Private ruling: Sporting club’s eligibility for income tax exemption
Date of advice: 30 October 2018
Published: January 2019
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: After the proposed restructure will the Entity be exempt from income tax pursuant to item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Background The Entity is an incorporated company limited by guarantee. The Entity has struggled financially, relying heavily on playing subscriptions and the benevolence of local sponsors and benefactors. Infrastructure costs such as power, water, electricity and telecommunications were increasing at alarming rates for an essentially volunteer based entity. Coupled with disproportionately increasing public liability insurance, medical and merchandising costs, the Entity was often verging on the brink of insolvency. The Entity undertook a major feasibility study aimed at developing an operating model that would enable the pursuit and encouragement of the game to be viably maintained. The result of this feasibility study and a coincidental commercial opportunity was a recommendation that the Entity undertake a redevelopment of the clubhouse and grounds. This would enable regular, reliable income to be achieved. This was unanimously endorsed by members at an Annual General Meeting. The Entity notes: a. There is very little social activity facilities for members available; b. The vast majority of the building is physically taken up by external commercial lease paying tenants; c. The balance comprises dressing sheds and gymnasium, the sole purpose of which is dedicated for rugby football activity. Restructure The day to day running of the Entity has, to date, been undertaken primarily by a volunteer network of well-meaning players and supporters. Due to the changes in the turnover and nature of the operation the Entity is now of the view that to achieve maximum efficiency in the management of both aspects of the organisation, the best solution is to separate the running of the “commercial” part of the club and the sporting aspects. To that extent, it is proposed that there be two separate and distinct entities with both pursuing a common purpose: d. The Entity, which will manage the physical asset; and e. The Playing Club, a new association to be incorporated under the Associations Incorporation Act which will manage all football playing activity. Both entities will exist solely for the purpose of promoting and encouraging support for and the playing of the sport. The commercial reasons for this legal structural separation are: i. The Entity has the physical commercial asset. ii. Creating the separate incorporated association, the Playing Club, will allow those people knowledgeable about the nuances of running a sporting club to concentrate solely on so doing. Despite its relative simplicity compared to the Entity, there is still the need for the people running the Playing Club to be sufficiently financially astute to ensure that financial budgets and records are adhered to, ensuring the ongoing financial viability of the Playing Club in its own right. iii. Because both the Entity and the Playing Club co-exist for the sole purpose of benefitting the sport, it is imperative that the financial management of both entities is clearly transparent. It must be clearly demonstrable that any financial surpluses of the Entity are clearly identified and allocated solely to the Playing Club for the betterment of sport and ensure that money received is directed towards what it was meant to be – the sole purpose of supporting sport. iv. The proposed restructure is not inconsistent with what occurs in normal corporate businesses with good corporate governance principles. v. It is considered desirable to insulate the commercial and playing activities from each other to ensure that difficulties or defaults by one entity does not impact adversely on the viability or continuation of the other. After the restructure, the Entity will not undertake any sporting activities in its own right, but will as its dominant purpose support the Playing Club, providing both financial support and facilities to the Playing Club. In addition to providing fields and facilities to the Playing Club, the Entity will also: a. Provide its playing facilities to other sports (e.g. summer touch, football competitions, summer cricket games and the like). b. Provide fields and facilities to other sporting or community organisations. c. Collect payments from its commercial operation. d. Organise and run events such as wedding receptions, offer Christmas parties and sportsman lunches. The majority (approximately 80%) of the Entity’s current paid employee’s time is spent on non-sporting activities such as running the bar, events and functions. We note that there are a significant number of unpaid volunteers that support the club’s sporting teams. Proposed constitution The proposed constitution sets out the objects of the Entity, three of the four objects being sporting objectives. The income and property of the Entity must be applied solely towards the promotion of the objects of the Entity. The Entity cannot make distributions to members. A person can only apply for membership if they are committed to the objects of the Entity. The Entity will be managed by a board of between five and nine directors of which two will be appointed annually by the Playing Club. Other than directors of the Playing Club, directors must be members of the Entity. Each member present at a general meeting (or their attorney) has one vote. On winding up the Entity, no property can be paid to or distributed among the members of the Entity but must be given or transferred to the Playing Club or if not the Playing Club other listed organisations with objects similar to the Entity. The playing grant It is the intention of the parties that the Entity will support the Playing Club financially on an ongoing basis. At this stage it is anticipated that the Playing Grant paid by the Entity to the Playing Club will be determined by the directors of the Entity. The Entity will not be under a formal, enforceable obligation to provide an annual grant to the Playing Club. There may be periods where the Entity is unable to provide annual playing