Private ruling: Income tax exemption
Date of advice: 3 September 2019
Published: October 2019
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the taxpayer an entity covered by item 9.1 of the table in section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997), so that its ordinary and statutory income is exempt from income tax under section 50-1 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: The taxpayer is an entity established in Australia that has at all relevant times undertaken its activities in Australia. The objects of the taxpayer are stated to advance and promote a specific type of sport. The governing documents of the taxpayer prevent it from distributing profits or assets for the benefit of its members both while it is operating and when it winds up. The taxpayer provides a venue for the sport that it promotes, as well as offers other entertainment or social facilities. The taxpayer offers coaching of the sport, as well as coordinates and supports relevant activities and events to the sport. The taxpayer has surplus funds that are planned to be used for investment activities.

Relevant legislative provisions: Income Tax Assessment Act 1997

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Pursuant to section 50-1 and item 9.1(c) of the table in section 50-45, the ordinary income and statutory income of a society, association or club established for the encouragement of a sport is exempt from income tax provided the special conditions in section 50-70 are satisfied. Subsection 50-70(1) requires that, to be exempt from income tax, an entity covered by item 9.1 of the table in section 50-45 must be a society, association or club that is not carried on for the purpose of profit or gain of its individual members (the non-profit requirement) 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. Subsection 50-70(2) provides that the entity must comply with all the substantive requirements in its governing rules (governing rules condition) and apply its income and assets solely for the purpose for which the entity is established (income and assets condition). The threshold question in order to quality for exemption under section 50-1 as an entity covered by item 9.1(c) of the table in section 50-45 is whether the entity is a society, association or club established for the encouragement of a sport. | Detailed Reasoning - Established: The meaning of the word 'established' in former subsection 23(g) of the Income Tax Assessment Act 1936 (ITAA 1936) was considered in Cronulla Sutherland Leagues Club Limited v. FC of T 90 ATC 4215 , where it was held that it referred not only to the circumstances existing when the entity was initially formed but also to its subsequent activities and to the circumstances of the particular year under consideration. This is noted in paragraph 24 of the Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), which states that the purpose for which an entity is established is determined by a consideration of all the features of the entity. The main factors to be considered are the objects in the entity's constituent documents and the activities of the entity after its formation. Other factors include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity. | Detailed Reasoning - Encouragement of sport: The words 'encouragement' and 'sport' and the composite phrase 'encouragement of sport' are not defined in the ITAA 1997 or ITAA 1936, and for the purposes of section 50-45 the words take on their ordinary meaning. Paragraph 28 of the Taxation Ruling 97/22 Income Tax: exempt sporting clubs (TR 97/22) refers to definition of 'sport' by Australian Sports Commission (ASC) as 'a human activity capable of achieving result requiring physical exertion and/or physical skill that, by its nature and organisation, is competitive and is generally accepted as being a sport'. In paragraph 11 of the TR 97/22, Macquarie dictionary meaning of 'encouragement' is adopted, being 'stimulation by assistance'. Encouragement can occur directly by: · forming, preparing and entering teams and competitors in competitions in the game or sport; · co-ordinating activities; · organising and conducting tournaments and the like; · improving the abilities 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 increased and wider participation and improved performance; and can occur indirectly: · through marketing; or · by initiating or facilitating research and development. In this case, objects and purpose of the taxpayer are stated as to provide facilities for, to promote and encourage activities of the sport. The taxpayer provides facilities for the activities of the sport; it offers coaching to improve abilities of the players as well as encourages participation and improved performance in playing the sport. It holds and coordinates relevant activities and events of the sport. These activities advance, promote and develop activities of the sport and give effect of the taxpayer's stated purposes and objects. Accordingly, it is considered that the taxpayer is established for encouragement of the sport. | Detailed Reasoning - Special Conditions: The taxpayer was established in Australia and has at all relevant times operated in Australia. Accordingly, the special conditions in section 50-70 will be satisfied if the non-profit requirement, governing rules condition and income and assets condition are satisfied. The non-profit requirement is explained in TR 97/22. In accordance with this explanation, an