Edited version of private advice

Authorisation Number: 1052375798540

Date of advice: 11 June 2025

Ruling

Subject: Income tax exemption

Question

Are you 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 9c.1(c) in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You are a company that was established several decades ago.

The company is a resident of Australia and registered as proprietary company limited by shares under the Corporations Act 2001.

The company constitution was adopted soon after it commenced operations and has been unchanged since that date.

Company membership is tied to the holding of company shares in the definitions in the constitution.

The company has one member, Company A.

The operations of the company are directed through Company A Committee meetings

With only one member the company does not conduct member or committee meetings.

Company A has been the only shareholder in the company since its inception and the company is 100% owned by Company A.

The company owns the grounds and facilities on which it operates.

The company grounds and facilities are located in Australia.

The objects of the company are to acquire the grounds and use them for the sport, conduct other similar sporting and recreational activities, and do anything else incidental or ancillary to these aims.

Under the company constitution all income and property of the company must be applied solely towards the promotion of the objects of the company and cannot be paid or transferred to members.

On the winding up of the company any property remaining after satisfaction of its debs must be given or transferred to some other institution with similar objects to the company and a constitution that similarly prohibits distribution of income or property to members.

No more than 50 shares are to be issued and the company cannot offer shares to the public or offer to accept subscriptions from the public.

Under the company constitution share value is set by the company directors. Members may transfer their shares for what they think is a fair price, or a price set by independent valuers if that is requested by other members or the directors.

The company may also consolidate or divide its share capital into shares of larger or smaller nominal value by a resolution of members at a general meeting.

General meetings may be convened by any director at any suitable time.

Under the company constitution the business of the company is to be managed by the directors who may exercise all powers that are not required to be exercised by a general meeting of the company. The directors may delegate their powers to a committee, another director or an employee. They may also appoint a managing director and delegate their powers to that managing director.

The constitution provides for the keeping of company accounts by the directors and their discretion to determine where, when, and to what extent these accounts and other company records will be open to inspection by company members other than the directors.

In the three years prior to the relevant financial year the company has run sport events, collected entry fees, managed a sports store and other sports facilities on their grounds. Other activities in this period include organising games and tournaments, arranging for the hire of their sports facilities, and arranging and promoting junior sports training and activities.

The company is not a member of an income tax consolidated group.

The company made a tax profit in the two financial years prior to the relevant financial year.

The company intends to use any surplus income to make improvements to the grounds.

Surplus income from the sports store was reinvested in sports equipment.

The company expenses were directed towards the objects of the company.

The company expenses were incurred 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 subsection 50-70(2)

Income Tax Assessment Act 1936 subparagraph 23(g)(v)

Charities Act 2013 section 12

Reasons for decision

Section 50-1 of the Income Tax Assessment Act 1997 (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.

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 if it:

•                     is a society, association, or club,

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

•                     satisfies the special conditions.

As discussed in Taxation Ruling TR 2005/22 Income tax: companies controlled by exempt entities consideration for exemption from income tax under Division 50 of the ITAA 1997 must be limited to the character and purpose of an entity and will not be based on the character or purpose of related entitles. Bodies corporate, clubs, and associations are included within the meaning of companies for the purposes of this ruling.

A 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.

A society, association, or club is described in paragraph 7 of Taxation Ruling TR 2022/2 Income tax: the games and sports exemption as:

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, politi9cal, 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'.

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'.

The possibility of a company with one member being regarded as an association has been considered in case law. In Navy Health Ltd v Deputy Commissioner of Taxation [2008] FCA 931 (Navy Health) a not-for-profit company providing private health insurance for the families of members of the Australian Defence Forces contended that it was an association for the purposes of subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), the predecessor of the current section 50-45 of the ITAA 1997. On finding the company had one member only, another company, Jessup J came to the view that such a company could not be regarded as an association, and any such proposition was 'quite at odds with the natural meaning of the word, and with normal, everyday usage.'

Application to your circumstances

With one member, Company A, the company cannot be considered a society, association or club for the purposes of section 50-45 of the ITAA 1997 as it is not a voluntary organisation of people associated for a common or shared purpose.

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. The circumstances in which the Commissioner will consider a society, association, or club to be established for the encouragement of a game or sport are described in TR 2022/2.

