Private ruling: Income tax exemption
Published: December 2013
Ruling period: n Year ended 30 September 2012 | n Year ended 30 September 2013 | n Year ended 30 September 2014
Date scheme commenced: 1 August 2011

Ruling: Q1: Is the Club exempt from taxation under section 50 1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is an exempt entity under Item 9.1(c) in the table in section 50-45 of the ITAA 1997? | A1: No.

Relevant facts and circumstances: 1. The Club was registered in Australia and it is bound by a constitution. 2. The Club began by simply providing facilities and finances to other organisations that were directly engaged in sport. 3. At the time, 'providing facilities' included the purchase of land as a new sporting ground and construction of a small clubhouse for use by local sports teams. The sports teams were managed from a small room in the clubhouse at the new grounds. Prior to this the Club was leasing grounds that were unsuitable for continued use. 4. The Club's object is stated in its constitution. 5. The Club's constitution prevents the distribution of income and profits to members during its operation, and upon winding up. Income and expenses 6. The Club undertook various renovations. 7. The Club provided in-kind support to various sports, community groups, schools and non-profit organisations, not including the cost of maintaining the grounds which are also provided to these groups free of charge. The Club also provided 'Cash support'. 8. The Club usually devotes the majority of its surplus to sports grants. 9. The Club employs over xxx staff members. 10. The Club also employs a Function Coordinator to work with the functions department and a Sports Development Manager to manage skills development and sport coordination. Membership 11. At year end the number of Club members was over XX,000. 12. The Club constitution limits official membership to persons over the age of 18. However, there are some junior members under 18. 13. It was estimated that around X,000 of the registered members are voting members. 14. Approximately xxx members actively participate in sport; up to x,000 members would be sports spectators. Most members are too old or physically unfit to participate in very active sport. Control 15. The requirements for election to the Board are stated in the constitution. 16. There is no requirement in the constitution for Board members to be participants in or concerned with the encouragement of the game or sport. 17. All of the current board members were involved in the sport. 18. Under the constitution only certain Members are entitled to receive notices, attend and vote at all general, annual general or special general meetings. Operations 19. The Club conducts activities from a number of sporting venues. 20. The Club fields one sports team. 21. In addition, The Club also fields other social sports teams. 22. The Club operates a number of clubs. 23. In each of the clubhouses are displayed trophies, honour rolls of people who have achieved success in their sport or made substantial contributions to the encouragement of sport, signed sporting memorabilia, photographs of successful teams, and television screens showing sporting content. 24. On its website, the club advertises packages for social and corporate events, such as weddings, Christmas lunches, corporate functions, seminars etc. to be held at the clubhouses. They offer various venues and catering options. 25. The Club also runs a number of promotions, including weekly gaming promotions, cafe promotions, meal deals and dedicated nights and days in the bistro. Marketing to members includes monthly emails, online competitions, free Wi-Fi within the club, Facebook and Twitter. 26. The clubhouses are also used for sport training conferences and meetings. There are training rooms used by sports teams and school children, free of charge. The training rooms are equipped with projectors, television and DVD player, whiteboard and photocopier. 27. Training facilities have been used for several sports conferences over the past numerous years. Venue 1 28. One Club venue is the home ground for the local sporting club. 29. The Club provides use of the venue regularly for various sporting events. 30. The Club does not charge for use of facilities for sporting events by sporting organisations or schools. 31. The clubhouse has various rooms available for hire for events. 32. The Club also has a Bistro and Coffee Shop, open everyday. 33. The Club provides a variety of gaming and entertainment with the latest in gaming technology, jackpots and a range of daily gaming promotions, including Raffles, Bingo, Keno and a TAB sports lounge with large plasma screens. Each week the club presents various entertainers. 34. The Club hosts a trade show annually. Venue 2 35. The Club operates a second club venue at a different location. 36. The venue is home to local sporting games. 37. The Club provides use of the venue regularly for various sporting events. 38. The Club plans include allowing use of the venue at night. 39. The Venue has undergone various improvements and upgrades and offers a family friendly bistro open 7 days (lunch and dinner), live entertainment at certain times, Trivia and Bingo twice weekly, gaming room, TAB facility, and function room for hire. The venue has a number of separate social clubs with various social activities including bus trips and associated activities. Venue 3 40. The venue is leased from the Council. The Club took over responsibility for the lease when it became no longer financially viable for the sports club to continue independently. 