entity will be accepted as being non-profit where it is prevented by its constituent or governing documents from distributing its profits or assets for the benefit of its members, both while it is operating and upon winding up; its actions must be consistent with this prohibition. In this case, taxpayer's governing documents prevent it from distributing profits or assets for the benefit of its members both while its operating and when it winds up. This ensures that the funds and assets of the taxpayer are applied only to carry out its purposes and are not applied for the benefit of its members. Accordingly, the non-profit requirement is satisfied. The governing rules condition is considered in paragraph 8 of the Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1), which lists down the following three questions to be asked: · what are the governing rules of the entity? (further explanations in paragraphs 9 to 16 of the TR 2015/1) · what are the substantive requirements in the governing rules? (further explanations in paragraphs 17 to 20 of the TR 2015/1) · at what time must the Association comply with all of the substantive requirements in its governing rules? (further explanations in paragraph 21). In this case, governing documents of the taxpayer constitute its governing rules. The substantive requirements in taxpayer's governing rules are those set out in its governing documents, including rules such as those that: · give effect to the objects of the taxpayer; · relate to the non-profit status of the taxpayer; · set out the powers of the taxpayer; · set out functions of the taxpayer's management committee and executive committee · require the taxpayer's financial statements to be prepared and retained; · set out the criteria for admission as a member of the taxpayer; · require the taxpayer to maintain a register of members; · relate to the winding-up of the taxpayer. On the basis that, there is no fact that could otherwise indicate or suggest that the taxpayer does not comply with any of the substantive requirements in its governing rules, it is considered that the taxpayer meets the governing rule condition in subsection 50-70(2). The income and assets condition is considered in paragraph 23 of the TR 2015/1, which requires the following two questions to be asked: · what is the 'purpose for which the entity is established'? (further explanations in paragraphs 24 to 29 of the TR 2015/1) · has the entity applied its income and assets solely for the purpose for which the entity is established? (further explanations in paragraphs 30 to 36 of the TR 2015/1). Paragraphs 26 to 28 of the TR 2015/1 explains that, the purpose for which the entity is established can include an incidental or ancillary purpose, which tends to assist, or naturally goes with, the achievement of the establishment purpose. Incidental and ancillary purposes are merely aspects of the purpose for which the entity is established. Thus the income and assets condition will not be breached merely due to an entity having an incidental or ancillary purpose. To determine a taxpayer's main purpose, paragraph 15 of the TR 97/22 lists down features that are highly persuasive. In the case where a taxpayer conducts other activities, particularly social or commercial activities, paragraph 44 of the TR 97/22 states this does not, of itself, preclude the taxpayer from being exempt. A taxpayer is still exempt provided the encouragement of a game or sport is the taxpayer's main purpose. Facts in this case indicate that the taxpayer is involved in the promotion of the sport, as well as support that the taxpayer's main purpose is consistent with its establishment purpose. The mere fact that the taxpayer conducts other social and commercial activities does not, of itself, breach the income and assets condition. Meaning of 'solely' is provided in paragraphs 33 to 35 of the TR 2015/1 that, the entity must exclusively or only apply its income and assets for that purpose. Paragraph 54 of the TR 97/22 referred to what was noted by Lockhart J in Cronulla Sutherland at ATC 4226; ATR 313 and states that what is important is the way such funds are used and the activities that are financed. In Example 8 of the TR 2015/1, a religious entity, which meets the description of a registered charity in item 1.1 of the table in section 50-5, generated profits from commercial activities of running an opportunity shop, the profits were then used to further the entity's purpose; in that example, it is considered that the establishment and operation of the opportunity shop is consistent with the entity applying its income and assets solely for the purpose for which it is established, it is not a breach of the income and assets condition. On the facts, the taxpayer's surplus funds are planned to be used for investment activities. The investment activities are consistent with the taxpayer applying its income and assets solely for its establishment purpose, provided that any profits generated from the investment activities together with any surplus funds are directed towards and utilised to develop and/or encourage the sport that the taxpayer promotes; accordingly the income and asset condition in subsection 50-70(2) is satisfied. Therefore, the taxpayer is a non-profit entity and is established and operated in encouragement of the sport; it meets the conditions as set out in section 50-70, and accordingly it qualifies as an exempt entity under item 9.1 of the table in section 50-45.