Private ruling: Income tax exemption of a Club
Published: January 2013
Ruling period: 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the ordinary and statutory income of a Club exempt from income tax under section 50-1 of the Income Tax Assessment Act (1997) on the basis that it is a society, association or club establishment for the encouragement of sport pursuant to paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: The club previously received a favourable private ruling from the ATO affirming its income tax exempt status on the basis that it is a society, club or association established for the encouragement of sport pursuant to paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997. This Private ruling covered the income tax years 2009 to 2011 inclusive. The club has submitted numerous documents in support of its present application. These documents are: a cover letter its treasurer, a copy of its memorandum of association, a copy of the club's Articles of Association, the club's 2011 and 2012 financial reports (including each income years' respective Chairman's report, Treasurer's report and President's report), a copy of the club's last three newsletters and a breakdown of all the services provided by the club for the 2012 financial year. The club's memorandum of association contains objects relating to the promotion of the game. It also features valid non-profit and wind-up clauses. In a letter to the Deputy Commission of Taxation, the club's treasurer stated: '…the Club's main purpose is that of the encouragement of the game. We compete in and conduct tournaments and have trainers and coaches accordingly to facilitate new members as well as to help the existing members.' The treasurer further stated: 'I wish to inform you that all Committee members are active. All members are active and regular participants in the activity. The majority of the club's members are members, as opposed to social members. The club's articles of association provide for both membership categories. The club's 2011 and 2012 financial statements both state the club's principal activities as being: 'the provision of facilities and associated club and social activities for the benefit of the members'. The club's 2011 Chairman's report refers to an influx of members for the purposes of revenue generation. The Chairman subsequently stresses that the conduct of game remains the club's principal objective and that such financially-oriented ventures are necessary to ensure the club's ongoing existence. The club's secretary provided a breakdown of the services the Club provided during 2012. These services included: men's, ladies, mixed, coaching, barefoot, school as well as various social amenities.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 199 7 section 50-45 | Income Tax Assessment Act 1997 section 50-70

Reasons for decision: Summary: The club is entitled to income tax exemption under section 50-1 of the ITAA 1997 as a society, association or club established for the encouragement of a game or sport pursuant to paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the ordinary income and statutory income of entities covered by subdivision 50-A of the ITAA 1997 is exempt from income tax. If a society, association or club established for the encouragement of a game or sport falls under paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997, its income is exempt from income tax. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs, covers the circumstances under which a club is regarded as being established for the encouragement of a game or sport pursuant to paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997. For a club to fall within paragraph (c) of section 50-45 of the ITAA 1997, it must satisfy the following three tests: · It must be a society, association or club; · It must satisfy the requirements of the special conditions contained in section 50-70. · Its main purpose must be for the encouragement of a game or sport. | Detailed Reasoning - 1. Society, Association or Club: The club was incorporated several decades ago as a company limited by guarantee and has been conducting activities permissible under its objects. In addition to its incorporation, the club has a clear and formal management structure, with a committee and board of directors. The requirement that it is a club is therefore satisfied. | Detailed Reasoning - 2. Section 50-70 of the ITAA 1997: Paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997 states that special conditions contained in section 50-70 of the ITAA 1997 must be satisfied in order for a club to be afforded tax exempt status. Section 50-70 of the ITAA 1997 states: 50-70 special conditions for items 1.7, 2.1, 9.2 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. The club's constitution contains valid non-profit and wind-up clauses. The presence of these clauses satisfies the requirements that the club be a non-profit organisation. The club is not a deductible gift recipient, nor seeking to be prescribed by law so it must meet the physical presence in Australia test. The physical presence in Australia test has two elements. One is that the organisation has a physical presence in Australia. The second is that it must pursue its objectives and incur its expenditure principally in Australia. The club's headquarters and facilities are located within Australia. Furthermore, its expenditure relates exclusively to the operation and maintenance of its facilities. Therefore, the club satisfies both elements of this test. | Detailed Reasoning - 3. Main Purpose of Encouraging a Sport or Game: According to TR 97/22, in order for a club to be exempt, its main or dominant purpose must be the encouragement of the relevant game or sport. | Detailed Reasoning - Encouragement of a game or sport: X is accepted as a 'sport' for the purposes of section 50-45 at paragraph 38 of the ruling. Paragraph 11 of Taxation Ruling TR 97/22 Income tax: exempt sporting clubs states: 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: · forming, preparing and entering teams and competitors in competitions in the game or sport; · coordinating 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 The club encourages participation through: · the provision for public use · the provision of coaching free of charge · hosting and organising competitions · entering of men's, mixed and ladies teams into various competitions · social events | Detailed Reasoning - Main Purpose: According to the ruling, a club's main purpose can be inferred from its activities. Paragraph 49 of the ruling provides guidance for ascertaining a club's activities. Paragraph of 49 of the ruling states: In order to identify a club's activities, regard would normally be had to such sources as: · the club's constituent documents ; · resolutions of the committee or of the persons controlling the direction of the club; · minutes of meetings of that committee or of those persons; · the club's business plans; · promotional material concerning the club's activities; and · published reports about the club, such as its annual report. Paragraphs 51 to 61 of the ruling provide a non-exhaustive list of features that indicate whether a club's main purpose may be the encouragement of a sport. 