Private ruling: Income Tax Exemption
Published: September 2011
Ruling period: Year ending 30 June 2012
Date scheme commenced: 29 July 2011

Ruling: Q1: Is the ordinary and statutory income of the trust exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that the trust is established purely for the encouragement of a game or sport pursuant to item 9.1(c) in section 50-45 of the ITAA1997? | A2: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. The trust has the object of promoting a sport. There are currently X trustees. 2. The trust fund of the Trust consists of cash only. It does not include any real property. 3. The trust is constituted by a trust deed. 4. The proposed course of action is that in order to improve the administration of the Trust the current trustees will: (a) appoint a ("New Trustee") as a trustee of the Trust and simultaneously retire as trustees; and (b) simultaneously, vary the Trust Deed to give effect to the change of trustees above. 5. A draft Deed of Variation and Retirement and Appointment containing a copy of the Trust Deed has been provided. 6. The current trustees do no intend to proceed if there are any adverse consequences to the proposed course of action in relation to the matters referred to in the questions and issues. 7. A clause prohibits the trustees of the Trust from varying the terms of the Trust Deed unless the variation has been approved by the Commissioner of Taxation as not affecting the tax status of the Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-45.

Reasons for decision: Summary: The trust is currently not exempt from income tax pursuant to section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport under item 9.1(c) of s50-45. The proposed new trustee could meet the requirements be exempt under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 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 ITAA 1997 is exempt from income tax pursuant to section 50-1 of the item in ITAA 1997. | Detailed Reasoning - Society, association or club: The term society, association or club is defined in ITAA 1997. The term is therefore construed according to its ordinary meaning. This legislation is explained in Taxation Ruling TR 97/22: exempt sporting clubs . The ruling gives the definition of encouragement which can occur directly by: · the teams in competitions · coordinating activities · organising and conducting tournaments · improving the abilities of participants · improving the standard of trainers and coaches. The trust is concerned with sport. In order for the trust to be exempt under section 50-1 of the ITAA 1997 it must be a society, association or club established for the encouragement of sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. The funds earned by the trust will be applied in accordance with the purpose as stated in a clause in the Deed entered into in respect of the Foundation. This clause states the purposes and objectives of the Foundation are: The raising and provision of financial support for the benefit of … development projects and programs …as considered by the Trustee to be worthy of and requiring such support, projects and programs as aforesaid will be limited to the following: (i) … ADMINISTRATION Support of a professional management structure … directed to: A. general administration of the sport B. the raising of funds for the development of the game C. development of new clubs (ii) JUNIOR DEVLEOPMENT A. to provide funding and organisation assistance aimed at enabling … participate in the sport of … or its derivatives. B. to undertake special clinics, workshops, coaching visits, and competitions for junior …players. (iii) PUBLICITY/PUBLIC RELATIONS/LOBBYING A. financially assist in the development and support of services available to clubs, associations and … organisations wishing to publicise new projects, the conduct of special events, the ways and means of attracting sponsorship, gaining publicity and solving planning problems affecting clubs. B. to financially aid in the conduct of community awareness campaigns in suburban and country centres …designed to encourage local authorities support of the … clubs. This indicates that the Foundation is not carried on for specific purposes. It is a mere trust that holds property in trust for another entity. In order for the trust to be accepted as a sports club, there must be an association of people. The word, association is not defined in the taxation legislation. The Tax Office considered the meaning of the term "association" in Taxation Determination TD 95/56 fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an association for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 ? The Shorter Oxford English Dictionary defines the term "association" to be "a body of persons associated for a common purpose; the organisation formed to effect their purpose". The Macquarie Dictionary defines "association" as being "an organisation of people with a common purpose and having a formal structure". The Concise Oxford Dictionary defines association as: organised body of persons. 