevant facts and circumstances

Background and History

1.     The Club is a public company limited by guarantee and was incorporated in 19XX. However, the Club was originally established in 19XX.

2.     The Club is located in Australia.

3.     The Club is governed by a Constitution.

4.     The Club is registered with the Australian Securities Investments Commission (ASIC).

5.     The Club is not registered with the Australian Charities and Not-for-profits Commission (ACNC).

6.     The Club has a Substituted Accounting Period.

Club's Constitution

7.     The objects of the Club are set out in the Constitution and stated as encouraging and promoting sport.

8.     The Club's Constitution includes the not-for-profit and winding up clauses prohibiting distributions to members.

9.     The Board of Directors currently consists of XX members.

10.  Candidates for the offices of some Board positions must have spent XX years as a Member at the Club, participated in the sport, or served at the Club in one or other non-Board sporting related position.

11.  The powers of the Board, the way the Board makes decisions and the procedures by which the Board operates are as set out in company law. The Board may meet together for the dispatch of business, adjourn and otherwise regulate its meetings as it thinks fit provided that the Board meets at least once in each quarter for the transaction of business.

12.  The office bearers are the directors of the Club.

13.  There must be an election of the office bearers of the Club biennially.

14.  A voting member may nominate to be on the Board of Directors. A voting member is a person who has been a full member of the Club for the preceding XX calendar years or, in respect of a general meeting, will have been a full member of the Club for the XX calendar years prior to the general meeting (including an annual general meeting), is not an employee of the Club, and hasn't been an employee of the Club at any stage during the preceding XX calendar years.

15.  A quorum for a general meeting is XX voting members.

16.  There are various classes of membership available.

17.  A member must pay a subscription, in advance, to the Club.

18.  Membership rights are not transferable.

Management and Control

19.  The ruling application states that almost all of the current Board have a long interest in various forms in the sport and participate in the Club's sporting activities.

20.  The Board has set up a number of committees of the Club. These all have various functions and can assist the Board with additional matters.

21.  The ruling application states the Board of Directors and one of the Committees delegate authority to the sporting Manager who is responsible for the overall management of the Club's sporting and administrative operations of the Club.

Membership

22.  All classes of membership can participate in the sport.

23.  There are multiple classes of membership available.

24.  The rights and entitlements of each class of member regarding the Club's function venues and sporting facilities are:

•         a financial member of any class has access to the Club's sporting operations in.

•         a financial member of any class has access to the Club's full facilities with a minimum discount on any food and beverage purchase.

•         any member over the age of 21 and having a continuous financial membership of at least XX years is eligible to vote in general board elections.

•         any member over the age of 21, having a continuous financial membership of at least XX years and being an ex-employee for a minimum of XX years is eligible to nominate in general board elections.

•         the Club's annual registration fee through its national sporting body is based on the Club's total membership base.

•         any members can access reciprocal rights to other sport Clubs nationally.

•         any member can register to be a volunteer.

•         the Club's facilities are available to any member or non-member (the general public) of the Club.

25.  As at November 2023, the Club has XXXX members split across the classes.

Facilities

26.  The Club has the following facilities:

• main Clubhouse
  • gaming area
  • dining options, both indoor and outdoor
  • kids play area
  • conference and meeting rooms
  • snooker tables
  • TAB sportsbet
• sheds
• car park

27.  The Club is a lessee of Crown Lands. This lease was renewed during the 20XX financial year. The renewed lease is for XX years expiring in 20XX.

28.  The Club has various sporting assets.

29.  The Club has capacity for XXXX persons across its various function venues.

30.  The Club has gradually acquired investment properties surrounding the Club. These properties have different uses.

Activities

Sporting

31.  The ruling application states the Club undertakes various sporting activities.

32.  The Club's has various Strategic Priorities for the year ended 31 March 20XX.

33.  The Club both holds various sporting activities and programs for members as well as members participating in externally held competitions.

34.  The Club hosts a program which is designed to provide opportunities for those with physical and intellectual disabilities to participate in the sport. The Club provides equipment and financial assistance.

35.  The Club has numerous sporting policies and instructions.

36.  The Club is implementing a coaching and training program for junior participants.

37.  The Club supplies equipment and volunteers for participants.

38.  The Club has a website with a separate link for all sporting related activities.

39.  The Club also hires out its facilities for holding presentation afternoons/nights for various sporting clubs, as well as presentations for sporting and/or sporting related events. Furthermore, these rooms are also used for first aid safety training, as well as for volunteer inductions.

40.  The Club has XX volunteers that assist with sporting activities.

41.  The Club provides a number of grants to assist participants undertaking the sport including travelling for competitions and purchasing equipment.

