Private ruling: Income tax exemption
Date of advice: 24 July 2019
Published: September 2019
Ruling period: 1 July 2019 - 30 June 2024
Date scheme commenced: 1 July 2019

Ruling: Q1: Will Club A continue to be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a club established for the encouragement of animal racing under item 9.1 (a) in section 50-45 of ITAA 1997, during and after the proposed redevelopment of the racecourse site? | A1: Yes

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. Club A is currently exempt from income tax under section 50-1 of the ITAA 1997 pursuant to the application of item 9.1(a) of section 50-45 of that Act as a club which was established for the encouragement of animal racing. 2. Club A is an incorporated association. 3. Club A has a long history of involvement and is involved in animal racing. 4. Club A's Constitution lists its objective as the encouragement of animal racing. 5. Club A promotes itself as an animal racing organisation. 6. Club A's Constitution has the relevant non-profit clauses. 7. Club A provided membership and financial details. 8. Club A has employees employed directly in relation to animal racing. 9. Club A holds a number of race meetings each year. 10. Club A has animal racing and social facilities. 11. Club A is currently redeveloping its' facilities with a view to improving its long term viability in the animal racing industry.

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 | Income Tax Assessment Act 1997 section 50-70(1)(a)

Reasons for decision: Summary: The main purpose of Club A is the encouragement of animal racing. The proposed redevelopment of the Racecourse will be incidental or secondary and to assist Club A to carry out its main objective. Club A is a society, association or club established for the encouragement of animal racing under item 9.1(a) of section 50-45 in Division 50 of the ITAA 1997, and is exempt from income tax under section 50-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 states: The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for the encouragement of animal racing is listed at item 9.1(a) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special conditions detailed in section 50-70 of the ITAA 1997, and the special condition in section 50-47 of the ITAA 1997. An entity is therefore exempt from income tax as a society, association or club established for the encouragement of animal racing if it: · is a society, association or club, · is established for the encouragement of animal racing, and · satisfies the special conditions. | Detailed Reasoning - Society, association or club: The term society, association or club is not defined in the ITAA 1997. The term is therefore 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. In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279: In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)...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'... 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. It merely seems to have happened that some organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two...Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects... The meaning of society, association or club as described above, emphasise a 'body of persons' and 'an organisation of people' with a 'common purpose'. Club A is an incorporated association. Clause 6 of the Constitution describes its objectives, which are: · The principal object of the club is the encouragement of animal racing. · In support of this aim, the secondary objects of the Club are the promotion and provision of sporting, amusement, recreation, entertainment and social events in order to carry on its principal object. Club A is managed by a Board, has a Constitution, and its members voluntarily associate together for a common purpose and common interest. Therefore, Club A is considered to be a society, association or club. | Detailed Reasoning - It must be for the encouragement of animal racing: Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22), although directed at sporting club exemption, provides guidelines which are also applicable to animal racing clubs when determining income tax exemption Animal racing Animal racing includes horse racing, trotting and greyhound racing, and the racing of other animals. Encouragement of animal racing Paragraph 11 of TR 97/22 states that 'encouragement' means 'stimulation by assistance. Encouragement can occur directly by: · Forming, preparing and entering teams and 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, increasing and wider participation and improved performance And can occur indirectly: · Through marketing; or · By initiating or facilitating research and development. Club A operates a Racecourse which it uses to run the animal racing. Based on this it is considered that the club is encouraging the relevant animal racing. That encouragement must be the club's main purpose Paragraph 13 of the TR 97/22 provides: To be exempt, the main purpose of the club must be the encouragement of a game or sport. Paragraph 14 of TR 97/22 states: A club's main purpose can only be ascertained after objectively weighing all of the club's features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the clubs main purpose is or is not 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: (a) The club conducts activities in the relevant year that are directly related to the game or sport; (b) The sporting activities encouraged by the club are extensive: (c) The club uses a significant portion of its surplus funds in encouraging the game or sport; and (d) 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 Relevant but less persuasive features are listed at paragraph 16 of TR 97/22 and include: (a) A high level of participation by members in the game or sport; (b) The members of the committee, or persons who control the direction of the club are predominantly participants in or concerned with the encouragement of the game or sport (as distinct from the day to day management of the club; (c) Voting rights in the club vest only in encouraging the game or sport, whether by personal participation or by encouraging participation by others; and (d) The club promotes itself to patrons and the public as one encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided. The above features will now be considered as