Private ruling: Exemption from income tax as a not for profit sporting organisation
Date of advice: 10 May 2019
Published: July 2019
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Club a society, association or club established for the encouragement of a game or sport under item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The Club was founded in the late 1960s to provide sporting facilities for its members. The Club is active for five months of the year. Competition is conducted over these five months. The facilities are not used by anyone at other times of the year. The Club organises its own competitions during the day and also evenings. The Club has a website that advertises its competitions. The Club does not compete against other clubs, the constitution does allow such games to take place. In recent years, with numbers declining, non-members may play with members to maximise the number of sides competing. The Constitution relevantly states its objects as: · The Club is established solely for the following purposes: · Conduct, encourage, promote, advance and administer Sport A throughout its local area; · Act, at all times, on behalf of and in the interest of the Members and Sport A; · Advance the operations and activities of the club throughout the local area; · Maintain and conduct a sporting and social Club and to build, maintain or otherwise provide facilities for the use and recreation of the Members and others; · Raise and borrow any monies, and to buy, sell or otherwise deal with any real or personal property, required for the purposes of the Club upon such terms and conditions and/or on such securities as may be determined; · Apply for, hold and renew liquor licences; · Amalgamate with organisations with similar objects; · Have regard to the public interest in its operations; and · Undertake and or do all such things or activities which are necessary, incidental or conducive to the advancement of these purposes. All members of the Club are required to be a member of a similar club affiliated with the governing body when they join. The Constitution establishes the number and categories of members. The current membership of the club is significantly less than a few years ago. The Club is managed by a Board of Directors. Only Ordinary members and Life members who have been such members for a period of 5 or more continuous years are eligible to be directors. The Board of Directors comprises a President, two Vice-Presidents, a Secretary, a Treasurer and four other members. The Club Constitution states: · The income and property of the Club shall be applied solely towards the promotion of the purposes of the Club as set out in this constitution. · No portion of the income or property of the Club shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise to any Member but this shall not preclude payment to a Member in good faith for expenses incurred or services rendered. The Constitution of the Club states: · The Club may be wound up voluntarily by special resolution. · In the event of the Club being wound up, the liability of the Member shall be limited to any outstanding monies due and payable to the Club, including the amount of the Annual Subscription payable in respect of the current Financial Year. No other amount shall be payable by the Member. · If upon winding up or dissolution of the club there remains, after satisfaction of all its debts and liabilities any property, the same shall not be paid to or distributed amongst its Members, but shall be given or transferred to some other organisation having purposes similar to the purposes of the and which prohibits the distribution of its or their income and property among its or their members and which is also not carried on for the profit or gain to its members. Such body or bodies to be determined by the members at or before the time of the dissolution and in default thereof by such judge of the Supreme Court of Victoria as may have or acquired jurisdiction in the matter. The Club rents out an office at the rear of the premises. The Club earns income from the placement of a mobile telephone antenna tower on the roof of the building. The Club has a small bar facility open for competitors and very few guests on competition days, manned by volunteers. The Club charges membership fees and playing session fees. There are no employees.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-45 table item 9.1(c) | Income Tax Assessment Act 1997 section 50-70

Reasons for decision: Summary: The Club is exempt from income tax as a club established for the encouragement of a game or sport as described in item 9.1(c) of section 50-45 of the ITAA 1997 because it is a club whose main purpose is the encouragement of a game or sport and it satisfies the special condition. Detailed reasoning Section 50-1 of the ITAA 1997 exempts from income tax a society, association or club established for the encouragement of a game or sport described in item 9.1(c) of the table in section 50-45 of the ITAA 1997. A sporting club is exempt from income tax if: · it is a society, association or club, · it is established for the encouragement of a game or sport, · that encouragement is the club's main purpose, and · it satisfies the special condition | Detailed Reasoning - Society, association or club: The entity must be a 'society, association or club'. This term is not defined in the ITAA 1997 and therefore is 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. The members of the Club are bound by its constitution including its objects which state that the purpose of the Club is to promote and carry on sport A in its' local area. The members of the Club voluntarily associate together for the common purpose and interest. The Club is a club. | Detailed Reasoning - It is established for the encouragement of a game or sport: Taxation Ruling 97/22 Income tax: exempt sporting clubs (TR 97/22) describes the circumstances under which a sporting club is regarded as being established for the encouragement of a game or sport. Paragraph 11 of TR 97/22 provides guidance on the meaning of 'encouragement'. 