Private ruling: Income tax exemption
Published: August 2013
Ruling period: Income year ending 30 June 2012 | Income year ending 30 June 2013 | Income year ending 30 June 2014 | Income year ending 30 June 2015
Date scheme commenced: June 2012

Ruling: Q1: Is the Company exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 9.1 in the table in section 50-45 of the ITAA 1997? | A1: Yes. | Q2: Is the Company exempt from income tax under section 50-1 of the ITAA 1997 prior to when its constitution was amended? | A2: No.

Relevant facts and circumstances: 1. The Company is a proprietary limited company incorporated under the Corporations Act 2001 (Cth). 2. The Company was established as a joint venture vehicle by agreement for the purpose of holding and exploiting the media rights granted to it by clubs for the encouragement and promotion of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997. 3. The Company underwent a restructure where the shareholders of the Company changed. 4. In the relevant year the Constitution of the Company was amended to include non-profit clauses and to prevent the payment of dividends or distribution of capital to shareholders. 5. Up to the relevant year even though the constitution provided for the payment of dividends to members no dividends or capital had been distributed to shareholders.

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 Company is exempt from taxation under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a society, association or club established for the encouragement of an activity specified under Item 9.1 in the table in section 50-45 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in sections 50-1 and 50-45 of the ITAA 1997 as follows: Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of the ITAA 1997. Item 9.1of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of one of the activities listed shall be exempt from income tax subject to the special conditions in section 50-70 of the ITAA 1997. The matters to be satisfied under section 50-45 of the ITAA 1997 are: &squf; the organisation is a society, association or club &squf; it is established for the encouragement of a specified activity &squf; it is not carried on for the profit or gain of its individual members, and &squf; the special conditions have been met. | Detailed Reasoning - Society, Association or club: The terms association and society are not defined and therefore take on their ordinary meaning. The Macquarie Dictionary defines 'association' as 'an organisation of people with a common purpose and having a formal structure.' 'Society' has an equivalent meaning ( Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 26 at 35). An association may be incorporated or unincorporated. The Company is: § an Australian proprietary limited company incorporated under the Corporations Act 2001 (Cth) , and § an organised body of members instituted for the purposes of its constitution. It is accepted that the Company is an association/society for the purposes of section 50-45 of the ITAA 1997. | Detailed Reasoning - Encouragement of animal racing: The main purpose of the society, association or club must be encouragement of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997. To determine an organisation's main purpose, consideration is given to its constituent documents, activities, use of funds and history. It is the purpose and character of the entity itself that is determinative, rather than the character of the controlling body or related exempt entities. Paragraph 16 of Taxation Ruling TR 2005/22 Income tax: companies controlled by exempt entities states: 16. It is not possible to merely attribute the characteristics and purposes of an exempt entity to a different company, or to simply 'look through' the company to the exempt entity, ignoring the characteristics and purposes of the company itself. This position is consistent with the decision of the High Court in Federal Commissioner of Taxation v. Word Investments Ltd (2008) 236 CLR 204; 2008 ATC 20-072; (2008) 70 ATR 225 ( Word Investments ). In Word Investments, the High Court held that Word Investments Limited was charitable because it had a sole charitable purpose itself, not because it had been established by and had links with a charitable entity. The use of a company's funds for exempt entities that encourage animal racing will not on its own cause it to meet this requirement. Paragraph 44 of TR 2005/22 explains: 44. For example in Cronulla Sutherland Leagues Club Ltd v. Federal Commissioner of Taxation the Leagues Club was not accepted as an exempt sporting club. The majority of the Federal Court held that the Leagues Club's main object or purpose was the provision of social amenities to its members, not the encouragement or promotion of rugby league football. This was despite the fact that without the funds it provided, the associated football club could not have continued to play in the New South Wales Rugby League competitions. To be exempt under this provision the encouragement of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997 must be the main purpose of the entity. Any other purpose of the organisation must be incidental, ancillary or secondary to encouragement of animal racing. Paragraph 42 and 43 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides guidance on how to determine an entity's main purpose. Paragraphs 42 and 43 state: 42. Where the other activities are merely ancillary or incidental, or secondary, to the encouragement of the game or sport we accept that the main purpose may be that encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 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.' 43. However, if the main purpose becomes the carrying out of those other activities, the club is not exempt. Nor is it exempt if it continues to be involved in the game or sport to a substantial degree but is equally involved with another purpose or purposes. As Lockhart J said at ATC 4225; ATR 312: 'But if it has two co-ordinate objects, one of which is outside the exemption, the exemption cannot apply because it would be impossible to say that one object is the main or predominant object.' The determination of an entity's main purpose in the relevant year of income is a matter of fact and degree. An entity 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. Paragraph 58 of TR 97/22 discusses further indicators of purpose: 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. TR 97/22 discusses the meaning of 'encouragement' as used in section 50-45 of the ITAA 1997. Paragraph 11 states the following: 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: &squf; forming, preparing and entering teams and competitors in competitions in the game or sport; &squf; co-ordinating activities; &squf; organising and conducting tournaments and the like; &squf; improving the abilities of participants; &squf; improving the standard of trainers and coaches; &squf; providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors; or &squf; encouraging increased and wider participation and improved performance; and can occur indirectly: &squf; through marketing; or &squf; by initiating or facilitating research and