Private ruling: Income Tax Exemption as a Sporting Club
Date of advice: 7 March 2016
Published: May 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the entity 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 and sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997? | A1: No

Relevant facts and circumstances: The entity is an incorporated association and is governed by its Constitution. The Constitution details the objectives of the entity. The Constitution provides that income and property of the entity shall be applied solely to the promotion of its objects and shall not be paid or transferred directly or indirectly to its members. The Constitution includes the entity's dissolution clause. The entity is prohibited from applying surplus assets to the benefit of members. Any surplus assets remaining following the winding up of the company will be transferred to another club, association or institution having objects similar wholly or in part. The entity has Honorary Members, Life Governor Members, Foundation Members, Life Members, Ordinary Members and Transit Members. Approximately XX% of the entities members are registered sports players. The entity has three committees; the main committee, the building committee and the sports committee. The financial statements for the year ended 30 June 20XX of the entity state that the main activity of the club is 'cultural club'. Clubrooms In a previous income year the entity used its surplus revenue to renovate the clubrooms. Sport In the 20XX income year the club hosted a number of sports competitions. In the 20XX income year the club is scheduled to host a similar number of sports competitions. Both members and the public play sport at the entity's clubrooms. The entity has junior players (ages 10 years and up) and senior men and women players. Members play on most days of the week. The entity advised that the sport is promoted to its members and to the wider community, as well as locally and internationally. Social activities The entity also offers bistro dining facilities and is open to both members and the general public for this. The entity participates in cultural festivals/events during the year including onsite weekly programs.

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 50-70

Reasons for decision: Summary: Section 50-1 of the ITAA 1997 provides the total ordinary income and statutory income of entities covered in section 50-45 is exempt from income tax. This includes at item 9.1(c) of the table in section 50-45 of the ITAA 1997, a society, association or club established for the encouragement of a game or sport. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) provides the Tax Office view and describes the circumstances under which a society, association or club is regarded as being established for the encouragement of a game or sport. Paragraph 7 of TR 97/22 sets out the relevant tests in determining an entity's tax exempt status under item 9.1(c) of section 50-45 of the ITAA 1997, as detailed below: For a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy the following three tests: 1. It must be a society, association or club; 2. Meet the requirements of section 50-70 of the ITAA 1997 (special conditions); and 3. Its main purpose must be for the encouragement of a game or sport. | Detailed Reasoning - Society, Association or Club: The entity was incorporated as a non-proprietary company and has been conducting activities permissible under its objects. The requirement that it is a club is therefore satisfied. | Detailed Reasoning - Meet the requirements of section 50-70 of the ITAA 1997: Item 9.1(c) in the table in section 50-45 of the ITAA 1997 requires consideration of the special condition under section 50-70 of the ITAA 1997. 50-70(1) Special conditions for items 1.7, 2.1, 9.1 and 9.2 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. The entity's constitution suggests that the club was established not for individual profit or gain. It contains clauses to prohibit the distributions of profit or gain to its members in the life of the operations and in the event of winding up. These clauses are considered to be suitable non-profit and winding up clauses. The entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It therefore satisfies paragraph 50-70(1)(a) of the ITAA 1997. Further subsection 50-70(2) provides that 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 entity has advised that it complies with both of these obligations. | Detailed Reasoning - Main Purpose of Encouraging a Sport or Game: To satisfy item 9.1(c) in section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the main purpose of the club. Paragraph 38 of TR 97/22 includes the clubs sport as a form of sport. Paragraph 11 of TR 97/22 provides the following regarding the encouragement of a sport: 11. 'Encouragement' means 'stimulation by assistance', according to the Macquarie Dictionary. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club. Encouragement can occur directly by: • forming, preparing and entering teams and competitors in competitions in the game or sport; • co-ordinating activities; • organising and conducting tournaments and the like; • 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; or • encouraging increased and wider participation and improved performance; and can occur indirectly: • through marketing; or • by initiating or facilitating research and development. The Notes on Clauses of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 state: The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support. It is accepted that the entity carries on and promotes sporting activities and tournaments. Particularly since an earlier income year when it undertook extensive renovations to its clubroom facilities. However, to be eligible for exemption under item 9.1(c) of section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the entity's main purpose. | Detailed Reasoning - Main Purpose: In determining main purpose, difficulties can arise when a club conducts other activities, particularly social and/or commercial activities. There have been a number of Federal Court cases and Administrative Appeal Tribunal decisions that have considered the main purpose of a club that has a sporting purpose while also conducting extensive social activities. Hill J in St Marys Rugby League Club Limited v FT of T 97 ATC 4528; (1997) 36 ATR 281 ( St Marys ) said in relation to subparagraph 23(g)(iii) of the Income Tax Assessment Act 1936 : The parties agree that in the subsequent decision of Terranora Lakes Country Club Ltd v FC of T 93 ATC 4078 I correctly stated the law when I quoted Lockhart J in Cronulla- Sutherland at ATC 4225; FCR 95 where his Honour said: ``... 