'Society' has an equivalent meaning (see Pro-campo case below ). The Macquarie dictionary defines society as: an organisation of persons associated together for particular purposes or a body of persons associated by their calling, interests. All definitions require that an association must have formality and structure. For the trust to qualify as an association, the trustees as defined in the terms of the trust deed must be brought together as an association established for the purpose of the encouragement of sport and not merely connected by having a common undertaking through an obligation to administer property as fund managers. In the Supreme Court of New South Wales case of Pro-Campo Ltd v Commissioner of Land Tax (NSW) (1981) 81 ATC 4270; 12 ATR 26 ( Pro-campo case) Lee J said: In Theosophical Foundation Pty Ltd v. Comr of Land Tax (NSW) [1966] 67 SR (NSW) 70 it was held that a limited company could be a society within the meaning of the expression "religious society" in s 10(1)(e) of the Act. In that case Sugerman JA stated at 82: A society, in the relevant sense, is 'a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc: an association'. ( Oxford English Dictionary , 'Society' III 8) (cf the shorter description in Else-Mitchell, Challinor and Greenwood Land Tax Practice 36-37.) A society as thus described, in which the common element pertains to areas concerned with religion, may aptly be described as a religious society." … The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects.. There no doubt can be instances when a company would have so few members that it could not fairly be described as a society or association, let alone a club. For it is the fact that those, who make up the membership of the company, have a common interest in the objects expressed in the Memorandum, and have associated themselves with each other for the purpose of achieving those objects that brings about the situation that a society or association comes into existence. These references indicate that a society or association is a number of persons who come together for common purposes. On the other hand, a trust is merely a legal obligation whereby the trust property is being held by a person for another person. A trust has no members and cannot permit anyone to join and leave it at will. In Commr of Land Tax (NSW) v Joyce (1974) 48 ALJR 432 the issue was whether land was owned by an institution carried on solely for charitable purposes. The owners were four trustees who were to hold the land for charitable purposes, preferably as a meeting place for Christians. The trustees were members of the Christian sect known as the Brethren and the land and halls on it were used for religious purposes of the Brethren. All members of the High Court held that the trustees were not an institution. Stephen J, with whom Gibbs and Mason JJ agreed, said at 436: The trustees' only function is the management of the trust property consistently with the trust deed and with the wish it expresses that the trust property should primarily be devoted to providing a meeting place for Christians. The performance of this function cannot, in my view, confer upon these four trustees the quality of an 'institution', however widely that term may be construed. That function involved ordinary administrative operations only: They do meet from time to time, make decisions and keep minutes of their proceedings but these proceedings relate exclusively to the management of the trust property and not to the general affairs of the Brethren. They have no standing in relation to the religious practices of any congregation and control neither the general funds of the Brethren in New South Wales or in Sydney nor even those of the Ashfield congregation... The common purpose of the four trustees in the above case amounted to no more than could be expected of any trustees with an obligation to administer property in accordance with the terms of a trust. There is a clear distinction between their obligations of being mere trustees' to that of being an institution. Where trustees are connected in their common undertaking solely by their trust obligation to administer property, they will not constitute an association. However, the following cases show that trustees can come together to carry out trust obligations as an association or society. In Manor Foundation Ltd v Commr of Land Tax (NSW) (1983) 14 ATR 676 the company was formed to hold as trustee a house and land (the Manor) and, as trustee, to conduct on the land a spiritual centre and educational Community based on Theosophical ideals. Membership of the company was on application subject to the approval of the 'Outer Head for the time being of the Esoteric School of Theosophy of India'. At issue was whether the company was exempt from land tax on the bases that it was land owned by or in trust for a religious society and held solely for religious, charitable or educational purposes, or that it was a building owned and solely occupied by a society, club or association not carried on for pecuniary profit. Yeldham J held at 684 that: In my view the plaintiff was and is at the present time a religious society (using that word in the charitable sense of being concerned with the advancement and promotion of theosophy) because it is not merely a trustee for the Community or its members but has active duties under the deed and in fact manages and conducts the centre and the educational community at the Manor. ... The plaintiff is not merely a trustee for the Community or its members but has active duties to perform under the deed in connection with the conduct of the Centre and the educational Community . The plaintiff's membership is entirely composed of members of the Esoteric School, some of whom reside in the Community. In Manor Foundation , although the group of people were connected in a common undertaking which involved performing actions as trustees, they were accepted to jointly be an association because their actions were more than merely administering property in terms of the trust. What bound them together was not