Private ruling: Income tax exemption
Date of advice: 17 July 2018
Published: September 2018
Ruling period: 30 June 20XX to 1 July 20XX
Date scheme commenced: 30 June 20XX

Ruling: Q1: Is the Club exempt from income tax 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 Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The Club has applied for a private ruling on whether the Club is exempt from income tax as a society, association or club established for the encouragement of a game or sport in accordance with section 50-45 of the ITAA 1997. In the application provided by the Club dated xx/xx/201x the following information was provided: 1. The Clubs purpose, rules regards members, non-profit and winding up clauses are stated in its Rules. 2. The Club is an incorporated association 3. The current Clubhouse facilities include dining rooms, bar, kitchen, courts, change-rooms, toilet facilities, manager’s office and Committee room. The dining-room is used regularly by members and occasionally by the public. 4. The Club undertakes social and sporting activities. 5. During the year 12 Committee Meetings were held comprising the President, two Vice Presidents and five committee members.

Relevant legislative provisions: Section 50-1 Income Tax Assessment Act 1997 | Item 9.1(c ), Section 50-45 Income Tax Assessment Act 1997 Section 50-70 Income Tax Assessment Act 1997 | Relevant Rules and Determinations: Taxation Ruling TR 97/22 | Relevant Cases: | AAT Case 8267 (1992) 24 ATR 1068 | Cronulla Sutherland Leagues Club Limited v. FC of T 90ATC 4215 at 4225; (199) 21 ATR 300 | South Sydney Junior Rugby League Club Limited v. FC of T 2006 ATC 2150; [2006] AATA 265 | Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100 | St Marys Rugby League Club Limited v. FC of T 97 ATC 4528; (1997) 36 ATR 281 | Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294

Reasons for decision: Summary: The Club is not exempt from income tax pursuant to 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) of s50-45. | Detailed Reasoning - ACNC type entity condition: Section 50-47 of the ITAA 1997 provides that an entity that is covered by any item and 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 (‘ACNC Act’). Section 50-47 of the ITAA 1997 provides: 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 . The expression ‘ACNC type of entity’ is defined in subsection 995-1(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. Broadly, an entity capable of being a registered charity is an ACNC type of entity. In 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. Paragraph 26 of TR 2011/4 provides that an institution is charitable if it’s main or predominant or dominant' purpose is charitable in the technical legal meaning and it was established and is maintained for that charitable purpose. Any other purpose can only be incidental or ancillary to the charitable purposes. The Rules sets out the purposes of the Club. Clause 2 of the Rules provides that the purposes are as a sporting and social Club. These purposes are non-charitable purpose and not ancillary or incidental. As the Club has non-charitable purposes, it is not capable of being a registered charity. The Club is therefore not an ACNC type of entity and section 50-47 is not applicable. | Detailed Reasoning - Society, association or club for the encourage of a game or sport: A society, association or club which has been established for the encouragement of a game or sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1 of the ITAA 1997. | Detailed Reasoning - Society, association or club: The term society, association or club is not defined in ITAA 1997. The term is therefore construed according to its ordinary meaning. In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW), Sugerman JA defines society 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 organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two. Paragraph 2 of Taxation Determination TD 95/56 considers the definition of 'association' as follows: …The Shorter Oxford English Dictionary defines the term 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose’. The Macquarie Dictionary defines 'association' as being 'an organisation of people with a common purpose and having a formal structure'. Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. The Macquarie Dictionary 2001, 5th edition (The Macquarie Library Pty Ltd, Macquarie University) 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 Club is an incorporated association. The purposes of the Club are as a sporting and social club. The Club is considered to be a society, association or club. For the Club to be exempt from income tax as a society, association or club established for the encouragement of a game or sport, it needs to satisfy the following three tests (as set out in paragraph 7 of Taxation Ruling Income tax: exempt sporting clubs (TR 97/22): n It cannot be carried on for the purposes of profit or gain to its individual members n It must be for the encouragement of a game or sport, and n That encouragement must be the club’s main purpose TR 97/22 states at paragraph 8 that where a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997. | Detailed Reasoning - Non-profit: TR 97/22 states the following on the non-profit requirement: | Detailed Reasoning - Non-profit requirement: 9. A club must not be carried on for the purposes of profit or gain to its individual members. 10. A club's Memorandum and/or Articles of Association or other constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and on its winding-up. