Private ruling: Income tax exempt entity
Date of advice: 20 December 2021
Published: March 2022
Ruling period: 1 July 2020 to 30 June 2023
Date scheme commenced: 1 July 2020

Ruling: Q1: Is Club A exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 as a society, association or club established for the encouragement of a game or sport under item 9.1(c) in section 50-45 of the Income Tax Assessment Act 1997 for the 2021, 2022 and 2023 income years? | A1: Yes

Relevant facts and circumstances: 1. Club A is an Australian public company limited by guarantee. 2. Club A submit that they are well known throughout the Region C community for encouraging, sponsoring and promoting Sport B, and that they are arguably the largest Sport B community in Region C. Club A characterise their principal activities for the 2018, 2019 and 2020 income years as operating a Sport B Club, and licensed premises. 3. Club A also operate five social venues, which offer facilities of a social and entertainment nature. Most of Club A's revenue is generated from these activities. Club A's venues: five services clubs and one Sports Centre 4. Club A have six venues in Region C: venues D, E, F, G, H, and a Sports Centre. 5. Venue D was Club A's original club site. Club A acquired Venue E some decades ago because of concerns that a certain facility might threaten the Venue D site or limit expansion. 6. Club A acquired Venues F, G and H through amalgamations. Club A have explained the amalgamations this way: • Venue F was a failing club with a rich Sport B history and Club A's board saw amalgamation as an opportunity to revitalise the club's history and support the local juniors and seniors programs. • Venue H was a failing Sport M club on the Sports Centre site acquired by Club A. The board of the Sport M club at the time elected to amalgamate with Club A as the best option for the longevity of the club. Venue H supports social Sport M and broader social sports, and hosts a number of social events following games held at the Sports Centre. • Venue G was a club with 3,500 members of which 1,600 were mutual to Club A. Venue G is one of the oldest sporting services clubs in Australia and was formed to cater to and support all branches of local sport. Venue G was a failing club. Club A saw this as an opportunity to save a club with a rich sporting history, because Venue G was the only club in Region C when it was established. Today, Venue G is only a food & beverage, gaming and social hub for Region C, including social sport. While it was previously the home base for the Region C District Sport B headquarters, it has never operated its own team. Club A's membership and board 7. Club A had roughly 24,000 members as at 30 June 2021, across all Club A venues. These members comprise several categories listed in Table 1. Table 1 : membership by category [1] Category Number of members Playing members Senior Sport B 50 Junior Sport B 450 Total playing members 500 Non-playing members Associate members 16,000 Life members 20 Perpetual members 100 Senior members 7,000 Sport B members 5 Total non-playing members 23,500 8. All current directors on Club A's board have an interest in Sport B, either having been a player, coach, administrator or volunteer in the past, or a current passion for the sport. The current directors include: • the Chairperson - who was a former player, and former coach • the Deputy Chairperson - who was a former first grade player, and former Region C 'player of the year' • a former player • a former player, and former Junior Sport B Secretary • a former first grade coach • the current junior Sport B Secretary and registrar • a volunteer who has volunteered in weekend roles supporting the administration of the games for about 40 seasons • a social Sport I member. 9. Some years ago, Club A received a private ruling to the effect that it wasn't a tax-exempt entity. It has reapplied because of subsequent changes to its operations and activities. Club A's Sports Centre 10. Club A purchased a Sports Centre for roughly $2M. Club A leased playing fields before the purchase. The Sports Centre is used as Club A's home ground. The Sports Centre includes a grandstand with seating for around 1,000 people, several corporate boxes, lighting towers, change rooms, and canteen facilities. The Sports Centre also includes a Sport J and Sport K centre. 11. By around 2020, the Club had spent around $6M in capital additions and improvements to the Sports Centre, with around $5M of this being spent in the 2012 and 2013 income years. 12. The Sports Centre has hosted many Sport B events and competitions with regional and national significance since at least 2015. 13. See Table 2 for Club A's expenditure on the Sports Centre in the 2018, 2019 and 2020 income years. Table 2: Sports Centre expenditure 2018-2020 2018 2019 2020 Improvements 160K 260K 140K Ongoing costs (eg, rates, insurance, repairs, maintenance, wages, cleaners, depreciation) 360K 400K 340K Total 520K 660K 480K Club A's Sport B activities 14. Club A has entered teams in Junior Sport B competitions: roughly 30 in 2018, 2019 and 2020. Club A had roughly 500 players and about 40 senior players competing in the 2020 income year. Club A enters a first grade, reserve grade, and Under 18 team in Senior Sport B competitions. 