41. Sports activities and competitions are conducted at the venue most weekdays, weeks nights and weekends. 42. Two of the directors spend 10-30 hours each week organising and supervising activities at the venue, including games and functions. 43. The Venue is advertised on the Club website. The venue has a number of rooms available for hire for social and corporate functions. 44. The Venue is open 6 days a week. Other activities: 45. The Club provides sponsorship and annual funding for the junior sports clubs in the catchment area. 46. The Club facilitates a traineeship program for students from local secondary schools. 47. The Club provides uniforms to local schools for participation in sporting competitions. 48. The Club donates each month to the various community activities. 49. The Club provides some sports scholarships. 50. The Club transports school children to and from sporting events held at the sporting venues at no cost. 51. The Club arranges for sporting events held at its venues to be broadcast on radio. 52. The Club organises raffles and fundraising activities to support various sports teams. 53. The Club undertakes leaflet drops in the local community to encourage residents' interest in sport. 54. The Club owns premises located adjacent to its venue. Some of these premises are used for accommodation for students who have come to the area on scholarships to learn sport. The remaining premises are used to generate income to subsidise the costs of making houses available for student accommodation.

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: Summary The Club is not exempt from taxation under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as it is not an exempt entity under Item 9.1(c) in the table in section 50-45 of the ITAA 1997. Detailed reasoning The statutory conditions that the applicant must meet before being entitled to exemption from income tax are set out in sections 50-1 and 50-45 of the ITAA 1997 as follows: 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 the 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. The matters to be satisfied under section 50-45 of the ITAA 1997 are: &squf; the organisation is a society, association or club &squf; it is established for the encouragement of a game or sport &squf; it is not carried on for the profit or gain of its individual members, and &squf; the special conditions have been met. | Detailed Reasoning - Society, Association or club: The terms 'association' and 'society' are not defined and therefore take on their ordinary meaning. The Macquarie Dictionary defines 'association' 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 26 at 35). An association may be incorporated or unincorporated. The Club is: &squf; an Australian company, and &squf; an organised body of members instituted for the purposes of its constitution. It is accepted that the Club is an association/society for the purposes of section 50-45 of the ITAA 1997. | Detailed Reasoning - Established for the encouragement of a game or sport: To qualify for exemption the society, association or club must be established for the encouragement of a game or sport. The encouragement of a game or sport must be the main purpose of the entity. Determining an organisation's main purpose involves an objective weighing of all its features, including its constitution, activities, policies, administration, finances, history and control. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs discusses the meaning of 'encouragement' as used in section 50-45 of the ITAA 1997. Paragraph 11 states the following: 11. '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: &squf; forming, preparing and entering teams and competitors in competitions in the game or sport; &squf; co-ordinating activities; &squf; organising and conducting tournaments and the like; &squf; improving the abilities of participants; &squf; improving the standard of trainers and coaches; &squf; providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors; or &squf; encouraging increased and wider participation and improved performance; and can occur indirectly: &squf; through marketing; or &squf; by initiating or facilitating research and development. It is the purpose and character of the entity itself that is determinative, rather than the character of the controlling body or related exempt entities. Paragraph 16 of Taxation Ruling TR 2005/22 Income tax: companies controlled by exempt entities states: 16. It is not possible to merely attribute the characteristics and purposes of an exempt entity to a different company, or to simply 'look through' the company to the exempt entity, ignoring the characteristics and purposes of the company itself. This position is consistent with the decision of the High Court in Federal Commissioner of Taxation v. Word Investments Ltd (2008) 236 CLR 204; 2008 ATC 20-072; (2008) 70 ATR 225 ( Word Investments). In Word Investments, the High Court held that Word Investments Limited was charitable because it had a sole charitable purpose itself, not because it had been established by and had links with a charitable entity. The use of a company's funds for exempt entities that encourage sport will not on its own cause it to meet this requirement. Paragraphs 44 and 45B of TR 2005/22 further explain: 44. For example in Cronulla Sutherland Leagues Club Ltd v. Federal Commissioner of Taxation the Leagues Club was not accepted as an exempt sporting club. The majority of the Federal Court held that the Leagues Club's main object or purpose was the provision of social amenities to its members, not the encouragement or promotion of rugby league football. This was despite the fact that without the funds it provided, the associated football club could not have continued to play in the New South Wales Rugby League competitions. 