Private ruling: Income tax exempt entity - sporting club
Date of advice: 18 March 2024
Published: 29 April 2024
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Entity A an income tax exempt entity under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of a game or sport under item 9.1(c) in section 50-45 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: Background 1. Entity A is an Australian public company limited by guarantee, registered in 19XX. 2. Entity A has previously been issued with a favourable ruling following for the period 1 July 20XX to 30 June 20XX (Previous Ruling). 3. Entity A submits that they are well known throughout a local community for encouraging, sponsoring, and promoting a particular sport, and that they are one of the largest communities supporting the particular sport in their local region. 4. Entity A operate non-sporting venues, which offer facilities of a social and entertainment nature. Most of Entity A's revenue is generated from these activities. 5. Entity A continues to expand its competitive and social sporting community options, including launching an inaugural women's team as well as hosting other social clubs such. 6. Since the Previous Ruling, there has been no material changes to the venues being operated by Entity A but for the recent closure of one of Entity A's facilities. 7. Entity A's board members remain the same since the Previous Ruling, with most being former players, coaches or administrators of the particular sport. 8. The displays of sporting memorabilia and promotions have not materially changed at any of the premises. 9. Entity A was the head of a consolidated group and treated its subsidiary, Company X as a part of the tax consolidated group and hence income tax exempt for the following periods: • Income year ended 30 June 20XX; • Income year ended 30 June 20XX; and • Income year ended 30 June 20XX. 10. As Entity A is a tax-exempt entity it ceased to be eligible to be the head company of a tax consolidated group. On DD MM 20XX, Entity A submitted the 'Notification of head company no longer eligible: income tax consolidated group ceases to exist' form, to notify their ineligibility to be the head of an income tax consolidated group from 1 July 20XX. Constitution 11. Entity A's Constitution amended DD MM 20XX is the most recent Constitution of Entity A (the Constitution). A copy of this has been provided 12. Since the Previous Ruling, amendments were made to the Constitution during 20XX. Entity A's 20XX Annual Report lists all amendments that were made. A copy of this has been provided. 13. The Constitution includes clauses about the following: a. Objects; b. Non Proprietary Club; c. Winding up; d. Membership categories and qualifications; e. Life members; f. Board of directors; and g. Eligibility for election to the board of directors Entity A' recent changes 14. Since the issue of the Previous Ruling, Entity A submits major events that occurred to Entity A leading up to this request are summarised as below: • Event 1 - Consistent with the strategy submitted to the ATO during the Previous Ruling request, in 20XX, Entity A entered into an option agreement with a property developer to sell one of its clubs. The option ends in MM 20XX and is part of a larger property development project being managed by the property developer to develop a significant portion of the block on which the club is located on. The agreement will involve the property developer building the club a new modern and refreshed premises at an expected net zero cost to Entity A. Given the club's continuous loss position, this is an attractive venture for Entity A as it will provide a better member experience and should in turn improve the profitability of the club. • Event 2 - Consistent with the submission to the ATO in the Previous Ruling request, in or around MM 20XX, Entity A entered into a land swap transaction with a different property developer for part of another Entity A's club premises' car parking space at the back. This would allow Entity A to eventually redesign the front facade of the club and build other facilities. • Event 3 - A decision was taken to close one of Entity A's club on DD MM 20XX. This was a result of poor trading results and patronage. • Event 4 - Entity A acquired a café and a takeaway restaurant. Both places are located in a same suburb. These acquisitions are aimed to broaden Entity A's income stream through other business to place less reliance on its current revenue stream. Entity A's membership and board composition 15. Entity A had over XX members across all Entity A clubs. These members comprise several categories. Entity A's Sporting activities 16. Entity A entered over XX teams in competitions. In 20XX, Entity A had over XX junior players and a significant number of senior players competing. Entity A enters a first grade, reserve grade, and Under 18 team in competitions for the specific sport it supports. 17. Entity A gives financial support to over XX junior players managed by a separate committee. In 20XX and 20XX Entity A provided $XXX worth of on and off field gear. Entity A's Non-Rugby League activities 18. Entity A continues to support other sporting ventures. In addition, Entity A have hosted other sporting events at one of its locations. 19. There have been no changes to Entity A budget projections since 20XX. Most venues have dining, bar facilities, and other gaming facilities. 20. In MM 20XX, Entity A entered a land swap deal for one of its sites. This land swap will in time allow Entity A to develop the area and provide a better experience for members with the main entrance to be redesigned and potentially additional facilities. This proposed development was mentioned in the Previous Ruling however the land swap component is a new development. The development of the additional facilities is also subject to Council approval. 21. These additional facilities allow Entity A to diversify its revenue streams and place less reliance on its gaming revenue to fund its sporting activities. 