Private ruling: Exemption from Income Tax
Date of advice: 16 November 2016
Published: March 2017
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20WW

Ruling: Q1: Is the sporting club exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it is a club established for the encouragement of sport under item 9.1 of the table in section 50-45 of the ITAA 1997? | A1: Yes | Q2: Will the proceeds of the proposed sale and subdivision of land be on capital account? | A2: Yes | Q3: Will the sporting club continue to be an exempt entity under section 50-1 of the ITAA 1997, after the proposed sale and sub-division of the land? | A3: Yes | Q4: Will the proceeds of the proposed sale and subdivision of land be exempt from income tax? | A4: Yes

Relevant facts and circumstances: You are an incorporated association operating as a sporting club. The Constitution of the Club includes the Statement of Purposes and the Rules of the Club. The purposes for which the Club is established are outlined in the Club's Statement of Purposes. The Statement of Purposes provides that the income and property of the Club wheresoever derived shall be applied solely towards the promotion of the objects of the Club as set forth in the Statement and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to any persons who at any time are or have been members of the Club. A clause contained in the Rules of the Club provides that if upon winding up or dissolution of the Club there remains after the satisfaction of all its debts and liabilities any money or property whatsoever the same shall not be paid to or distributed among the members of the club or any of them but shall be given or transferred to some other association, institution or body having objects similar to the objects of the Club or having charitable objects (and which prohibits the distribution of its income and property among its members to an extent at least as great as is imposed on the Club. The Club has several categories of membership. The Committee of Management has responsibility for the daily operation of the Club. The Committee of Management comprises members who actively participate in sport. Voting control rests with those who have an interest in and actively participate in sport. The Club organises and conducts many competitions, tournaments and events in which members compete. Sport related activities are conducted at the Club daily. The Club also runs weekly Club Competitions. The Club also holds annual competitions and events. Club members also participate in sporting activities at other clubs at a regional and state level The Club undertakes some social activities and provides licensed facilities to its members such as bar and dining facilities. They cater predominantly to those playing sport. The Club does not have any gaming facilities. In a prior year the Club purchased land with the intention of expanding the sporting facilities at a future stage. As time passed the board and members determined that an expansion would not be financially viable and a decision was made to sell the land. Attempts to sell the land have been unsuccessful to date. An Investment Group contacted the club to discuss whether an agreement could be reached to assist in the sale of land. The Investment Group proposed to subdivide the land into residential blocks at their own cost and then the club would receive a percentage of the sale proceeds. The Club is completely removed from the development process and will only supply the physical land. The Club has determined that the likely return to the Club would be similar under this proposal to the original asking price for the land. Any sale proceeds from the sale of the land will be used for the development of the Club and will not be paid to members. The members of the Club have voted that this will occur. The Club Committee has identified various Club facilities that require improvement and for which finance is required.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 25 | Income Tax Assessment Act 1936 section 25A | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-10 | 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 108-5 | Income Tax Assessment Act 1997 subsection 112-25(2)

Reasons for decision: Summary: The total ordinary income and statutory income of the sporting club 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 - Detailed reasoning: Section 50-1 of the ITAA 1997 exempts from income tax the total ordinary and statutory income of an entity covered by section 50-45 of the 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 an exempt entity, subject to special conditions in section 50-70 of the ITAA 1997. Accordingly, to be an exempt entity described in 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 Macquarie Dictionary defines 'association' to be '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. This approach is also confirmed in Taxation Determination TD 95/56 Fringe benefits tax: can a body which is formed by government, is controlled by government and performs functions on behalf of government be an 'association' for the purposes of section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? 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 a 'body of persons' and 'an organisation of people' with a 'common purpose'. The sporting club is an incorporated association and is brought into existence by its members, a body of persons, to pursue a common purpose as stated in its constitution. The sporting club is a society, association or club. | Detailed Reasoning - Game or sport: The terms 'game' or 'sport' for the purposes of section 50-45 of the ITAA 1997 are not defined in the ITAA 1997 and have their ordinary meanings. Taxation Ruling TR 97/ 22 Income tax: exempt sporting clubs (TR 97/22) provides the Commissioner's view on what constitutes an exempt sporting club. 