Private ruling: Income tax exemption
Published: March 2014
Ruling period: 01 July 2013 to 30 June 2017
Date scheme commenced: 01 July 2013

Ruling: Q1: Is the ordinary income and statutory income of the Club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a club established for the encouragement of a game or sport under item 9.1 of the table in section 50-45 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: Background 1. The objects of the Club, as its constitution include: • To foster promote and conduct sailing.. • To participate in interstate and State Championship regattas and all other sailing competitions… • To promote the sport of sailing and other sports and pastimes associated therewith... • To hold or arrange sailing and other sporting events, trials and competitions and provide or contribute towards the provision of prizes, awards and distinctions. 2. The Club's constitution contains rules which prevent the distribution of property or income to members of the Club during operation and on winding up. 3. The Club's constitution specifies that the club's committees and officers must include a director, a commodore, a club captain and a race secretary, all of which are specific to the sporting objectives of the club. Sailing Activities 4. The Club is located on the water's edge with sailing taking place in the surrounding waters. 5. Since its formation, the Club has continuously carried out activities to encourage both juniors and seniors to participate in the sport of sailing. These activities include but are not limited to: • the purchasing of sailing vessels, rescue boats and safety equipment; • incurring expenditure to upgrade and maintain boat ramps; • running local/state/national sailing competitions and regattas; and • providing 'learn to sail' classes to encourage new participants. 6. The Club has been affiliated with other associations. 7. The Club has a junior and senior division which sail on weekends. 8. The Club hosts a training program to provide juniors with the opportunity to learn to sail in a safe and fun environment. The sailing program is run primarily by senior sailors and parents, who volunteer their time. 9. To ensure that the sailing facilities are up to date, the club recently purchased several new sailing boats. This encouraged new training participants by providing them with access to sailing boats, without having to incur the additional expenses associated with owning and maintaining sailing craft. The Club also purchases and provides life vests and other safety equipment. 10. The Club is the location for the sailing courses of a non-profit community organisation that works with disadvantaged and vulnerable young people. 11. The Club routinely sponsors a number of inter-club, regional, state and special occasion Regattas. 12. The Club has over X members many of whom are or have been active participants or supporters of the sailing activities. Other activities 13. The Club provides support a local sporting clubs through meat raffles, badge draws and social events for sporting club members. 14. The Club generates funds through the following activities: • Entertainment events and charity fundraising events • A bistro • Kiosk/Bar • Snooker tables, KENO, TAB Sportsbet. Expenditure 15. All net profits earned by the Club are re-directed back into the sailing activities of the club. Annual report 16. The Club's annual report lists its short term objectives, long term objectives, strategies for achieving the objectives, principal activities and how the principal activities assist in achieving the objectives.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 50-1, | Income Tax Assessment Act 1997 section 50-45 and | Income Tax Assessment Act 1997 section 50-70.

Reasons for decision: Summary: The ordinary and statutory income of the Club is exempt by virtue of section 50-1 of the ITAA 1997 on the basis that it is a society, club or association that is not carried on for the purposes of profit or gain of its individual members but that is established for the encouragement of the sport of sailing. | Detailed Reasoning - Detailed reasoning: Section 50-1 of the ITAA 1997 states that the ordinary income and statutory income of the entities covered by the tables in Subdivision 50-A of the ITAA 1997 are exempt from income tax. A society, association or club established for the encouragement of game or sport is one such entity, covered by item 9.1 of the table in section 50-45 of the ITAA 1997. The entity will be exempt if it is covered by that provision and if it meets the special requirements outlined in section 50-70 of the ITAA 1997. 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 characteristics will be considered in turn: | Detailed Reasoning - Society, club or association: The terms society, club or association are not defined in TR 97/22 and take on their ordinary meaning. A 'club' is defined in the Macquarie Dictionary as: a group of persons organised for a social, literary, sporting, political, or other purpose, regulated by rules agreed by its members. The terms society and association have similar meanings. The Club is accepted as being a society, club or association as it is an organisation of people having a common purpose who are regulated by a set of rules (their constitution). | Detailed Reasoning - Non-profit requirement: A club must not be carried on for the purposes of profit or gain to its individual members. This is a characteristic outlined in TR 97/22 and also a special condition contained in subsection 50-70(1) of the ITAA 1997. A club's governing document should contain a prohibition against a distribution of profits and assets among members while the club is functional and on it winding up. The club's activities should conform to the prohibition. The Club's constitution contains suitable non-profit clauses. It is accepted that the Club meets this requirement. | Detailed Reasoning - Encouragement of a game or sport: There is no special definition of what constitutes a game or sport for the purposes of section 50-45 and so they take on their ordinary meaning. Common features of a game or sport is a set of conventions, expectations and rules. Competition is also a very common feature although not essential. A club must be established for the encouragement of a game or sport. 