Private ruling: Income tax exemption
Date of advice: 26 October 2015
Published: September 2015
Ruling period: 1 July 2015 to 30 June 2025
Date scheme commenced: 1 July 2015

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 ITAA 1997? | A1: Yes

Relevant facts and circumstances: • The Club is a sports club and its essential character, activities and purpose have not changed since inception. • The Club conducts extensive sporting activities including successful competition teams - actively promoting the sport and increasing membership. • The Club expends considerable financial resources and volunteer hours in undertaking and promoting its sporting activities. The purposes of the Club are stated in the Statement of Purpose: 1. Play, promote and encourage the game generally and to have affiliation with other bodies having purposes similar to those of the club. 2. Promote and encourage other sports and recreational activities and pastimes and to encourage social life and amusement amongst the members of the club and to provide adequate and suitable accommodation for members of the club and their guests upon premises of which the club is the bona fide occupier. 3. Provide facilities and all things incidental to the playing the game 4. Supply refreshments for members and apply for hold and renew from time to time any necessary certificate of registration as an Incorporated Association and any licence permits or other provisions for the sale and disposal of liquor within the meaning of the Act. The Statement of Purposes and Rules also contains the following non-profit and dissolution clauses: 38.1 No board member, member, employee or agent of the club may receive any payment of any amount by way of commission or allowance from the Club's receipts for the supply of liquor and other goods supplied by the Club. 38.2 No board member shall be paid any remuneration or commission for his/her services to the club but the Board shall have the power to grant an honorarium to a board member of such amount as it deems appropriate 38.3 No member shall receive any dividend or profit whatsoever from the Club other than remuneration for remuneration for services or product provided, or honorarium for work done as approved by the board in accordance with these rules or salary or wages paid to employees. 41.1 The members at a general meeting may, by simple majority of the members present, pass a resolution for the dissolution of the club.… 41.3 If the conditions set out in the previous Rule 40.2 are met, the board shall proceed to realize the property of the club after the discharge of all liabilities shall proceed to allocate all moneys to local charitable organisations as specified by the majority of members at the general meeting referred to in rule 40 and after completion of the distribution the club shall be dissolved. The Club uses a significant proportion of its funds and resources in order to encourage sport.