45B. The charitable status of Word Investments Limited in Word Investments did not result just from the fact that its surplus funds were directed to other charitable institutions. Rather, the company was a charitable institution because, having regard to factors such as the proper construction of its objects as set out in its memorandum of association, the circumstances of its foundation and the 'effectuation' of its objects in its activities, it was clear that its own purposes were charitable. The objects in the constituent documents of an institution and its activities which give effect to those objects are the starting point in determining the main purpose of an entity. In Cronulla Sutherland Leagues Club Ltd v. Federal Commissioner of Taxation 90 ATC 4215; (1990) 21 ATR 300; 23 FCR 82, Lockhart J in the Full Federal Court said, at ATC 4225; ATR 312: '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. 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 so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.' Therefore, section 50-45 of the ITAA 1997 looks to the relevant year of income to determine whether each of its elements is satisfied. Evidence of the purpose for which the club was originally or later set up is helpful but the club must demonstrate by reference to its activities in the year of income that it has as its main purpose the encouragement of the game or sport. This approach was confirmed in Word Investments. Quoting Lockhart J in Cronulla Sutherland Leagues Club Ltd v Federal Commissioner of Taxation 90 ATC 4215; (1990) 23 FCR 82 at 96, the High Court provided the following caveat at 34: 34. A caveat. To avoid doubt in future, it should be noted that it would not be enough that the purpose or main purpose of an institution were charitable if in fact it ceased to carry out that purpose. Just like the former s 23(g)(iii) of the 1936 Act, so the former s 23(e) of that Act, and item 1.1 in the table in the present s 50-5 of the 1997 Act, being provisions in the legislation exempting tax on annual income, have "a periodic operation"; the statute "directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the [institution] was established but also the purpose for which it is currently conducted."… Any other purpose of the organisation must be incidental, ancillary or secondary to encouragement of sport. Paragraph 42 and 43 of TR 97/22 provides guidance on how to determine an entity's main purpose. Paragraphs 42 and 43 state: 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. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 at 4225; (1990) 21 ATR 300 at 312 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.' 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 or purposes. As Lockhart J said 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.' Similarly, in Terranora Lakes Country Club Limited v FC of T , 93 ATC 4078, Hill J stated at 86: Clearly, each case will depend upon its own facts. If the social activities have become an end in themselves, as was the case in Cronulla Sutherland , it will be necessary to see whether that end has become the predominant purpose for which the club is established in the year of income… A club's main purpose can only be ascertained after objectively weighing all of the club's features. Paragraphs 15 and 16 of TR 97/22 outline a number of features to consider when determining purpose: 15. Features that are highly persuasive in supporting a conclusion that the main purpose of the club is to encourage a game or sport include: - the club conducts activities in the relevant year that are directly related to the game or sport (see paragraph 51); - the sporting activities encouraged by the club are extensive (see paragraph 53); - the club uses a significant proportion of its surplus funds in encouraging the game or sport (see paragraph 54); 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 (see paragraph 56). 16. Other features that are relevant but less persuasive include: - a high level of participation by members in the game or sport (see paragraph 57); - 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) (see paragraph 58); - 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 (see paragraph 59); 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 (see paragraph 60). Activities referred to in paragraph 51 of TR 97/22 include: - participating in competitions or tournaments involving the game or sport; - bringing into existence, organising and running such competitions or tournaments; - providing referees, umpires or other officials for the game or sport; - coaching participants in the game or sport; - encouraging club members to be spectators at and to support the game or sport; and - fundraising, for specific events in the game or sport in which the club's teams or competitors are involved, such as organising raffles to fund a club member's participation in an overseas event. Difficulties in working out main purpose can arise for clubs that conduct both sporting and non-sporting activities and the non-sporting activities are not incidental or ancillary to the sporting purposes. Non-sporting activities provided for members typically include social activities such as entertainment, dining, gambling and accommodation. The above features indicating a purpose of encouraging sport therefore need to be weighed against a