they apply to Club A. | Detailed Reasoning - Highly persuasive features: a) The club conducts activities in the relevant year that are directly related to the activity of animal racing Club A conducts animal racing competitions. b) The animal racing activities encouraged by the club are extensive Club A conducted a number of animal racing events in 2018. Its historical and current activities indicate a strong and continuing association with animal racing. Club A is in the process of upgrading its facilities. c) The club uses a significant proportion of its surplus funds in encouraging animal racing Over recent years Club A has been in a loss position and has not made any surplus. Club A will undertake a redevelopment to raise funds. The redevelopment will include building of residential and commercial premises (to gain funding for the redevelopment), and an upgrade to the sporting facility. Any remaining surplus from the redevelopment will be invested by Club A to generate revenue for its ongoing operations. The surplus funds of the Club will be used to encourage the animal racing. d) The club's constituent documents emphasise that the clubs main purpose is to encourage animal racing The objects of Club A are to encourage animal racing. The Club carries out this object by operating a racecourse and clubhouses for members, and running racing competitions, and awarding prizes. It is accepted that the Constitution emphasises the encouragement of animal racing as its main purpose. | Detailed Reasoning - Relevant but less persuasive features: a) High level of participation in animal racing by members of the club The Courts have been favourably persuaded by the number of members participating in sport: · In the St Mary's case 2257 of its 6648 members were football members (players and ex players). The club fielded 32 teams of 450 players plus a reserve grade and a metropolitan cup team. · In Terranora lakes Country Club Ltd v. FC of T (1993) 93 ATC 4078 ( Terranora ), 2854 of 4076 members were sporting members · In Re Tweed Heads Bowls Club v FC of T 92 ATC 2087; (1992) 24 ATR 1068 ( Tweed Heads ), 830 of its 920 members were bowling members. · In Case W114 ( Grand United Port Macquarie Bowling Club v. F.C. of T ) 89 ATC 891, 1353 of its 2476members were bowling members. The members of Club A are not required to actively participate in the sport. b) The members of the committee, or persons who control the direction of the club, are predominantly participants in or concerned with the encouragement of animal racing The Constitution does not require its members or committee members to be actively involved in animal racing. c) Voting rights in the club vest only in members involved in encouraging animal racing The Constitution does not restrict the voting rights in Club A to members who actively participate in the sport. d) The club promotes itself to patrons and the public as one encouraging animal racing, and its advertisements and publicity emphasise the racing facilities provided The Club actively promotes itself to patrons and the public as a club that encourages animal racing; for example, through its website. Other purposes including social or commercial activities Difficulties can arise in determining a club's main purpose where a club is involved in other activities particularly social or commercial activities. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (21 ATR 300 at 312 (Cronulla Sutherland) 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. Where the main purpose becomes the carrying out of those other activities, a 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 in Cronulla Sutherland 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. In Terranora the Terranora Country Club provided and promoted an extensive range of sporting activities, including golf, lawn bowls, cricket, and football. Terranora Lakes Country Club also had extensive social facilities that were used by the members and a large number of visitors. In the most recent year reported in the Terranora case, 90.3% of the Terranora Lakes Country Club income cane from poker machines, bar trading and catering but only 16.9% was spent on sporting activities. The Court ruled in favour of the taxpayer and concluded that the main purpose of the Terranora Lakes Country Club was the promotion of athletic sport and not one established for the purpose of carrying on a business of gambling, provision of entertainment and food, and the selling of time-share units. Hill J concluded that while the social activities of the Terranora Lakes Country Club were extensive and could be seen as ends in themselves, these activities were pursued as a means of financing the extensive sporting activities conducted by the club. In Tweed Heads , the taxpayer was a lawn bowls club which had indoor and four outdoor bowling greens. The club participated in and organised large number of tournaments each year. The club building was substantial and the catering and entertainment facilities were extensive. The clubs main source of revenue was derived from poker machines which were used predominantly by the 400,000 annual visitors to the club. In a judgement by Dr P Gerber at 92 ATC 2099 he stated: ...I am satisfied that the club, from its very inception, has been and is dedicated to a very substantial degree to the promotion of lawn bowls and, latterly, to indoor bowls. True it is that some elements of the Club's activities- leaving the poker machines aside for the moment- are social and cannot, as such, be characterised as "promoting the athletic game of bowls", but that is true of virtually all sports clubs. Be that as it may, I am left in no doubt that the Club has as its main or dominant purpose, the promotion and encouragement of the bowling. That leaves the issue of the poker machines, which earn substantial revenue, only a relatively small proportion of which was, in the years before me, used for bowling. In the Vernacular, the Club has money pouring out of its ears and doesn't know what to do with it all. So what? Provided its main object is the promotion of bowls, the fact it also produces repetitive strain injury (RSI) in some 400,000 non bowling poker machine players while at the same time emptying their pockets seems to me to be utterly irrelevant. In St Mary's , Hill J found that the significant social activities of a