22. Entity A has also come to an agreement with a property developer where one of its clubs will be sold to the developer as part of a far greater development project (managed and run by the property developer) whereby the entire zone where the club is located will become a new multi-faceted development with Entity A as the main tenancy, to create a new club (with parking). Entity A will be able to deliver a new and refreshed experience for members at an expected net zero cost to the club. The club being sold has not performed well, so this uplift is expected to improve its financial position significantly. Entity A's financial position 23. While Entity A generates substantial revenue from services from club activities, Entity A submits this is incidental to promoting the sport. Their financial information shows that most of their income comes from services club type activities, and incurred most of its expenditure on those activities. 24. While Entity A's expenditure on sporting activity is small compared to its total operations (revenue and expenditure), it makes up a significant portion of its net profit. 25. The total accounting profit for the year ended 30 June 20XX for Entity A was $XXX. 26. The total accounting profit for the year ended 30 June 20XX for Entity A was $XXX. Entity A's cash reserves 27. Entity A's 20XX Annual Report shows cash reserves of $XXX. 28. Cash reserves as of 30 June 20XX are approx. $XXX. Entity A's employees and roles 29. There are currently XXX employees. 30. Number of volunteers There are approximately XXX volunteers who provide coaching, training, and general ground manager volunteering services to Entity A. Approximately a quarter of these people have multiple roles, meaning they may volunteer in both a coaching and training capacity. Entity A's venues & activities 31. Following the closure of one of the venues, Entity A now has XX nonsporting facilities around the region. Each of the XX venues are similar and provide typical sporting clubs services. 32. Venue X is the home ground for the Entity A's sporting club that features a main grandstand with undercover seating for XXX people as well as XX corporate boxes and lighting towers.

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: 1. Entity A is exempt from income tax for the 20XX, 20XX and 20XX income years, because it is a club established for the encouragement of a game or sport. It meets the requirements to be eligible under item 9.1(c) in section 50-45 of the ITAA 1997. • While Entity A has multiple purposes, encouraging a specific sport is its main purpose. While Entity A runs substantial services club activities it does this to fund a specific sport. • Entity A is a non-profit body which complies with its rules and carries out its activities principally in Australia. | Detailed Reasoning - Detailed reasoning: 2. A society, association or club which has been established for the encouragement of rugby league under section 50-45 item 9.1(c) is exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997). 3. 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 (as defined in section 995-1 of the ITAA 1997). 4. 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. Additionally, 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. 5. An entity is 'an ACNC type of entity' if it has a charitable purpose. An entity that does not have a charitable purpose, per the ATO Commissioner's view in Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities , is not required to be registered with the Australian Charities and Not-for-profits Commission (ACNC) to be exempt from income tax. 6. 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. 7. An entity is therefore exempt from income tax under Item 9.1(c) of the table in section 50-45 of the ITAA 1997, if the entity: • is not carried on for the purposes of its individual members' profit or gain; • is a society, association, or club established for the encouragement of a game or sport; and • satisfies the special conditions in sections 50-47 and 50-70 of the ITAA 1997. | Detailed Reasoning - Society, association or club: 8. 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. Based on the definitions provided in the Macquarie Dictionary a 'society, association or club' refers to a voluntary organisation of people associated together for a common or shared purpose. A society, association or club may be constituted as an unincorporated association or be formally recognised by incorporation. | Detailed Reasoning - Not-for-profit requirement: 9. Taxation Ruling TR 2022/2 Income tax: the games and sports exemption (TR 2022/2) discusses in more detail the provisions around the games and sports tax exemption. 10. Paragraphs 11 to 16 of TR 2022/2 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is not-for-profit if it is not carried on for the profit or gain of its individual members, either while it is operating or on its winding up. 11. Organisations satisfy the not-for-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. | Detailed Reasoning - Established for the encouragement of a game or sport: 12. TR 2022/2 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 13. 'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 27 of TR 2022/2 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997. | Detailed Reasoning - Encouragement: 14. A society, association or club will only be exempt from income tax if it has as a main purpose the encouragement of a game or sport. 15. Paragraph 30 of TR 2022/2 provides guidance on the term 'encouragement'. 'Encouragement' is not a defined term and takes its ordinary meaning. The ordinary meaning of encouragement (or the act of encouraging) has been described as stimulating by assistance or approval, including through direct or indirect means. 16. Direct or indirect activities relevant in determining whether the main purpose of the entity is the encouragement of a game or sport are listed at paragraph 43 of TR 2022/2. These include: • forming, preparing and entering teams and competitors in competitions in the game or sport • coordinating activities • organising and conducting tournaments • 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 • marketing • initiating or facilitating research and development, and • facilitating the activities above by making a financial or in-kind contribution to an organisation that performs them. | Detailed Reasoning - Main purpose: 17. Paragraph 31 of TR 2022/2 states that determining the main purpose of an entity requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of an entity to determine its main purpose. 