Private ruling: Income tax exemption
Date of advice: 1 September 2017
Published: December 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the total ordinary income and statutory income of the Club exempt from income tax pursuant to section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis it is an entity described in item 9.1 of section 50-45 of the ITAA1997? | A1: Yes | Q2: Would the proposed sale of property by the Club be subject to the Capital Gains Tax provisions in the ITAA 1997? | A2: No

Relevant facts and circumstances: 1. The Club is incorporated. 2. The Rules of Association state its sporting purpose. 3. There Rules have a non-profit clause and a winding up clause.

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 Section 50-5

Reasons for decision: Summary: The total ordinary income and statutory income of the Club is exempt from income tax pursuant to section 50-1 of the ITAA 1997 on the basis it is an entity described in item 9.1 of section 50-45 of the ITAA1997. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 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 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. 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 of the ITAA 1997. The society, association or club must meet the special condition detailed in section 50-70 of the ITAA 1997. An entity is therefore 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. | 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. In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270; (1981) 12 ATR 26 the court considered the meaning of 'society, club or association'. The court stated at 4279: In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)…Sugerman JA stated at 82: "A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association'…" … The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organizations are called "associations", others are called "societies" but no meaningful difference can be detected between the two…Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects… The members of the Club voluntarily associate together for a common purpose and common interest. The Club has a management committee and rules of association. The Club is an 'association, society or club'. | Detailed Reasoning - Established for the encouragement of a game or sport: Taxation Ruling TR 97/22 Income tax: exempt sporting clubs (TR 97/22), describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport. | Detailed Reasoning - Game or sport: 'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 38 of TR 97/22 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997. | Detailed Reasoning - involving animals:: Equestrian activities; polo; pony club activities; rodeo activities; The sport is not explicitly listed as a sport in TR 97/22. However, paragraph 35 of TR 97/22 provides that the presence of a set of conventions, expectations and rules indicates a level of organisation that is commonly indicative of a game or sport. The imposition of rules and conventions in an organised group of participants can transform an otherwise ordinary leisure activity like hunting into a game or sport. The Macquarie Dictionary also includes hunting as a sport. ‘Sport’ is defined as: An activity pursued for exercise or pleasure, usually requiring some degree of physical prowess, as hunting, fishing, racing, baseball, tennis, golf, bowling, wrestling, boxing, etc. The constituent documents of the Club reference its association with a sport. It is accepted that the Club is concerned with a game or sport. | Detailed Reasoning - Encouragement: A society, association or club will only be exempt from income tax if it has as a main purpose the encouragement of a game or sport. Paragraph 11 of TR 97/22 refers to the meaning in the Macquarie Dictionary which defines ‘encouragement’ to mean ‘stimulation by assistance’ and provides that encouragement can occur directly by: ● forming, preparing and entering teams and competitors in competition in the game or sport; ● coordinating activities; ● organising and conducting tournaments and the like; ● improving the abilities of participants; ● improving the standards 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 promotes the sport through its website: The Clubs activities enable members to participate in the sport. The Clubs activities actively encourage the sport. | Detailed Reasoning - Main purpose: Paragraph 41 of TR 97/22 provides that to be eligible for exemption, an association’s main purpose must be to encourage a game or sport. The main purpose can only be ascertained after objectively weighing all of the association’s features such as the constituent document, history, control and activities. An association’s constituent documents will help identify the purpose for which the association was set up and should be consistent with the aim of encouraging a game or sport. The activities must then demonstrate that the association’s main purpose is the encouragement of a game or sport. TR 97/22 details features considered to be persuasive of supporting a conclusion that the main purpose of a club is to encourage a game or sport. Paragraph 15 of TR 97/22 describes highly persuasive features which are present when a club is for the encouragement a game or sport: ● the club conducts activities in the relevant year that are directly related to the game or sport; ● the sporting activities encouraged by the club are extensive; ● the club uses a significant proportion of its surplus funds in encouraging the game or sport; 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. Taxation ruling TR 97/22 also lists other features considered relevant at paragraph 16: ● 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. | Detailed Reasoning - The objects in the association’s constituent document: The objects of the Club are set out in the Club rules and emphasise that the main purpose of the Club is to encourage a game or sport. | Detailed Reasoning - The activities of the Association: The activities of the association should be extensive and directly related to sport. Members of the Club organise and participate in the sport on a weekly basis and the Club conducts extensive activities directly related to sport and in accordance with its objectives. It is accepted that the Club is an organisation associated with a sport. | Detailed Reasoning - Social Activities: The fact that an association also encourages social and other activities does not, of itself, preclude a club from being exempt. As noted by Lockhart J in Cronulla Sutherland Leagues Club Limited v FC of T 90 ATC 4215 at 4225 ( Cronulla ), where an association conducts other activities, which are merely ancillary or incidental or secondary to the encouragement of the game or sport, we accept that the main purpose may be that of encouragement. In contrast, where an association’s main purpose is providing social amenities and licensed club facilities to its members, the exemption does not apply. Therefore, in order for an entity to be exempt as an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to a sporting end. Similarly, the conservation purposes can only be secondary to the main purpose of encouraging a game or sport. If the other purposes become an end in themselves, it will be difficult for a club to demonstrate that it is predominantly for the encouragement of a game or sport. Taxation Ruling 97/22 states at paragraphs 41 and 42 that: 41. To be eligible for the exemption, the club's main purpose must be to encourage a game or sport. Difficulties can arise where the club conducts other activities, particularly social or commercial activities. 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.” | Detailed Reasoning - Application to the facts: The Club conducts social activities to raise funds for the Club. Monies raised through fundraising go to meet the expenses of the sport. The social activities are considered ancillary or of minor importance compared to the main sporting purpose of the Club. Monies raised from social activities provide a source of revenue and are used to fund the sporting activity. | Detailed Reasoning - Control: The Committee of Management controls the Club. There are a small number of social members but voting control of the Club is with those who have an interest in and actively participate in the encouragement of the sport. | Detailed Reasoning - Special condition: Section 50-70 of the ITAA 1997 states 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. Non-profit requirement Paragraphs 9 and 21 – 23 of Taxation Ruling TR 97/22 discuss the non-profit requirement. A society, club or association established for the encouragement of a game or sport is non-profit if it is not carried on for the profit or gain of its individual members. Organisations satisfy the non-profit requirement if their constituent documents prevent them from distributing profits or assets among members while the organisation is functional and on winding up. The organisation's actions must be consistent with this requirement. The Rules of the Club prevents distributions to members both while it is operating and on winding up. The Club is not carried on for the profit or gain of its individual members. Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia The Club is a resident of, and is located in, Australia. The Club carries on its activities in Australia. It pursues its objectives and incurs its expenditure in Australia and therefore satisfies this requirement. The Club satisfies the special condition in section 50-70 of the ITAA 1997. | Detailed Reasoning - Conclusion: Section 50-1 of the ITAA 1997 provides that the incomes of the entities covered by the tables in sections 50-5 to 50-45 of the ITAA 1997 are exempt from income tax. An entity is exempt from income tax 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 it: ● is a society, association or club, ● is established for the encouragement of a game or sport, and ● satisfies the special condition. The Club is a society, association or club and is established for the encouragement of a game or sport. In addition, it satisfies the special condition and is therefore exempt from income tax. | Detailed Reasoning - Question 2: Would the proposed sale of property by the Club be subject to the Capital Gains Tax provisions in the ITAA 1997? As the Club is income tax exempt, any capital gain resulting from the proposed sale will be disregarded for income tax purposes.