club's other activities. All the relevant features must be examined as a whole. Paragraph 57 of TR 97/22 illustrates how these factors can have different weight in different cases: 57. A high level of participation by members in the sport or game encouraged by the club would also support the club's main purpose being the encouragement of the game or sport: Case W114 89 ATC 891 at 898; AAT Case 5452 (1989) 20 ATR 4125 at 4133 (Grand United Port Macquarie West Bowling Club v. FC of T); St Marys case ATC 4534, ATR 288. Where members are chiefly involved in the club's social activities and not in the sporting activities, it may indicate that its main purpose is not the encouragement of the game or sport. In both the Cronulla Sutherland and Terranora cases, the entertainment activities of the clubs were similarly extensive but the courts characterised the activities differently in each case. The activities in Cronulla Sutherland were characterised as the provision of social amenities to members and guests, which led to the club not being exempt. The entertainment activities in Terranora were characterised as a means of financing the members' sporting activities, which led to the club being exempt. One factor behind the difference in characterisation was the high sporting participation of members in Terranora and the low participation in Cronulla Sutherland . | Detailed Reasoning - Determining the purpose of the Club: As a starting point, the Club has been constituted with a purpose of encouraging sport. The object of the Club is stated in its constitution. The Club is restricted by its constitution to apply its income and property solely for the promotion of its object. This legal obligation for the Club to apply its income only to the encouragement of sport is significant. As noted above, to determine the predominant purpose for which the Club is established in a year of income, factors beyond the stated objects must be considered including history and activities giving effect to the stated objects. Although the stated objects of the Club have been revised between its establishment and more recent years, there has been little change in the operations of the Club and the activities it carries out to achieve its objects. In practice, the Club continues to provide a sporting club for members and member guests with all the usual facilities of a club. At the same time, the Club also continues to encourage sports. Giving effect to its stated object, the Club conducts a range of activities. These generally include supporting the local particular sporting club, supporting sports programs for local schools, hosting and organising sports events and expos, providing sporting and other facilities for local sporting events and activities, fielding various competitive and social sports teams, arranging and encouraging social sporting competitions and providing in-kind, cash and other financial support for community and sporting activities. In addition to these sports related activities, the Club also offers members and member guests various social activities and entertainment at its clubhouses, function rooms for event hire, an event expo and social clubs. There is little contention that the activities of the Club result in the encouragement of sport, both directly and indirectly. However, the Club also provides club facilities and engages in social activities for the benefit of members. It therefore needs to be determined whether the hospitality and entertainment activities have become an end in themselves and therefore a purpose of the Club in the relevant year of income, and if it is a purpose, whether this is its main purpose. Considering the features set out in TR 97/22 and weighing sporting activities against social activities it can be determined objectively on the facts which is the dominant purpose. The Club conducts activities from a number of venues. At each venue the Club operates a clubhouse. The Club has a history of involvement with sport in the community. At the time, 'providing facilities' included the purchase of land as a new sports ground and construction of a small clubhouse for use by local teams. The teams were managed from a small room in the Clubhouse at the new grounds. Prior to this, the team club was leasing grounds from the Council that were unsuitable for continued use. Over the years the Club has acquired other local sports clubs that were struggling financially at the time. One venue continues to serve as the home ground for the local sports team. The team club relies on the ongoing support of the Club to remain competitive in the competition and to carry out its development program. The venues are used for various sporting activities. The Club bears the cost of running and maintaining the fields and clubhouses at the locations and does not charge for use of facilities for sporting events by sporting organisations or schools. The Clubhouses are generally open everyday for social activities. All clubhouses have a sporting focus displaying trophies, honour rolls of people who have achieved success in their sport or made substantial contributions to the encouragement of sport, signed sporting memorabilia, photographs of successful teams, and television screens showing sporting content. Each has a viewing area to watch games played on the fields. However, the Clubhouses are primarily used for non-sporting activities provided for members and guests such as entertainment, dining, gambling and other social activities. One venue has rooms available for hire for events. It also has a Bistro, open everyday for lunch and