merely their duty as trustees. Based on the decision in Manor Foundation , a trustee that is more than merely performing actions of trustees i.e. administering of property in terms of the trust, can be an association if actively involved in the operation of an entity. In this case the Trustees merely manage property of the trust as required of them under the provisions of the Deed of Trust. The duties of the five current trustees are not similar to those described in the Manor Foundation case and in this sense the trust does not meet the requirements of being an association. The definition of "trustee" in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936) states: In addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or operation of law, includes - (a) (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, A trustee may be a natural or any other juristic person. The trustee of a trust holds a legal or equitable interest in trust property and is obliged to deal with that interest in accordance with the terms of the trust for the benefit of the beneficiaries. They are required to act as a body to carry out the obligations in the interests of the Foundation. The Trustees do not have any discretion to act otherwise. Managing trust property in accordance with a deed of trust is not enough for an entity to be considered a society, association or club. For these reasons the trust is not an entity that is established for the encouragement of sport. If the deed of Variation and Retirement and Appointment is executed: The current trustees will retire and … Inc will be appointed as the new trustee of the Trust. The purposes of the entity are set out in a clause … of the Statement of Purposes and Rules indicating that it is an Association. Based on the decision in the Manor Foundation case, a trustee that is more than merely performing actions of trustees i.e. administering of property in terms of the trust, can be an association if actively involved in the operation of an entity. … Inc (as the proposed new trustee) will be doing more than merely managing trust property. It could meet the requirements be exempt under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of sport as required under item 9.1(c) of section 50-45 of the ITAA 1997. | Detailed Reasoning - Non-profit: To be eligible for exemption from income tax as a society, association or club which has been established for the encouragement of a game or sport section 50-70 of the ITAA requires that the society, association or club is not carried on for the profit or gain of its individual members (non-profit requirement). Taxation Ruling TR 97/22 Income tax: exempt sporting clubs states the following on the non-profit requirement: | Detailed Reasoning - 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. The clause does not clearly state that the purpose of the trust is the encouragement of a sport and that it is not for profit or gain. As such we do not consider the non-profit requirement to be met. | Detailed Reasoning - Game or sport: There is no special definition of what constitutes a game or sport for the purposes of section 50-45 of the ITAA 1997, hence, those words should be given their ordinary meanings. TR 97/22 provides a non-exhaustive list of activities that would be considered as 'sport'. The trust is concerned with the raising and provision of financial support for the benefit of development projects and programs. We consider the trust to be concerned with a game or sport. | Detailed Reasoning - Encouragement: Paragraph 11 of TR 97/22 states that according to the Macquarie Dictionary, 'Encouragement' means 'stimulation by assistance'. Encouragement can occur directly by: · forming, preparing and entering teams and competitors in competition in the game or sport · coordinating activities · organising and conducting tournaments and the like · improving the abilities of participants · improving the standards of trainers and coachers · 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 trust deed does not state specifically state that it is for the encouragement of the sport. However, the trust will be used to support development projects and programs. The trust is considered to be established for the promotion of a game or sport. It is considered that the promotion of a game or sport is the Trusts main purpose. | Detailed Reasoning - Special Requirement: Section 50-70 of the ITAA 1997 provides that an entity covered by item 9.1 of section 50-45 of the ITAA 1997, 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 of the ITAA, 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 It has already been determined that the non-profit requirement is not satisfied. Therefore this requirement is not met. | Detailed Reasoning - Conclusion:: Currently the trust is not a Society, association or club it is not exempt from income tax pursuant to section 50-1 of the ITAA 1997. However, if the variation is executed, the five current trustees retire and the incorporated entity becomes the new trustee the requirements under s50-45 could be met. | Detailed Reasoning - Question: 2: Does a change of trustees incur a capital gains tax event? | Detailed Reasoning - Answer:: No | Detailed Reasoning - Section 104-10 Disposal of a CGT asset: CGT events A1 of the Income Tax Assessment Act 1997: Under section 104-10 (2) of the Act you dispose of a CGT asset if a change of ownership occurs from you or another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur: (b) merely because of a change of trustee

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.