'Encouragement' means 'stimulation by assistance' according to the Macquarie Dictionary. Encouragement can occur directly by: • forming, preparing and entering teams and competitors in competitions in the game or sport; • co-ordinating 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 activities conducted by the Club indicate that it is actively promoting participation in the sport of sailing. It ensures that it provides a safe environment for juniors and seniors to participate in races that it coordinates. It also provides training to encourage new participants to take up the sport. It is accepted that the Club is actively encouraging participation in the sport of sailing. | Detailed Reasoning - Main purpose: To be exempt, the main purpose of the club must be the encouragement of the relevant game or sport. The Club undertakes additional activities outside of its pursuit of sailing. It is essential that these activities be considered merely ancillary, incidental or secondary to the encouragement of the sport. The Club will not qualify for the exemption if its main purpose becomes the carrying out of other activities not related to the sport or if it is equally involved with another activity or purpose. The non-sailing activities that the Club's undertakes include the operation of a restaurant, hiring of their auditorium for events, functions and parties, operating a bar and kiosk as well as a number of other recreational activities including snooker tables, KENO, TAB Sportsbet and Karaoke. The Club submits that these activities generate the funding necessary for the operation of the sailing schools and events. In St Marys Rugby League Club Limited v FC of T 97 ATC 4528, Hill J stated: A consequence of the exemption of the income of that club from tax is often that the club grows and prospers. Particularly, it engages in activities which are designed to raise money to be used to further the sporting activities. Activities so undertaken may include poker machines, liquor sales, bingo games and the like. There may… come a time when these other activities take on a life of their own. From being merely concomitant or incidental to the activities of the sport, they become an end in themselves. In order to determine the main purpose of the Club, it is necessary to have regard to its constitution, activities, history and control. The Club's objects in its constitution refer only to its sporting purposes. It conducts a number of activities that clearly demonstrate its commitment to promoting sailing as a sport. However, it also conducts significant social and gambling activities which, according to its financial statements, account for almost its entire revenue stream. Paragraph 54 of TR 97/22 outlines that a club should use a significant portion of its surplus funds in encouraging its game or sport. It is unclear from the detail within the financial statements of the Club whether it has spent any of its income on its sporting activities. It appears that it is not generating surplus revenue over its expenditure. However, it has stated that any surplus funds would be applied towards its sporting purposes. The annual report indicates that its principal activities include the provision of catering beverage service and gaming facilities. There are short term and long term goals of reducing debt for the Club and improving its facilities (so that it can start to generate profits). The Club also has a short term and long term goal of continuing to foster, promote and conduct sailing. Had the Club been generating surplus revenues and applying them towards its sporting activities it would have been accepted that, despite its substantial non-sporting activities, its main purpose was to promote sport. It is more difficult to definitively arrive at this conclusion given its current financial position. Although, consideration is given to the fact that, where the Club does generate profits, they will be applied to its sporting activities. Other factors are also taken into consideration. Many of the Club's members are involved in the sport and the Club's committee and officers are required to consist of persons involved with the sporting activities. The Club's annual report contained a report from the Sailing Director which listed the extensive sailing activities that had taken place in that year. After having regard to the Club's constitution, activities, history and control, it is reasonable to conclude that on the balance of all the factors, that its main purpose is the advancement of sport and that its non-sporting purposes are secondary. | Detailed Reasoning - Special Conditions: The special conditions contained in section 50-70 of the ITAA are that, in addition to the entity not being carried on for the purpose of profit or gain of its individual members, it: a) has a physical presence in Australia and, to that extent, incurs it expenditure and pursues its objectives principally in Australia; or b) is a deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; 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 a resident. The entity must also: (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 Club is not a deductible gift recipient or prescribed entity but it does have a physical presence in Australia and to that extent incurs its expenditure and pursues its objectives principally in Australia. It is accepted that the club will have also complied with the substantive requirements in its governing rules and applied its income and assets solely for its purposes. It must continue to do so in future to remain entitled to its exemption.