Private ruling: Exempt entity
Published: April 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the sporting club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an association established for the encouragement of sport under item 9.1 of the table in section 50-45 of the ITAA 1997? | A1: Yes. | Q2: Will the sporting club continue to be classed as an exempt entity under sections 50-45 and 50-70 of the ITAA 1997 , after the proposed re-development of the grounds and member facilities? | A2: Yes. | Q3: Will the sporting club be subject to capital gains tax under Division 104 of the ITAA 1997 on the proposed subdivision and sale of land? | A3: 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. You are an incorporated association operating as a sporting club. There are over X members of the club, the vast majority of who play sport and/or compete in the various sporting events organised each year. You are considering sub-dividing and selling part of the existing grounds to enable purchase of adjacent farmland. The purchased farmland would be used to build a new sporting facilities and upgrading current member facilities. An upgrade would include a renovation of the original clubhouse. The redevelopment of the property is being undertaken to ensure continued viability as a sporting club. You describe yourself as being exempt from income tax under sections 50-45 and 50-70 of the Income Tax Assessment Act 1997 on the ordinary and statutory income of the association, due to being a not-for-profit association and being established for the encouragement of a game or sport. The constitution contains the following provisions: Winding Up or Cancellation In the event of the winding up or the cancellation of the incorporation of the club, any property of the club remaining after the payment of all debts and liabilities must not be paid to or distributed amongst the members. Instead, such property must be given or transferred to some other institution or institutions which: • have objects similar to the objects of the club; and • have a constitution which prohibits the distribution of its income and property among its members to an extent at least as great as is imposed on the club under these rules. No Payment or Transfer to Members All of the income and property of the club must be applied solely towards the promotion of the objects of the club, as set out in the Statement of Purposes, and no portion of it may be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to the Members. The Objects of the entity, as outlined in its Statement of Purposes, are: • to operate and administer the club efficiently and effectively, and on a sound financial basis. • to operate and make available the course, the clubhouse and any other sporting facilities pursuant to the terms of the lease, or any other lease in existence from time to time, for use by members and any other persons who are authorised by these rules to use such facilities; • to maintain the course, the clubhouse and any other sporting facilities made available to members at a reasonable standard; • in relation to the clubhouse and other sporting facilities, to promote those facilities in the interests of members; • to conduct competitions and tournaments in relation to the grounds and the clubhouse, including those for persons who are not members; • to make available the grounds and the clubhouse for persons who are not members, at times and on terms to be determined by the Executive Committee; • to provide such other facilities to the members as the Executive Committee determines; • to raise funds by any lawful means for the achievement of the objects; and • to aim to achieve a high level of membership and ensure the long term sustainability and growth of the Club.

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 ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of ITAA 1997. Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997. Accordingly, to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must: (a) be a society, association or club; (b) be established for the encouragement of a game or sport; and (c) meet the special conditions specified in section 50-70 of the ITAA 1997. (a) Society, Association or Club The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning. The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose. The Macquarie Dictionary defines it 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 90 at 35). This approach is also confirmed in Taxation Determination TD95/56, which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. The Macquarie Dictionary defines 'club' as a 'group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members'. The interpretations of 'society', 'association' or 'club' as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'. The sporting club is an incorporated association and is brought into existence by its members to pursue a common purpose as stated in its constitution. It is considered that the sporting club is a society, association or club. (b) Established for the encouragement of a Game or Sport Game or sport The terms 'game' or 'sport' for the purposes of section 50-45 are not defined in the ITAA 1997 and have their ordinary meanings. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides the Commissioner's view on what constitutes as exempt sporting clubs. The objects of the sporting club as stated in its constitution are directed at promoting sport and providing members, guests and other approved persons with the facilities to play sports. The activities of the sporting club in effectuating their objects include grounds for playing and practicing and bar and dining facilities. It is accepted that the sporting club is concerned with a game or sport. Encouragement Paragraph 11 of TR 97/22 refers to the meaning in the Macquarie Dictionary which defines 'encouragement' to mean 'stimulation by assistance' and provides that 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 sporting club encourages sport to be played through the following activities: • Provision of grounds • Conduct member competitions • Undertake programs for junior players • Sponsor teams in various competitions • Provide facilities for members and social players It is considered that the sporting clubs activities directly and indirectly encourage sports. Main purpose Paragraph 41 of the TR 97/22 provides that to be eligible for the exemption, an association's main purpose must be to encourage a game or sport. Difficulties can arise where the association conducts other activities, particularly social or commercial activities. The main purpose can only be ascertained after objectively weighing all of the association's features such as the constituent document, history, control and activities. Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting a conclusion that the main purpose of the association 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 proportion of its surplus funds in encouraging the game or sport, and • the club's constituent documents emphasise that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents The fact that an association also encourages social and other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225 ( Cronulla ), where an association 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 be that of encouragement. In contrast, where an association's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply. In order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to the sporting ends. If they become an end in themselves, it will be difficult for a club to demonstrate that it is predominantly for the encouragement of a game or sport. The Objects of the entity, as outlined in its Statement of Purposes, are: • to operate and administer the club efficiently and effectively, and on a sound financial basis. • to operate and make available the course, the clubhouse and any other sporting facilities pursuant to the terms of the lease, or any other lease in existence from time to time, for use by members and any other persons who are authorised by these rules to use such facilities; • to maintain the course, the clubhouse and any other sporting facilities made available to members at a reasonable standard; • in relation to the clubhouse and other sporting facilities, to promote those facilities in the interests of members; • to conduct competitions and tournaments in relation to the grounds and the clubhouse, including those for persons who are not members; • to make available the grounds and the clubhouse for persons who are not members, at times and on terms to be determined by the Executive Committee; n to provide such other facilities to the members as the Executive Committee determines; n to raise funds by any lawful means for the achievement of the objects; and • to aim to achieve a high level of membership and ensure the long term sustainability and growth of the club. From the above objects it is evident that the sporting club is directed at the encouragement and promotion of sports. The activities of the sporting club include providing amenities to its members and guests, junior programs as well as organising competitions to encourage competitiveness between players. The sporting club does provide some social activities and licensed facilities to its members such as bar and dining facilities. The sporting club conducts a variety of competitions and sporting events each year. Of the current members, the vast majority play social sports and/or compete in the various sporting events organised each year. Following the decision in Cronulla , the provision of social activities will not disqualify an entity from exemption if the activities were incidental, ancillary or secondary to its main purpose. Further, activities related to the bar and dining areas can be considered as ancillary to the encouragement of sports as they cater predominantly to participants, before and after playing sports and encourage use of the sporting club's facilities In summary, the sporting club directly encourages sports and demonstrates features persuasive of the sporting club being for the encouragement of a game or sport. (c) Special Conditions Section 50-70 of the ITAA 1997 states: | Detailed Reasoning - 50-70 Special conditions for items 1.7, 2.1, 9.1 and 9.2: 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. (i) Not carried on for the profit or gain of its members Section 50-45 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. The sporting club has the following non-profit clause and dissolution clause in its Constitution: Winding Up Or Cancellation In the event of the winding up or the cancellation of the incorporation of the club, any property of the club remaining after the payment of all debts and liabilities must not be paid to or distributed amongst the members. Instead, such property must be given or transferred to some other institution or institutions which: • have objects similar to the objects of the club; and • have a constitution which prohibits the distribution of its income and property among its members to an extent at least as great as is imposed on the club under these Rules. No Payment or Transfer to Members All of the income and property of the club must be applied solely towards the promotion of the objects of the club, as set out in the Statement of Purposes, and no portion of it may be paid or transferred directly or indirectly by way of dividend, bonus or otherwise to the members. From the above clauses, it is evident that the sporting club has appropriate clauses in its constitution that prevents members from receiving benefits. However, it is also necessary that an association's actions are consistent with their constituent documents. In Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611 ( Yorkshire Agricultural ) the provision of specific benefits to members to induce membership were disregarded. Although the Society applied as a charitable institution, it was found that the benefits to the members in the form of various privileges attaching to membership could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society. It is accepted that the sporting club operates in a non-profit manner. (ii) Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia For the sporting club to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia. From the information provided, the sporting club has a physical presence in Australia. It is located in Australia and incurs its expenditure and pursues its purposes principally in Australia. Accordingly, the sporting club satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - Conclusion: Based on the above, the total ordinary income and statutory income of the sporting club is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is an association established for the encouragement of a game or sport, pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997. | Detailed Reasoning - Question 2: The sporting club is considered to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997. Under item 9.1(c) an association must be established for the encouragement of a game or sport. This means that its main purpose must be the encouragement of a game or sport. An association's main purpose can only be ascertained after objectively weighing all of the association's features, in particular, its constitution, activities, history and control. An association's constituent documents will help identify the purpose for which the association was set up and should be consistent with the aim of encouraging a game or sport. The activities must then demonstrate that the association's main purpose is the encouragement of a game or sport. Paragraph 15 of the TR 97/22 listed the features that are highly persuasive in supporting a conclusion that the main purpose of the association 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 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 The sporting club's main purpose is the encouragement of sport; its constituent documents emphasis the encouragement of sport, its activities are directed at promoting sport and providing sporting facilities and a significant proportion of surplus funds are directed at sporting activities. The sporting club displays features that are persuasive in supporting a conclusion that its main purpose is the encouragement of a game or sport. Under the land realisation proposal, the sporting club is considering subdividing and selling part of the existing grounds to enable the purchase of adjacent farmland. The purchased land will be used to build a new sports facilities and additional funds raised from the subdivision and sale of existing land will be used for upgrading current member facilities. From the information provided in the private ruling application the new activities that the sporting club will undertake will not affect the club's constitution. As such the objects of the sporting club will remain the same, that is, to promote sport and provide sporting facilities. Page 8 of the ATO publication Income tax exemption and sporting clubs [73773-02-2011] states that the sale of assets to fund a club's ongoing sporting commitments will not in itself disturb the club's encouragement of sport. Page 8 also provides the following example: The club….sells a portion of land it owns adjacent to its courts to upgrade its courts and clubhouse facilities and enter a team in a state-wide competition. The club's main purpose is the encouragement of sport. From the information provided in the private ruling application, the reasons provided for selling the land are to: • build new sporting facilities • upgrade current member facilities • renovation of the original clubhouse It is considered that the proposal to subdivide and sell part of the existing grounds will not affect the sporting club's exemption as a sporting club as the proceeds from the sale will be applied to the sporting club's purpose of encouraging sport. The proceeds from the sale will be used to build new sports facilities and will be used to upgrade the club's facilities to encourage and promote sport to members and the public. It is considered that the sporting club's main purpose is the encouragement of sport. Even though the sporting club plan to apply some of the proceeds of the sale to the upgrading of its clubhouse and associated social and recreational facilities, it will not affect the sporting club's exemption as a sporting club. These social activities are used as a means to attract members and the public to play sport and are therefore considered to be ancillary to its main purpose. Following the decision in Cronulla , activities, particularly social or commercial activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, will not affect the club's main purpose as being the encouragement of a game or sport. From the information provided, it is evident that the sporting club will apply the proceeds of the sale solely for the encouragement of sport and to attract members and the public to use its facilities. | Detailed Reasoning - Conclusion: Based on the above, the proposed arrangement to subdivide surplus land will not affect the sporting club's income tax exemption as a sporting club under item 9.1(c) of the table in section 50-45 of the Income Tax Assessment Act 1997. | Detailed Reasoning - Question 3: As determined above, the sporting club continues to be accepted as an association or club established for the encouragement of a game or sport under item 9.1, and as a consequence, any capital gain resulting from the proposed sub-division and re-development will be disregarded for capital gains tax purposes.