grants to the Playing Club. For example in the future, the financier may require increased debt repayments or the directors may retain funds within the Entity to maintain and improve the facility. The 2019 cashflow surplus will be, subject to the directors of the Entity retained to provide future maintenance or the facility, or repaid to the financier or granted to the Playing Club. It is the intention of the parties that the Entity will support the Playing Club financially on an ongoing basis. Financials You have provided an extract of the Entity’s financial history for the three most recent completed financial years and the estimated financial position for the next 3 years. The 20XX audited financial statement details the principal activities of the Entity in that year. The principal activities were to promote, support and encourage sport as well as to provide clubhouse facilities for the recreation and enjoyment of members. The 20XX financial statement details that the principal activities during the financial year were to promote, support and encourage sport as well as to provide clubhouse facilities for the recreation and enjoyment of members. Strategic Plan The strategic plan was developed by various Board and committee members of the Entity and documents the common goals of the club. Other relevant information The members of the Entity will consist of some current players but will primarily comprise life members and former retired players, coaches, officials, administrators and supporters who have supported and assisted the club physically and financially over the last forty or more years. 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 of sport (as distinct from day to day management of the club). All of the elected directors of both the Entity and the Playing Club are either participants or concerned with the encouragement of sport. Voting rights in the Entity vest only in members involved in encouraging the game or sport whether by personal participation or by encouraging participation by others. The members who will be entitled to vote at meetings will all be involved in encouraging the game or sport. The Entity maintains a comprehensive list of honour rolls, pictures and club history on its website. The Entity’s premises contain memorabilia, photos of famous players, games, team and other items. The Entity attributes an amount to this memorabilia on its balance sheet.

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: After the restructure occurs, the Entity will be exempt from income tax as a society, association or club established for the encouragement of a game or sport. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of the ITAA 1997. Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be an exempt entity, subject to special conditions in section 50-70 of the ITAA 1997. Accordingly, to be an exempt entity described in item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must: (a) be a society, association or club; (b) be established for the encouragement of a game or sport; and (c) meet the special conditions specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - (a) Society, Association or Club: The words ‘society’, ‘association’ or ‘club’ are not defined in the ITAA 1997 and have their ordinary meaning. The Macquarie Dictionary defines ‘club’ as 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 36 ATR 532; (1997) 77 FCR 112; 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. The Entity is a public company limited by guarantee. It is managed by a Board. The members associate together and pursue a common purpose. They are governed by the rules outlined in the constitution. The Entity is a society, association or club for the purposes of section 50-45 of the ITAA 1997. | Detailed Reasoning - Game or sport: The terms ‘game’ or ‘sport’ for the purposes of section 50-45 of the ITAA 1997 are not defined in the ITAA 1997 and have their ordinary meanings. Taxation Ruling TR 97/ 22 Income tax: exempt sporting clubs (TR 97/22) provides the Commissioner’s view on what constitutes an exempt sporting club. TR 97/22 provides a non-exhaustive list of activities that are considered a ‘sport’ for the purposes of section 50-45 of the ITAA 1997 (at paragraph 38). This list includes football (all codes). The relevant activity is a ‘sport’ for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997. | Detailed Reasoning - Encouragement: Paragraph 11 of TR 97/22 refers to the meaning in the Macquarie Dictionary which defines ‘encouragement’ to mean ‘stimulation by assistance’ and provides that encouragement can occur directly by: ● 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; or ● encouraging increased and wider participation and improved performance. And can occur indirectly: ● through marketing; or ● by initiating or facilitating research and development. Once the restructure occurs, the Entity will undertake the following activities to encourage sport: ● It will provide funding to the Playing Club to enable it to undertake extensive sporting and related activities; ● It will provide facilities for use by the Playing Club sporting teams including dressing rooms and gymnasium; ● It will provide the playing fields for use by Playing Club; and ● The Entity will be responsible for the lease fees paid to Council, insurance and maintenance of the entire facility. The Entity will sublease the playing fields to the Playing Club for a notional amount but may recoup some of the annual maintenance costs. | Detailed Reasoning - Main purpose: To be exempt pursuant to 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. It can be difficult to determine a club's main purpose when the club conducts other activities, particularly social or commercial activities. The fact that a club also encourages social and 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 ( Cronulla ), where a club conducts other activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, it can be accepted that the main purpose may be that of encouragement. However, where the main purpose becomes the carrying out of those other activities, a club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes. As Lockhart J stated in Cronulla at 4225: 