42.  In the 2023 financial year, the Club provided sponsorships for Club participants.

43.  The Club provides sponsorships for other external sporting clubs.

44.  The Club supports a number of subsidiary clubs through financial and operational support.

Non-Sporting

45.  The Club's has various non-sporting Strategic Priorities.

46.  The Club hosted live entertainment (musicians) at its various venues during the ruling period. There were less events in the 20XX financial year due to Covid 19 restrictions.

47.  The Club holds various functions and events including corporate conferences, weddings, birthday parties, wakes and other entertainment and charity events.

48.  The Club provides a rewards club for members. This Club provides benefits to members such as access to exclusive promotions and events, member only special meal deals, discounts on food and beverage, free courtesy bus and access to sporting facilities and subsidiary clubs. There are different tiers within the rewards Club which provide further benefits for members.

49.  The Club participates in a scheme which covers activities that are aimed at improving the living standards of low income and disadvantaged people.

50.  The Club has a website where it advertises its dining venues, other marketing and promotions and entertainment schedules. The Club also has separate social media pages to promote their sporting and non-sporting activities.

Property and development projects

51.  The facility development is a refurbishment to include a mezzanine level which offers facilities for sporting administration, training, briefings and administration. There is also additional storage. The development is ongoing.

52.  There is a redevelopment of the existing Clubhouse. The redevelopment includes a complete refurbishment of the inside of the existing Clubhouse. The works are expected to be completed in November 20XX.

Employees

53.  The Club employs XXX full-time, part-time and casual staff. These are split between sporting and non-sporting activities.

Financial position

54.  The Club generates revenue through bar, restaurant and kiosk sales, poker machines, memberships, government grants, interest, TAB, Keno, promotions, services, fees, event revenue, publications and rental income from their investment properties.

55.  The Club received Government grant income in the 20XX and 20XX financial years.

56.  A provision has been recognised for estimated ClubGrants. This provision has been based on gaming machine net revenue from September 20XX to March 20XX, less any amount already expended during that period. The Club is required to account for this expenditure for the period ending August each year.

57.  The audited financial statements for the financial years ending 31 March 20XX, 20XX, 20XX and 20XX were provided there is a consistent history of surpluses and the smaller surplus in the 20XX financial year being due to Covid-19 trading restrictions.

58.  The Club forecasts to reinvest $X million in sporting and non-sporting refurbishments, rebuilds and other expenditure for the income year 1 April 20XX to 31 March 20XX.

59.  Other than the facility development, the Club has not provided any details of other significant investment in sporting infrastructure. The Club is considering further development of its facilities including additional dining options. It is also considering a hotel and developing the investment properties into senior living units. This later development is only in the preliminary stages, involving discussions with council.

Relevant legislative provisions

Section 50-1 of the Income Tax Assessment Act 1997

Section 50-45 of the Income Tax Assessment Act 1997

Item 9.1(a) in section 50-45 of the Income Tax Assessment Act 1997

Section 50-47 of the Income Tax Assessment Act 1997

Section 50-70 of the Income Tax Assessment Act 1997

Section 12 of the Charities Act 2013

Reasons for decision

Issue 1

Question 1

Summary

The Club is exempt from income tax under section 50-45, item 9.1(c) under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as it is established for the encouragement of a game or sport for the financial years ending 31 March 2020 to 31 March 2024.

Detailed reasoning

A society, association or club which has been established for the encouragement of sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

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. A society, association or club established for the encouragement of a game or sport is listed at item 9.1(c) in the table in section 50-45. The society, association or club must meet the special conditions detailed in section 50-70 and section 50-47 of the ITAA 1997.

An entity is exempt from income tax as a society, association or club established for the encouragement of a game or sport if it:

•         is a society, association or club

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

•         satisfies the special conditions.

Society, association or club

The term 'society, association or club' is not defined in the ITAA 1997. The term is therefore construed to the ordinary meaning of the words.

In Douglas v. Federal Commissioner of Taxation 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose.

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)...Sugerman JA stated at 82:

A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association'...

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two...Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The meaning of 'society, association or club' emphasise a 'body of persons' and an 'organisation of people' with a 'common purpose'.

The Club is managed by a Board and is a Company established under a constitution for the common purpose of its members. Therefore, the Club is a society, association or club.

Established for the encouragement of a game or sport

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. Taxation Ruling TR 2022/2 Income tax: the game and sports exemption (TR 2022/2) describes the circumstances in which the Commissioner will consider a society, association or club to be established for the encouragement of a game or sport. 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 of the ITAA 1997.

The objects and activities of the Club are concerned with sport.

Encouragement

Paragraph 30 of TR 2022/2 states that 'encouragement' is not a defined term, therefore 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 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

•         co-ordinating 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 Club holds regular sporting competitions. The Club has various sporting assets and equipment.

