Private ruling: Income Tax exempt sporting club
Date of advice: 28 January 2016
Published: March 2016
Ruling period: 1 June 20WW to 31 May 20XX
Date scheme commenced: 1 June 20WW

Ruling: Q1: Is the Entity 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 and sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997? | A1: No.

Relevant facts and circumstances: The Entity is a licenced club. The Entity amalgamated with a sports Club. Prior to the amalgamation the Sports Club was under financial strain. The Entity saw the need to retain these facilities for locals, and add them to their own sporting armada. The Entity provides non-sporting activities such as bar, entertainment, restaurants, functions and gaming. The Memorandum lists the objects for which the Entity was established. One of its objects is to provide for members and for members' guests a social and sporting Club with all the usual facilities of a club including residential and other accommodation liquid and other refreshment, libraries and provision for sporting musical educational activities and other social amenities. The Entity has a large number of social members. The Entity states that it generates the majority of its income from entertainment and social activities however, it also promotes its sporting activities heavily. There are over 5000 financial members. All members of the Entity are eligible to vote. Junior Members must take an active part in the sporting activities of the club or a sporting section of the club on a regular basis. The Entity's board directors are not required to be members of any of the sporting inner clubs; however, the majority are linked to sports. The Entity displays photographs of sporting competitors and life members along with honour boards and sporting trophies. The Entity is an association not for gain and in the event of a wind up, any excess property shall not be paid to or distributed amongst members but shall not be given or transferred to such body or institution as the Board may resolve.

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 50-70

Reasons for decision: Summary: The Entity does not meet all the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and is therefore not entitled to income tax exemption under section 50-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The Entity has requested a private ruling on whether it is exempt from income tax under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) in the table in section 50-45 of the ITAA 1997. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22) provides the Tax Office view and describes the circumstances under which a society, association or club is regarded as being established for the encouragement of a game or sport. Paragraph 7 of the TR 97/22 sets out the relevant tests in determining an entity's tax exempt status under item 9.1(c) of section 50-45 of the ITAA 1997, as detailed below: For a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy the following three tests: 1. It must be a society, association or club; 2. Meet the requirements of section 50-70 of the ITAA 1997 (special conditions); and 3. Its main purpose must be for the encouragement of a game or sport. | Detailed Reasoning - Society, Association or Club: The Entity was incorporated as a non-proprietary company and has been conducting activities permissible under its objects. The requirement that it is a club is therefore satisfied. | Detailed Reasoning - Section 50-70 of the ITAA 1997: Item 9.1(c) in the table in section 50-45 of the ITAA 1997 requires consideration of the special conditions under section 50-70 of the ITAA 1997. | Detailed Reasoning - 50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2: 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. The Entity's Rules suggests that the Entity was established not for individual profit or gain. It contains clauses to prohibit the distributions of profit or gain to its members in the life of the operations and in the event of winding up. These clauses are considered to be suitable non-profit and winding up clauses. The Entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. It therefore satisfies paragraph (a) of 50-70 of the ITAA 1997. Under subsection 50-70(2) of the ITAA 1997 the Entity 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. The Entity states that they satisfy the requirements prescribed under subsection 50-70(2) of the ITAA 1997 by complying with all substantive requirements in their governing rules and applying income and assets for the purpose for which the entity was established. | Detailed Reasoning - Main Purpose of Encouraging a Sport or Game: To satisfy item 9.1(c) in section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the main purpose of the club. Encouragement of a game or sport Paragraph 11 of TR 97/22 Income tax: exempt sporting clubs states: 11. 'Encouragement' means 'stimulation by assistance', according to the Macquarie Dictionary. It is essential that the encouragement of a game or sport is the main or dominant purpose of a club. 