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 exception cannot apply because it would be impossible to say that one object is the main or predominant object.'' The question is thus one which goes to the character and nature of the applicant. That question of characterisation is to be determined having regard to the objects, purposes and activities of the taxpayer. As the present case illustrates, however, the fact that the law may be said to be settled does not remove the difficulties of the Commissioner or a club in applying the law to the facts of a particular case. The reason is simple enough. Many, if not all, sporting clubs commence in a small way and in circumstances where there can be no doubt as to the characterisation of the club as a sporting club. A consequence of the exemption of the income of that club from tax is often that the club grows and prospers. Particularly, it engages in activities which are designed to raise money to be used to further the sporting activities. Activities so undertaken may include poker machines, liquor sales, bingo games and the like. There may, as I said in my judgment at first instance in Cronulla- Sutherland Leagues Club Ltd v FC of T 89 ATC 4936 at 4955, come a time when these other activities take on a life of their own. From being merely concomitant or incidental to the activities of sport, they become an end in themselves. That was the case in Cronulla- Sutherland . It had not happened to the Terranora Lakes Country Club. As each of those cases demonstrates and the present facts reinforce, the line to be drawn will be a difficult one. To determine on what side of that line the Club falls in the years of income in dispute, the years 1992 to 1995 inclusive, it is necessary to have regard, as Lockhart J observed in Cronulla-Sutherland at ATC 4225; FCR 95-96, to the constitution, activities, history and control of the body seeking the exemption. In the case of the entity, it provides social and commercial/entertainment activities including: dining facilities, a social meeting place, a weekly program for senior citizens, and participation in cultural events and festivals. Paragraph 14 of TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all the club's features, including those features described in paragraphs 15 and 16. 15. Features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include: • the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51); • the sporting activities encouraged by the club are extensive (see paragraph 53); • the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); and • the club's constituent documents emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents (see paragraph 56). 16. Other features that are relevant but less persuasive include: • a high level of participation by members in the game or sport (see paragraph 57); • the members of the committee, or persons who control the direction, of the club are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from day to day management of the club) (see paragraph 58); • voting rights in the club vest only in members involved in encouraging the game or sport, whether by personal participation or by encouraging participation by others (see paragraph 59); and • the club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided (see paragraph 60). Further, it is necessary to look to the relevant years of income, in the entity's case being the financial year ending 30 June 2016 to determine if each of the elements are satisfied, paragraph 48 of TR 97/22 stating: 48. Section 50-45 looks to the year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport. A club's main purpose hinges on whether the dining/bar and cultural activities (social activities) are beyond a secondary purpose to the clubs sporting objectives. In St Marys case it was held that the gaming activities and bar profits totalling $1,494,203 for 1995 were outweighed by the sporting objectives. In St Marys case it was considered "It is obvious from the evidence that persons are drawn to membership of the club because of their interest in rugby league". The consideration here must be whether the members drawn to the entity's clubrooms are for sport or social reasons. As per the ruling application, only 25% of members attend the club to partake in sport. The majority of members are not drawn to the club for sporting purposes but rather the social and cultural aspect of the Club. It is therefore considered that the main purpose appears to be weighted to social rather than a purpose of encouraging sport. | Detailed Reasoning - Each of the highly persuasive features is examined in the context of the entity.: Conducts sporting or game activities: The entity is involved with sport. During the 20XX income year the club hosted a number of sporting tournaments. For the 20XX income year the entity is scheduled to host a similar number of tournaments. The entity provides referees for these tournaments. The entity advised that sport is played almost daily at the club. The entity also provides social and entertainment activities including; bistro dining facilities, a bar, hosting and participating in cultural events, hall hire and hosting a weekly senior citizens program. It is therefore considered that the entity conducts and provides both sporting and social activities and facilities. The sporting activities encouraged by the club are extensive: The entity states that it encourages and promotes sport throughout the club and to the community. The entity states that the encouragement of sport is the main/dominant purpose of the club and this is emphasised by the investment into