dinner, and a Coffee Shop, open everyday. The Venue also provides a variety of gaming and entertainment with poker machines and a range of daily gaming promotions, including Raffles, Bingo, Keno and a TAB sports lounge with large plasma screens. The Club also presents various live entertainment and shows. Venue 2 has undergone various improvements and upgrades and offers a family friendly bistro open 7 days (lunch and dinner), live entertainment, Trivia and Bingo twice weekly, gaming room, TAB facility, and function rooms for hire. The venue has three separate social clubs with various social activities including bus trips, overnight trips and golf. Venue 3 has a number of rooms available for hire for social and corporate functions and is open 6 days a week. The Club advertises packages for social and corporate events, such as weddings, Christmas lunches, corporate functions, seminars etc. to be held at the Clubhouses. They offer various venues and catering options. The Club also runs a number of promotions, including weekly gaming promotions, new coffee shop promotions, meal deals and dedicated nights and days in the bistro. Marketing to members includes monthly emails, online competitions, free Wi-Fi within the Club, and social media. Not all revenue generated from these business activities is directed to the social aspects of the organisation. The Club aims to arrange its operations to continue providing support to the community, schools sports associates and sports club. Though the Club has no particular policy for the application of its surplus it usually applies the majority, if not all of its surplus to sports grants. The Club also provides training for students to referee school competitions, training for coaches for local schools, upgrades to the local school gymnasium, weight training for players and scholarships. The Clubhouses are also used for sport training conferences and meetings. There are training rooms used by sports teams and school children. The training rooms are equipped with projectors, television and DVD player, whiteboard and photocopier. The Club clearly provides substantial financial support, facilities and other assistance for local sporting clubs and schools in the area, collaborating with them to host and organise various sporting events. However, the Club has little participation in sport by its members. The Club fields the sports teams along with social sports. The number of the Club members was over XX,000. It is estimated that X,000 of the registered members are voting members. Approximately xxx members actively participate in sport; up to x,000 members would be sports spectators. Most members are too old or physically unfit to participate in very active sport, particularly the game of rugby league. The vast majority of members and guests therefore would be visiting the club venues for non-sporting activities. The Club has recently undergone standard renovations to upgrade its facilities. | Detailed Reasoning - Conclusion: The evidence indicates, that although the Club does have a purpose to encourage sport and engages in significant activities and expenditure to carry out this purpose, it also carries out considerably more extensive social activities and incurs equal if not more expenditure on the social, entertainment and hospitality aspects of its operation for members. Annual revenue is mostly from poker machines, bar trading and other entertainment and expenditure is predominantly geared towards producing this income. Promotion of the Club is mainly directed towards gambling, dining and entertainment. Additionally, the membership structure does not give emphasis and importance to players or supporters, with only a minority of members actively participating in sport. It is acknowledged that the surplus from the business operations is directed to sporting activities. The conducting of business to finance sporting activities does not prevent exemption. However, the information provided indicates that the far majority of members attend the Club to participate in non-sporting activities. It follows that the Club devotes a significant proportion of its resources to provide non-sporting facilities and services to members in the form of hospitality, gaming and entertainment. Therefore, in this case, the business of providing a club for members, with the usual social, entertainment and hospitality services and facilities of a club for the benefit of members and member guests has become more than a means of fundraising but an end in itself and therefore an independent purpose of the Club. The support given to the sporting purpose is significant and has not been overlooked. It is difficult to weigh up which purpose predominates. Nevertheless, considering the intensity of activity and extent of resources devoted to the non-sporting purpose, on balance it is evident that this social purpose is not merely ancillary or incidental to the sporting purpose but has become the predominant purpose for which the Club is established. It is the social activities of the Club as a members club which characterises its main purpose of providing for the social needs of its members rather than for the encouragement of sport. Weighing up the various factors, on the whole of the material, it is concluded that the Club has not been established for the encouragement of a game or sport for the years of income covered by this ruling. The Club is therefore not exempt from taxation under section 50-1 of the ITAA 1997 as it is not an entity described in section 50-45 of the ITAA 1997. The special conditions have not been considered.