Private ruling: Income tax exempt status and dividend withholding tax
Published: September 2012
Ruling period: 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the ordinary & statutory income of the proposed entity be exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that the entity is a society, association or club established for the encouragement of sport pursuant to section 50-45 item 9.1(c) of the ITAA 1997? | A1: Yes | Q2: Will grants made by the entity to an overseas entity be subject to dividend withholding tax in accordance with section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No

Relevant facts and circumstances: The entity has been established in Australia as a company limited by guarantee. The head office of the entity will be in Australia. The entity is being established as the management company for a specific event to be held in Australia and an overseas country. The majority of the games will be held in Australia. The majority of the crowd for the entire event is expected to attend in Australia. The majority of expenses are expected to be incurred in Australia. Any surplus from the event will be paid by way of grants by the entity to two associations (A and B) in the ratio specified in the constitution of the entity. Association A is a tax exempt Australian association, and Association B is an overseas association. A copy of the proposed entity's constitution has been provided. The entity will derive income from the event from various sources. The entity will incur various costs in relation to the event. The entity may, from time to time, make payments of grants from its net income to Association A and B in the proportion specified in its constitution.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 11A | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1 936 section 128B | 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: Detailed Reasoning - Summary of decision: The entity is considered to be a non-profit association established for the encouragement of sport. It has a physical presence in Australia and pursues its objective and incurs its expenditure principally in Australia. | 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 item 9.1 of the table in section 50-45 of the ITAA 1997, its income is exempt from income tax. The exemption is subject to the special conditions outlined in section 50-70 of the ITAA 1997. The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it: · has a physical presence in Australia, and to that extent, incurs its expenditure and pursues its objectives principally in Australia; or · is a deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; or · 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 a resident. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs describes the circumstances under which a society, association or a club is regarded as being established for the encouragement of sport. Each of the requirements will be considered in turn: · Non-profit society, club or association An 'association' is defined in the Macquarie Dictionary as: · an organisation of people with a common purpose and having a formal structure. The entity, being a company limited by guarantee formed with a number of members for a common purpose, is considered to be an association. The association must not be carried on for the purposes of profit or gain to its individual members. The governing document of the association should contain a prohibition against a distribution of profits and assets among members while the association is functional and on its winding up. The entity's non-profit rule is considered acceptable in that members are not entitled to benefits other than for bona fide compensation for services rendered or expenses incurred on behalf of the entity. On winding up of the entity its constitution stipulates that surplus assets are to go to Associations A and B in a specified proportion. Associations A and B are not members of the entity. They are also organisations which are established for the encouragement of sport and not carried on for the profit or gain of individual members. Therefore, we are satisfied that on windup, the entity meets the non-profit requirement in that surplus assets are not being distributed to members. | Detailed Reasoning - Established for the encouragement of a game or sport: To be eligible for the exemption the association's main purpose must be to encourage a game or sport. There is no special definition of what constitutes a game or sport. Accordingly the words take on their ordinary meaning. It is essential that the encouragement of a game or sport is the main or dominant purpose of an association. 'Encouragement' means 'stimulation by assistance' according to the Macquarie Dictionary. Taxation Ruling TR 97/22 indicates that a highly persuasive feature that supports the conclusion that an association has a main purpose of encouraging a game or sport is if it conducts activities to bring into existence organises and runs competitions or tournaments. The main purpose of the entity, when considering its proposed objects and activities, is accepted as being the encouragement of a sport. | Detailed Reasoning - Special conditions: For a sporting organisation to be exempt from income tax, it must pass one of the following tests from section 50-70 of the ITAA 1997: · physical presence in Australia · deductible gift recipient test; or · prescribed by law test. The entity 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 entity will be established in Australia and its head office will be in Australia so it is accepted that it will have a physical presence in Australia. On the basis of this information it is accepted that the entity will pursue its objectives and incur its expenditure principally in Australia. | Detailed Reasoning - Summary of decision: The grants made by the entity to Association B will not be subject to dividend withholding tax in accordance with section 128B of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Liability to non-resident withholding tax is determined by Division 11A of Part III of the ITAA 1936. Section 128B of the ITAA 1936 deals with liability to withholding tax. Subsections 128B(1) and (4) of the ITAA 1936 provide that, subject to certain exceptions listed in subsection 128B(3) of the ITAA 1936, a non-resident is liable to withholding tax on income consisting of dividends paid by a company that is a resident. What is the nature of the grant payments to be made to Association B? A dividend is defined in subsection 6(1) of the ITAA 1936 to include: · any distribution made by a company to any of its shareholders, whether in money or other property; and · any amount credited by a company to any of its shareholders as shareholders; ... 'Shareholder' is defined in subsection 6(1) of the ITAA 1936 to include a 'member or stockholder'. The term 'stockholder' is not defined in either the ITAA 1936 or ITAA 1997. Section 960-130 of the ITAA 1997 provides that, in relation to a company, the term 'member refers to 'a member of the company or a stockholder in the company'. Section 231 of the Corporations Act 2001 provides that A person is a member of a company if they: · are a member of the company on its registration; or · agree to become a member of the company after its registration and their name is entered on the register of members; or · become a member of the company under section 167 (membership arising from conversion of a company from one limited by guarantee to one limited by shares). In addition, subsection 120(1) of the Corporations Act 2001 provides that: A person becomes a member, director or company secretary of a company on registration if the person is specified in the application with their consent as a proposed member, director or company secretary of the company. You have advised that the members of the entity will be 6 individuals. Under the proposed constitution, Associations A and B will not legally or beneficially be a member of the entity. Associations A and B will not own any interests in the entity, therefore they cannot be considered to be 'stockholders' or 'members' of the entity. Accordingly, any payments made by the entity to Association B will not be payments to a shareholder of the entity and therefore will not be a dividend, as defined in section 6(1) of the ITAA 1936. Division 7A of the ITAA 1936 Division 7A of the ITAA 1936 deems certain distributions made by a private company to a shareholder or associate of a shareholder to be an unfranked dividend. Subsection 103A(1) of the ITAA 1936 defines a private company to be a company that is not a 'public company'. Pursuant to paragraph 103A(2)(c) of the ITAA 1936 deems a company to be a public company if: · the company has not, at any time since its formation, been carried on for the purposes of profit or gain to its individual members and was, at all times during the year of income prohibited by the terms of its constituent document from making any distribution, whether in money, property or otherwise, to its members or to relatives of its members; Under its constitution, the entity will not be carried on for 'the profit or gain to its individual members', and is prohibited from making any distributions to its members. Accordingly, the entity will not be a private company for the purposes of Division 7A of the ITAA 1936, and it is not necessary to further consider the provisions contained within that Division. | Detailed Reasoning - Conclusion: As the payments made by the entity are not dividends they will not be subject to withholding tax under section 128B(1) of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.