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 ability 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 Club conducts activities directly related to sport by organising, hosting and participating in sporting events within the club. The Club is carried on for the encouragement of a game or sport. | Detailed Reasoning - That encouragement must be the club's main purpose: Paragraph 13 of TR 97/22 provides: 13. To be exempt, the main purpose of the club must be the encouragement of a game or sport. Paragraph 15 of TR 97/22 lists the following features as being highly persuasive in supporting a conclusion that the main purpose of the club is to encourage 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 portion of its surplus funds in encouraging the game or sport; and · The club's constituent documents emphasise the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents. Paragraph 16 of TR 97/22 specifies other factors that are relevant but less persuasive to determining purpose, including: · A high level of participation by members in the games or sport; · whether members of the committee or the persons controlling the direction of the club are predominantly participants in or concerned with the encouragement of the game or sport; · whether voting rights vest in those persons concerned with participating in or 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 of encouraging the game or sport. Paragraph 41 of TR 97/22 explains that difficulties can arise in determining the club's main purpose where the club conducts other activities, particularly social or commercial activities. TR 97/22 elaborates at paragraph 42 stating that where the club conducts other activities, particularly social or commercial activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may still be that of encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 ( Cronulla Sutherland case ) said: 'It [the club] 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.' This view was also elaborated on in Terranora Lakes Country Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294: 'Hill J concluded that: ....while social activities ....were very extensive and could clearly be seen as an end or perhaps as ends in themselves, those activities were...pursued as a means of financing the extensive sporting activities conducted by the club.' (at ATC 4086-4087;ATR 304). Although the sporting activities of the club cannot be described as extensive, the Club displays most of the features listed in paragraph 15 of TR 97/22 as being highly persuasive of supporting its contention that the encouragement of sports is the club's main or dominant purpose. The club conducts activities in the relevant year that are directly related to the game or sport. Although the Club does undertake some social and commercial activities, its constituent documents emphasise the Club's main purpose is to encourage a game or sport and the Club operates in accordance with those documents Paragraph 54 of TR 97/22 explains one indicator of purpose is when the club uses 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 Club's annual financial reports show income from bar sales, rink fees and functions and rents received. The Club used a portion of this income to pay for trophies and prizes. When looking at the less persuasive features, we note that to be a member of the Club you must first be a member of a similar Club which may be taken to indicate a high level of participation by members in the sport and also that the Club has a website on which it promotes itself as encouraging the sport. We are satisfied that the Club's social and commercial activities are pursued as a means of financing the sporting activities conducted by the Club and that its main purpose is the encouragement of a game or sport. Special conditions A club will satisfy the special condition in section 50-70 of the ITAA 1997 if it: · 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, · complies with all the substantive requirements in its governing rules, and · applies its income and assets solely for the purpose for which it is established. The Club satisfies the special condition as explained below. | Detailed Reasoning - Not carried on for the profit or gain of its individual members: Paragraphs 9 and 10 of TR 97/22 explain the non-profit requirement. 9. A club must not be carried on for the purposes of profit or gain to its individual members 10. A club's Memorandum and/or Articles of Association or other constituent documents should contain a prohibition against a distribution of profits and assets among members while the club is functional and on its winding up. Alternatively, a club satisfies the test if the law governing its activities prevents the club from making distributions to members. The club's activities should conform to the prohibition. Paragraph 22 of TR 97/22 explains that we accept a club as being non-profit where, for example, the Constitution of the club includes a non-profit clause and dissolution clause. The constituent document of the Club is its Constitution. Clauses 29(a) and 29(b) of the Constitution provides that the income and property of the club must be applied solely to its objects and not distributed to members except as payment in good faith for services rendered, etc. Clause 34(b) of the Constitution prohibits distribution of the Club's income and property to its members upon dissolution. The income and property shall be transferred to similar institutions having similar objects to the Club. The Club has met the non-profit requirement. | Detailed Reasoning - Physical presence in Australia: The Club is a resident of and is located in Australia. The Club pursues its objectives and carries on its activities in Australia. The Club has a physical presence in Australia and to that extent pursues its objectives and incurs its expenditure in Australia. | Detailed Reasoning - Complies with all the substantive requirements in its governing rules: The supporting evidence provided shows that the Club complies with all the substantive requirements in its governing rules. | Detailed Reasoning - Applies its income and assets solely for the purpose for which it is established: The Club applies its income and assets solely for the purpose for which it is established