Private ruling: Income Tax exemption
Published: August 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | Year ended 30 June 2023 | Year ended 30 June 2024 | Year ended 30 June 2025 | Year ended 30 June 2026
Date scheme commenced: 1 July 2016

Ruling: A1: Yes

Relevant facts and circumstances: The Entity is an incorporated association. The Entity has members who are themselves incorporated associations. Member branches have voting rights with The Entity. The Entity also has individual members. Individual members of The Entity are also members of the member branches and they have voting rights within their own branch. The Rules of The Entity (the rules) contains the objects and purposes. The Entity is not for profit. The Entity has several categories of membership and a board manages the business and affairs of the Association. The Entity organises and conducts many competitions and promotes an activity. The activity is governed by a number of laws. The Entity does not lodge income tax returns as it believes it is (i) income tax exempt and (ii) does not have taxable income, based on the principles of mutuality.

Relevant legislative provisions: Income Tax Assessment Act 1997 (Cth) Section 50-1 | Income Tax Assessment Act 1997(Cth) Section 50-45 | Income Tax Assessment Act 1997(Cth) Section 50-70 | Associations Incorporation Reform Act 2012 (Vic) Section 32 | Associations Incorporation Reform Act 2012 (Vic) Section 48 | Associations Incorporation Reform Act 2012 (Vic) Section 48

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 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 'association' to be 'an organisation of people with a common purpose and having a formal structure'. This meaning is confirmed in Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?. TD 95/96 references the decision in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, where it was stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. 'Society' has an equivalent meaning ( Pro-campo Ltd v Commr of Land Tax (NSW) 81 ATC 4270. The Macquarie Dictionary defines 'society' as an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic, or other purposes. 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 a 'body of persons' and 'an organisation of people' with a 'common purpose'. The Entity is an incorporated association and is brought into existence by its members, a body of persons, to pursue a common purpose as stated in its constitution. The Entity is a society, association or club. | 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): | Detailed Reasoning - Using other equipment:: abseiling; archery; billiards; darts; fencing; gymnastics; pool; power lifting; snooker; skateboarding; snow sports including bobsled, luge, skiing, ski-jumping and snow boarding; target shooting; water skiing; weight-lifting; windsurfing; wood chopping; While one of the Entity's activities is listed by name as a sport, the other activity is not explicitly listed as a sport in TR 97/22. However, paragraph 35 of TR 97/22 provides that the presence of a set of conventions, expectations and rules indicates a level of organisation that is commonly indicative of a game or sport. The imposition of rules and conventions in an organised group of participants can transform an otherwise ordinary leisure activity into a game or sport. The Macquarie Dictionary also includes the activity as a sport. 'Sport' is defined as: An activity pursued for exercise or pleasure, usually requiring some degree of physical prowess, as hunting, fishing, racing, baseball, tennis, golf, bowling, wrestling, boxing, etc. The Entity is directly connected with activities played 'using other equipment', namely 'the activity' and is also involved in encouraging an activity, which although generally non-competitive is still considered a sport. Therefore 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 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 Entity encourages the sport through a number of activities: The Entity's activities actively encourage both activities. | Detailed Reasoning - Main purpose: Paragraph 41 of TR 97/22 provides that to be eligible for exemption, an association's main purpose must be to encourage a game or sport. 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. An association's constituent documents will help identify the purpose for which the association was set up and should be consistent with the aim of encouraging a game or sport. The activities must then demonstrate that the association's main purpose is the encouragement of a game or sport. Paragraph 15 of TR 97/22 lists 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 association conducts activities in the relevant year that are directly related to the game or sport, The sporting activities encouraged by the association are extensive, The association uses a significant proportion of its surplus funds in encouraging the game or sport, and The association's constituent documents emphasise that the association'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, 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. Therefore, 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. Similarly, the other purposes can only be secondary to the main purpose of encouraging a game or sport. If the other purposes 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. | Detailed Reasoning - The objects in the constituent document: The objects of The Entity are set out in the Rules and emphasise that the main purpose of The Entity is to encourage a game or sport. | Detailed Reasoning - The activities of the Association: The activities of the association should be extensive and directly related to sport. The Entity conducts extensive activities directly related to sport and in accordance with its objectives. | Detailed Reasoning - Conclusion - Main Purpose: The rules of The Entity emphasise that the main purpose of the association is to encourage sport. Therefore, it is considered that The Entity's objectives and activities support the conclusion it is an association established for the encouragement of a game or sport. S pecial Conditions 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 association 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. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. An association'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. Section 32 of the Associations Incorporation Reform Act applies and provides that where an incorporated association has been wound up under the act, remaining property can only be distributed to members where the member is a body corporate or an association which is prevented by its rules or otherwise from distributing the surplus assets to its members. 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 The Entity 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 the Association 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. It is accepted that the Association complies 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 activities of the Association demonstrate that The Entity is complying with the main purposes for which it was established. Accordingly, it is accepted that the Association applies its income and assets solely for the purpose for which it was established. Accordingly, The Entity 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 Entity 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.

Subject: Income Tax exemption: Is The Entity exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an association established for the encouragement of sport under item 9.1 of the table in section 50-45 of the ITAA 1997?