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition. The Club’s Rules prevent the income and capital of the Club from being distributed to the benefit of its members both while the Club operates and when it winds up. There is nothing in the facts to indicate that the Club is acting, or will act, contrary to the prohibition. | Detailed Reasoning - Special Requirement: Section 50-70 of the ITAA 1997 provides that an entity covered by item 9.1 of section 50-45 of the ITAA 1997, 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 of the ITAA, 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 It has already been determined that the Club is a society, association or club which is not carried on for the purpose of profit or gain of its individual members. In this case, the relevant test is a) - the entity must have a physical presence in Australia. The Club is operated in Australia, and incurs its expenditure and pursues its objectives principally in Australia. Therefore this requirement is met. | Detailed Reasoning - Game or sport: There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997 therefore, those words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that would be considered as ‘sport’. The Club’s rules express that one of its purposes is a sporting club. Further the members of the Club are involved in sporting activities organised by the Club. We consider the Club to be concerned with a game or sport | Detailed Reasoning - Encouragement of sport to be the club’s main purpose: Paragraph 11 of TR 97/22 states that according to the Macquarie Dictionary, ‘Encouragement’ means ‘stimulation by assistance’. Encouragement can occur directly by: n forming, preparing and entering teams and competitors in competition in the game or sport n coordinating activities n organising and conducting tournaments and the like n improving the abilities of participants n improving the standards of trainers and coaches n providing purchased or leased facilities for the activities of the game or sport for the use of Club Members and visitors; or n encouraging increased and wider participation and improved performance and can occur indirectly: n through marketing; or n by initiating or facilitating research and development The Rules of the Club state that the purpose is a sporting and social club. There is nothing to indicate that the Club is directly involved in the training and development of its players and coaches except that they arrange in house coaching for some sports at additional cost to members. The Club has various sporting facilities and changing rooms. We consider that the Club encourages a game or sport. However, to be eligible for exemption under 9.1 (c) of Section 50-45; of the ITAA 1997 the main purpose of a club must be to encourage a game or sport. | Detailed Reasoning - Main purpose: The test to be applied to determine whether a society, association or club is established for the encouragement of a game or sport 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). 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 of 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. 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. (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 of the body seeking the exemption 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 lists features of a club that the ATO considers highly persuasive or relevant but less persuasive in identifying whether a club was/is established for the encouragement of a game or sport in an income year. 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: n the club conducts activities in the relevant year that are directly related to the game or sport n the sporting activities encouraged by the club are extensive n the club uses a significant proportion of its surplus funds in encouraging the game or sport, and n 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 51 of TR 97/22 discusses highly persuasive features : 51. A highly persuasive feature that supports a conclusion that a club has a main purpose of encouraging a game or sport is that the club conducts activities in the relevant year that are directly related to the game or sport. Examples of such activities include: ● participating in competitions or tournaments involving the game or sport; ● bringing into existence, organising and running such competitions or tournaments; ● providing referees, umpires or other officials for the game or sport; coaching participants in the game or sport; ● fundraising, for specific events in the game or sport in which the club's teams or competitors are involved, such as organising raffles to fund a club member's participation in an overseas event. … | Detailed Reasoning - Purpose and activities of the Club:: The Club’s constituent document states its purpose. The Club’s constituent document indicates the Club has a dual purpose rather than the main purpose of encouraging sport and the 201X Annual Report of the Club demonstrate purposes of promoting both sports/games and social/recreational activities. The Club currently provides social facilities including dining facilities, bars and other entertainment. To determine whether the main purpose of the Club is to encourage or promote a game or sport, it is necessary to look at the details of the Club’s activities and examine whether the activities reflect the purpose of promoting a game or sport. | Detailed Reasoning - Sporting activities: The minutes of meeting and weekly newsletters do not indicate significant activity in forming, preparing and entering teams and competitors in competition in the game or sport. Nor is there much evidence in these documents of coordinating activities, organising and conducting tournaments and the like, or improving the abilities of participants, improving the standards of trainers and coaches. There is nothing to indicate in the name of the Club that it is a sporting club. The Club does not employ any staff with a dedicated sporting purpose. The process for attracting new members, which relies