During the ruling period the Club has made significant additions to its facilities including a new mezzanine level offering functions for sporting administration, training, briefings and administration.

The Club is implementing a coaching and mentoring program to new, junior and adult participants to maintain their skills as well as providing real-time mentorship. The Club has numerous sporting policies and instructions to assist participants.

The Club holds a program which is designed to provide opportunities for those with intellectual and physical disabilities to participate in the sport.

The Club provides assets, equipment and financial assistance.

The Club employs a casual sporting manager and casual sporting instructors. The Club supports a number of volunteers all involved in sporting activities.

The Club hires out its facilities for holding presentation afternoons/nights for various sporting clubs, as well as presentations for sporting and/or sporting related events. Furthermore, these rooms are also used for first aid safety training and volunteer inductions.

The Club provides financial and operational assistance to subsidiary clubs as well as providing sponsorships to other local sporting clubs. The Club also provides financial assistance to participants to assist them with travelling to competitions or assistance with purchasing equipment.

The Club has a separate link on its website to promote its sporting activities. The Club has a separate social media purely for its sporting activities which shares similar information to the website as well as photos from sporting events.

The Club has a purpose of encouragement of the sport.

Purpose of providing entertainment for members

The Club has facilities which include multiple dining options, kids play area, conference and meeting rooms, snooker tables and TAB sportsbet and a gaming area. All members have full access to these facilities. The Club has a rewards program which provides benefits to members such as access to exclusive promotions and events, member only special meal deals, discounts on food and beverage, use of a free courtesy bus and access to sporting facilities and the subsidiary clubs.

The Club provides live music entertainment for the benefit of its members most weekends throughout the year at its various venues. There were XXX events held during the ruling period as at 31 December 20XX and it was noted there was a decline in the 2021 financial year due to Covid-19 health restrictions.

The Club's non-sporting expenditure is significant over the ruling period, at least $X million for each of the ruling years. Expenditure items include bar, catering, gaming, keno and TAB, other entertainment and marketing, promotions, rental expenses, administration and wages. For the financial year ending 30 March 20XX the Club invested $X million in refurbishments; XX% was invested in non-sporting refurbishments.

The Club is also considering further development of its member facilities including another restaurant in the main Clubhouse. It is also considering the repurposing the auditorium into a hotel and developing the investment properties into senior living units. This later potential development is only in the preliminary stages, involving discussions with council, and is at a point too soon to impact the Club's purpose for the ruling period.

The Club has a website with promotions and raffles, advertises their dining facilities and provides a schedule of their entertainment. The Club has a separate social media page which advertises their entertainment, promotions and dining options.

The Club has a purpose to provide entertainment facilities for its members that is independent to its sporting purpose.

Main or dominant purpose

To be an exempt entity under item 9.1(c) of section 50-45 of the ITAA 1997, the main or dominant purpose of a club must be the encouragement of a game or sport.

The test to be applied was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. 90 ATC 4215 (Cronulla) as follows:

For a society, association or club to qualify for the exemption... it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object (at 4225).

To determine whether a club is established for a game or sport in a particular year of income, Lockhart J in Cronulla stated:

The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely the year of income... (at 4225).

TR 2022/2 provides the following commentary regarding 'main purpose':

31. Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances...

32. The subjective motives or intentions of the founders or members of the club are relevant but do not necessarily determine the main purpose of the club. The stated purpose of a club is also significant but not decisive. Other important considerations include the activities and history of the club and how the club is controlled.

33. It is the main purpose of the club in the year under examination that is the relevant consideration. it is not enough to examine the purpose of a club at the time of formation (or in past years), as its main purpose may change from year to year...

36. No one factor on its own will determine the main purpose of a club. A weighing of all factors is needed. When considering the factors together, an objective conclusion must be reached that a club has a main purpose of encouraging a game or sport.

37. 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 sort.

The Club's stated objects are to promote the sport generally, to promote other athletic sports or pastimes, to provide, or support the provision of, community facilities for the localities in which the Club operates a licensed premises and to operate a licensed club or clubs to further these objectives.

The Club is made up of a Board members who almost all have a long interest in various forms in the sport and participate in the Club's sporting activities. For some of the offices of the Board positions, candidates must have spent XX years as a Member at the Club, participated in the sport and served at the Club in one other non-sporting related position.

The Board has set up a number of committees of the Club that have various functions and assist in the day to day activities of running the Club. The Board of Directors and one of the Committees delegate authority to the sporting Manager who is responsible for the overall management of the Club's sporting activities both operational and administrative.