Application to your circumstances

A non-exhaustive list of activities that are considered 'sport' for the purposes of section 50-45 of the ITAA 1997 is given in Paragraph 27 of TR 2022/2. This list includes the sport.

Encouragement

As stated in paragraph 30 of TR 2022/2 'encouragement' is not a defined term and 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. As discussed in paragraph 34 of TR 2022/2 activities that are ancillary or secondary to the sporting purpose of an entity will not prevent that entity from qualifying for the games and sports exemption.

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.

Application to your circumstances

The club has conducted and undertaken a range of programs and activities that encourage and promote the sport. Operation of the sports store on club grounds is considered ancillary to the encouragement of sport as it is selling sport equipment for use on the grounds of the club.

Special conditions

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.

The variable nature of company share values in the provisions of the company constitution leaves open the possibility of company members making a capital gain on the transfer of shares as they appreciate in value over time or are consolidated into shares of higher nominal.

The inherent constitutional possibility of members making a profit on the transfer of shares will prevent the company from meeting the non-profit requirement of subsection 50-70(1) of the ITAA 1997

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

The meaning of physical presence in Australia for the purposes of section 50 of the ITAA 1997 is defined in paragraphs 52 and 53 of Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax entities.

In determining these matters the objectives and activities undertaken to achieve these objectives must be identified. The degree to which objectives are pursued and expenditure is incurred in Australia can be determined by comparing the facts, and each case will turn on its own facts.

Physical presence in Australia

As stated in paragraph 53 of TR 2019/6 'an entity has a physical presence in a place where it employs assets or people to conduct its range of physical operations'.

Pursues objectives

An entity usually pursues its objectives in the place where it seeks to realise its purposes. In determining where an entity principally pursues its objectives the nature of the entity's activities must be established based on the facts of the case. An entity undertaking some of its activities in Australia is not necessarily pursuing its objectives in Australia.

Incurs expenditure

In determining where an entity principally incurs its expenditure the nature of the expenditure must be established in each case. Expenditure will normally be considered to have been incurred in Australia where the decision to make the payment is made in Australia from a source such as an Australian financial institution.

An entity can also pursue its objectives and incur expenditure in Australia by making distributions to other entities or supplying goods and services in Australia.

Application to your circumstances

The company is an Australian resident and employs its assets and people in conducting its operations in Australia, pursues its objectives and undertakes all its activities in Australia and incurs its expenditure principally in Australia.

Complies 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

•                     relate to the winding-up of the entity.

Application to your circumstances

In the absence of records of committee meetings, it is difficult to come to meaningful conclusions as to whether the company complies with the substantive requirements of its constitution. There is, however, no evidence of any activity undertaken by the company that is inconsistent with the governing rules of the company.

Apply its income and assets solely for the purpose for which the entity is established

In discussing how to determine whether an entity has applied its income and assets solely for the purpose for which it is established TR 2015/1 describes the factors to be taken into account in determining that purpose. The main factors to be considered are the objects given in the entity's constituent documents and the activities of the entity. Other factors that may also be considered include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity.

Application to your circumstances

The objects of the company are set out in the constitution and are directed towards the use of its grounds and facilities to conduct sport and other sporting or outdoor recreational activities. All the activities undertaken by the company in the three years preceding the relevant year are directed towards these objectives. The expenses of the company were also directed to these ends in these years.

The company has applied its income and assets solely for the purpose for which it is established.

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. 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 health, education, social or public welfare, religion, and culture. A purpose of advancing sport is not included in this list.

Application to your circumstances

The promotion of sport is not a charitable purpose and the company is not an ACNC type of entity. Section 50-47 of the ITAA 1997 will not apply in this case.

Conclusion

The company is not a society, association or club for the purposes of section 50-45 of the ITAA 1997 and does not meet the not for profit requirement of subsection 50-70(1) of the ITAA 1997.

While the company was established for the encouragement of sport, has a physical presence and pursues its objectives and incurs its expenditure in Australia as required under subsection 50-70(1) of the ITAA, the company does not meet the non-profit requirement as members may profit or gain upon the sale of their share in the company.

Therefore, the company is not exempt from income tax pursuant to section 50-1 of the ITAA 1997.