Private ruling: Income tax exemption - association for the encouragement of sport
Date of advice: 31 July 2020
Published: September 2020

Ruling: Q1: Is the total ordinary income and statutory income of the Entity exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis it is an entity described in item 9.1 of section 50-45 of the ITAA1997? | A1: Yes. This ruling applies for the following periods: Year ending 30 June 20XX Year ending 30 June 20XX The scheme commences on: 1 July 20XX

Relevant facts and circumstances: Background This description of the facts is based on information provided by the applicant. The following documents, or relevant parts of them, form part of and are to be read with the description: · Previous applications for private ruling · New application for private ruling · Documents attached - Articles of association - Draft project development agreement - Notice of extraordinary general meeting · The Entity website The Entity has requested an extension to a private binding ruling that confirmed that it is an entity as described in item 9.1 of section 50-45 of the ITAA1997, notwithstanding that one of the Entity's facilities was to be sold and a new facility developed at a different location. The Entity owns land upon which all its facilities reside. The facility had a number of limitations with hillsides that prevented appropriate placement of drainage works and watering systems. In addition, the layout of the facility prevented maintenance. This resulted in a significant decline in revenue - particularly from the fee paying public. The Entity determined that due to the significantly sloping land, and the increasing problems of insurance risk/costs, that the facility's continued use was not viable. The Entity is in the process of selling the land. Developing the site from a marketing perspective offers potential purchasers the ability to make stamp duty savings by buying the property off the plan. It is necessary for the Entity to remain the land owner whilst the property is being sold off in segments. The Entity is not involved in the project in any manner other than being the landowner. The consideration for the land has been determined by the parties involved. The Entity only plays a passive role in the property development activities with no involvement in the development or sales activities. The proceeds from the sale of the land will be wholly utilised for the continued development of the Entity's objects and purposes. There have been no material changes to the circumstances outlined in the original private binding ruling application. Sporting Activities Facilities are available to both members and the public. The Entity provides dining facilities for members and guests. Membership The categories of membership are set out in the Entity's Articles of Association. Articles of Association The Articles of Association provide information in relation to the Entity's objects, winding up, members, ordinary members, social members, members eligible as directors, voting members and the Council. Development progress The explanatory notes to the notice of extraordinary general meeting describe an undertaking by the developer to provide the land for a new facility. The infrastructure work is well underway. The Entity ceased its operations and handed over total control of the property to the developer. The developer anticipates that it will take a further period of time to fully complete the development. Relevant legislative provisions Income Tax Assessment Act 1997 Section 50-1 Income Tax Assessment Act 1997 Section 50-45 Income Tax Assessment Act 1997 Section 50-47 Income Tax Assessment Act 1997 Section 50-70 Income Tax Assessment Act 1997 Section 995-1 Reasons for decision 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) 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 condition detailed in section 50-70 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. 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. 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... 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 95/56) refers to the definition of 'association': 2. .... 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 members of the Entity voluntarily associate together for a common purpose and common interest. The Entity has a management committee and rules of association. The Entity is an 'association, society or club'. 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. The constituent documents of the Entity reference its association with sports. The Entity provides facilities for members and guests to play sport. It is accepted that the Entity is an organisation associated with a game or sport. Encouragement 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. Encouragement can occur directly or indirectly. TR 97/22 details features considered to be persuasive of supporting a conclusion that the main purpose of a club is to encourage a game or sport. Paragraph 15 of TR 97/22 describes highly persuasive features which are present when a club is for the encouragement 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. The Entity conducts activities that are directly related to sport. The development project plan provides for continuity of these activities during the ruling period. The proceeds of the development are in the main to be spent on developing a new facility. The Entity's objects in its Articles of Associations do not clearly state a main purpose being sport, however the membership categories indicate a sporting purpose. The club provides facilities for both sporting and social purposes. Taxation Ruling TR 97/22 also lists other features considered relevant at paragraph 16: · 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. The Entity's constitution allows for several membership categories; however, members currently fall in either a sporting category or a social category. Social members may not vote at meetings. Therefore, only sporting members vote and may be elected as directors of the Entity. In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 (Terranora), Hill J, held that in that case, the provision of extensive social activities to visitors to the club did not prevent a finding that the entity was for the encouragement of the sport undertaken by a majority of