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: A sporting club which is established for the encouragement of a game or sport and which is not carried on for the purposes of profit or gain to its individual members is exempt from income tax pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, subject to the special conditions under section 50-70 of the ITAA 1997 which states: An entity covered by item…9.1…. 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. As the Club has a physical presence in Australia, incurs its expenditure in Australia, and pursues its objects in Australia, it satisfies section 50-70 of the ITAA 1997. Paragraph 7 of Taxation Ruling TR 97/22 Exempt sporting clubs (TR 97/22), provides that for a club to be exempt from income tax under section 50-45 of the ITAA 1997, it needs to satisfy three tests: 1.) it cannot be carried on for the purpose of profit or gain to its individual members; 2.) it must be for the encouragement of a game or sport; and 3.) that encouragement must be the club's main purpose. The Ruling states at paragraph 8 that where a club does not satisfy all three requirements, it is not exempt from income tax under section 50-45 of the ITAA 1997. | Detailed Reasoning - Test 1 - Not carried on for the purpose of profit or gain to its individual members: Paragraphs 9 and 10 of TR 97/22 provide: A club must not be carried on for the purpose of profit or gain to its individual members. 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… Paragraph 23 of the TR 97/22 provides: 23. Where the law or constituent documents do not prohibit distributions, it is a question of fact in case as to whether the club is not carried on for purposes of profit or gain to the individual members…Where it is clear from the objects, policy statements, history, activities and proposed future directions of the club that there will be no distributions to members, we accept that the nonprofit test has been satisfied. We are satisfied that the Club is not carried on for the profit or gain of its individual members. | Detailed Reasoning - Encouragement: Paragraph 11 of TR 97/22 provides: '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: • forming, preparing and entering teams and competitors in competitions in the game or sport; • organising and conducting tournaments and the like; • improving the abilities of participants; • 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. | Detailed Reasoning - How this applies to you,: One of the Club's objects is to play, promote and encourage the game. The Club achieves this object by providing facilities, coaches and umpires. The Club also conducts expert coaching, school programs, competitions and other fundraising events throughout the year. Therefore, the Club is considered to be encouraging a game or sport. | Detailed Reasoning - Game or sport: As stated in TR 97/22, at paragraph 24 and 25: 24. There is no special definition of what constitutes a 'game' or 'sport' for the purposes of section 50-45. Accordingly, those words should be given their ordinary meanings. 25. Various sources can throw light on what is meant by a game or sport. and at paragraph 28: The Australian Sports Commission (ASC), which is the Federal Government agency responsible for the development of sport in Australia, defines sport as 'a human activity capable of achieving a result requiring physical exertion and/or physical skill that, by its nature and organisation, is competitive and is generally accepted as being a sport'. This definition is used, in part, to determine whether a sport is entitled to funding and support by the ASC. Paragraph 31 and 32 state: 31. Games and sports can be contrasted with endeavours where a thing, object or animal is the essential focus, or where the activities are merely a means to some other end. 32. Activities that could be games or sports may be merely a means to other ends. This is so where the activities themselves are not organised in a sport- or game-like way and some other purpose is predominant. For example, while the activity of dancing could be organised in a game- or sport-like way, it is commonly a means of promoting sociability, participation and relaxation. In such cases it does not constitute a game or sport. Furthermore, paragraphs 34 to 36 provide that there are expectations around intention, rules, and competition for an activity to be considered a game or sport: 34. The participants must intend that the activities they perform are the activities of a particular game or sport and that the intention and activities must be shared by the other participants. … 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) 36. Competition is a very common feature although not essential. TR 97/22, at paragraph 38, also provides a non-exhaustive list of examples of activities that would be considered a 'sport' for the purposes of section 50-45, provided they satisfy the features outlined above. Included in this list under the heading of played with ball or projectile. | Detailed Reasoning - How this applies to you,: The Club conducts activities in relation to a game, which is listed as a game or sport under paragraph 38 of the TR 97/22 under 'played with ball or projectile'. Therefore, this requirement is satisfied. | Detailed Reasoning - Test 3 - That encouragement must be the club's main purpose: Paragraph 13 of TR 97/22 provides: To be exempt, the main purpose of the club must be 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: • 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 portion of its surplus funds in encouraging the game or sport; and • 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 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 the 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. Paragraph 14 of TR 97/22 also states: A club's main purpose can only be ascertained after objectively weighing all of the club's features, including those features described in paragraphs 15 and 16. The presence or absence of a feature may not conclusively determine that the club's main purpose is or is not the encouragement of a game or sport. Difficulties can arise in determining a club's main purpose where the club conducts other activities, particularly social or commercial activities. Where a club 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 still be that of encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 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. Therefore, the fact that a sporting club also encourages social and other activities does not, in 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 however, conversely if the club's main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply even if sport is encouraged. In Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078; (1993) 25 ATR 294 (Terranora), the country club provided and promoted an extensive range of sporting activities including golf, lawn bowls, cricket, and football. The 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 case, 90.3% of the club's income came 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 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 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 St Mary's Rugby League Club Limited v. Federal Commissioner of Taxation 97 ATC 4528 ; 36 ATR 281 ( 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 club's history centered around the support of local football, and that the club rules required a certain proportion of its funds support local football. | Detailed Reasoning - How this applies to you: Based on the information provided, we accept that on balance the main purpose of the entity is the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997 . The Club's objects listed in its Constitution have two main objects - to promote and encourage the game and to provide for members and guests other sports and recreational activities and refreshments. Although the objects refers to 'recreational activities and refreshments', they do not specifically place emphasis on the provision of 'social' activities and facilities. The activities of the Club suggest that it has extensive sporting activities with teams in the sport and volunteers dedicating many hours per year for the encouragement of the game. The Club also provides its facilities to be used for extensive training, competitions, championships and school programs throughout the year. The Club does provide social activities and facilities however, the social activities are accepted in part as the incidental use of the sporting club's social facilities to assist the financing of the Club's sporting activities. This can be supported by the fact that a majority of its operating profit is used for operating and capital expenditure for its sporting activities. | Detailed Reasoning - Conclusion: We accept that the entity is not carried on for the gain of individual members is established for the encouragement of a game or sport, and the encouragement of a game or sport is its main purpose. We accept that the entity is a club 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 .