on knowing and being proposed by an existing member, is not conducive to actively encouraging increased and wider participation and improved performance in a game or sport. These factors do not support the Club having the main purpose of being established for the encouragement of a game or sport. | Detailed Reasoning - Social activities: Although the Club does have a number of sporting activities the Club’s social activities are not minor or ancillary, and they could be seen an ends in themselves. The sporting purpose could be seen as merely enhancing the social aspect of the Club. That is, the Club exists to encourage social activities, including sport, rather than for the encouragement of sport per se. | Detailed Reasoning - Clubs financial information: It is considered appropriate to examine the financial information provided by the Club to determine whether it indicates that the main purpose of the Club is the encouragement of a game or sport. The financial information of the Club does not show significant sporting income or expenditure to support that the Club’s main purpose is the encouragement of sport and highlights the focus of the Club in respect of the allocation of financial resources to social activities compared to sporting activities. | Detailed Reasoning - Staff engagement: No sporting personnel are directly employed or contracted by the Club to support sporting activities. This highlights the focus of the Club in respect of the allocation of the human resources to social activities compared to sporting activities. Paragraph 15 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: n a high level of participation by members in the game or sport (see paragraph 57); n 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) (see paragraph 58); n 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 (see paragraph 59); and n 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 (see paragraph 60). | Detailed Reasoning - Sporting Participation: The Club’s constitution provides for 5 membership categories; life member, ordinary member with sporting entitlements, ordinary members with social entitlements, country member and junior member. All members can participate in the sporting and social activities of the Club except Ordinary members with social entitlements can use social, bar and dining facilities and the billiard facility unrestricted but the other sporting facilities are restricted to a few occasions. As discussed under the heading ‘Sporting activities’ above, the extent of sporting participation by members does not support the Club having the main purpose of being established for the encouragement of a game or sport. | Detailed Reasoning - Control: Paragraph 16 of TR 97/22 states that: 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… Paragraphs 59 of TR 97/22 also states that: A situation in which only members participating in the game or sport have voting rights, and only participants in the game or sport have a direct say in the running and direction of the club, would be indicative but not conclusive of a club's main purpose being encouraging a sport; for example, a club for golfers or bowlers that is controlled, by the golf committee or the bowls committee, respectively, of the club: see Tweed Heads at ATC 2100; ATR 1083; St Marys case ATC 4534, ATR 288. It is important to note that a relevant factor in respect of the members’ voting rights is whether only members who participate in the game or sport have voting rights in a club. All members of the Club can be elected to the Committee and the Rules of the Club do not require the Club to be managed by people concerned with a game or sport. Therefore, the Rules allow the Club to be managed by members with an interest only in the social activities of the Club. The governance of the Club is distinguishable from the circumstances in the St Marys Rugby League Club Limited (Supra) case. In that case the constitution of St Mary required that the Club be managed by ‘sporting members’ and the classes of members all require being current or past players of rugby league or supporting rugby league “by reason of consistent attendance at football matches or personal effort in relation to the organisation, coaching, managing or otherwise carrying out work or duties in relation to the playing of football”. | Detailed Reasoning - Conclusion: The Club’s Rules state a dual purpose as a sporting and social club. It does not emphasise a main purpose of encouraging a game or sport. A number of sports activities are undertaken by members however there does not seem to be any programs or processes in place to actively increase sporting members or encourage greater participation in a game or sport. The Club does not employ any persons dedicated to a sporting purpose either in an organisational or sporting role to encourage and promote sport. The 201X Annual Report of the Club also demonstrates a dual purpose of promoting both sports/games and social/recreational activities. The 201X Financial Statements record only minor sporting income and expenses in comparison to significant income and expenditure relating to bar and dining sales. The Club does not spend a significant proportion of its surplus funds to encourage sport. Additionally, there is no requirement that sporting members only have voting rights and control the Club. After reviewing the information provided about the Club’s features and operations in 201X and 201X it is considered that the Club has a dual purpose and its substantial social activities are not minor or ancillary. Therefore the Club does not have its main purpose as being for the encouragement of a game or sport. Based on the above, the total ordinary income and statutory income of the Club is not 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.