The activities of the Club include the purchasing of assets and equipment, incurring expenditure to upgrade and maintain sporting facilities, running and sponsoring sporting competitions, providing officials for sporting events, encouraging new participants, junior participants and for current adult participants to maintain their skills, encouraging club members to be spectators at, and to support the sport, providing equipment and sport management facilities.

The Club both holds and participates in various sporting competitions. The Club has sporting assets. The Club provides assistance to other local sporting clubs and assists its subsidiary clubs with operations.

The Club has a main Clubhouse, gaming area, various dining options and is capable of indoor and outdoor dining. The Club hosted a number of live music events at its various venues during the ruling period. The revenue generated from these activities is used in the Club on purchasing sporting assets and equipment, upgrading facilities and buildings, providing coaching and mentoring programs to participants to maintain their abilities, travel assistance for participants to participate in sporting programs, attend competitions overseas or assistance with purchasing assets.

The main facilities have undergone developments in the ruling period. The facility development includes a refurbishment to include a mezzanine level which offers facilities for sporting administration, training, briefings and administration. There is also additional storage. The development is ongoing. There is also a refurbishment of the existing Clubhouse. The redevelopment includes a complete refurbishment of the inside of the existing Clubhouse including a rooftop bar and additional indoor/outdoor dining options. The works are expected to be completed in November 20XX.

The Club has members split across various classes of membership and all members can participate in sport. All members of the Club have full access to the Club's facilities.

The Club provides a website where it advertises its dining venues, other promotions and marketing and entertainment schedules. The Club also uses social media to promote both sporting and non-sporting related activities. The Club has a separate link on their website for its sporting activities as this provides a focussed information hub for participants.

The Company has a history of surpluses over the ruling period and generous retained earnings which are used to achieve the objects of the Club. The usage of these significant retained earnings in future years will impact the Club's main purpose.

Weighing up the Club's sporting and non-sporting activities and considering all the evidence provided and the analysis above, the Club's main purpose is the encouragement of sport. The independent non-sporting purpose of the Club, to provide a licenced club with entertainment facilities to members, is secondary for the period of the ruling.

Section 50-47 of the ITAA 1997

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, 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.

Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 sets out the requirements to be a charity. Section 12 of the Charities Act provides purposes that are a 'charitable purpose' and includes purposes such as advancing education and advancing health. The encouragement of a game or sport is not a charitable purpose.

The Club has a purpose of encouraging a game or sport which is a non-charitable purpose. As such, the Club is not capable of being a registered charity and is not an ACNC type of entity.

Section 50-47 of the ITAA 1997 does not apply to the Club.

Section 50-70

Subsection 50-70(1) of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members (not-for-profit requirement) and:

• it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or
• it is a deductible gift recipient; or
• it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Non-profit

TR 2022/2 states the following about the non-profit requirement:

11. To qualify for the games and sport exemption, a club must be not-for-profit... The club must not be carried on for the purposes of individual members' profit or gain, either while the club is operating or on its winding up.

12. Club members may receive communal membership benefits, such as the use of the facilities, that are incidental to the club's objects. This will not prevent the club meeting the not-for-profit requirement. The club may also pay members reasonable remuneration for services they perform for the club.

13. Clubs can use various mechanisms to ensure they meet the not-for-profit requirement. 'Not-for-profit' clauses in governing documents are the most common way. These prevent the distribution of profits or assets for the benefit of particular persons while the club is operating and on winding up.

The Club's Constitution prevents distribution to members while the Club is operating and on winding up. There is nothing to indicate that the Club does not operate in accordance with this prohibition. The Club is not carried on for the profit or gain of its individual members.

In Australia

The Club is a resident of, and is located in, Australia. The Club carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfied this requirement Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities)

Subsection 50-70(2) of the ITAA 1997 provides that the Club must:

• comply with all the substantive requirements in its governing rules; and
• apply its income and assets solely for the purpose for which the entity is established.

Comply with all the substantive requirements in its governing rules

Paragraph 9 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (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 and include rules such as those that:

• give effect to the object or purpose of the entity
• relate to the non-profit status of the entity
• set out the powers and duties of directors and officers of the entity
• require financial statements to be prepared and retained
• set out the criteria for admission as a member of an entity
• require an entity to maintain a register of members, and
• relate to the winding-up of the entity.

From the supporting evidence provided, the Club complies with the substantive requirements set out in its current Constitution.

Apply its income and assets solely for its purpose

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. This means that the entity must exclusively or only apply its income and assets for that purpose.

Based on the supporting evidence and the above analysis, the Club applies its income and assets solely for the purpose for which it was established.

The Club satisfies the special conditions in sections 50-47 and section 50-70 of the ITAA 1997.

Conclusion

The Club is a society, association or club established for the encouragement of a game or sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. As such the Club's ordinary and statutory income is exempt from income tax by virtue of section 50-1 of the ITAA 1997.