18. Paragraph 37 of TR 2022/2 lists factors that have been identified by courts and tribunals as relevant when considering purpose. These include: • emphasis in the club's constituent documents that the main purpose is to encourage a game or sport • extent of sporting activities • the conduct of activities directly related to the game or sport • a high level of member participation in the game or sport • promotion of the organisation to patrons and the public as one that encourages a game or sport • involvement of the committee of management in the promotion of sport • the use of surplus funds for encouraging the game or sport, and • the provision of financial and in-kind support for encouraging the game or sport. 19. This is further explained in paragraphs 38 to 42 of TR 2022/2; 38. The activities undertaken by a club are an important consideration in determining whether it qualifies for the games and sports exemption. However, activities considered in isolation do not demonstrate the purpose of a club. 39. Activities are commonly a means to an end. Activities can serve the purpose of encouraging a game or sport and other independent non-sporting purposes. All of the club's activities must be objectively weighed against the objects, history and control of the club to determine the main purpose for which it is established in a particular year. 40. An activity like the organisation of, or participation in, sporting competitions can be readily understood as advancing a purpose of encouraging a game or sport. 41. Where a club derives its revenue from commercial operations, the club needs to objectively determine the extent to which commercial operations are a means to the end of advancing the sporting purpose, or are advancing some other purpose. 42. A club can demonstrate a purpose of encouraging a game or sport where it provides financial and in-kind contributions to other organisations that directly conduct those activities. To demonstrate a main purpose of encouraging a game or sport, a club that does not directly conduct any games or sports will need to objectively show that the activities it carries out are a means to that end. | Detailed Reasoning - Special Conditions: Section 50-47 of the ITAA 1997 20. Section 50-47 provides a further condition that if an entity that is covered by one of the items in Subdivision 50-A is an ACNC type of entity, they will not be exempt from income tax unless they are registered under the Australia Charities and Not-for-profits Commission Act 2012 (ACNC Act). 21. Broadly, an entity that can be registered as a charity is an ACNC type of entity. As the Club's objects indicate that it does not have charitable purposes, it is not an ACNC type of entity therefore it does not need to be registered under the ACNC Act. Section 50-70 of the ITAA 1997 22. Section 50-70 of the ITAA 1997 provides: | Detailed Reasoning - Special conditions for items 1.7, 2.1, 9.1 and 9.2: (1) An entity covered by item 1.7, 2.1, 9.1 and 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 Australian and, to that extent, incurs its expenditure and pursues it 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). (2) The entity must: (a) Comply with all substantive requirements in its governing rules; and (b) Apply its income and assets solely for the purpose for which the entity is established. | Detailed Reasoning - Society association or club: 23. Entity A is an Australian public company limited by guarantee, registered in 1970. The Constitution outlines Entity A' objects at rule X which includes promoting the specific sport and to participate in the sports competitions. 24. Entity A has a board or directors, a class of members who pursue a common purpose and are governed by the rules outlined in the Constitution. 25. Entity A is a society, association or club for the purposes of section 50-45 of the ITAA 1997. | Detailed Reasoning - Not-for-profit requirement: 26. At Rules X and X of the Constitution, it prevents Entity A from distributing to members both while it is operating and upon winding up and dissolution. 27. The not-for-profit requirement is satisfied. | Detailed Reasoning - Game or Sport: 28. Entity A will be directly and indirectly involved in the sporting activity. 29. The activity Entity A is involved in is a game or sport for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997. | Detailed Reasoning - Main purpose: 30. Entity A' objects are outlined in the constitution at Rule X of the Constitution. It includes objects of encouraging the sport along with its ancillary objects. 31. These objects and their emphasis on sport supports the characterisation of Entity A as an association established for the encouragement of a game or sport. In furtherance of Entity A' objects, Entity A will provide money, property and/or benefits (including both financial and in-kind contributions) to not-for-profit organisations which encourage, grow, and develop the sport. 32. Entity A hold multiple venues that operate sporting activities and non sporting activities to generate income for the enhancement of their objects of encouraging the game of the specific sport. 33. Entity A undertakes sporting activities directly. It doesn't merely support activities undertaken by related bodies. Entity A enters teams in competitions in the region they're located in, from juniors through to a senior first grade team. It also conducts coaching and hosts various competitions and events. These activities indicates that Entity A are forming, preparing, and entering teams and competitors in competitions in the game or sport. 34. Entity A generates revenue from its sporting activities. 35. Information provided also indicates that sporting expenditure usually exceeds Entity A' net profit, suggesting the services clubs are carried on for the purpose of supporting sporting activities. 