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. Just what is a clubs main purpose must be considered in each year. As Lockhart J went on to state in Cronulla at 4225: 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… Cronulla confirms that if a sporting club also engages in commercial activities that does not, in itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. On the other hand, if the club's main purpose is the commercial activities the exemption does not apply even if sport is extensively encouraged. In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 ( Terranora ), the club provided and promoted an extensive range of sporting activities including golf, bowls, tennis and other sports, games and pastimes. The club also had extensive social facilities that were used by the clubs members and also by a large number of non-members. In the most recent year reported in the case, 90.3% of the club’s income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities. The Court ruled in favour of the taxpayer and concluded that the main purpose of the Club was the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and the selling of time-share units. Hill J concluded that, while the social activities of the club were extensive and could be seen as an end in themselves, the activities were pursued as a means of financing the extensive sporting activities conducted by the Club. While the non-sporting activities were vital to the club’s financial survival, they were neither equal nor predominant in importance to the sporting activities. In St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528; 36 ATR 281 ( St Mary's ), Hill J found that the significant social activities of a sporting club were acceptable if the club was formed principally for sport and if the sport was financed by the social activities. It was acceptable in that case that only 20% of the funds earned by the social activities of the club were spent on football. Hill J emphasised the importance of the club’s constitution which stated that the principal aim of the club was the support of local football and that a large amount of the club’s activities were sport related. It was also important that the club’s history was centred on the support of local football and that the club rules required a certain proportion of its funds to support local football. These cases emphasis the requirement that in order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to a sporting end. Where an association’s main purpose is providing social amenities and licensed club facilities to its members the exemption does not apply. TR 97/22 provides a list of features of a club that the Commissioner considers either highly persuasive or relevant but less persuasive in identifying whether a club is established for the encouragement of a game or sport in an income year. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport. Paragraph 15 of TR 97/22 identifies the following features as highly persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport: ● the club conducts activities in the relevant year that are directly related to the game or sport ● the sporting activities encouraged by the club are extensive ● the club uses a significant proportion of its surplus funds in encouraging the game or sport, 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. Paragraph 16 of TR 97/22 identifies the following features as relevant but less persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport: ● a high level of participation by members in the game or 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); ● 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; 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. The main purpose can only be ascertained after objectively weighing all of the club’s features. | Detailed Reasoning - 1. Activities directly related to a game or sport: It has already been established that the activities of the Entity are directly related to sport. | Detailed Reasoning - 2. The sporting activities encouraged by the Club are extensive.: TR 97/22 provides that where the sporting activities encouraged by the sporting club are very extensive it is highly persuasive that the club’s main purpose is the encouragement of a game or sport. The Entity provides and maintains two playing fields, dressing rooms and a gymnasium. The sporting activity encouraged by the Entity’s provision of the fields and other financial support is extensive. | Detailed Reasoning - 3. The Club uses a significant proportion of its funds to encourage the game or sport.: The Club should use a significant proportion of its surplus funds in encouraging its game or sport. As Lockhart J noted in Cronulla it is a significant matter if a club has the potential to apply its surplus funds for purposes that have nothing to do with the encouragement of a game or sport. The Entity will be responsible for the lease of the grounds to the Council and maintenance of the fields. The Playing Club will provide a nominal amount to the Entity for the sublease of the fields. The Playing Club may also make a contribution towards maintenance. The 20XX cashflow surplus will subject to the directors of the Entity, be retained to provide future maintenance of the facility, or repaid to the financier of the Entity, or granted to the Playing Club to provide further funds for the Playing Club to spend on its sporting activities. It is therefore accepted that the Entity uses a significant portion of its funds to encourage sport. | Detailed Reasoning - 4. The objects in the Club’s constituent document: The constitution of the Entity should be consistent with the aim of encouraging a game or sport. Object 1, 3 and 4 of the Entity’s constitution directly relate to encouraging sport and object 2 is consistent with encouragement. The constituent documents emphasise that the main purpose of the Entity is to encourage a game or sport. | Detailed Reasoning - 1. High level of participation by members in the game or sport;: The members of the Entity will consist of some current players but will primarily comprise life members and former retired players, coaches, officials, administrators and supporters who have supported and assisted the club physically and financially over the years. A person can only apply for membership if they are committed to the objects of the Entity. However there is no requirement that members participate in the sport. 