sporting club were acceptable if the club was formed principally for sport and if the sport was financed by the social activities. It was acceptable that in that case that only 20% of the funds earned by the social club were spent on football. Hill J stated the importance of the club's constitution which stated that the principal aim of the club was the support of local football and that a large amount of the club's activities were sport related. It was also important that the clubs history centred on the support of local football, and that the club rules required a certain proportion of its funds to be applied for the support of local football. Therefore, the fact that a sporting club also encourages social and other activities does not, in itself, preclude a club from being exempt. A club is still exempt provided the encouragement of a game or sport is that clubs main purpose. Conversely if a club's main purpose is providing social amenities and licenses club facilities to its members, the exemption does Club A has significant social facilities and it has also entered into a joint venture to develop part of its land and to upgrade the Racecourse facilities. Under the joint venture Club A has received a commitment fee from the developer (during the 2018 financial year). Initial proceeds of the development will be paid to the developer as a development fee to make debt repayments. Club A will then retain the first $X of surplus proceeds. The surplus proceeds will be determined on a monthly basis. After the first $X of surplus proceeds, the project income will be used to repay the Developers equity plus a return of X% per annum, and Club A will receive X% of any remaining surplus proceeds after the Developers equity and a return of X% per annum has been fully paid. Club A will invest a significant sum from the gross proceeds from the joint venture into upgrading its animal racing facilities. Club A intend to reinvest any remaining surplus from the joint venture into passive investments to generate revenue stream to fund its ongoing operations. The Commissioner is satisfied that these non-sporting activities are currently undertaken in furtherance of its animal racing purpose (they provide funding for the animal racing activities and facilities of Club A) and are not the main purpose of Club A. The Commissioner accepts that the main purpose of Club A is to encourage animal racing. The Commissioner accepts that Club A has entered into the joint venture to further its main purpose of encouraging animal racing. | Detailed Reasoning - Section 50-47 of the ITAA 1997: Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997, it states: An entity that: (a) is covered by any item; and (b) is an ACNC type of entity; is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012 . Broadly, an entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are 'charitable purpose', and includes purposes such as advancing education and advancing health. The promotion of sport is not a charitable purpose. Club A has a purpose of encouraging animal racing which is a non-charitable purpose. As such, Club A is not capable of being a registered charity, and is not an ACNC type of entity. Section 50-47 of the ITAA 1997 does not apply to Club A. | Detailed Reasoning - Section 50-70: Subsection 50-70(1) of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members and: · it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or · it is a deductible gift recipient; or · it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence. Non-profit requirement Paragraphs 9 and 21 - 23 of TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members. Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement. The Constitution prevents distribution to members while Club A is operating and on winding up. The supporting evidence shows that Club A acts in accordance with this prohibition. Club A 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 Club A is a resident of, and is located in, Australia. Club A carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement. Subsection 50-70(2) of the ITAA 1997 provides that the Association must: · comply with all the substantive requirements in its governing rules; and · apply its income and assets solely for the purpose for which the entity is established. Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1)provides guidance in respect of the conditions in subsection 50-70(2). Comply with all the substantive requirements in its governing rules Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that: · give effect to the object or purpose of the entity · relate to the non-profit status of the entity · set out the powers and duties of directors and officers of the entity · require financial statements to be prepared and retained · set out the criteria for admission as a member of an entity · require an entity to maintain a register of members, and · relate to the winding-up of the entity. The supporting evidence shows that Club A complies with the substantive requirements set out in its current constituent document. Apply its income and assets solely for the purpose for which it is established Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied. The earlier discussion shows that the Club A applies its income and assets solely for the purpose for which it was established. Club A satisfies the special conditions in section 50-70 and section 50-47 of the ITAA 1997. | Detailed Reasoning - Conclusion: Club A is considered to a society, association or club established for the encouragement of animal racing pursuant to item 9.1(a) of the table in section 50-45 of the ITAA 1997. The features of Club A leading to this conclusion are summarised as follows: · Club A conducts, and will conduct, activities in the relevant year that are directly related to animal racing. · The animal racing activities conducted by Club A are extensive. · Club A uses a significant portion of its surplus funds in encouraging animal racing. · Club A's constituent documents emphasise that its main purpose is to encourage animal racing. · Club A promotes itself to members, patrons and the public as an animal racing Club. · The social and commercial activities of Club A provide an income stream that supports its animal racing activities As such, Club A is exempt from income tax under section 50-1 of the ITAA 1997.