Private ruling: Income tax exemption
Date of advice: 19 May 2021
Published: August 2021

Ruling: Q1: Will the proposed entity be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association or club established for the encouragement of a game or sport? | A1: Yes Relevant fact and circumstances It is proposed that the Entity will be incorporated as a company limited by guarantee. Upon registration, the Entity will adopt as its constitution (the proposed Constitution) the document in Attachment A to the letter, dated 15 April 20XX, addressed to the Australian Taxation Office. The proposed Constitution contains a non-profit clause, clause 8.1, preventing the distribution of profits or assets directly or indirectly to members whilst the Entity is functional. The proposed Constitution contains a winding up clause, clause 69.1, preventing the distribution of assets to members on winding up. The objects of the Entity are specified in clause 6.1 of the proposed Constitution. The objects include supporting the growth and development of sport: by providing direct and indirect financial support to the activities of the Club and supporting identified male and female players, officials and supporters participating in the sport. The Entity will be located, and carry on its activities, in Australia. Detailed reasoning A non-profit society, association, or club established for the encouragement of a game or sport under item 9.1(c) of section 50-45 of the ITAA 1997 is exempt from income tax pursuant to section 50-1 of the ITAA 1997. The exemption from income tax is subject to the entity meeting the special conditions in sections 50-47 and 50-70 of the ITAA 1997. Therefore, to be exempt from income tax the Entity must meet all the following requirements: • be a society, association or club; • be established for the encouragement of a game or sport; • not be carried on for the gain or benefit of its individual members - (subsection 50-70(1) of the ITAA 1997); • have a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia - (paragraph 50-70(1)(a)); • comply with all the substantive requirements in its governing rules (paragraph 50-70(2)(a)); • apply its income and assets solely for the purpose for which the entity is established (paragraph 50-70(2)(b)); and • be registered under the Australian Charities and Not-for-profits Commission Act 2012 unless it is not an ACNC type of entity (section 50-47). A Society, association or club The terms, 'society, association or club' in item 9.1 of section 50-45 are not defined in the income taxation legislation and therefore take on their ordinary meaning. The Macquarie Dictionary Online defines an association as, 'an organisation of people with a common purpose and having a formal structure.' The Entity will be incorporated as a not for profit public company limited by guarantee under the Corporations Act 2001 . The Entity will have a constitution which, along with the Corporations Act 2001 , provides the formal structure and purpose of the company. Once incorporated, the Entity will meet the definition of an association. Established for the encouragement of a game or sport To be exempt from income tax under section 50-1 of the ITAA 1997 an entity covered by item 9.1(c) of section 50-45 must be established for the encouragement of a game or sport. There is no definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997. Hence, the words should be given their ordinary meaning. Paragraph 38 of Taxation Ruling TR 97/22 Income Tax: exempt sporting clubs (TR 97/22) identifies games played with a ball or projectile meet the definition of a sport. The sport therefore meets the definition of a sport for the purposes of section 50-45 of the ITAA 1997. Taxation ruling TR 97/22 makes it clear that it is essential that the encouragement of a game or sport is the main, or dominant, purpose of the entity (paragraphs 41-46). The encouragement of the game or sport can occur either directly or indirectly. The Object and purposes specified in clause 6 of the proposed Constitution demonstrates that the main purpose of the Entity will be the direct and indirect funding of the activities of the Club. The Entity will encourage the sport through funding: • the formation, preparation and entry of teams in the sport; • the improvement of the abilities of players, trainers and coaches; and • facilities provided for the playing of the sport for the use of the Club. The Entity satisfies the requirement that it is established for the encouragement of a game or sport. Not Carried on for the gain or benefit of its individual members Section 50-45 of the ITAA 1997 requires the association not be carried on for the purpose of profit or gain of its individual members. Paragraph 22 of TR 97/22 states that, 'We accept a club as being non-profit where, by operation of law (for example, a statute governing a club's activities) or by its constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding up.' Clause 8.1 of the Entity's proposed Constitution prevents the distribution of the income or assets directly or indirectly to its members. The proposed Constitution also contains a dissolution clause, clause 68, which prevents any surplus assets being distributed to members, or former members. Therefore, the Entity satisfies the requirement not to be carried on for the gain or benefit of its individual members. Have a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. An entity which is exempt from income tax under section 50-1 of the ITAA 1997 satisfies the condition in subsection 50-70(1) if it has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. Applying the facts, as the entity will be located and carry on its activities in Australia, the Entity satisfies the condition in subsection 50-70(1). Comply with all the substantive requirements in its governing rules. Paragraph 50-70(2)(a) of the ITAA 1997 requires that, in order to be exempt from income tax under section 50-1, an entity must comply with all the substantive requirements in its governing rules. As the Entity is not yet incorporated, the decision in this ruling is based on the assumption that the Entity will comply with all the substantive requirements in its governing rules. On the basis of this assumption, the Entity satisfies the condition in subsection 50-70(2) of the ITAA 1997. The condition in paragraph 50(2)(a) is an ongoing requirement, and to continue to be exempt from income tax under section 50-1 of the ITAA 1997 the entity must continue to comply with all the substantive requirements in its governing rules. Apply its income and assets solely for the purpose for which the entity is established In order to be exempt from income tax under section 50-1 of the ITAA 1997, paragraph 50-70(2)(b) of the ITAA 1997 requires an entity to apply its income and assets solely for the purpose for which the entity is established. As the Entity is not yet incorporated and is yet to gain or produce income or acquire any assets, the decision in this ruling is based on the assumption that the Entity will apply its income and assets solely for the purpose for which the Entity is established. The condition in paragraph 50(2)(b) is an ongoing requirement, and to continue to be exempt from income tax under section 50-1 of the ITAA 1997 the entity must apply its income and assets solely for the purpose for which the Entity is established on a continuing basis. Be registered under the Australian Charities and Not-for-profits Commission Act 2012 unless it is not an ACNC type of entity. Section 50-47 of the ITAA 1997 requires that, to be exempt from income tax under section 50-1 of the ITAA 1997, an entity which is an ACNC type of entity must be registered under the Australian Charities and Not-for-profits Commission Act 2012 ('ACNC Act'). Pursuant to subsections 995-1(1) of the ITAA 1997 and 25-5(5) of the ACNC Act, an 'ACNC type of entity' is a 'charity', as defined in section 5 of the Charities Act 2013 (Charities Act). Section 5 of the Charities Actdefines a charity as, an entity: a) that is a not-for-profit entity; and b) all of the purposes of which are: i. charitable purposes that are for the public benefit; or ii. purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and c) none of the purposes of which are disqualifying purposes; and d) that is not an individual, a political party or a government entity. A list of charitable purposes is provided in section 12 of the Charities Act. The encouragement of a game or sport is not listed as a charitable purpose in section 12. Information on the Australian Charities and Not-for-profits Commission internet site confirms that generally sporting clubs or associations do not meet the legal meaning of charity. It is concluded that the entity is not an ACNC type of entity and is therefore not required to be registered with the ACNC. Conclusion The Entity, as proposed, will meet the requirements for income tax exemption as set out in item 9.1(c) of section 50-45 of the ITAA 1997 when incorporated. The Entity will therefore be exempt from income tax under section 50-1 of the ITAA 1997.