Private ruling: Assessable Income
Date of advice: 12 May 2017
Published: January 2018
Ruling period: 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the ordinary and statutory income of Event Entity be exempt from income tax under sections 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis the Event Entity is a society, association or club established for the encouragement of sport pursuant to sections 50-45 item 9(c) and 50-70 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The entity has been established in Australia as a company limited by guarantee. The head office is located in Australia. The entity is being established as the management company for a specific sporting event to be held in Australia. The expenses are expected to be incurred in Australia. Upon winding up, all surplus funds will be distributed to an associated company (Company A) as specified in the company’s constitution. Company A is an Australian tax exempt company for the promotion of sport. The entity will derive income from the event and various sources.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 199 7 section 50-45 | Income Tax Assessment Act 1997 section 50-70

Reasons for decision: Summary: The Event entity is considered to be a non-profit association established for the encouragement of sport. It has a physical presence in Australia and pursues its objectives and incurs its expenditure principally in Australia. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ordinary income and statutory income of entities covered by subdivision 50-A of the ITAA 1997 is exempt from income tax. If a society, association or club established for the encouragement of a game or sport falls under item 9.1 of the table in section 50-45 of the ITAA 1997, its income is exempt from income tax. The exemption is subject to the special conditions outlined in section 50-70 of the ITAA 1997. The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it: (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 deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; 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 a resident. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or a club is regarded as being established for the encouragement of sport. | Detailed Reasoning - Non-profit society, club or association: An ‘association’ is defined in the Macquarie Dictionary as: “an organisation of people with a common purpose and having a formal structure”. The Event Entity, being a company limited by guarantee formed with a number of members for a common purpose, is considered to be an association. The association must not be carried on for the purposes of profit or gain to its individual members. The governing document of the association should contain a prohibition against a distribution of profits and assets among members while the association is functional and on winding up. The constitution of the Event Entity contains provisions that prevent it from providing benefits to members and stipulate that surplus assets are to go to Company A upon winding up The Event Entities non-profit rule is considered acceptable in that members are not entitled to benefits other than bona fide compensation for services rendered or expenses incurred on behalf of the entity. | Detailed Reasoning - Established for the encouragement of a game or sport: To be eligible for the exemption the association’s main purpose must be to encourage a game or sport. There is no special definition of what constitutes a game or sport. Accordingly the words take on their ordinary meaning. It is essential that the encouragement of a game or sport is the main or dominant purpose of an association. ‘Encouragement’ means ‘stimulation by assistance’ according to the Macquarie Dictionary. Taxation Ruling TR 97/22 indicates that a highly persuasive feature that supports the conclusion that an association has a main purpose of encouraging a game or sport is if it conducts activities to bring into existence, organises and runs competitions or tournaments. According to a rule of the Event Entities constitution the purpose of the Event Entity is the promotion and encouragement sport in Australia and internationally. The Event Entity is established to organise, stage and host the Event. It is the vehicle by which Company A will run the competition with the ultimate aim of promoting and encouraging sport in Australia and internationally. Given that the Event is a competition organised for the promotion of sport and given the scale of the Event, it is accepted that the main purpose of the Event Entity is the encouragement of the sport. | Detailed Reasoning - Company Limited by Guarantee: A company limited by guarantee is an incorporated legal structure being a type of company permitted under Australian legislation, under section 112 Corporations Act (2001 ) Cth. The Corporations Act allows charitable or not-for-profit organisations to register as a public company that is limited by guarantee. Registration of a company limited by guarantee creates a legal entity separate from its members, and the company can hold property and can sue and be sued in the same way as other companies in Australian law. Limited by guarantee means the liability of the company’s members is limited to the amount the members undertake to contribute to the property of the company if it is wound up. The members agree in writing in the company’s constitution to pay a nominal amount to the property of the company. This amount is known as a guarantee. If the company is wound up, the liability of the members is limited to the nominal amount that they have guaranteed (as set out in section 517 of the Corporations Act). ASIC is the regulator of such companies. The Corporations Act sets out obligations for officers, members, in relation to record keeping and winding up among other matters appropriate for company regulation. An overview of the obligations of a company limited by guarantee is set out in section 285A of the Corporations Act. The Event Entity is incorporated to run the Event, employ staff, enter into various contracts and pays all costs, including Host Costs and costs covered by the Event Budget. | Detailed Reasoning - Special conditions: For a sporting organisation to be exempt from income tax, it must pass one of the following tests from section 50-70 of the ITAA 1997: ● physical presence in Australia ● deductible gift recipient test; or ● prescribed by law test. The Event Entity is not a deductible gift recipient, nor seeking to be prescribed by law so it must meet the physical presence in Australia test. The physical presence in Australia test has two elements. One is that the organisation has a physical presence in Australia. The second is that it must pursue its objectives and incur its expenditure principally in Australia. The Event Entity is established in Australia and its head office is in Australia so it is accepted that it has a physical presence in Australia. All of the games played as part of the competition will be held in Australia and as such the majority of the expenses are expected to be incurred in Australia. 100% of any surplus generated will be provided to Company A to promote sport in Australia. On the basis of this information it is accepted that the Event Entity will pursue its objectives and incur its expenditure principally in Australia.