Private ruling: Exempt income
Date of advice: 6 July 2018
Published: September 2018
Ruling period: Year ending 31 July 2019 | Year ending 31 July 2020 | Year ending 31 July 2021 | Year ending 31 July 2022 | Year ending 31 July 2023
Date scheme commenced: Prior to 31 July 2018

Ruling: Q1: Is the club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 ("ITAA 1997") as a club established for the encouragement of animal racing under item 9.1(a) of the table in section 50-45 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The club was originally registered with the Australian Securities and Investment Commission (‘ASIC’) as a public company limited by guarantee. The club is a registered X racing club and is located and operates only in Australia. The Constitution governs the objectives and operations of the club. The club has been established for the encouragement of X racing and other incidental related purposes and to carry on any other activity which will directly or indirectly enhance or further the interests of registered X racing. The club undertakes activities for the purpose of pursuing its predominant object, the encouragement of X racing as per the Constitution. To the extent that activities are undertaken for incidental related purposes or other purposes the surpluses arising are applied in pursuit of the encouragement of X racing. The club’s Constitution contains a not for profit clause and a winding up clause. Activities of the club The club operates X racing tracks in Australia. The principal activities of the club include organising and conducting a significant number of X racing events and X races at its operating X racecourses, investing in and maintaining its X racecourses, enhancing X racing and training facilities and programs, the provision of membership, hospitality and event services, and retirement of debt through the sale of certain assets and application of surpluses from the conduct of all activities. The club also undertakes activities not related to X racing to generate surpluses to retire debt and to apply to upgrade facilities and other activities that will promote X racing. The non-race day revenue by venue was provided. None of the non-race day revenue is member related. Details of revenue and expenses of the club were provided. Tax status The club is currently exempt for income tax purposes under section 50-45 of the ITAA 1997. And the club is not an ACNC type of entity as referred to in section 50-47 of the ITAA 1997. This means that the club abides by the Constitution for the encouragement of X racing, which is not considered to be a charitable purpose.

Relevant legislative provisions: Section 50-1 of the ITAA 1997 | Item 9.1(a) of the table in section 50-45 of the ITAA 1997 | Section 50-47 of the ITAA 1997 | Section 50-70 of the ITAA 1997

Reasons for decision: Summary: Section 50-1 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of the ITAA 1997 subject to special conditions. Item 9.1(a) of the table in section 50-45 of the ITAA 1997 states that a society, association or club established for the encouragement of animal racing is exempt from income tax subject to the special condition under section 50-70 of the ITAA 1997. | Detailed Reasoning - Special conditions in section 50-70 of ITAA 1997: The income tax exemption provided under section 50-45 of the ITAA 1997 is subject to the special conditions listed in section 50-70 which have been amended for income years starting on or after 30 June 2013 and further necessitate that an entity complies with all the substantive requirements in its governing rules and applies its income and assets solely for the purpose for which the entity is established. The special conditions in section 50-70 are: | Detailed Reasoning - “50-70(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 - 50-70(2): 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. “ Therefore, to claim an exemption from income tax under the above provisions, the Club must: ● be a club, association or society; ● be established for the encouragement of animal racing; ● not be carried on for the purposes of profit or gain to its individual members; and ● satisfy the conditions in subsection 50-70(1)(a) and subsection 50-70(2). Additionally, it is necessary to consider the club’s status as a charity, called an Australian Charities and Not-for-profits Commission (‘ACNC’) type of entity in section 50-47 of the ITAA 1997. Under section 50-47, an entity which qualifies as an ACNC type of entity is not entitled to income tax exemption unless it is registered under the Australian Charities and Not-for-profits Commission Act 2012. | Detailed Reasoning - Club, association or society: The words society, association or club are not defined in the Act. The meaning of these words was discussed in Douglas and Others v Commissioner of Taxation (1997) 36 ATR 532; 97 club 4722. In that case Olney J said: ‘Unassisted by authority I would construe the collation "society, association or club" to refer to a voluntary organisation having members associated together for a common or shared purpose. Such a description is consistent with various dictionary definitions of the several words used. The following examples can be found in the Concise Oxford Dictionary : Society: Association of persons united by a common aim or interest or principle; Association: Organised body of persons for a joint purpose; Club: Association of persons united for some common interest, usually meeting periodically for shared activity.’ It is clear from the club's Constitution and activities that it would meet the description of a club, association or society. The club is an organisation comprised of persons, who are associated together for a common purpose. That purpose, being the encouragement of X racing – refer to discussion below about club’s purpose. Further, it is considered that the club is an "organised body of persons" so as to meet the dictionary definition of association. The club’s Constitution sets out, among other things, its management, admission of members, holding of meetings etc. | Detailed Reasoning - The main purpose must be for the encouragement of animal racing: Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, although directed at sporting club exemption, provides guidelines which are also applicable to animal racing clubs when determining income tax exemption. TR 97/22 indicates that in order for an entity to satisfy this requirement: (i) it must be established for the encouragement of animal racing; and (ii) that encouragement must be the entity’s main purpose. Paragraph 11 of TR 97/22 states that “encouragement” means “stimulation by assistance” according to its ordinary meaning and can occur directly by: ● forming, preparing and entering teams and competitors in competitions ● 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 ● encouraging increased and wider participation and improved performance TR 97/22 also states that encouragement can occur indirectly through marketing or by initiating or facilitating research and development. There is no definition of the words “animal racing” in section 50-45 of the ITAA 1997. The ATO publication, Income Tax Guide for Non-Profit Organisation provides some guidance, however, by stating that the phrase “animal racing” includes “horse racing, trotting and grey hound racing, and racing of other animals.” With regard to evaluating whether an entity has as its main purpose the encouragement of animal racing, the approach which should be adopted was decided in Cronulla Sutherland Leagues Club Limited v. FCT, where Lockhart J said at club 4225; ATR 312: “For a society, association or club to qualify for the exemption granted by sec. 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. 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 exemption cannot apply because it would be impossible to say that one object is the main or predominant object. 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 its control. 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 so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently established.” TR 97/22 provides further guidance by giving examples of features which are highly persuasive of a conclusion that the main purpose of an entity is to encourage a game or sport, as well as examples of features which are relevant but less persuasive of such a purpose. Whilst the examples relate to an entity whose main purpose is to encourage a game or sport, they can be applied by analogy to an entity whose main purpose is to encourage animal racing. The relevant examples are summarised in paragraphs 15 and 16 of TR 97/22. Paragraph 15 contains a non-exhaustive list of features that are highly persuasive in supporting a finding that the main purpose of an entity is to encourage a game or sport. In particular: ● 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 ● the club’s constituent documents emphasise that the entity’s main purpose is to encourage a game or sport and the club operates in accordance with those documents. Paragraph 16, on the other hand, gives a non-exhaustive list of relevant but less persuasive features of such a purpose. These features are: ● 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 entity are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from the 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 ● 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. Applying these authorities and principles to the present case it is clear that the X racing events conducted by the club qualify as “animal racing” within the meaning of item 9.1(a) of the table in section 50-45 of the ITAA 1997. Therefore, the club will satisfy the requirement that it is established for the encouragement of animal racing if its constitution, activities, history and control indicate that this is in fact its main purpose. If the club has other purposes, these purposes must be incidental or secondary to the purpose of encouraging animal racing. In other words, the club will not qualify for exemption from income tax under item 9.1(a) of the table in section 50-45 of the ITAA 1997 if its other purposes are found to be of equal importance to its purpose of encouraging animal racing. An examination of some of the club’s activities discloses that it encourages animal racing as defined in paragraph 11 of TR 97/22 by: ● organising and conducting a significant number of X racing events and X races at its operating X racecourses ● investing in and maintaining its X racecourses ● enhancing X racing and training facilities and programs. The financial data for the years stated above show that the club derived most of its revenue from X racing and related activities. Virtually all income and expenditure is related, either directly or as in the case of commercial, indirectly, supporting X racing. There is no doubt that conducting X racing events and X races are directly related to the encouragement of animal racing. The magnitude of this particular