Private ruling: Income Tax Exemption
Published: February 2012
Ruling period: Income year ended 30 June 2012 | Income year ended 30 June 2013 | Income year ended 30 June 2014 | Income year ended 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: A1: Yes

Relevant facts and circumstances: The Entity is a non-profit incorporated association. The Entity provides sport facilities to its members and the public. The Entity is a traditional sporting club and does not have extensive gaming and social activities. Activities provided by the Entity (in order of importance): § Provide sport facilities for both members and social players § Conduct members competitions several days a week § Undertake programs for junior players § Sponsor teams in various pennants competitions § Provide facilities for members and social players. Promotion of the Entity is limited at present due to its financial position. However, the Entity does and will be undertaking some promotional activities. The Entity has in recent years suffered from recurring losses and is considering selling surplus land to enable the Entity's financial survival. The Entity is investigating a number of options to realise part of its land. Proceeds from the sale of surplus land will be used for the following purposes: § Pay-off past and current debts § Improve its facilities The Entity's management committee is directly involved in the encouragement of the sport. The objects of the Entity are stated in its constitution and are directed at promoting the sport and providing facilities for members and guests to play the sport. The constitution provides the privileges and restrictions for each category of membership. The Entity has appropriate non-profit and winding up clauses in its constitution.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 50-1 | Income Tax Assessment Act 1997 Section 50-10 | Income Tax Assessment Act 1997 Section 50-45 | Income Tax Assessment Act 1997 Section 50-70 | Income Tax Assessment Act 1997 Section 50-75(1)