the renovated sporting facilities. The entity states that further encouragement of sport is evidenced by the forming, preparing and entering of teams and competitions locally, nationally and internationally. Based on above it is concluded that the encouragement of sport by the entity is extensive. However, the entity also offers a large range of social, recreational and entertainment activities and facilities for members and the public and as stated above the percentage of members participating in sport is low. The entertainment, dining, social and cultural activities attract people to the entity's clubrooms, members and non-members alike enabling the Club to generate revenue to devote that money to the promotion of its sporting activities. This supports a conclusion that the entity encourages sporting activities in addition to the social activities, however, it cannot be determined that the social aspects are beyond a secondary purpose. The club uses a significant proportion of its surplus funds in encouraging the game or sport: Paragraph 54 of TR 97/22 states: 54. The club should use a significant proportion of its surplus funds in encouraging its game or sport. As noted by Lockhart J in Cronulla Sutherland at ATC 4226; ATR 313, '...the potential of [a club] to apply its surplus funds for purposes having nothing to do with the encouragement or promotion of [a sport or game] is a significant matter'. What is important is the way such funds are used and the activities that are financed by the club. In an earlier income year the entity committed a large amount of funds the renovation of its sporting facilities. In an earlier income year the entity also used funds to renovate the dining facilities. Information has not been provided regarding the expenditure of surplus funds for the 20XX income years. A review of the financial statements for the 20XX income year provide no clear information on what the surplus funds have been used for. From these documents there is no clear indication that surplus amounts have been directed towards the encouraging of a game of sport. The club's constituent documents emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents. Paragraph 56 of TR 97/22 states: 56. The constitution and founding documents of an exempt organisation should be consistent with the aim of encouraging a game or sport. The club's history should also characterise it as one that was established, originally or after its foundation, by people with an interest in the game or sport and one that has in fact continued to encourage a game or sport: St Marys case ATC 4534, ATR 288; Case G53 (1956) 7 TBRD 301 at 309; Case T52 (1968) 18 TBRD 271 at 276; cf Case K24 78 ATC 216 at 238. See also Brookton Co-operative Society Limited v. FC of T 81 ATC 4346; (1981) 11 ATR 880; A & S Ruffy Pty Ltd v. FC of T (1958) 98 CLR 637; and paragraphs 47 and 48 above. The Constitution of the entity demonstrates that the Club was established for the provision of both sports/games and for social/cultural purposes. The Constitution details the objectives of the entity. From these objects, six out of the nine objects of the Club relate to providing a social/cultural environment for its members. Only one object provides for the provision of sports and recreation. There is no emphasis on a sporting purpose above that of a social and cultural purpose within the Constitution. Therefore, it cannot be concluded from the entity's Constitution that the main purpose is to encourage sport. | Detailed Reasoning - Each of the relevant but less persuasive features listed in TR 97/22 are also examined below in the context of the entity.: High level of participation by members in the game or sport Paragraph 57 of TR 97/22 states: 57. A high level of participation by members in the sport or game encouraged by the club would also support the club's main purpose being the encouragement of the game or sport: Case W114 89 ATC 891 at 898; AAT Case 5452 (1989) 20 ATR 4125 at 4133 (Grand United Port Macquarie West Bowling Club v. FC of T); St Marys case ATC 4534, ATR 288. Where members are chiefly involved in the club's social activities and not in the sporting activities, it may indicate that its main purpose is not the encouragement of the game or sport. In both the Cronulla Sutherland and Terranora cases , the entertainment activities of the clubs were similarly extensive but the courts characterised the activities differently in each case. The activities in Cronulla Sutherland were characterised as the provision of social amenities to members and guests, which led to the club not being exempt. The entertainment activities in Terranora were characterised as a means of financing the members' sporting activities, which led to the club being exempt. One factor behind the difference in characterisation was the high sporting participation of members in Terranora and the low participation in Cronulla Sutherland . With 75% of members not being registered sports players it cannot be inferred that the club has a high level percentage of member participation in sport. The members of the committee, or persons who control the direction, of the club are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from day to day management of the club) Paragraph 58 of TR 97/22 states: 58. The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports a conclusion that it is established for the encouragement of the game or sport: Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100; AAT Case 8267 (1992) 24 ATR 1068; St Marys case ATC 4534, ATR 288. There is no requirement under the entity's Constitution for the Main Committee members to be registered and active sports players. However, in noting this, the club is comprised of a main committee, a building committee and a sports committee. So whilst there is no requirement that the main committee members be active sports players there is a separate sub-committee set up for the function of overseeing the sporting activities. Voting rights in the club vest only in members involved in encouraging the game or sport, whether by personal participation or by encouraging participation by others Paragraph 59 of TR 97/22 states: 59. A