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. The Notes on Clauses of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1990 state: The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support. It is accepted that the Entity conducts a large number of sporting and game activities, and since its amalgamation with the Sports Club, the Entity has been increasing its sporting facilities in the form of a sports course, bowling greens and tennis courts as well as providing donations and sponsorships to sporting and benevolent organisations. However, to be eligible for exemption under item 9.1(c) of section 50-45 of the ITAA 1997, the encouragement of a game or sport must be the Entity's main purpose. Main Purpose In determining main purpose, difficulties can arise when a club conducts other activities, particularly social and or commercial activities. There have been a number of Federal Court cases and Administrative Appeal Tribunal decisions that have considered the main purpose of a club that has a sporting purpose while also conducting extensive social activities. Hill J in St Marys Rugby League Club Limited v FT of T 97 ATC 4528; (1997) 36 ATR 281 ( St Marys ) said in relation to subparagraph 23(g)(iii) of the Income Tax Assessment Act 1936 : The parties agree that in the subsequent decision of Terranora Lakes Country Club Ltd v FC of T 93 ATC 4078 I correctly stated the law when I quoted Lockhart J in Cronulla- Sutherland at ATC 4225; FCR 95 where his Honour said: ``... 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 exception cannot apply because it would be impossible to say that one object is the main or predominant object.'' The question is thus one which goes to the character and nature of the applicant. That question of characterisation is to be determined having regard to the objects, purposes and activities of the taxpayer. As the present case illustrates, however, the fact that the law may be said to be settled does not remove the difficulties of the Commissioner or a club in applying the law to the facts of a particular case. The reason is simple enough. Many, if not all, sporting clubs commence in a small way and in circumstances where there can be no doubt as to the characterisation of the club as a sporting club. A consequence of the exemption of the income of that club from tax is often that the club grows and prospers. Particularly, it engages in activities which are designed to raise money to be used to further the sporting activities. Activities so undertaken may include poker machines, liquor sales, games and the like. There may, as I said in my judgment at first instance in Cronulla- Sutherland Leagues Club Ltd v FC of T 89 ATC 4936 at 4955, come a time when these other activities take on a life of their own. From being merely concomitant or incidental to the activities of sport, they become an end in themselves. That was the case in Cronulla- Sutherland . It had not happened to the Terranora Lakes Country Club. As each of those cases demonstrates and the present facts reinforce, the line to be drawn will be a difficult one. To determine on what side of that line the Club falls in the years of income in dispute, the years 1992 to 1995 inclusive, it is necessary to have regard, as Lockhart J observed in Cronulla-Sutherland at ATC 4225; FCR 95-96, to the constitution, activities, history and control of the body seeking the exemption. Difficulties in determining main purpose can arise where a club conducts other activities, particularly social or commercial activities. In this case the Entity provides social and entertainment activities including: restaurants, cafés, bars, function and conferences rooms and services, live music and poker machines. Paragraph 14 of TR 97/22 states that a club's main purpose can only be ascertained after objectively weighing all the club's features and lists the following features, including those features described in paragraphs 15 and 16. 15. Features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include: • the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51); • the sporting activities encouraged by the club are extensive (see paragraph 53); • the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); 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 (see paragraph 56). 16. Other features that are relevant but less persuasive include: • a high level of participation by members in the game or sport (see paragraph 57); • 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); • 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 • 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). Further, it is necessary to look to the relevant years of income to determine if each of the elements is satisfied. Paragraph 48 of TR 97/22 states: 48. Section 50-45 looks to the year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport. The definition of main purpose hinges on whether the gaming and bar facilities (social activities) are beyond a secondary purpose to the clubs sporting objectives. In St Marys case it was held that the gaming activities and bar profits totalling $1,494,203 for 1995 were outweighed by the sporting objectives. In St Marys case; "It is obvious from the evidence that persons are drawn to membership of the club because of their interest in rugby league", therefore the consideration in this case must be whether the members drawn to the Entity are for sport or social reasons. With regard to the visitors and members of the Entity, a majority do not pursue sporting activities. Of the total financial members, approximately 10% are sporting members. Given the demographic of sporting participants relative to the number of members it is evident that persons are drawn to membership of the Entity not for sport, but instead for social objectives. The Entity states that the bulk of visitors and a substantial portion of club members do not use the sporting facilities. The extensive revenue from the social activities demonstrates that a majority of members and visitors were involved in social pursuits. It is considered that the main purpose appears to be weighted to social rather than a purpose of encouraging sport. | Detailed Reasoning - Each of the highly persuasive features is examined in the context of the Entity.: Conducts sporting or game activities: As