development. The Company was established for the purpose of holding and exploiting the media rights granted to it for the encouragement and promotion of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997 in Australia. The Company seeks to encourage an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997 by improving and exploiting media rights managed by the Company through various distribution channels and by increasing exposure of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997 to greater audiences. Such increase in exposure can be comparable to marketing which generates interest in an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997 and potentially increases participation in the sport. This purpose is accepted as indirect encouragement of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997. There is little contention that the activities of the Company result in the promotion and encouragement of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997, even if indirectly. However, its activities also promote the interests of its Shareholders. It therefore must be determined whether the Company is established for the promotion of the industry as a whole or for the purpose of promoting the interests of its individual shareholders, and if both, which is its main purpose. Though there is a purpose to promote the activities of the shareholders and act in their interests, the evidence indicates that the main purpose of the Company is to carry out its activities to promote and encourage the industry as a whole. There are a number of facts that point to this conclusion. Decisions regarding the operation of the Company are not made solely by the Shareholders. The Board of directors includes representatives from the principal authorities and regulators of the industry. Also, the activities of the Company promote the interests of entities that are not Shareholders. These factors support the contention that the Company is established for the main purpose of the encouragement of an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997. Any purpose to promote the activities of the shareholders is considered secondary to this main purpose. | Detailed Reasoning - Special conditions: Section 50-70 of the ITAA 1997 sets out the special conditions that need to be met by entities covered by item 9.1 in the table in section 50-45 of the ITAA 1997, as follows: 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. | Detailed Reasoning - Non-profit requirement: If an association is carried on for the profit or gain of its individual members, it will fail to be exempt from income tax under section 50-1 and 50-45 of the ITAA 1997. The Australian Taxation Office (ATO) publication Income tax guide for non profit organisations (QC 27150) available on the ATO's web site www.ato.gov.au states: We accept an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. These documents should contain acceptable clauses showing the organisation's non-profit character. …The organisation's actions must be consistent with this requirement. To meet the non-profit requirement firstly, an entity's constituent documents must display a non-profit character and secondly, the entity's actions must be consistent with this non-profit character. In determining the latter, it is necessary to distinguish a purpose of providing benefits to members from the incidental benefits which will often flow to members as a result of the activities with which they are involved. Organisations will not be exempt where they have a purpose to protect or promote the interests of members. The expression "not carried on for the purpose of profit or gain to its individual members" in relation to exemption pursuant to section 50-40 of the ITAA 1997 was considered in FC of T v Co-Operative Bulk Handling Ltd (2010 ATC 20-231) It was decided that benefits to members did not arise because they were members of the company but because they were members of the industry. At 112 it states: 112. While members do benefit from the activities of CBH, in its grain handling and storage activities, they do so to no greater extent than, and have no preference over, non-members who deal with the company, and in these circumstances such benefits do not accrue to them as "individual members". The Company's current Constitution prevents the distribution of income and profits to members during its operation, and upon winding up. The Constitution removes any rights to dividends or share capital from shares of the Company. The Company's constitution displays a non-profit character. As discussed above, the Company conducts its activities consistent with its non-profit character. Any benefits to members are incidental to its main purpose of encouraging animal racing and members benefit in their capacity as members of the industry and not in their capacity as members. We accept that the Company is not carried on for the purpose of profit or gain of its individual members. | Detailed Reasoning - Physical presence in Australia: An entity covered by item 9.1 in the table in section 50-45 of the ITAA 1997 will not be exempt unless it also has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. The Company was incorporated in Australia and operates in Australia. It pursues its purpose to encourage an activity specified in Item 9.1 in the table in section 50-45 of the ITAA 1997 in Australia by promoting the industry in Australia. It is accepted that the Company has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. The Company meets the special conditions of section 50-70 of the ITAA 1997. | Summary: The Company will not qualify for exemption from income tax prior to relevant year when its constitution was amended to include clauses evidencing its non profit character. | Detailed Reasoning - Detailed reasoning: As discussed above, in order to be exempt from income tax under section 50-1 of the ITAA 1997 and pursuant to section 50-45 of the ITAA 1997 the club, society or association must be a non-profit entity. An entity will be accepted as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people - both while it is operating and when it winds up. Where these clauses are included in governing documents by amendment they cannot be accepted as having retrospective effect even if the entity in practice has operated on a non-profit basis. In Repromed Pty Ltd v Lucas (2000) 76 SASR 575 at [42] to [43] and [35] to [36] Debelle J held that it is insufficient that in fact there has been no distribution of profits or assets among members. There must be a constraint on the distribution of profits and assets to members in the organisation's constitution. Prior to the relevant year, when the Constitution was amended by the insertion of a non-profit clause and a dissolution clause and the removal of clauses relating to dividends, the Constitution permitted the declaration of dividends to members. That is, before the relevant year, the Company was a proprietary limited company that could, even if it in fact did not, carry on its activities for the purpose of profit or gain. As such, it was not a non-profit entity and would not qualify for exemption from income tax under section 50-1 and 50-45 of the ITAA 1997.