Private ruling: Income tax exempt status
Date of advice: 12 May 2017
Published: December 2017
Ruling period: 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the ordinary and statutory income of a company continue to be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a society, association or club established for the encouragement of sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, if the proposed structure for the Event was adopted? | A1: Yes

Relevant facts and circumstances: The Company is a company limited by guarantee, incorporated under Australian law with its registered office in Australia. The Company has submitted a copy of its constitution as part of the application for private ruling. The constitution confirms that the Company was established for the promotion of sport. The Company will co-host a sporting tournament (the Event).

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 199 7 section 50-45 | Income Tax Assessment Act 1997 section 50-70

Reasons for decision: Summary: Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ordinary income and statutory income of entities covered by Subdivision 50-A of the ITAA 1997 are exempt from income tax. If a society, association or club established for the encouragement of a game or sport falls under item 9.1 of the table in section 50-45 of the ITAA 1997, its income is exempt from income tax. The exemption is subject to the special conditions outlined in section 50-70 (1) of the ITAA 1997. The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it: 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 deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; 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 a resident. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or a club is regarded as being established for the encouragement of sport. | Detailed Reasoning - Non-profit society, club or association: An 'association’ is defined in the Macquarie Dictionary as: “an organisation of people with a common purpose and having a formal structure”. The Company being a company limited by guarantee formed with a number of members for a common purpose is considered to be an association. Its involvement with the Event does not change this. The association must not be carried on for the purposes of profit or gain to its individual members. The governing document of the association should contain a prohibition against a distribution of profits and assets among members while the association is functional and on winding up. The Memorandum of Association of the Company contains provisions that prevent it from providing benefits to members and stipulate that surplus assets are to go to its members providing that they have objects similar to the objects of the Company. The involvement of the Company in the Event has no effect on its non-profit status. | Detailed Reasoning - Established for the encouragement of a game or sport: To be eligible for the exemption the association’s main purpose must be to encourage a game or sport. There is no special definition of what constitutes a game or sport. Accordingly the words take on their ordinary meaning. It is essential that the encouragement of a game or sport is the main or dominant purpose of an association. 'Encouragement’ means 'stimulation by assistance’ according to the Macquarie Dictionary. Taxation Ruling TR 97/22 indicates that a highly persuasive feature that supports the conclusion that an association has a main purpose of encouraging a game or sport is if it conducts activities to bring into existence, organises and runs competitions or tournaments. According to its Memorandum of Association, the purpose of the Company is the encouragement, control, management, regulation and promotion of sport. Given that the Event is a tournament organised for the promotion of that sport, the Company’s involvement is considered a natural part of pursuing their purposes. Therefore it will not have a negative impact on its status as a non-profit association established for the encouragement of sport. | Detailed Reasoning - Special conditions: For a sporting organisation to be exempt from income tax, it must pass one of the following tests from section 50-70 of the ITAA 1997: ● physical presence in Australia ● deductible gift recipient test; or ● prescribed by law test. The Company is not a deductible gift recipient, nor seeking to be prescribed by law so it must meet the physical presence in Australia test. The physical presence in Australia test has two elements. One is that the organisation has a physical presence in Australia. The second is that it must pursue its objectives and incur its expenditure principally in Australia. The Company’s involvement in the tournament will not change the fact that it has a physical presence in Australia, nor will it change the fact that the Company pursues its objectives and incurs its expenditure principally in Australia.