Private ruling: Income tax exemption
Date of advice: 4 May 2020
Published: June 2020
Ruling period: 01 July 20XX to 30 June 20XX
Date scheme commenced: 01 July 20XX

Ruling: Q1: Is the taxpayer an entity covered by item 9.1 of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997), so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The taxpayer is an entity established in Australia that has at all relevant times undertaken its activities in Australia. The objects of the taxpayer are stated to encourage and promote a specific activity. The governing documents of the taxpayer strictly prevent it from distributing assets and income directly or indirectly for the benefit of its members both while it is operating and when it winds up. The taxpayer conducts activities and establishes systems that are directly related to and for encouragement and administration of the activity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 50

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997). Pursuant to section 50-1 and item 9.1 of the table in section 50-45, the ordinary income and statutory income of a society, association or club established for the encouragement of the activity is exempt from income tax provided the special conditions in section 50-70 are satisfied. Subsection 50-70(1) requires that, to be exempt from income tax, an entity covered by item 9.1 of the table in section 50-45 must be a society, association or club that is not carried on for the purpose of profit or gain of its individual members (the non-profit requirement) 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. Subsection 50-70(2) provides that, the entity must comply with all the substantive requirements in its governing rules (governing rules condition) and apply its income and assets solely for the purpose for which the entity is established (income and assets condition). The threshold question in order to quality for exemption under section 50-1 as an entity covered by item 9.1(a) of the table in section 50-45 is whether the taxpayer is a society, association or club established for the encouragement of the activity. | Detailed Reasoning - Association: The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organization formed to effect their purpose'. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. The taxpayer is considered as an association. | Detailed Reasoning - Established: The meaning of the word 'established' in former subsection 23(g) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 , where it was held that it referred not only to the circumstances existing when the entity was initially formed but also to its subsequent activities and to the circumstances of the particular year under consideration. This is noted in paragraph 24 of the Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), which states that the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity's constituent documents and the activities of the entity after its formation. Other factors include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity. | Detailed Reasoning - Encouragement of animal racing: The word 'encouragement' is not defined in the ITAA 1997 or ITAA 1936, and for the purposes of section 50-45 the word takes on its ordinary meaning. In paragraph 11 of the Taxation Ruling 97/22 Income Tax: exempt sporting clubs (TR 97/22), Macquarie dictionary meaning of 'encouragement' is adopted, being 'stimulation by assistance'. Encouragement can occur directly by: · forming, preparing and entering teams and competitors in competitions in the game or sport; · 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; or · encouraging increased and wider participation and improved performance; and can occur indirectly: · through marketing; or · by initiating or facilitating research and development. In the present case, the taxpayer was established for the encouragement and promotion of the activity as stated in its Constitution. Since establishment, it has been conducting activities and establishing systems that are directly related to and for encouragement and administration of the activity. It is considered that, the taxpayer was established for encouragement of that activity. | Detailed Reasoning - Special Conditions: The taxpayer was established in Australia and has at all relevant times operated in Australia. Accordingly, the special conditions in section 50-70 will be satisfied if the non-profit requirement, governing rules condition and income and assets condition are satisfied. Generally it is accepted that an association operates on a non-profit basis where, by operation of law or by its constituent document, the association is prevented from distributing its profits or assets among members while the association is operating and on its winding-up. The association's actions must, of course, be consistent with the prohibition. The non-profit requirement is explained in paragraphs 21 to 23 of the TR 97/22, where it states that benefits received by members communally as members (e.g., by using the club's facilities) and incidental to the pursuit of a club's objects do not prevent the club from passing the non-profit test nor does the payment of reasonable remuneration to members for services they provide to the club. Where the law or the constituent documents do not prohibit distributions, it is a question of fact in each case as to whether the club is not carried on for purposes of profit or gain to the individual members. Factors that we consider relevant include whether distributions have been made, whether there is a stated or demonstrated policy to make or not to make such distributions and whether winding-up is contemplated. Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the non-profit test has been satisfied. On the facts, the taxpayer satisfies the non-profit requirement. The governing rules condition is considered in paragraph 8 of the TR 2015/1, which lists down the following three questions to be asked: · what are the governing rules of the entity? (further explanations in paragraphs 9 to 16 of the TR 2015/1) · what are the substantive requirements in the governing rules? (further explanations in paragraphs 17 to 20 of the TR 2015/1) · at what time must the Association comply with all of the substantive requirements in its governing rules? (further explanations in paragraph 21). In this case, the taxpayer's Constitution constitutes its governing rules. The substantive requirements in the taxpayer's governing rules are those set out in its Constitution. On the facts, it is considered that the taxpayer meets the governing rule condition in subsection 50-70(2). The income and assets condition is considered in paragraph 23 of the TR 2015/1, which requires the following two questions to be asked: · what is the 'purpose for which the entity is established'? (further explanations in paragraphs 24 to 29 of the TR 2015/1) · has the entity applied its income and assets solely for the purpose for which the entity is established? (further explanations in paragraphs 30 to 36 of the TR 2015/1). In this case, the taxpayer was established to encourage and promote the specific type of activity. It conducts activities and establishes systems that are directly related to and for encouragement and administration of the activity. Its governing document is consistent with formation purpose, and its history clearly characterises it the same. Accordingly, it supports that the taxpayer's main purpose is consistent with its establishment purpose and object. Meaning of 'solely' is provided in paragraphs 33 to 35 of the TR 2015/1 that, the entity must exclusively or only apply its income and assets for that purpose. On the facts, the income and asset condition in subsection 50-70(2) is satisfied. Therefore, the taxpayer is a non-profit association and is established and operated for encouragement of the activity, it meets the conditions as set out in section 50-70, and accordingly it qualifies as an exempt entity under item 9.1 of the table in section 50-45.