Private ruling: Exemption from income tax
Date of advice: 16 January 2019
Published: April 2019
Ruling period: Other/Substituted Accounting Period 01 January 2019 to 31 December 2019 | Other/Substituted Accounting Period 01 January 2020 to 31 December 2020 | Other/Substituted Accounting Period 01 January 2021 to 31 December 2021 | Other/Substituted Accounting Period 01 January 2022 to 31 December 2022 | Other/Substituted Accounting Period 01 January 2023 to 31 December 2023
Date scheme commenced: 1 January 2019

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

Relevant facts and circumstances: 1. The Club is a company in State A 2. The Club’s constitution prevents distribution to members. 3. The Club has sports fields, a clubhouse, and other business activities 4. All expenditure of the Club is solely incurred within Australia and the Club pursues its objectives solely in Australia. 5. The Club conducts several competitions, tournaments and other events in golf, bowls, tennis, and croquet. 6. The Club fields teams in golf, bowls, tennis, and croquet. 7. The Club employs professionals that coach sport. 8. The Club has a Plan to upgrade its sport facilities at a cost of approximately $X million 9. The Club has several membership categories including sport members and social members. Most members are social members. Only sport members are entitled to vote at general meetings of the Club. 10. Only sport members can be directors of the Club. 11. The Club’s Board of Directors Manages the Club.

Relevant legislative provisions: Section 50-1 of the Income Tax Assessment Act 1997 | Section 50-45 of the Income Tax Assessment Act 1997 | Section 50-47 of the Income Tax Assessment Act 1997 | Section 50-70 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Section 50-1 of the ITAA 1997 states: The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for the encouragement of a game or sport is listed at item 9.1(c) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special conditions detailed in section 50-70 of the ITAA 1997, and the special condition in section 50-47 of the ITAA 1997. An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport if it: ● is a society, association or club, ● is established for the encouragement of a game or sport, and ● satisfies the special conditions. | Detailed Reasoning - Society, association or club: The term society, association or club is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words. 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 (at ATC 4726). In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279: In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)…Sugerman JA stated at 82: A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association'… The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two…Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects… The Club is a company whose members voluntarily associate together for the purposes and objects of the Club. Therefore, the Club is considered to be a society, association or club. | Detailed Reasoning - Established for the encouragement of a game or sport: Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport. Game or sport 'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of 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. This list includes golf, bowls, croquet and tennis. The objects of the Club show that the Club is concerned with promoting sport (golf, bowls, tennis, and croquet). Golf, bowls, croquet and tennis are all sports for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997. Encouragement Paragraph 11 of TR 97/22 states that ‘encouragement’ means ‘stimulation by assistance’. 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 The Club undertakes the following activities to encourage sport: ● It provides facilities for playing sport. ● It holds competitions and tournaments in golf, bowls, croquet and tennis. ● Fields teams in golf, bowls, croquet, and tennis. ● Hosts regional events. ● Employs golf professionals who provide coaching. Main or dominant 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. The test to be applied was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. 90 ATC 4215: For a society, association or club to qualify for the exemption… it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. 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 (at 4225). To determine whether a club is established for a game or sport in a particular year of income, Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. (supra) stated: 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… (at 4225). TR 97/22 provides the following commentary regarding the ‘main purpose’ test: 41. To be eligible for the exemption, the club’s main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities. 42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. … 43. However, if the main purpose becomes the carrying out of those other activities, the 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… 44. Therefore, the fact that a sporting club also encourages social and other activities does not, of 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. By contrast, where the club’s main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply. TR 97/22 lists 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. | Detailed Reasoning - Constitution: The objects of the Club are concerned with conducting sport (including competitions), and operating a clubhouse and other facilities for members and guests. The Club’s short term and long term objectives in its annual reports are also concerned with conducting sports, and providing clubhouse and other facilities for members and guests. The annual reports state its principal activity as the promotion and conduct of sport and the operation of a licensed sporting club. The promotion of sport is also reflected in the Club’s Plan which is concerned with upgrading sport facilities. The governing documents of the Club show that the Club has a purpose of promoting sport but also a purpose of providing a clubhouse and social facilities for its members and guests. | Detailed Reasoning - Activities: The Club owns sporting grounds which are used to conduct a significant number of competitions and tournaments (including regional events). The Club fields several teams in competitions (in golf, bowls, croquet and tennis), and has significant participation in the competitions and events it runs. The Club holds events to encourage new players to its respective sports, provides coaching, and has employed golf professionals. The Club also uses a significant portion of its surplus on sport; the Club will spend approximately $5 million on upgrading its sport facilities. The club also has extensive social facilities and events. The Club promotes itself (advertising and its website) as encouraging sport, but also promotes its social facilities. | Detailed Reasoning - History: The club has operated sports facilities in State A for several decades. | Detailed Reasoning - Control: The vast majority of members are social members. Social members are not entitled to stand for election as a director, and cannot be a director. Only sport members are entitled to vote at the general meetings of the Club. The operations of the Club are under the management of the Board of Directors and only sport members can be elected as directors. | Summary: The foregoing analysis shows that: ● the Club conducts activities directly related to sport ● the Club has extensive sporting activities ● the Club uses a significant proportion of its surplus funds in encouraging sport ● the persons who control the direction of the Club are predominantly participants in or concerned with the encouragement of sport ● voting rights in the Club vest only in members involved in encouraging sport ● the Club promotes itself to the public as one encouraging sport The Club has many of the features identified by the Commissioner in paragraphs 15 and 16 of TR 97/22 that support the conclusion that a club has the main purpose of encouraging a game or sport. The Club also has significant non-sporting activities which indicate that the Club also has a non-sporting purpose. However, the Commissioner is satisfied that these non-sporting activities are currently undertaken in furtherance of its sporting purpose (they provide funding for the sport facilities and activities of the Club) and are not the main purpose of the Club. As such, the Commissioner accepts that the main purpose of the Club is to encourage sport, and its other purposes are incidental to the sport purpose. | Detailed Reasoning - Section 50-47 of the ITAA 1997: Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states: An entity that: (a) is covered by any item; and (b) is an 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 . Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an ‘ACNC type of entity’. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are ‘charitable purpose’, and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose. The Club has sporting and social purposes which are not charitable purposes. As such, the Club is not capable of being a registered charity, and is not an ACNC type of entity. Section 50-47 of the ITAA 1997 does not apply to the Club. | Detailed Reasoning - Section 50-70: Subsection 50-70(1) of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members and: ● it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or ● it is a deductible gift recipient; or ● it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence. Non-profit requirement Paragraphs 9 and 21 – 23 of TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members. Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement. The Club’s constitution prevents distribution to members. The supporting evidence shows that the Club acts in accordance with this prohibition. The Club is not carried on for the profit or gain of its individual members. Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia The Club is a resident of New South Wales, and is located in Australia. The Club carries on its activities solely in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement. Subsection 50-70(2) of the ITAA 1997 provides that the Association must: ● comply with all the substantive requirements in its governing rules; and ● 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. The supporting evidence shows that the Club complies with the substantive requirements set out in its current 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. The earlier discussion shows that the Club applies its income and assets solely for the purpose for which it was established. The Club satisfies the special conditions in section 50-70 and section 50-47 of the ITAA 1997. | Detailed Reasoning - Conclusion: The Club is considered to be a society, association or club established for the encouragement of a game or sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. As such, the income of the Club is exempt from income tax under section 50-1 of the ITAA 1997.