Private ruling: Not-for-profit - encouragement of sports
Date of advice: 2 November 2022
Published: 9 January 2023
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Entity continue to be 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 pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, if the proposed amendments to their Constitution are made? | A1: Yes

Relevant facts and circumstances: This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Entity is a public company limited by guarantee. The Entity has previously applied for private binding rulings confirming it is an entity exempt from income tax on the basis it is established for the encouragement of sport. The Entity has sought a new private binding ruling to confirm it will still be an entity established for the encouragement of sport should the proposed amendment to their Constitution be made. The objects of the Entity's constitution provide that it is to encourage, promote and further the game or sport The principal activities of the Entity' since its inception has been to provide activities associated with a game or sport and other services to members. It organises and participates in a significant number of competitive activities. The constitution of the Entity provides that no portion of its income or property can be distributed by way of profit to its members; and also provides that any surplus on winding up or dissolution cannot be distributed to members but must be transferred to similar organisations with similar prohibitions. The Entity has various classes of memberships. Any income derived by the Entity will continue to be applied to support and encourage the game or 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. | Income Tax Assessment Act 1997 subsection 50-70(1) | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . A society, association or club which has been established for the encouragement of a game or sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1. Section 50-1 states: The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. (* as defined in section 995-1 of the ITAA 1997) The tables referred to in section 50-1 are contained in sections 50-5 to 50-45. A society, association or club established for the encouragement of a game or sport is listed at item 9.1 (c) in the table in section 50-45. The society, association or club must meet the special condition detailed in section 50-70. An entity is exempt from income tax as a society, association or club established for the encouragement of a game or sport if it: • is a society, association or club, • is established for the encouragement of a game or sport, and • satisfies the special conditions. The special conditions in section 50-70 state that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members and: • it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia; or • it is a deductible gift recipient; or • it is prescribed by law in the income tax regulations, and it is located outside Australia and is exempt from income tax in its country of residence. | Detailed Reasoning - Society, association or club: The term 'society, association or club' is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words. In Douglas v Federal Commissioner of Taxation 36 ATR 532; (1997) 77 FCR 112; 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. 'Society, association or club' was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose. The members of the Entity voluntarily associate together for a common purpose and common interest. The Entity has a management committee and rules of association. It is therefore accepted that the entity is an 'association, society or club'. | Detailed Reasoning - Established for the encouragement of game or sport: Paragraph 30 of the Taxation Ruling TR 2022/2 Income Tax: the games and sports exemption (TR 2022/2) state: For a club to be established for the encouragement of a game or sport, the main purpose of the club in the relevant income year must be the encouragement of a game or sport. 'Encouragement' is not a defined term and takes its ordinary meaning. The ordinary meaning of encouragement (or the act of encouraging) has been described as stimulating by assistance or approval, including through direct or indirect means Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of a club to determine its main purpose. Paragraph 17 of TR 2022/2 states, Game' and 'sport' are not defined terms and take their ordinary meaning, shaped by the statutory context in which they appear. Some activities are obviously games or sports; for example, netball or football. For other activities, characterisation as a game or sport can be demonstrated by evidence of a competitive element and by participants' compliance with the conventions and rules of the activity. Paragraph 27 of TR 2022/2 provides some examples of games or sports. The category, 'using equipment to achieve mobility' lists yachting as a sport. Paragraph 31 of TR 2022/2 emphasises that: Determining the main purpose of a club requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of a club to determine its main purpose. No one factor on its own will determine the main purpose of a club. A weighing of all the factors is needed. When considering the factors together, an objective conclusion must be reached that a club has a main purpose of encouraging a game or sport: paragraph 36 of TR 2022/2. Paragraph 37 of TR 2022/2 lists, the following factors identified by courts and tribunals as relevant when considering purpose: • emphasis in the club's constituent documents that the main purpose is to encourage a game or sport • extent of sporting activities • the conduct of activities directly related to the game or sport • a high level of member participation in the game or sport • promotion of the organisation to patrons and the public as one that encourages a game or sport • involvement of the committee of management in the promotion of sport • the use of surplus funds for encouraging the game or sport, and • the provision of financial and in-kind support for encouraging the game or sport. The Entity and its members confirmed that they: • organise and participate in a significant number of competitive sports; • conducts weekly games throughout the year • run training sessions; • has significant number of enrolments in the respective year. The Proposed Constitution of the Entity contains the Purpose and Objects that it is primarily established to encourage, promote and further the game or sport and therefore meet this requirement under section 50-45. | Detailed Reasoning - Satisfying the special conditions: As per subsection 50-70(1): 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; and the entity satisfies the conditions in subsection (2). The Entity is based in State-A in Australia, therefore it meets the requirements of paragraph 50-70(1)(a). Subsection 50-70(2) states: The entity must: a. comply with all the substantive requirements in its governing rules; and b. apply its income and assets solely for the purpose for which the entity is established. The Entity has proposed changes to their constitution. The main purpose and object of the Entity is to encourage and further the game or sport along its relevant purpose. The changes to the Proposed Constitution will not impact their tax-exempt status. Therefore, it is considered that the Entity is established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45. Paragraph 8 of Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1),explains that: three questions must be considered to determine whether an entity satisfies the governing rules condition: • What are the 'governing rules' of the entity? • What are the 'substantive' requirements in the entity's governing rules? • At what time must the entity comply with all of the substantive requirements in its governing rules? The substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity. The Entity is complying with its objects as outlined in its constitution. It is encouraging sporting activity and enabling sporting competitions. Paragraphs 22 and 23 of Taxation Ruling TR 2015/1 explain that: The income and assets condition requires an entity to 'apply its income and assets solely for the purpose for which the entity is established'. Two questions must be considered to determine whether an entity satisfies the income and assets condition: • what is the 'purpose for which the entity is established', and • has the entity applied its income and assets solely for the purpose for which the entity is established? Paragraph 45 of TR 2022/2 states: Using surpluses from commercial activities to support the conduct of sporting activities is a factor that would support a conclusion that the main purpose of the club is encouraging a game or sport. However, where a club uses surpluses to undertake commercial activities which provide services to members, the extent of those activities, which do not achieve a sporting end, may result in the club's main purpose not being about encouraging a game or sport. It is necessary to carefully consider all relevant factors when determining the main purpose of a club. Paragraph 61 of TR 2022/2 states: The main purpose of a club can change over time and there is an ongoing requirement to make an objective evaluation of all of the facts and circumstances that apply to that club to determine its main purpose. The primary object and purpose of the Entity for which it is established is in their Proposed Constitution. It will continue to encourage a game or sport and use its income and assets for the purposes of undertaking the activities for which it is established, and the surplus funds are being retained and not distributed to members consistent with its non-profit requirements. Therefore, the Entity continues to be exempt from income tax under section 50-1 as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45, under the proposed amendments to their Constitution