Private ruling: Exemption from income tax
Date of advice: 21 April 2016
Published: June 2016
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2008

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

Relevant facts and circumstances: The objects and activities of the Club are concerned with a sport The Club does not have any social Club facilities

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: Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the ordinary and statutory income of the entities covered by the tables in Division 50 is exempt from income tax. To be an exempt entity under item 9.1(c) of the table in section 50-45 of the ITAA 1997 an entity must be a society, association or club established for the encouragement of a game or sport, and satisfy the special conditions of that item. Society, association or club The terms 'society', 'association' and 'club' are not defined in the ITAA 1997. In Pro-Campo Ltd v Commr. of Land Tax (NSW) 81 ATC 4270 Lee J said the following on the meaning of society, association and club: The three words "society, club or association" are words in frequent use in our community and societies, clubs and associations are well known entities… In Theosophical Foundation Pty Ltd v Commr. of Land Tax (1966-1967) 67 SR 70 … Sugerman JA stated at p.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 ,…) 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 three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects… (at 4728-4729). In Douglas v. Federal Commissioner of Taxation 97 ATC 4722 Olney J stated that the collation 'society, association or club' refers to: … a voluntary organisation having members associated together for a common or shared purpose (at 4726). Members of the Club have associated together for a common purpose. The Club is a society, association or club. Established for the encouragement of a game or sport | Detailed Reasoning - Game or sport: The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs sets out the circumstances under which the Commissioner will regard a society, association or club as being established for the encouragement of a game or sport, and states that 'fishing' is a leisure activity and will not be a sport unless it is organised in a sport like manner: 35. A common feature of a game or sport is a set of conventions, expectations and rules. This contributes to the element of organisation that is commonly indicative of a game or sport. While written or defined rules are not essential, the imposition of such rules and conventions in an organised group of participants can convert an otherwise ordinary leisure activity into a game or sport (e.g., hunting, fishing, walking). The activities are governed by a set of conventions and rules and are considered a sport. | Detailed Reasoning - Encouragement: Paragraph 11 of TR 97/22 states that '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 club conducts a sport tournament, and coordinates sport activities for its members. The club is encouraging a sport. | Detailed Reasoning - Main purpose: The test to be applied to determine whether a society, association or club is established for the encouragement of a game or sport was stated by Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. of T. 90 ATC 4215: For a society, association or club to qualify for the exemption… it must be one that has as its main object or purpose the encouragement or promotion of [a game or sport]. It 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. 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 (at 4225). TR 97/22 provides the following commentary regarding the 'main purpose' test: 41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities. 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. … 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 of purposes… 44. Therefore, the fact that a sporting club also encourages social and other activities does not, of itself, preclude the club from being exempt. The club is still exempt provided the encouragement of a game or sport is the club's main purpose. By contrast, where the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply. To determine whether a club is established for a game or sport in a particular year of income, Lockhart J in Cronulla Sutherland Leagues Club Ltd v F.C. (supra) stated: The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control of the body seeking the exemption these may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely the year of income… (at 4225). TR 97/22 lists features of a club that the ATO considers either highly persuasive or relevant but less persuasive in identifying whether a club was/is established for the encouragement of a game or sport in an income year. Paragraph 15 of TR 97/22 identifies the following features as highly persuasive features that support the conclusion that a club has the main purpose of encouraging 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 proportion of its surplus funds in encouraging the game or sport, and • the club's constituent documents emphasis that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents Paragraph 15 of TR 97/22 identifies the following features as relevant but less persuasive features that support the conclusion that a club has the main purpose of encouraging a game or sport: • a high level of participation by members in the game or sport; • 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 day to day management of the club); • voting rights in the club vest only in members involved in 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 encouraging the game or sport, and its advertisements and publicity emphasise the game or sporting facilities provided. The Club does not have social club facilities such as a bar and gaming. The evidence shows that the Club is concerned with encouraging a sport, but is also concerned with other purposes. The other purposes are considered incidental to the purpose of encouraging a sport. The main purpose of the Club is the encouragement of a sport. Special conditions Section 50-70 of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from tax unless: (1) … 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; and the entity satisfies the conditions in subsection (2) (2) The entity must: a) comply with all the substantive requirements in its governing rules; and b) apply its income and assets solely for the purpose for which the it is established. | Detailed Reasoning - Not carried on for the purpose of profit or gain of individual members: The phrase 'carried on for the purpose of profit or gain of its individual members' is not defined in the tax legislation. In Commissioner of Taxation v Co-operative Bulk Handling [2010] FCAFC 155, the Full Federal Court considered the operation of section 50-40 of the ITAA 1997, a special condition of which is that an entity 'must not be carried on for the profit or gain of its individual members'. Mansfield and McKerracher JJ stated the following on the meaning of the expression 'not carried on for the profit or gain of individual members': ...if as a consequence of pursuing the purpose, the members derive a benefit or gain..., that gain or benefit will not preclude exemption unless it is a gain produced only by reason of individual membership... In all cases of exemption, it must be the position that it is not open to the body to disburse any profits or dividends to members... (at paragraph 94). This was also the approach of the South Australian Supreme Court in Repromed Pty Ltd v Lucas and Anor (2000) 76 SASR 575 where the court considered whether Repromed Pty Ltd was exempt from pay-roll tax on the basis that it was an employer who provided health services 'otherwise than for the purpose of profit or gain'. Debelle J held that Repromed Pty Ltd was carried on for the purpose of profit or gain as its constitution did not provide barriers to individual profit, and profits could find their way into pockets of individuals (at paragraph 35). TR 97/22 states the following regarding the prohibition: 9. A club must not be carried on for the purpose 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 Club has relevant clauses that prohibit profit or gain to members while it is operating and on winding up. The Club is not carried on for the purpose of profit or gain of its individual members. | Detailed Reasoning - Physical presence in Australia and expenditure: The Club has a physical presence in Australia and, to that extent, incur their expenditure and pursue their objectives principally in Australia. | Detailed Reasoning - Comply with all substantive requirements in its governing rules: Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt sets out the Commissioner's view on the meaning of the special conditions set out in subsection 50-70(2), and provides the following meaning of 'substantive requirements': 18. The 'substantive' requirements in an entity's governing rules are those rules that define the rights and duties of the entity. 19. The substantive requirements in an entity's governing rules 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. … 21. The governing rules condition is applied on a continuous basis throughout an income year. The entity must consider whether, at all times throughout the income year, it has complied with all of the substantive requirements in its governing rules. In order for an entity to be exempt from income tax for all of an income year, it must (among other things) satisfy the governing rules condition at all times during that income year. While an entity is in breach of the governing rules condition, its ordinary and statutory income will not be exempt from income tax. (Footnotes removed) There is no evidence that the Club has failed to comply with the substantive requirements in its governing rules. It is accepted that the club complies with all of the substantive requirements in its governing rules. | Detailed Reasoning - Apply its income and assets solely for its purpose: Paragraph 23 of TR 2015/1 provides that: 23. Two questions must be considered to determine whether an entity satisfies the income and assets condition: • What is the 'purpose for which the entity is established', and • Has the entity applied its income and assets solely for the purpose for which the entity is established? As discussed above, the main purpose of the Club is to encourage a sport. The financial reports of the Club show that the income and assets of the Club are being applied for the purpose for which it was established. The Club is an exempt entity under item 9.1(c) of the table in section 50-45 of the ITAA 1997, and its ordinary and statutory income is exempt from income tax in accordance with section 50-1 of the ITAA 1997.