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; · the sporting activities encourage by the club are extensive; · the club uses a significant proportion of its surplus funds in encouraging the game or sport; · 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. Other features that are relevant but less persuasive 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 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 satisfies all of the 'highly persuasive' features enumerated at paragraph 15 of the ruling. The club's constituent document emphasises the encouragement and promotion of the game in its objects, as well as the provision of suitable facilities. The club's newsletter, website, financial reports and the furnished breakdown of services provided all demonstrate that it consistently conducts activities that are directly relevant to the sport. These activities are extensive, with the club operating competitive various teams, organising and hosting competitive tournaments, providing free-of-charge equipment, coaching and offering social events for schools and the general public. The club's 2011 & 2012 financial reports both demonstrate that a significant proportion of its surplus funds are direct to the encouragement of the sport, both directly and indirectly. In relation to the less persuasive features enumerated at paragraph 16 of the ruling, the club's treasurer has affirmed that all committee members are active in the sport. It is also noted that the majority of club members are sporting members, with the remainder being social members. As the club actively promotes social in addition to its competitive offerings, it is reasonable to assume that a high percentage of the social members participate. The club's website and newsletter promote this sport as its main feature. Other activities are portrayed as being merely incidental to the encouragement of the sport. Particular emphasis is also placed on the club's sporting facilities. The club has a long-established history of promoting the sport since its inception a number of decades ago. The club's articles of association place restraints on the voting rights of social members. Social members are only entitled to vote at general meetings of the club in relation to business of electing a social member as director of the club. By contrast, members are afforded full voting privileges. The club rents a portion of its land to a third party, which generates significant revenue. Additionally, the club offers bar facilities 7 days per week as well as hosting some social during the week. The club also makes its social facilities available to some other clubs for use as their home clubs. It is recognised in both case law and TR 97/22 that a club might conduct social or commercial activities without impacting its tax exempt status, provided that these activities are ancillary or incidental to the encouragement of the game or sport, rather than co-ordinate with such encouragement. Lockhart J in Cronulla Sutherland Leagues Club Limited v. FC of T 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 without disqualifying the body from the exemption.' Terranora Lakes Country Club Limited v. FC of T 93 ATC 4078 (1993) 25 ATR 294 provides a pertinent example of a club pursuing non-sporting activities as a means of financing its sporting activities without jeopardising its tax exempt status. In this case, a large sporting club with a membership of nearly 4,100 provided extensive social amenities to both members and non-members. Indeed, 90.3% of the club's income came from poker machines, bar trading and catering but only 16.9% was spent on sporting activities. Hill J concluded that: ' … while the social activities … were extensive and could clearly be seen as an end, or perhaps as ends in themselves, those activities were … pursued as a means of financing the extensive sporting activities conducted by the club.' (at ATC 4086-4087; ATR 304) The club's 2012 Chairman's report stresses that the conduct of the sport remains the club's principal objective, but that revenue generating ventures are necessitated by the club's operations running at a loss. The club's strong focus on the sport is emphasised by the fact that all committee members are active participants in the sport and by the restrictions placed on social members with respect to voting rights at the club's AGM. It is clear from the club's financial statements that it is dependent on the income it derives from its social facilities in order to conduct its sporting activities. The club's various Chairman's reports, newsletters and promotional material make clear that the club's predominant focus is the encouragement of the sport. Its other activities can be considered to be ancillary to this predominant focus. This notion is objectively supported by the allocation of expenditure and investment in the club's financial statements. As discussed above, an objective analysis of the club's constituent documents, financial statements and promotional materials demonstrates that the club's activities satisfy all of the 'highly persuasive' and 'relevant but less persuasive features' enumerated at paragraphs 15 and 16 of the ruling. On the basis of the above factors, it is determined that the main purpose of the club is the encouragement of a game or sport, per paragraph (c) of item 9.1 of the table in section 50-45 of the ITAA 1997 and is therefore exempt from income tax under section 50-1 of the ITAA 1997.

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