Reasons for decision: Detailed Reasoning - Issue 1 Question 1: Section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) exempts from income tax the total ordinary and statutory income of an entity covered by section 50-40 of ITAA 1997. Item 9.1(c) of the table in section 50-45 of the ITAA 1997 provides that a society, association or club established for the encouragement of a game or sport shall be exempt from income tax, subject to the special conditions in section 50-70 of the ITAA 1997. Accordingly, to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997, an entity must: (a) be a society, association or club; (b) be established for the encouragement of a game or sport; and (c) meet the special conditions specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - (a) Society, Association or Club: The words 'society', 'association' or 'club' are not defined in the ITAA 1997 and have their ordinary meaning. The Shorter Oxford English Dictionary defines 'association' to be 'a body of persons associated for a common purpose; the organisation formed to effect their purpose. The Macquarie Dictionary defines it as 'an organisation of people with a common purpose and having a formal structure'. 'Society' has an equivalent meaning ( Pro-campo Ltd v. Commr of Land Tax (NSW) 81 ATC 4270 at 4279; (1981) 12 ATR 90 at 35). This approach is also confirmed in Taxation Determination TD95/56, which refers to the decision by Olsson J, in Quinton v. South Australian Psychological Board (1985) 38 SASR 523, who also stated that the term 'association' has come to be regarded as attaching to a body of persons associated for a common purpose. The Macquarie Dictionary defines 'club' as a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members. The interpretations of 'society', 'association' or 'club' as described above, emphasise on a 'body of persons' and 'an organisation of people' with a 'common purpose'. The Entity is an incorporated association brought into existence by its members to pursue a common purpose as stated in its constitution. It is considered that the Entity is a society, association or club. | Detailed Reasoning - Game or sport: The terms 'game' or 'sport' for the purposes of section 50-40 are not defined in the ITAA 1997 and have their ordinary meanings. Taxation Ruling TR 97/22 Income tax: exempt sporting clubs provides the Commissioner's view on what constitutes as exempt sporting clubs. TR 97/22 provides a non-exhaustive list of activities that are considered as 'sport' for the purposes of section 30-45, and includes (at paragraph 38): | Detailed Reasoning - played with ball or projectile:: badminton; baseball; basketball; bocce; bowling (ten-pin); bowls; cricket; croquet; football (all codes); golf; handball; hockey; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball; The objects of the Entity as stated in its constitution are directed at promoting sport and providing members, guests and other approved persons with the facilities to play sport. In effectuating its objects the Entity has activities which are directed at playing sport. It is considered that the Entity is directly connected with activities played with a ball or projectile, and would therefore fit within the meaning of a game or sport. | Detailed Reasoning - Encouragement: 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 coachers § 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 Entity encourages sport to be played through its activities. It is considered that the Entity's activities are directed at the encouragement of sport. | Detailed Reasoning - Main purpose: Paragraph 41 of the TR 97/22 provides that to be eligible for the exemption, an association's main purpose must be to encourage a game or sport. Difficulties can arise where the association conducts other activities, particularly social or commercial activities. 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. Paragraph 15 of TR 97/22 lists the features that are highly persuasive in supporting a conclusion that the main purpose of an association is to encourage 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 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, particularly social or commercial 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. In order for an entity to be exempt as a club established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to the sporting ends. If they 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. To determine whether the Entity displays features that support a main purpose of encouraging a game or sport, its constitution, activities, history and control will be examined: | Detailed Reasoning - Constitution: From the constitution of the Entity its objects are directed at the encouragement and promotion of sport. There are no independent objects in the constitution directed at social or recreational purposes. | Detailed Reasoning - Activities: The activities of the Entity include providing sport facilities for its members and guests, junior programs as well as organising competitions to encourage competitiveness between players. The Entity does provide some social activities and licensed facilities to its members. Following the decision in Cronulla , the provision of social activities would not disqualify an entity from exemption if the activities were incidental, ancillary or secondary to the main purpose. It is considered that the Entity does not have extensive gaming or social activities. All other activities are directly related at promoting and encouraging sport. | Detailed Reasoning - History & Control: The Entity is a traditional sporting club and has always been promoted to the public as a sports club since its inception. Paragraph 58 of 97/22 states: The way a club is run and controlled on behalf of its members and the nature of the voting membership, are relevant in determining its purpose. Where the committee of a club is interested and involved in the promotion of its sport, it supports a conclusion that it is established for the encouragement of the game or sport… Control of the Entity is vested in the management committee and is restricted to life members and full members. The management committee is directly involved in the encouragement of the sport and is not just involved in the running of the club. In summary, the Entity directly encourages the sport and demonstrates features persuasive of the Entity being for the encouragement of a game or sport. | Detailed Reasoning - (c) Special Conditions: Section 50-70 of the ITAA 1997 states: | Detailed Reasoning - 50-70 Special conditions for items 1.7, 2.1, 9.1 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. | Detailed Reasoning - (i) Not carried on for the profit or gain of its members: Section 50-45 of the ITAA 1997 requires that the association not be carried on for the purposes of profit or gain to its individual members. This is known as the non-profit requirement. Where members, in their individual capacity, are to receive benefits from an association it will fail the non-profit test. An association usually ensures they operate on a non-profit basis by including non-profit clauses in their constituent documents. The Entity has non-profit and winding up clauses in its constitution that prevents members from receiving benefits. However, it is also necessary that an association's actions are consistent with their constituent documents. In Inland Revenue Commissioners v Yorkshire Agricultural Society (1928) 1 KB 611 ( Yorkshire Agricultural ) the provision of specific benefits to members to induce membership were disregarded. Although the Society applied as a charitable institution, it was found that the benefits to the members in the form of various privileges attaching to membership could be disregarded. The fact that benefits accrued to members of the Society did not detract from the fact that the Society had been established for the purpose of improvement of agriculture as a whole and not for any confined purpose of benefiting only the particular members of the Society. According to the membership categories of the Entity, members receive benefits. However, similar to the decision in Yorkshire Agricultural these benefits can be construed as privileges attached to membership to attract people to join the club. These benefits do not detract from the fact that the Entity has been established for the main purpose of encouraging sport and not for any confined purpose of benefiting individual members. It is accepted that the Entity operates in a non-profit manner. (ii) Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia For the Entity to meet this condition, it must have a 'physical presence' in Australia and, to that extent, incur its expenditure and pursues its objectives principally in Australia. From the information provided, the Entity has a physical presence in Australia. It is located in Australia and incurs its expenditure and pursues its purposes principally in Australia. Accordingly, the Entity satisfies the 'Special Conditions' specified in section 50-70 of the ITAA 1997. | Detailed Reasoning - Conclusion: Based on the above, the total ordinary income and statutory income of the Entity is exempt from income tax pursuant to section 50-1 of ITAA 1997 as it is an association 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. | Detailed Reasoning - Issue 2 Question 1: The Entity is considered to be exempt from income tax under item 9.1(c) of the table in section 50-45 of the ITAA 1997. Under item 9.1(c) an entity must be established for the encouragement of a game or sport. This means that an entity's main purpose must be the encouragement of a game or sport. An association's main purpose can only be ascertained after objectively weighing all its features in particular its constitution, its activities, its history and its control. The 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 association's activities must then demonstrate that the association's main purpose is the encouragement of a game or sport. Paragraph 15 of TR 97/22 lists the features that are highly persuasive in supporting a conclusion that the main purpose of an association is to encourage 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 emphasis that the club's main purpose is to encourage a game or sport and the club operates in accordance with those documents The Entity's main purpose is the encouragement of a game or sport, as it displays highly persuasive features that support a conclusion that its main purpose is to encourage a game or sport. The Entity is considering subdividing surplus land to pay-off past and current debts and return its sport facilities to an acceptable standard. The new activities the Entity will undertake will not affect the association's constitution. As such the objects of the Entity will remain the same, that is, to promote sport and provide sport facilities. Page 8 of the ATO publication Income tax exemption and sporting clubs [73773-02-2011] states that the sale of assets to fund a club's ongoing sporting commitments will not in itself disturb the club's encouragement of sport. Page 8 also provides the following example: The club….sells a portion of land it owns adjacent to its courts to upgrade its courts and clubhouse facilities and enter a team in a state-wide competition. The club's main purpose is the encouragement of sport. It is considered that the proposal to subdivide and sell surplus land will not affect the Entity's exemption as a sporting club as the proceeds from the sale will be applied to the Entity's purpose of encouraging sport. The proceeds will be used to pay-off past and current debts to ensure the continuation of the association and will be used to upgrade the association's facilities to encourage and promote sport to members and the public. It is considered that the Entity's main purpose is the encouragement of sport. | Detailed Reasoning - Conclusion: Based on the above, the proposed arrangement to subdivide surplus land will not affect the Entity's income tax exemption as a sporting club under item 9.1(c) of the table in section 50-45 of the ITAA 1997 .

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. | Is the Entity a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table under section 50-45 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore exempt from income tax under section 50-1 of the ITAA 1997? | Will the proposed arrangements to subdivide surplus land affect the Entity's income tax exemption as a sporting club under item 9.1(c) of the table in section 50-45 of the ITAA 1997 ?