situation in which only members participating in the game or sport have voting rights, and only participants in the game or sport have a direct say in the running and direction of the club, would be indicative but not conclusive of a club's main purpose being encouraging a sport; for example, a club for golfers or bowlers that is controlled, by the golf committee or the bowls committee, respectively, of the club: see Tweed Heads at ATC 2100; ATR 1083; St Marys case ATC 4534, ATR 288. There is no requirement at the entity that voting rights vest only in members involved in encouraging sport. All membership classes, except for Honorary Members, are entitled to vote. There is no requirement to be involved in sport to be a member. There is no requirement to be active in sport for membership to the club. As only 25% of members are registered sports players, the majority of voting rights vest in members who do not participate in the sport. The club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided Paragraph 60 of TR 97/22 states: 60. An exempt club should promote itself to patrons and the public as one encouraging a game or sport, and its advertisements and publicity, including the organisation's annual report, should emphasise the game or sport it encourages. The Memorial Club states that it promotes itself as a sporting club. There is currently a golf club campaign airing on television and advertising on the Memorial Club's website illustrates an emphasis on sport. The entity has stated in its ruling application that the encouragement and promotion of sport is the main purpose of the club. The entity stated that this is evident by: • the massive surplus financial investment in the sporting facilities (however this is in a previous income year) • forming, preparing and entering teams and competitions locally, nationally and internationally. • It has increased the nature of the promotion and encouragement of sport significantly. Finally, in considering factors that help determine the purpose of a club paragraph 61 of TR 97/22 notes that: Other factors that may be supportive of a conclusion that a club's main purpose is to encourage a game or sport include: • the proximity of the club's social facilities to its sporting facilities; and • the decoration and fit out of the club so as to reflect its game or sporting nature, e.g., the display of trophies, honour rolls or boards, pictures or statues of outstanding sporting achievers, displays of sporting equipment, etc., along with the actual game or sporting facilities. The entity's sporting and social facilities are at the one location. | Detailed Reasoning - Comparison to St Mary's, Terranora Lakes and Tweed Heads: The entity stated that the decision in St Mary's (97 ATC 4528) , Terranora Lakes (93 ATC 4078) and Tweed Heads (92 ATC 2087) supports the conclusion that the entity's main objective is the encouragement of sport. St Mary's is distinguished though as their memorandum contained six initial objects dominant in the promotion and encouragement of rugby league. Only one object pertained to a social/recreational pursuit. Membership was associated with rugby league. Football and associate members made the large majority of memberships and both required an involvement with the sport (whether it be playing or coaching or supporting). Control of the club was with former footballers and the history of the club was centred on rugby league from its inception. Tweed Heads is also distinguished from the entity. Only bowling members and life members had the right to participate in control and management of the club. In addition, only bowling members could vote in the election of the board of directors and on any other resolution at the general meeting. Justice Hill stated that from its very inception the club had been dedicated to a very substantial degree to the promotion of bowls. In addition the club had a high percentage of bowling members (830 of the 920 members were bowling members). For the relevant year in Terranora Lakes there were 4076 ordinary members of the club. Of that, only 130 were social members and 226 were junior members. Social members were not entitled to vote nor become an office bearer of the club. | Detailed Reasoning - Conclusion: In consideration of the highly persuasive features it is determined: • the entity undertakes extensive sporting activities but also undertakes extensive social and cultural activities. • its Constitution and history show both a social/cultural and sporting purpose, rather than a main sporting purpose. There are six objects of the Constitution that relate to a cultural/social purpose and only one with a sporting purpose. • there are no indications that a significant proportion of the entity's surplus funds have been spent or are intended to be spent on the encouragement of sports or games activities during the 20XX income year (however it is acknowledged that there has been significant funding of the of the sporting facilities in an earlier year). • it cannot be concluded from the entity's documents that the main purpose is to encourage a sport or game. • the 20XX financial statements of the entity state that the main activity of the club is 'cultural club'. There has been no significant change in the promotion of sport from the relevant income years. In considering the less persuasive features it is determined: • the majority of members do not participate in sport; • there is no requirement to be a sports participant to be either a member or to have a position in control of the entity; and • there is no requirement for voting members to have any sporting association and the voting rights are not vested only with members involved in encouraging sport. Whilst the entity does carry on sporting activities it cannot be concluded that the club's main purpose is the encouragement of a game or sport. It is considered that the provision of social and cultural services is equal or greater to its purpose of the encouragement of sport. Therefore, the entity does not meet all of the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and therefore is not entitled to income tax exemption under section 50-1 of the ITAA 1997.