Private ruling: Income tax exempt - encouragement of game or sport
Date of advice: 18 August 2023
Published: 3 October 2023
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XY | Year ended 30 June 20XZ
Date scheme commenced: 20XX

Ruling: Q1: Is the Club an entity covered by item 9.1 of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The Club is in Australia and is registered with the Australian Securities and Investment Commission as a company limited by guarantee. The Club has provided its Constitution which includes its objects, non-profit clause, and wind-up clause. The Club has various categories of membership, including sport specific membership. The Constitution outlines the entitlements of the membership categories. The Club has X number of members, a portion of whom are sport specific members. The Club's Board, which consists of X directors, is responsible for the management of the business and affairs of the Club and is comprised mainly of sport specific members who take an active intertest in the sports supported by the Club. There is a committee comprised of sport specific members to administer the sport and it is responsible for promoting the sport. The Club provides sporting facilities along with other recreational and accommodation facilities. The Club has provided information about its various sporting and other activities. It also provides support to local sporting teams. The Club has provided information in relation to income and expenses, and about the use of surplus funds.

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

Reasons for decision: Summary: All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997)unless otherwise stated. The Club is an entity covered by item 9.1 of the table in section 50-45 so that its ordinary and statutory income is exempt from income tax under section 50-1. | Detailed Reasoning - Detailed reasoning: The Club's ordinary and statutory income is exempt from income tax in accordance with section 50-1 if: • it is a society, association, or club established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45, and • it meets the special conditions in sections 50-47 and 50-70. | Detailed Reasoning - Section 50-45: The phrase 'society, association or club' refers to a voluntary organisation of people associated together for a common or shared purpose. This description is consistent with the Macquarie Dictionary definition of each word: • Society '... an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic or other purposes' • Association '... an organisation of people with a common purpose and having a formal structure'. • Club '... a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'. A society, association or club may be constituted as an unincorporated association or be formally recognised by incorporation. The Club is a company limited by guarantee, has X members, and is managed by a Board. The Constitution describes it objectives. Paragraphs 30 and 31 in Taxation Ruling TR 2022/2 Income tax: the games and sports exemption (TR 2022/2) state: For a club to be established for the encouragement of a game or sport, the main purpose of the club in the relevant income year must be the encouragement of a game or sport. '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. Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of a club to determine its main purpose. Paragraphs 34 and 35 in TR 2022/2 explain that: A club that has both sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is: • merely ancillary and incidental to its sporting purpose (that is, a purpose that is related to carrying out its sporting purpose), or • secondary to its sporting purpose (that is, a purpose that is independent to, but less important or less significant than, the sporting purpose). A club can have both sporting and independent non-sporting purposes and still qualify for the games and sports exemption. For example, a club that provides secondary non-sporting related services or facilities to members will not automatically be disqualified for the games and sports exemption. Paragraph 37 of TR 2022/2 notes that: The following factors have been identified by courts and tribunals as relevant when considering purpose: • 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 • the provision of financial and in-kind support for encouraging the game or sport. In considering the Club's activities and purpose, paragraph 43 of TR 2022/2 explains that: Direct or indirect activities that indicate the encouragement of a game or sport can 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 listed in this paragraph by making a financial or in-kind contribution to an organisation that performs them. Majority of Board members are sport specific members and take an active intertest in the sports supported by the Club. A Committee comprised of sport specific members has responsibility for administering the sport and is responsible for promoting the sport by way of making all people feel welcome. Based on the facts, the Club has numerous activities to encourage sport. In relation to the utilisation of surpluses paragraph 45 from TR 2022/2 notes that: Using surpluses from commercial activities to support the conduct of sporting activities is a factor that would support a conclusion that the main purpose of the club is encouraging a game or sport. However, where a club uses surpluses to undertake commercial activities which provide services to members, the extent of those activities, which do not achieve a sporting end, may result in the club's main purpose not being about encouraging a game or sport. It is necessary to carefully consider all relevant factors when determining the main purpose of a club. Based on the facts, the Club uses its surpluses towards sporting activities and facilities. We consider that the Club is established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45 based on its objects and activities. | Detailed Reasoning - Section 50-47: 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). 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. | Detailed Reasoning - Section 50-70: (1) 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; and the entity satisfies the conditions in subsection (2). (2) 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 Club satisfies the requirements of subsection 50-70(1) as its Constitution prohibits it from distributing income to its members and it is in Australia. Paragraphs 22 and 23 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt note that: The income and assets condition requires an entity to 'apply its income and assets solely for the purpose for which the entity is established'. Two questions must be considered to determine whether an entity satisfies the income and assets condition: • what is the 'purpose for which the entity is established', and • has the entity applied its income and assets solely for the purpose for which the entity is established? The Club has been encouraging sport by providing sporting facilities and activities and assisting local sporting teams. It has provided a sporting and social Club with all the usual facilities of a Club for members and guests. The Club has used its income and assets for the purposes of undertaking the Club's activities, both sporting and social. It is considered that subsection 50-70(2) is satisfied. As the Club has been established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45, and it meets the special conditions in section 50-47 and 50-70, its ordinary and statutory income is exempt from income tax in accordance with section 50.