Private ruling: Income Tax Exemption
Published: June 2012
Ruling period: Income year ended 30 June 2009 | Income year ended 30 June 2010 | Income year ended 30 June 2011 | Income year ended 30 June 2012
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the company a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The entity is a public company limited by guarantee and was established in prior to 2010. The company's incorporation was promoted jointly between two Australian peak bodies for sport. The two peak bodies have the right to appoint and remove the directors of the company. The company will carry on all its activities in Australia. A sub-lease has been granted to the company for the specified area. The company conducts the following activities: Facilitates the specified area for use by the two peak bodies during the sporting periods. Facilitates the specified area for use by the State for international sporting events Facilitates, promotes and conducts certain events and functions in its own right Responsible for the day to day management, operation and control of the specified area. Responsible for maintenance, repair, capital replacement and upgrades of the specified area. Expected use of the specified facilities: Sport - 22 matches; 5 games Sport - 31 days per year Concerts - 1-2 per year Special events - 1-3 days per year for events Other sporting events - 1-2 days per year Hire out function rooms for weddings and corporate events The company's objects are to: Encourage, promote and manage sport Encourage, promote and manage recreational and entertainment events Promoted control and manage the multi-purpose stadium for the above 2 objects. Make distributions to non-profit sporting organisations The company has non-profit and dissolution clauses which prevent members from receiving income and property of the company. At the end of each financial year the company must apply its net profit to a non-profit organisation whose principal object is the encouragement of sport and does not carry on business for the profit or gain to its individual members The Financial Reports of the company provide that no income or property was paid, transferred or distributed, directly or indirectly, by way of dividends, bonuses, fees or otherwise to the members.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 50-1 | Income Tax Assessment Act 1997 Section 50-10 | Income Tax Assessment Act 1997 Section 50-45 | Income Tax Assessment Act 1997 Section 50-70 | Income Tax Assessment Act 1997 Subsection 50-75(1)

Reasons for decision: Summary: 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 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 exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997. Accordingly, to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must: · be a society, association or club; · be established for the encouragement of a game or sport; and · 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 therefore have their ordinary meaning. The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning ( Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35). This approach is also confirmed in Taxation Determination TD 95/56 , which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. 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'. The interpretations of 'society', 'association' or 'club' as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'. The company is a public company limited by guarantee and is brought into existence by its members to pursue a common purpose as stated in its constitution. It is considered that the company is a society, association or club. | Detailed Reasoning - Game or sport: The terms 'game' or 'sport' for the purposes of section 50-45 are not defined in the ITAA 1997 and have their ordinary meanings. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides the Commissioner's view on what constitutes as exempt sporting clubs. TR 97/22 provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 50-45, and includes (at paragraph 38): · played with ball or projectile: · badminton; baseball; basketball; bocce; bowling (ten-pin); bowls; cricket; croquet; football (all codes); golf; handball; hockey; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball; The objects of the company as stated in its constitution are directed at promoting, controlling and managing games of sport within the specified area and operating the multi-purpose sporting stadium for both sporting and recreational purposes. It is considered that the company is directly connected with activities played with a ball or projectile, and would therefore fit within the meaning of a game or sport. It is accepted that the entity is concerned with a game or sport. | 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 coachers · 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 | Detailed Reasoning - The company conducts the following activities:: · Facilitates the specified area for use by the two peak bodies during the sporting periods. · Facilitates the specified area for use by the State for international sporting events · Facilitates, promotes and conducts certain events and functions in its own right. · Responsible for the management, operation and control of the specified area, including the multi-purpose sports stadium, and for maintenance repair and upgrades. · Provision of grants and/or financial assistance to sporting clubs that have a principle object of encouraging sport and is not carried on for the profit or gain of its individual members. From the above activities, it is evident that the company is directly involved in the encouragement of sport. The company provides facilities including the multi-purpose sports stadium and surrounding area for sports to be played and is responsible for the day to day management, operation and control of the specified area. This includes maintenance, repairs and upgrades of the facilities. It is considered that the company encourages sport. | Detailed Reasoning - Main purpose: Paragraph 41 of the TR 97/22 provides that to be eligible for the exemption, an association's main purpose must be to encourage a game or sport. Difficulties can arise where the association conducts other activities, particularly social or commercial activities. The main purpose can only be ascertained after objectively weighing all of the association's features such as the constituent document, history, control and activities. Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting a conclusion that the main purpose of the association is to encourage 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 The fact that an association 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 an association conducts other activities, particularly social or commercial 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 providing social amenities and licensed club facilities to its members, the exemption does not apply. 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 the sporting ends. 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. To determine whether the company displays features that support a main purpose of encouraging a game or sport, its constitution, activities, history and control will be examined: | Detailed Reasoning - Constitution: The Company has mixed objects which are directed at both sport and recreational purposes. | Detailed Reasoning - Activities: It is considered that the following activities of the company are directed at the encouragement of sport: · Facilitates the specified area for use by the two peak bodies during the sporting periods. · Facilitates the specified area for use by the State for international sporting events · Facilitates, promotes and conducts certain events and functions. · Responsible for the management, operation and control of the specified area, including the multi-purpose sports stadium, and for maintenance repair and upgrades. · Provision of grants and/or financial assistance to sporting clubs that have a principle object of encouraging sport and is not carried on for the profit or gain of its individual members. In addition to the above, the company will also conduct the following activities: · Concerts, · Special events · Hiring out of function rooms for weddings and corporate events Therefore, the company will provide activities of a social and recreational nature in addition to its activities that are directed at the encouragement of sport. Following the decision in Cronulla , the provision of social activities will not disqualify an entity from exemption if the activities were incidental, ancillary or secondary to its main purpose. From the information provided by the applicant it is estimated that concerts will be held 1 to 2 times per year while Special Events will be held 1-3 days per year. This is contrasted with the 22 matches, 5 grand finals, 31 days of sport and 1-2 days sporting events. It is evident that the company does not have extensive social or recreational activities and they can be considered as a secondary purpose. The activities related to the hiring out of the function rooms for such functions as weddings and corporate events are considered to be ancillary to the encouragement of sport as the surplus funds are directed at providing financial assistance to sporting organisations that encourage sport. | Detailed Reasoning - History & Control: The company was incorporated in prior to 2010 and its incorporation was promoted jointly by two peak bodies for sport. Paragraph 58 of 97/22 states: 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… Control of the company is vested in its board of directors. The two peak bodies have the right to appoint and remove the directors of the company. It is considered that the board are involved themselves in the promotion of sport. In summary, the company directly encourages games of sport and demonstrates features persuasive of the company being for the encouragement of a game or sport. | Detailed Reasoning - (c) Special Conditions: Section 50-70 of the ITAA 1997 states: 50-70 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. (i) Not carried on for the profit or gain of its members Section 50-45 of the ITAA 1997 requires that the association not be carried on for the purposes 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. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. The company has appropriate clauses in its constitution that prevents members from receiving benefits during its operation and upon its winding-up. It is also necessary that an association's actions are consistent with their constituent documents. The Financial Reports of the company provide that no income or property was paid, transferred or distributed, directly or indirectly, by way of dividends, bonuses, fees or otherwise to the members. It is accepted that the company operates in a non-profit manner. (ii) Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia For the company 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 company has a physical presence in Australia as it carries out all activities in Australia. Therefore, the company will incur its expenditure and pursues its purposes principally in Australia. Accordingly, the company satisfies 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 company is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is an association 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.

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