the ordinary members: The attraction the club has for persons living as far away as Brisbane was made apparent by the evidence. Numerous buses arrive at regular intervals during the morning carrying visitors to the club, many of whom are elderly pensioners. Presumably these visitors are attracted, or were attracted in the year of income, by the poker machines not then available in Queensland. The evidence indicates that of the approximately 1,000 visitors per day to the club, 65-70% of them arrive by bus. In addition to the poker machines, the visitors enjoy the special social promotions in the club. In the year of income, there were 4,076 ordinary members of the club, 226 junior members and 130 social members. A social member is entitled to utilise all the facilities of the club, sporting or recreational, but is not entitled to vote or become an office bearer of the club." (at ATC 4082; ATR 300). ...in the present case, I have reached the conclusion that, while the social activities (by which I include the gambling, entertainment, dining and accommodation activities) were very extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were, I am satisfied, pursued as a means of financing the extensive sporting activities conducted by the club. (at ATC 4086-4087; ATR 304) In St Marys Rugby League Club Limited v FC of T 97 ATC 4528 (St Marys), Hill J listed at 4534 a combination of factors which are also present in this Club as being in favour of that club's claim to exemption: In the present case each of the matters said by Lockhart J in Cronulla-Sutherland to be significant, namely ''constitution, activities, history and control'' point to the characterisation of the Club as one having as its main object or purpose ''the encouragement or promotion'' of rugby league within the meaning of s 23(g)(iii) of the Act. The Memorandum of Association records the significance of rugby league as the major object of the Club. The Articles of Association, both in the membership categories and in the conferring of control upon Football Members (or Life Members), point to the significance of the football activities over the social activities. The activities of the Club involve both social and football activities. Were this not so then, no doubt, the case would not be before the Court. But, although income is derived from the social activities and the football activities constitute an outgoing, there is an intensity of activity directed towards football which tips the balance in favour of the applicant. The history of the Club is one of close association with rugby league from its inception and again points to the correct characterisation as being one for ''the encouragement or promotion'' or rugby league. Finally, the control of the Club rests in the hands of former footballers (or Life Members) whose task it is not merely to run the Club but also to promote the competitions in which the Club participates in the rugby league season. Tribunal decisions which also support the Entity's claim are Tweed Heads Bowls Club v. FC of T 92 ATC 2087; AAT Case 8267 (1992) 24 ATR 1068 and Case X25 90 ATC 251; (1990) 21 ATR 3257. Whilst the Entity has relocated the facility by way of a sale of the former site and the purchase of land upon which the new facility has been built, this arrangement does not materially alter the fact that the Entity encourages a game or sport. This transaction by the Entity was necessary as the existing facility had a number of limitations. Adequate drainage and watering systems required were not possible due to the facility being located on a hillside. Over time this led to a large decline in users. In addition, increased insurance costs and insurance claims were putting further pressure on the Entity's finances. In St Marys Hill J at 4534 noted that the use of surplus funds for the building of a motel would make a conclusion that the club was established for the purpose of 'the promotion or encouragement'' of sport more difficult to arrive at. In this case, the sale and subsequent development of the new facility can be seen as further encouraging a game or sport, as the new facility is located on land where the former limitations do not apply. This enables the Entity to properly maintain the facility and thereby increase the participation in the game. In addition, as the new facility is located away from residential housing, insurance claims and associated premiums will decrease. These factors will have a positive effect on the Entity's finances and allow the Entity to further invest in its object of providing '...suitable sporting facilities and Club house for the members and their guests'. Consideration of these factors leads to the conclusion that the Entity is established for the encouragement of a game or sport. Special conditions 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 purposes' and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose. The Entity has sporting and social purposes which are non-charitable purposes. As such, the Entity is not capable of being a registered charity and is not and 'ACNC type of entity'. Section 50-47 of the ITAA 1997 does not apply to the Entity. Section 50-70 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 Taxation Ruling 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 Articles of Association of the Entity prevents distribution to members. The Entity 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 Entity is a resident of, and is located in, Australia. The Entity carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement. The Entity satisfies the special condition in section 50-70 of the ITAA 1997. Conclusion Section 50-1 of the ITAA 1997 provides that the income of the entities covered by the tables in sections 50-5 to 50-45 of the ITAA 1997 are exempt from income tax. An entity is exempt from income tax as a society, association or club 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 if it: · is a society, association or club, · is established for the encouragement of a game or sport, and · satisfies the special condition. The Entity is a society, association or club and is established for the encouragement of a game or sport. In addition, it satisfies the special condition and is therefore exempt from income tax for the years ended 30 June 20XX until 30 June 20XX.