previously discussed, the Entity organises and conducts a number of sporting and game activities. The Entity also provides social and entertainment activities including: restaurants, cafés, bars, function and conferences rooms and services, live music and poker machines. It is therefore considered that the Entity conducts and provides both sporting and social activities and facilities. The sporting activities encouraged by the club are extensive: The Entity states that it encourages a variety of games and sports both directly and indirectly through its sporting venues. The Entity also states that its sports club promotes itself as one of the major sporting destinations in the area. They also offer the services of a Sports Academy to local high school students to improve their game. The Entity states that the focus on sport in the major inner sporting club is evidenced by its high level of organisation, significant memberships and affiliations and participation in major regional events. The range of sporting activities and games provide the sporting focus for two small towns. Based on above it is concluded that the sports and games encouraged by the Entity are extensive. However, as demonstrated earlier, the Entity also offers a large range of social, recreational and entertainment activities and facilities for members and their guests and it has been stated that a high volume of visitors and a substantial proportion of the Entity's members do not use the sporting facilities. This supports a conclusion that the Entity encourages sporting activities in addition to the social and recreational activities, however, it cannot be determined that the social aspects are beyond a secondary purpose. The club uses a significant proportion of its surplus funds in encouraging the game or sport: Paragraph 54 of TR 97/22 states that: 54. The club should use a significant proportion of its surplus funds in encouraging its game or sport. As noted by Lockhart J in Cronulla Sutherland at ATC 4226; ATR 313, '...the potential of [a club] to apply its surplus funds for purposes having nothing to do with the encouragement or promotion of [a sport or game] is a significant matter'. What is important is the way such funds are used and the activities that are financed by the club. The Entity has significant expenses of maintaining the sport and game facilities. There are no indications that a significant proportion of the Entity's cash reserves or retained earnings were spent or allocated to the encouragement of sports or games activities during the relevant income year. The Entity stated that they own land adjacent to the sports course that they state would allow for development in the future. This did not occur in the relevant income year and could be considered in the Entity's assessment of future years. The relevant financial year has seen investment in social aspects of the Entity, focused on redevelopment and redesign. In contrast, it is considered that the spending on sporting facilities has been for the purpose of maintenance. 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 56 of TR 97/22 states that: 56. The constitution and founding documents of an exempt organisation should be consistent with the aim of encouraging a game or sport. The club's history should also characterise it as one that was established, originally or after its foundation, by people with an interest in the game or sport and one that has in fact continued to encourage a game or sport: St Marys case ATC 4534, ATR 288; Case G53 (1956) 7 TBRD 301 at 309; Case T52 (1968) 18 TBRD 271 at 276; cf Case K24 78 ATC 216 at 238. See also Brookton Co-operative Society Limited v. FC of T 81 ATC 4346; (1981) 11 ATR 880; A & S Ruffy Pty Ltd v. FC of T (1958) 98 CLR 637; and paragraphs 47 and 48 above. The Entity's Memorandum provides for members and for members' guests a social and sporting Club with all the usual facilities of a club including residential and other accommodation liquid and other refreshment, libraries and provision for sporting musical educational activities and other social amenities. The Memorandum demonstrates establishment for the provision of both sports/games and social/recreational activities and amenities for its members. There is no emphasis on a sporting purpose above that of a social purpose within these documents. Therefore, it cannot be concluded that the main purpose is to encourage a sport or game. | Detailed Reasoning - Each of the relevant but less persuasive features listed in TR 97/22 are also examined below in the context of the Entity.: High level of participation by members in the game or sport Paragraph 57 of TR 97/22 states: 57. A high level of participation by members in the sport or game encouraged by the club would also support the club's main purpose being the encouragement of the game or sport: Case W114 89 ATC 891 at 898; AAT Case 5452 (1989) 20 ATR 4125 at 4133 (Grand United Port Macquarie West Bowling Club v. FC of T); St Marys case ATC 4534, ATR 288. Where members are chiefly involved in the club's social activities and not in the sporting activities, it may indicate that its main purpose is not the encouragement of the game or sport. In both the Cronulla Sutherland and Terranora cases , the entertainment activities of the clubs were similarly extensive but the courts characterised the activities differently in each case. The activities in Cronulla Sutherland were characterised as the provision of social amenities to members and guests, which led to the club not being exempt. The entertainment activities in Terranora were characterised as a means of financing the members' sporting activities, which led to the club being exempt. One