activity – in terms of both the X racing events held and the income generated from same – is therefore considered to clearly indicate that the club’s main purpose is the encouragement of animal racing. The Constitution, which describes the club objects, is consistent with the abovementioned finding as it emphasises that the main purpose of the club is to encourage animal racing. This is made apparent by the fact that whilst this clause allows the club to pursue other purposes, it only authorises the club to pursue them to the extent that they are incidental or secondary to the purpose of encouraging animal racing. This would be the case in relation to the sale of surplus assets proposed by the club. Such activities may not be directly involved with X racing but all profits made will be applied to X racing activities and infrastructure upgrades. Accordingly, it is accepted that the main purpose of the club is the encouragement of animal racing. In order to be exempt from income tax as a club established for encouraging animal racing, the club must also satisfy the conditions set out in section 50-70 of the ITAA 1997. | Detailed Reasoning - Cannot be carried on for profit or gain to individual members – section 50-70: In TR 97/22, the non-profit requirement for the purposes of section 50-45 is discussed. The Commissioner accepts a club as being non-profit where, by its constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding-up. The club's actions must, of course, be consistent with the prohibition (refer to paragraph 22 of TR 97/22). The Constitution of the club has the appropriate non-profit and winding up clauses which ensure it operates in a non-profit manner. We have reviewed the club’s financial statements which are contained in the club’s Annual Report for the recent income years and accept that the club has operated in a non-profit manner. Accordingly, the club meets the non-profit requirement in section 50-70. | Detailed Reasoning - Other special conditions in section 50-70 of the ITAA 1997: The relevant condition within subsection 50-70(1) applicable to the club as a not for profit entity, is paragraph 50-70(1)(a) which provides that, in addition to the requirement that the entity is not carried on for the purposes of profit or gain of its individual members, it: “has a physical presence in Australia, and, to that extent, incurs its expenditure and pursues its objectives principally in Australia” In the present case, as determined above taking into consideration the non-profit and dissolution clauses, the club is not carried on for the profit or gain of individual members. The club operates X racecourses in Australia. The activities undertaken by the club and its financial statements show that the club has incurred its expenditure, and pursues its objectives, principally in Australia. Further, subsection 50-70(2) provides that the 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.” From the club‘s Constitution, its Annual Reports and the activities conducted by the club, it is accepted that the club complies with the substantive requirements in its Constitution in the pursuit of its objects as set out in its Constitution. We have reviewed the Annual Reports, including financial statements of the club and are satisfied that the club has applied its income and assets solely for the purpose of promoting and encouraging X racing. In that regard, we note that all financial surpluses received from the non-race day events and sale of surplus assets were used to upgrade the facilities and training facilities of the club and to increase prize money. The club will also apply the income receive from the sale of certain assets for the purpose of retiring debt and funding infrastructure investment. Consequently, the club satisfies subsection 50-70(2) of the ITAA 1997. The club therefore meets the special conditions specified in section 50-70 of the ITAA 1997. Special condition for all items under section 50-47 Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and is an Australian Charities and Not-for-profits Commission (‘ACNC’) type of entity is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (‘ACNC Act’). The expression ‘ACNC type of entity’ is defined in section 995-1 of the ITAA 1997 to mean an entity which meets the description of a type of entity in column 1 of the table in subsection 25-5(5) of the ACNC Act. Relevantly, column 1 of the table in subsection 25-5(5) refers to entities which are charities as the purpose of these entities falls under the four heads of charity as traditionally recognised by the courts. Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities sets out the Commissioner’s views on the meaning of 'charitable' in the terms 'charitable institution' and 'fund established for public charitable purposes' by reference to principles established by court decisions. It provides at paragraph 265 that a recreational or sporting purpose is not a charitable purpose, even if it may result in some benefit to the community. It specifically states, among other things, that the purpose of X racing is not accepted as charitable. The club is not considered to be a charitable institution in line with TR 2011/4. Hence, the condition in section 50-47 does not apply. Conclusion In conclusion, the club is an entity established for encouragement of animal racing pursuant to item 9.1(a) of the table in section 50-45 of the ITAA 1997. Accordingly, the club is exempt from income tax under section 50-1 of the ITAA 1997.