Edited version of private advice

Authorisation Number: 1052306578225

Date of advice: 11 October 2024

Ruling

Subject: Income tax exempt entities - encouragement of a sport

Question

Is the 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 under item 9.1(c) in section 50-45 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 September 2023

Year ended 30 September 2024

Year ending 30 September 2025

Year ending 30 September 2026

Year ending 30 September 2027

Year ending 30 September 2028

Year ending 30 September 2029

The scheme commenced on:

1 September 2023

Relevant facts and circumstances

The Club is in Australia and is a company limited by guarantee.

The Club has provided its Constitution which includes its objects, non-profit clause, and wind-up clause, as well as its Strategic Plan.

The Club has various categories of membership. The Constitution outlines the entitlements of the membership categories.

The Club has a certain number of members, a portion of whom are members of the Club's sporting groups.

The Club provides sporting facilities.

The Club has provided information about its various sporting and other activities.

The Club has provided information in relation to income and expenses.

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 section 995-1

Australian Charities and Non-for-profits Commission Act 2012 section 25-5

Charities Act 2013 section 12

Reasons for decision

Summary

The Club is considered to be 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 income of the Club is exempt from income tax under section 50-1 of the ITAA 1997. The Club is not for the profit or gain of its individual members and operates principally in Australia.

Detailed reasoning

Section 50-1 of the ITAA 1997 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 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. 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 of the ITAA 1997. The society, association or club must meet the special conditions detailed in section 50-70 of the ITAA 1997, and the special condition in 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 construed according 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 (at 4726).

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 as described above, emphasises a 'body of persons' and 'an organisation of people' with a 'common purpose'.

Application to your circumstance

The Club is a company limited by guarantee. The Club is managed by its board. Its members pursue a common purpose and are governed by the rules outlined in its Constitution.

The Club is a society, association or club for the purposes of section 50-45 of the ITAA 1997.

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 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 and includes sports that are made available at this Club.

The examples of games or sport in the ruling include sports supported by the Club (paragraph 27 of TR 2022/2).

Application to your circumstances

The objects and activities of the Club are concerned with sporting purposes.

Encouragement

Paragraph 30 of TR 2022/2 states that '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 and indirect means.

TR 2022/2 provides the following commentary about activities that encourage a game or sport:

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.

43. Direct or indirect activities that indicate the encouragement of a game or sport can include:

•      forming, preparing and entering teams and competitors in competition in the game or sport.

•      coordinating activities.

•      organising and conducting tournaments and the like.

•      improving the abilities of participants.

•      improving the standards 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.

Application to your circumstances

The Constitution describes its objectives. The first object in the Club's constitution is 'to establish, maintain, and conduct a club for the sporting, recreational, social, cultural and educational purposes of the members of the club'. The Club actively encourages sport through the events and competitions that it organises from club to international level. The Club is improving its facilities by building a roof over the fields so that sport can be played all year round. This will take considerable funds to complete.

Main or dominant 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 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).

TR 2022/2 discusses 'Other Purposes' at paragraphs 34 and 35. At paragraph 82, in 'example 8 - multi-factorial - main purpose of encouraging a game or sport', the ruling describes a Multi-Club that promotes football and sport generally, has bar, and bistro and passive investments in residential and commercial properties. The Multi-Club has a history of fielding sporting teams in competitions, but not in recent years, instead providing support financially and in-kind to football and cricket clubs. The example concludes that an objective evaluation of all the factors including no direct involvement in fielding sport or entering competitions and provision of social facilities, its main purpose is the encouragement of a game or sport and other activities are incidental and ancillary or secondary to its main purpose.

In order for an entity to be exempt as a club established for the encouragement of a game or 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.

Application to these circumstances

The following facts in this case were considered in determining the Club's main purpose to be consistent with those of encouraging sport:

•         the Club's Constitution has an object 'to establish, maintain and conduct a Club for the sporting, recreational, social, cultural and educational purposes of the Members of the Club'

•         a key area of focus is increasing participation through the delivery of sport

•         the Annual Report included reports from the various sporting sub clubs

•         use of funds from non-sporting activities contributes to improving the Club's sporting activities.

The Club's retained earnings will be used to achieve the objects of the Club.

The usage of these retained earnings will go towards upgrades to their sporting facilities.

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 its core sport. The independent non-sporting purpose of the Club, to provide a licenced club with entertainment facilities to members and patrons, is secondary for the period of this ruling.

The Club is considered to have been 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 based on its objects and activities.

Special conditions

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 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are a 'charitable purpose', and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose.

Application to your circumstances

As the Club's objects indicate that it does not have charitable purposes, it is not an ACNC type of entity. It does not need to be registered under the ACNC Act.

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

Section 50-70 of the ITAA 1997

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 requirement

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.

Application to your circumstances

The Club's Constitution prevents distribution to members while the Club is operating and on winding up. The Club is not carried on for the profit or gain of its individual members.

There is nothing to indicate that the Club does not operate in accordance with this prohibition.

The Club satisfies the not-for-profit requirement.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally 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 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 Association 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 substantive requirements in its 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) of the ITAA 1997. 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 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.

Application to your circumstances

The Club's governing documents include its Constitution. The Constitution sets out both substantive and procedural requirements about how the entity is to be operated. The objects and non-profits clauses about the use of assets, clauses governing the admission of members, and the board's composition are 'substantive' requirements.

Based on the supporting evidence and the above analysis, the Club complies with the substantive requirements set out in its Constitution.

Applies its income and assets for its purpose

Paragraph 33 of TR 2015/1 states 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. This means that the entity must exclusively or only apply its income and assets for that purpose.

Application to your circumstances

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 section 50-70 and section 50-47 of the ITAA 1997.

Conclusion

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