factor behind the difference in characterisation was the high sporting participation of members in Terranora and the low participation in Cronulla Sutherland . Only the Entity's junior membership has a requirement that links membership to participation in sporting activities. The Entity states that the majority of its members live in other towns and visit the local community for holidays. Rather than sign in as visitors, as the membership fees are very low, it is more convenient to be a member than a visitor. Approximately 10% of members participated in sport during the relevant income year. As discussed above in regards to the main purpose, these numbers do not support a finding that a high level of membership participates in 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) Paragraph 58 of TR 97/22 states: 58. The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports a conclusion that it is established for the encouragement of the game or sport: Re Tweed Heads Bowls Club v. FC of T 92 ATC 2087 at 2100; AAT Case 8267 (1992) 24 ATR 1068; St Marys case ATC 4534, ATR 288. There are no requirements under the Entity's Memorandum for the board directors to be members of any of the sporting inner clubs, however, the Entity states that although it is not a requirement, a number of the current board directors are linked to either sports or bowls. 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 Paragraph 59 of TR 97/22 states: 59. 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. The voting rights in the Entity vest in all members. There is no requirement that voting rights vest only in members involved in encouraging the game or sport, whether by personal participation or by encouraging participation by others. Based on the facts, the majority of voting rights vest in members who do not participate in sport. 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 Paragraph 60 of TR 97/22 states: 60. An exempt club should promote itself to patrons and the public as one encouraging a game or sport, and its advertisements and publicity, including the organisation's annual report, should emphasise the game or sport it encourages. The Entity states that it promotes itself as a sporting club. The Entity has advertising in a number of different media formats. The Entity states this illustrates the heavy emphasis on sport. The information provided by the Entity is that the gambling, entertainment, dining and social activities are a means of attracting persons to the Entity, members and non-members alike. The Entity states that this allows the club to devote that money to the promotion of its sporting activities. The promotional activities that the Entity undertakes encourage the use of its sporting facilities however they also encourage the use of its accommodation, entertainment, dining and functions. Finally, in considering factors that help determine the purpose of a club paragraph 61 of TR 97/22 notes that: Other factors that may be supportive of a conclusion that a club's main purpose is to encourage a game or sport include: • the proximity of the club's social facilities to its sporting facilities; and • the decoration and fit out of the club so as to reflect its game or sporting nature, e.g., the display of trophies, honour rolls or boards, pictures or statues of outstanding sporting achievers, displays of sporting equipment, etc., along with the actual game or sporting facilities. All of the Entity's locations or operations include sporting activities, as well as being in close proximity to each other. Photographs of sporting competitors and life members are on display, along with honour boards and sporting trophies in the club's Clubhouse. | Detailed Reasoning - Conclusion: In consideration of the highly persuasive features it is determined: • the Entity undertakes extensive sports and games activities but also concurrently undertakes extensive social and recreational activities generating the majority its revenue in the 20XX year; • its objects and history evidencing dual social and sporting purposes rather than a main sporting purpose due to its substantial range of social activities and facilities which includes functions, gaming, bar facilities, coffee shops, dancing and musical festivals and regular entertainments; • there are no indications that a significant proportion of the Entity's surplus funds was spent on the encouragement of sports or games activities during the income year of 20XX; and • it cannot be concluded from the Entity's documents that the main purpose is to encourage a sport or game. In considering the less persuasive features it is determined: • there is evidence that the vast majority of members do not participate in sport; • the control of the Entity is with persons who have both social and sporting interests; and • there is no requirement for voting members to have any sporting association and the voting rights is not vested only with members involved in encouraging sport. After objectively weighing all the Entity's features including those features listed in TR 97/22 and the relevant case law it is concluded that in the relevant year of income the Entity's main purpose is not the encouragement of the relevant game or sport. It is considered that the provision of social facilities and activities is equal or greater to its purpose of the encouragement of a game or sport. Accordingly it follows that the Entity cannot be found to have a main purpose of the encouragement of a sport or game. Therefore, the Entity does not meet all the requirements of item 9.1(c) in section 50-45 of the ITAA 1997 and therefore is not entitled to income tax exemption under section 50-1 of the ITAA 1997.