2. The members of the committee are predominantly participants in or concerned with the encouragement of the game or sport (as distinct to the day to day management of the club) The Entity’s constitution prescribes that it will be managed by a board of between five and nine directors. Two will be appointed annually by the Playing Club. The directors must be members of the Entity and therefore concerned with encouraging sport. Their role is the day to day management of the Entity, including the commercial activities. 3. Voting rights in the club vest only in members involved in the encouragement of the game or sport, whether by personal participation or by encouraging participation by others. Each member present at a general meeting (or their attorney) has one vote. All resolutions are ordinary resolutions and must be passed by more than fifty percent of the votes cast by members entitled to vote on the resolutions. As membership requires a commitment to the Entity’s objects, including encouraging the sport, all members of the Entity are committed to encouraging a game or sport. Therefore, voting rights vest only in members who encourage sport. 4. 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. The Entity promotes itself through the Playing Club’s website as a leading sports club. The website contains a comprehensive list of honour rolls, pictures and club history on its website. The Entity’s premises contain memorabilia, photos of famous players, games, team and other items. The Entity attributes an amount to this memorabilia on its balance sheet. It is accepted that the Entity 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. | Detailed Reasoning - Conclusion – Main Purpose: After consideration of all the features discussed above, it is accepted that following the restructure the Entity will be established principally for the encouragement of a game or sport. Although the commercial activities of the Entity will be extensive, it is clear that those activities will be pursued as a means of financing the extensive sporting activities conducted by the Playing Club. While the commercial activities are vital to the Entity’s financial survival, they will be neither equal nor predominant in importance to the sporting activities. The Commissioner is satisfied that after the restructure the Entity will be established and maintained for the main purpose of encouragement of a game or sport. | Detailed Reasoning - (c) meet the special conditions specified in section 50-70 of the ITAA 1997.: Section 50-70 of the ITAA 1997 sets out the special conditions for item 9.1. Subsection 50-70(1) of the ITAA 1997 states: (1) An entity covered by item 1.7, 2.1, 9.1 or 9.2 is not exempt from tax unless the entity is a society, association or club that is not carried on for the purpose of profit or gain of its individual members and that: (a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or (b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or (c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident. and the entity satisfies the conditions in subsection (2). | Detailed Reasoning - Not carried on for the profit or gain of its members: Subsection 50-70(1) of the ITAA 1997 requires that the club not be carried on for the purpose of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. A club usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. A club’s actions must also be consistent with the non-profit requirement. The Entity has the necessary non-profit clause and dissolution clauses in its constitutional document. The Constitution provides that all assets and income of the Entity are to be applied exclusively to the promotion of its objects. No portion of the property or income of the Entity is to be paid or distributed directly or indirectly to the members except as remuneration for services rendered. The Constitution also provides that on winding up or dissolution of the Entity, the remaining assets of the Entity shall be distributed to the Playing Club or another institution(s) with similar objects to the Entity. The other institution(s) must prohibit distribution of property and income to their members in the same manner as the constitution of the Entity. The Entity has the appropriate not for profit clauses in its constitution that prevent individual members from receiving benefits. It is accepted that the Entity is not carried on for the profit or gain of its members. | Detailed Reasoning - Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia: For a club to meet this condition, it must have a ‘physical presence’ in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia. The Entity has a physical presence in Australia and incurs its expenditure and pursues its purposes principally in Australia. | Detailed Reasoning - Governing rules and application of income and assets: Subsection 50-70(2) of the ITAA 1997 provides that a club 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. Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) provides guidance in respect of the conditions in subsection 50-70(2). 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. Based on a review of the Constitution, which incorporates the Entity’s objects, it is accepted that the Entity will comply with the substantive requirements set out in its constituent document. 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. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied. As previously determined, the Entity’s activities indicate that it will comply with the main purposes for which it was established. Accordingly, it is accepted that the Entity will apply its income and assets solely for the purpose for which it was established. Accordingly, the Entity will satisfy the ‘Special Conditions’ specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - Conclusion: Based on the above, the total ordinary income and statutory income of the Entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is a club established for the encouragement of a game or sport, pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997.