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, 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; ice-hockey; lacrosse; marbles; netball; softball; squash; table tennis; tennis; underwater hockey; volleyball; The objects of the Club as stated in its Constitution are directed at promoting sport and providing members, guests and other approved persons with facilities to play sport. The activities at the Club in effectuating their objectives include sporting facilities and bar and dining facilities. The Club organises and conducts many competitions, tournaments and events in which members compete. The Club is directly connected with activities played with a ball or projectile, and is therefore concerned with 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 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 encourages sport to be played through the following activities: ● Provision of sporting facilities and practice areas ● Conducting member competitions ● Undertaking sporting programs for junior players ● Sponsoring Club teams in various competitions ● Providing facilities for members and social players The Club's activities actively encourage 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. Paragraph 15 of the TR 97/22 lists the features that are highly persuasive in supporting a conclusion that the main purpose of the 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, 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 an association established for the encouragement of a game or sport, the revenue raising purposes must remain only a means to a sporting end. 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. The objects in the Club's constituent document The Club's Statement of Purposes refers to providing the game of sport and to provide sporting facilities and all things incidental to the playing of sport. Other purposes include acquiring sporting grounds and to lay out, prepare and maintain the same for the sport. The activities of the Club The activities of the Club should be extensive and directly related to sport. The Club conducts activities in accordance with its objectives. The Club provides sporting facilities. The Club organises and conducts many competitions, tournaments and events in which members compete. Sport related activities are conducted at the Club daily. Club members participate in sporting activities at other clubs at a regional and state level. The Club also undertakes some social activities and provides licensed facilities to its members such as bar and dining facilities. Control of the Club The Committee of Management comprises members who actively participate in sport. It is the Committee which controls the Club. The daily operation of the Club and voting control rests with those who have an interest in and actively participate in the game of sport. Surplus funds The funds raised from the proposed subdivision and sale of the land will be used to upgrade the Club's facilities to encourage and promote sport to members and the public. The Club plans to apply some of the proceeds of the sale to the upgrading of its sporting facilities and associated social and recreational facilities. | Detailed Reasoning - Conclusion - Main Purpose: The Club's Statement of Purpose emphasises that the main purpose of the Club is to encourage sport. The activities of the Club in respect of sport are extensive and concentrate on its growth and support within the Club and the community. The activities of the Club support its stated purposes and indicate that it operates in accordance with its governing documents. Control of the Club rests with those members who actively participate in the sport. Surplus funds will be used to upgrade the Club's facilities to encourage and promote the sport to members and the public. Even though the Club intends to apply some of the proceeds of the sale to the social and recreational facilities it will not affect the Club's main purpose. The Club does provide some social activities and licensed facilities to its members such as bar and dining facilities. These activities related to the bar and dining areas can be considered as ancillary to the encouragement of sport as they cater predominantly to members, before and after playing sport and encourage use of the Club's facilities. As was the decision in Cronulla , the provision of social activities will not disqualify an entity from exemption if the activities were incidental, ancillary or secondary to its main purpose. Therefore, it is considered that the Club's objectives and activities support the conclusion it is a Club established for the encouragement of a game or sport. | Detailed Reasoning - (c) Special Conditions: Section 50-70 of the ITAA 1997 includes the 'Special conditions for items 1.7, 2.1, 9.1 and 9.2'. Subsection 50-70(1) of the ITAA 1997 states: (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). | Detailed Reasoning - Not carried on for the profit or gain of its members: Subsection 50-70(1) of the ITAA 1997 requires that the association not be carried on for the purpose 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. An association's actions must also be consistent with the non-profit requirement. The Club has the necessary non-profit clause and dissolution clauses in its constitutional document. The Statement of Purposes indicates all income and property is to be applied to the promotion of objects. No portion is to be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to members. The Club's Rules provide that on winding up or dissolution of the Club, remaining property will not be distributed to members but transferred to another institution having purposes similar to those of the Club. The Club has the appropriate clauses in its constitution that prevent members from receiving benefits. It is accepted that the Club is not carried on for the profit or gain of its members. | Detailed Reasoning - Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia: For the Club 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. The Club has a physical presence in Australia. It is located in Victoria and incurs its expenditure and pursues its purposes principally in Australia. | Detailed Reasoning - Governing rules and application of income and assets: Subsection 50-70(2) of the ITAA 1997 provides that the Association 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. Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt (TR 2015/1) provides guidance in respect of the conditions in subsection 50-70(2). Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that: ● give effect to the object or purpose of the entity ● relate to the non-profit status of the entity ● set out the powers and duties of directors and officers of the entity ● require financial statements to be prepared and retained ● set out the criteria for admission as a member of an entity ● require an entity to maintain a register of members, and ● relate to the winding-up of the entity. Based on a review of the Club's Constitution which incorporates the Club's Statement of Purposes, it is accepted that the Association complies with the substantive requirements in its Constitution and Rules. Paragraphs 33 to 35 of TR 2015/1 provide that an entity must solely apply its income and assets for the purpose for which the entity is established. However, where the misapplication or misapplications of part of the income or assets are immaterial in amount and are a one-off misapplication or occasional misapplications, the income and assets condition will still be satisfied. As previously determined, the activities of the Club demonstrate that the management of the use and maintenance of the Club's facilities is the main purpose for which the Club was established. The information provided by the Club confirms that any surplus is allocated for reinvestment in the Club as members' funds. Accordingly, it is accepted that the Club applies its income and assets solely for the purpose for which it was established. Accordingly, the Club 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 sporting club 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. | Summary: The proceeds of the proposed sale and sub-division of the land will be on capital account. | Detailed Reasoning - Detailed reasoning: The sporting club intends to enter into an agreement with an Investments Group to assist in the sale of the land. The Investment Group propose to subdivide the land into residential blocks at their own expense and then the Club will receive a percentage of the sale proceeds. We therefore need to determine whether the proceeds to be received from the sale of the subdivided lots are: ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit; or ● a realisation of a capital asset and assessable as a capital gain under Parts 3-1 and 3-3 of the ITAA 1997. | Detailed Reasoning - Ordinary income: Section 6-5 of the ITAA 1997 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts. Ordinary income generally includes income that arises in the ordinary course of a taxpayers business. However, in certain circumstances proceeds not within the ordinary course of the taxpayers business may form part of their ordinary income. The decisions in Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135; 37 ATR 358 ( Casimaty ) and McCorkell v Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 ( McCorkell ) demonstrate that if a taxpayer does not intend to make a profit when he or she acquires farming land then the likelihood that any profit made on the eventual sale of land as ordinary income is greatly diminished. The Commissioner accepts that where the activities are no more than the realisation of a capital asset as per the Casimaty and McCorkell cases, any realised gain on the transaction will be a capital gain under the CGT provisions in Part 3-1 of the ITAA 1997. However, profits made on the sale of subdivided land can still be ordinary income if the activities become a separate business operation or commercial transaction. For example, in Case W59 89 ATC 538; 20 ATR 3728 Deputy President Mr I.R. Thompson considered the appellant was carrying on a business of subdividing, developing and selling land. This was because the appellant had a significant degree of personal involvement in planning, negotiating with local councils and other bodies, obtaining finance, employing contractors, and selling the blocks. In addition to this the subdivision and development was substantial (the land had been divided into over 180 small blocks). Similarly, the decision in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355, considered that in the operation of a business, it is relevant to take into account the purpose with which the taxpayer acted and, since the taxpayer was a company, the purposes of those who control it are its purposes. Therefore, in this case, when the shares in the taxpayer were purchased by three development companies, it transformed the company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. In addition to taking other factors into consideration, including the scale and magnitude of the subdivision, it was concluded that the taxpayer's activities involved more than a mere realisation of an asset. The principle has been established that profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693) ( Myer Emporium ). Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. According to paragraph 16 of TR 92/3: 16. If a taxpayer not carrying on a business makes a profit, that profit is income if: (a) The intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain: and (b) The transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. The Club did not purchase the land subject to subdivision and sale with the intent of entering into a profit making transaction. Their intent at the time of purchase was to expand its sporting facilities at a future stage. The subdivision and sale of the land lots is considered to be outside the ordinary course of the activities from which the Club derive their income. The transaction will not occur within the ordinary course of business being carried on by the Club as they are not involved in the property development industry. Therefore, the activity would be best described as an isolated transaction. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. In Myer Emporium , the High Court did not set out guidelines as to what constitutes a business operation or commercial transaction. However, the main indicia that has resulted from TR 92/3 and relevant case law is as follows: (a) whether the landowner held the land for a considerable period of time prior to any subdivision and sale; (b) whether the landowner conducted farming or other non-developmental activities, prior to beginning the process of developing and selling the land; (c) whether the landowner originally acquired the land as a private residence or for recreational purposes; (d) whether the landowner originally acquired the property as an investment, such as long term capital appreciation or to derive income; (e) whether the land was originally acquired near the urban fringe of a major city or town; (f) if the property has been recently rezoned, whether the landowners actively sought that rezoning; (g) whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement; (h) whether the landowners had tried to sell the land without subdivision; (i) whether the landowner had any history of buying and profitably selling developed land or land for development; (j) whether the operations will be planned, organised and carried on in a business-like manner; (k) whether the landowners have changed their business activity relating to the land from one business to another (eg. from farming to property development); (l) the scope, scale, duration and degree of complexity of the proposed development; (m) who initiated the proposal to develop the land for resale; (n) whether the development and pre-sale arrangement is sophisticated; (o) whether the landowners will be actively involved in any development activities; (p) the level of legal and financial control maintained by the landowners in the proposed or final development agreement; and (q) the level of financial risk borne by the landowner in acquiring, holding and/or developing the land. The selling of the subdivided land by the Club is considered below with reference to these factors: ● The Club have held the property for a considerable time prior to the development being contemplated. ● The Club was established with the main purpose of the encouragement of sport. The reason for subdividing and selling the extra land, relates to the Club's board and member's determining that a planned expansion of the sporting facilities would not be financially viable. ● The Club will not actively be involved in the development and sale of the subdivided lots. Their involvement will be passive in nature and they have engaged the Investment Group to attend to all matters necessary to effect the land development and sale. ● The Club will continue to operate a sporting facility on the land adjacent to the proposed subdivision and sale of excess land. ● The Club were approached by the property developer, after attempts by the Club to sell the land had been unsuccessful. ● The land will remain owned by the Club throughout its development until such time as the subdivided lots are sold, whereby the Club will receive a percentage of the sale proceeds. ● The Club will not bear the costs of the development. These will be paid by the Investment Group and recouped from the sale income as proceeds are received. The Club will not lend personally to finance the subdivision. The Club is completely removed from the development process and will only supply the physical land. As stated previously, whether an isolated transaction is business or commercial in character, and therefore whether the income from that transaction is assessable as ordinary income, will depend on the circumstances of each case. Taking into account the circumstances of the Club's purchase of the property and the proposed sale and development, profits arising from the sale of the property will not be ordinary income from an isolated business or commercial transaction. | Detailed Reasoning - Capital Gain or Loss: A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gain tax asset (CGT asset). Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? (TD 97/3) answers the question: if a parcel of land is subdivided into lots (blocks) do Part 3-1 and 3-3 of the ITAA 1997 treat the disposal of a block as an asset in its own right? The disposal of a subdivided block is treated as the disposal of an asset in its own right and not as a disposal of part of an asset (the original parcel of land). The subdivided and the newly created blocks are treated as separate assets under the capital gains provisions. Paragraph 4 of TD 97/3 states that when an original parcel of land is split into two or more blocks, and you are the beneficial owner of the original land and each of the new blocks, subsection 112-25(2) of the ITAA 1997 provides that each element of the cost base and reduced cost base of the original asset is apportioned in a reasonable way and included in the corresponding element of the cost base and reduced cost base of each new asset. As discussed above in relation to the Casimaty and McCorkell cases, in which farming land was subdivided and sold, the Full Federal Court held that the proceeds were not assessable under either section 25 or 25A of Income Tax Assessment Act 1936 (ITAA 1936) (note: section 25 (repealed) and section 25A of ITAA 1936 only apply up to and including the 1997 financial year. For 1998 financial year and following, sections 6-5, 6-10 and 15-15 of the ITAA 1997 have application). The subdivision of the land sale in these cases amounted to a mere realisation of a capital asset. The reasoning of the judges in these cases is not distinguishable from this case. The Club is considered to be undertaking the realisation of a capital asset and CGT event A1 (section 104-10 of the ITAA 1997) will happen when they dispose of the subdivided land. | Detailed Reasoning - Conclusion: Based upon the facts of the proposed subdivision and sale outlined above, in light of the factors set out in TR 92/3 and relevant case law, it is not considered the Club have ventured into a business activity of property development and sale of land for profit. Therefore, proceeds from the proposed subdivision and sale of lots will not be assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development. We also do not consider that the passive involvement of the Club in the development amounts to them engaging in a business-like operation or commercial transaction. As such, the profits or gains to be made by the Club from the proposed subdivision and sale of lots will not be assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit. The proceeds of the proposed sale and sub-division of the land will be subject to taxation under the Capital Gains Tax provisions in Parts 3-1 and 3-3 of the ITAA 1997. | Summary: The sporting club will continue to be exempt from income tax as a sporting club described in item 9.1(c) of the table in section 50-45 of the ITAA 1997 after the proposed sale and subdivision of the land. | Detailed Reasoning - Detailed reasoning: As explained at Question 1, the Club is considered to be exempt from income tax under section 50-1 of the ITAA 1997 as an entity described in item 9.1(c) of the table in section 50-45 of the ITAA 1997. Under item 9.1(c) of the table in section 50-45 of the ITAA 1997 an association must be established for the encouragement of a game or sport. This means that its main purpose must be the encouragement of a game or sport. The Club's main purpose is the encouragement of a sport. Its constituent documents emphasise the encouragement of sport; its activities are directed at promoting sport and providing sporting facilities and a significant proportion of surplus funds are directed at sporting activities. The Club displays features that are persuasive in supporting a conclusion that its main purpose is the encouragement of a game or sport. To determine whether the Club will continue to be exempt from income tax as a sporting club if it undertakes the proposed sale and subdivision of the land it is necessary to determine whether the proposed sale and subdivision of the land will result in the Club not having as its main purpose the encouragement of sport. Under the land realisation proposal, the Club is considering, in conjunction with the Investment Group, subdividing and selling excess land which was purchased with the intention of expanding the sporting facilities at a future stage. The funds raised from the subdivision and sale of the land will be used to pay out an existing loan facility and for upgrading current member's facilities. Page 8 of the ATO publication Income tax exemption and sporting clubs (NAT 73773) 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. Similar to the example given above, the Club will be selling land it owns adjacent to its sporting facilities and clubrooms in order to finance facility improvements and to finalise a current business loan facility. Based upon the facts of the proposed subdivision and sale outlined above in Question 2, it is not considered the Club have ventured into a business activity of property development and sale of land for profit. We also do not consider that the passive involvement of the Club in the development amounts to them engaging in a business-like operation or commercial transaction. The proceeds from the sale will be used to upgrade the club's facilities to encourage and promote sport to members and the public. Even though the Club plan to apply some of the proceeds of the sale to the upgrading of its clubhouse and associated social and recreational facilities, it will not affect the Club's main purpose. The Club's main purpose will continue to be the encouragement of sport. It is considered that the proposal to subdivide and sell the excess land will not affect the Club's exemption as a sporting club. | Detailed Reasoning - Conclusion: Based on the above, the proposed arrangement to sell and subdivide surplus land will not affect the sporting club's income tax exemption under section 50-1 of the ITAA 1997 as a sporting club described in item 9.1(c) of the table in section 50-45 of the ITAA 1997 . | Summary: The proceeds of the proposed sale and subdivision of land will be exempt from income tax. | Detailed Reasoning - Detailed reasoning: As determined above, the Club continues to be accepted as an association or 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 and exempt from income tax under section 50-1 of the ITAA 1997, and as a consequence, any capital gain resulting from the proposed sale and sub-division of the land will be disregarded for income tax purposes.