36. Entity A' carries out substantial sporting activities directly and gives financial support to other sporting activities. Entity A entered XX teams in Junior competitions in 20XX. In 20XX, Entity A had about XX junior players and about XX senior players competing. In 20XX those numbers increase to XX junior players and XX senior players. This indicates Entity A' ability to encourage increased and wider participation and improved performance. 37. Entity A providing financial support to XX junior rugby league players through on-field and off-field gear strongly suggests that Entity A encourages the sport. Through investing $XXX, Entity A demonstrates a significant financial commitment to supporting young players. 38. These specific actions align with Entity A' stated purpose of encouraging sport. It directly supports young players, demonstrating their commitment to fostering the sport. 39. Entity A had XXX members as of 30 June 20XX enrolled in their teams. Entity A also had XXX members including non-playing members. 40. Entity A carries out sporting activities, but also carries on a substantial services club operation. It also supports other community groups. The question is whether: • the sport is its main purpose, and other activities (such as carrying on a services club) is merely incidental to the sport, or • any of the other activities have become ends in themselves, or are so significant that it should be characterised as a 'co-ordinate' object? 41. While Entity A generates substantial revenue from services club activities, this is arguably incidental to promoting the sport. Their financial information shows that most of their income comes from services club type activities and they incurred most of their expenditure on those activities. However, merely generating substantial revenue from other activities doesn't prevent encouragement of a game or sport being the club's main purpose. Nevertheless, the other activities should serve to generate profits to fund the club's sporting activities. 42. While Entity A' expenditure on sporting activity is small compared to its total operations (revenue and expenditure), it makes up a significant portion of its net profit. This is consistent with the characterisation that the services club activities are carried on funding its rugby league activities. 43. There is no hierarchy in the objects clause: none are given explicit preference or priority over the others. However, the first, second and third subclauses mention the sport. All the other clauses can be fairly characterised as being 'incidental' to the objectives of supporting the sport. 44. Extensive sports activities remain their core focus, with any other offerings viewed as complementary. | Detailed Reasoning - Entity A' recent changes: 45. Event 1 Entity A entered into an option agreement with a property developer to sell one of its clubs. Building a new, modern club could improve facilities and potentially attract more members, indirectly supporting sports participation. 46. Event 2 Entity A entered into a land swap transaction with a different property developer for part of another club premises' car parking space at the back. Redesigning the facade and building new facilities could enhance overall member experience, benefiting sport indirectly. 47. Event 3 Entity A decided to close one of its clubs on DD MM 20XX. The closure of the club does not detract from the Entity A's purpose. 48. Event 4 While the acquisitions of the café and a takeaway restaurant do not directly relate to Entity A' primary purpose, it's crucial to note the distinct objectives behind them: • Diversifying Revenue: Entity A aimed to broaden their income sources, moving away from solely relying on gaming revenue. This diversification helps sustain their core activities. • Funding the sport: The acquired businesses don't directly supply Entity A' venues. Instead, the generated income helps finance their core mission of encouraging sporting activities. The acquisitions are neutral to characterising Entity A' main purpose. It is concluded that the operations are themselves aimed at diversifying income streams and generating profits to channel into the sport. The businesses are not significant enough to change Entity A' characterisation. Controlling catering costs may be part of the strategy to increase Entity A' total profits and allow it to devote more funds to supporting sports activities. All of the profits from these operations are channelled to the club. Therefore, the recent major events that occurred for Entity A does not alter Entity A' main purpose. The income generated from the events contribute to supporting and promoting the sport, rather than diverting focus away from it. | Detailed Reasoning - Conclusion on the main purpose: 49. Considering the above information, it is considered that Entity A' main purpose is the encouragement of a game or sport. | Detailed Reasoning - Special Condition: 50. Entity A' main purpose is the encouragement of participation in a game or sport, as such this is not an ACNC type of entity as defined in section 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 and therefore section 50-47 of the ITAA 1997 does not apply. 51. Entity A is physically present in Australia, it pursues its objectives in Australia and incurs expenditure principally in Australia. Subsection 50-70(1) of the ITAA 1997 is satisfied. 52. Entity A will comply with any substantive requirements in the constitution and will apply its income and assets solely for the purposes for which it is established. Subsection 50-70(2) of the ITAA 1997 is also satisfied. 53. Special conditions required under 50-47 of the ITAA 1997 does not apply to Entity A and conditions required under section 50-70 of the ITAA 1997 have been satisfied by Entity A. | Detailed Reasoning - Conclusion: 54. Entity A' ordinary and statutory income is exempt from income tax under item 9.1(c) of section 50-45 of the ITAA 1997, as it is an organisation established for the main purpose of encouragement of a game or sport. Entity A is not for the profit or gain of its individual members and operates principally in Australia.