15. Club A also gives financial support to at least 200 junior players managed by a separate Venue F committee. 16. Club A has around 75 coaches or trainers across the junior and senior leagues. The first grade, reserve grade, and under 18s coaches, the senior league coordinator, and trainers are employees. Other coaches are volunteers. 17. Club A have about 200 employees. These include full time, part time, and casual staff. About ten positions are directly Sport B related: see Table 3 for details. The remaining positions are for hospitality, finance and administration staff. However, Club A submit that employees' roles may cross over to different areas of the club. For example, staff with roles which are not directly Sport B related may help prepare for Sport B events. Table 3: employees directly engaged in Sport B activities Role Positions Total annual remuneration Club coach 1 $45K Reserves coach 1 $5K Under 18's coach 1 $5K Head trainer 1 $5K Club doctor 1 $5K Senior secretary 1 $5K Junior secretary 1 $5K Strappers 2 $5K Physiotherapist 1 $25K Total 10 $105,000 18. Three of Club A's venues (D, F, and G) have displays (physical or digital) about history, past teams and significant players. 19. See Table 4 for a summary of the club's income and expenses from sporting activities for the 2018 to 2021 income years. In Table 4, broadly: • 'income' items for sporting activities include: canteen sales and ground hire, competition income, gate proceeds, sale of merchandise and 'social income' • 'expense' items include sports centre depreciation, utility fees, insurance, repairs & maintenance, staff wages, cleaners, coach fees, presentation nights, medical expenses, player bonuses and sports gear. Table 4: income and expenses from sporting activities Item 2018 2019 2020 2021 Sports centre Income 150K 150K 100K 50K Expenses 350K 400K 350K 350K Expenses excluding depreciation 250K 300K 200K 250K Senior Sport B Income 13K 14K 4K 10K Expenses 450K 450K 300K 100K Junior Sport B Income 20K 60K 50K 50K Expenses 200K 220K 190K 190K Total Income 180K 230K 150K 100K Expenses 1M 1M 800K 600K Expenses excluding depreciation 900K 900K 700K 500K 20. Club A's records included an item described as club grants. This item is gaming revenue that has been directed to junior Sport B expenses as part of the Club Grants program. This is treated as a contra expense in Club A's internal accounts. 21. Club A submit that contributing factors to reduced spending on senior Sport B in 2020 and 2021 include: • a salary cap being introduced for the 2020 and following seasons • COVID 19 restrictions causing a reduced season in the 2020 year, and the 2021 season being completely abandoned. Club A's net profit, income, expenses 22. We summarise financial information which Club A have given in their application, supporting documents, and responses to questions. We've presented some details about net profit, income and expenses in Tables 5, 6 and 7. Table 5: Club A's (including its subsidiaries) total income and expenses Item 2018 2019 2020 2021 Total income 36M 34.5M 29.5M 41.5M Total expenses 35.5M 34M 30M 36M Net profit/loss (before income tax) 650K 550K -500K 5.5M Total expenses excluding depreciation and amortisation 31.5M 30M 26M 31.5M Table 6: Details of specific income items Item 2018 2019 2020 2021 Bar and catering sales - $ 9M 8M 6.5M 8.5M Bar and catering sales - % of total income 25% 24% 22% 20% Gambling income - $ 23M 22M 20.5M 30M Gambling income - % of total income 65% 65% 70% 75% Table 7: Details of specific expense items - in $ and as a percentage of total expenses, excluding depreciation and amortisation Item 2018 2019 2020 2021 Bar, bottle shop, catering expenses $ 4M 4M 3M 4M % 14% 13% 12% 12% Gaming $ 11M 10M 7M 8M % 35% 33% 28% 31% Entertainment $ 2.5M 2.5M 2M 2M % 7% 8% 8% 7% Salary and super $ 9.5M 9.5M 8.5M 10.5M % 31% 31% 33% 33% Occupancy, overheads and other costs $ 3M 3M 4M 5M % 10% 11% 16% 16% Gross Sport B expenditure, excluding depreciation $ 900K 950K 700K 500K % 3% 3% 3% 2% Club grants scheme $ 400K 350K 300K 450K % 1% 1% 1% 1% 23. Club A spent part of its salary and wages expenditure on remuneration for positions described as 'key management personnel', see Table 8 . None of the key management personnel are board members. All managers have full time roles, and manage all five club sites. 24. The CEO's contract is approved by the Board. All other management remuneration is determined by the CEO. 25. The CFO was made redundant in 2021, so the figure includes a termination payment. Table 8: remuneration for key management personnel Position 2017 2018 2019 2020 2021 CEO 300K 300K 350K 350K 350K CFO 100K 100K 100K 150K 320K Food & Beverage Manager 100K 100K 100K 150K 150K Gaming Manager - 100K 100K 100K 100K HR & Operations Manager - - 100K 100K 100K Marketing Manager - - 100K 100K 100K Head Chef - 100K - 100K 100K Operations Manager 150K - - - - Super 60K 70K 80K 100K 125K Directors Honorarium 5K 25K 30K - - Total 700K 850K 1M 1.2M 1.4M Club A's Non-Sport B activities 26. All venues, apart from the Sports Centre, have dining, bar facilities, electronic gaming machines, TAB, Keno and Bingo facilities. 27. Venue H has facilities for social and competitive Sport M activities. Venue H wound up competitive Sport M activities in 2019 due to lack of players. Venue H continues to offer social Sport M activities. Club A maintains the Venue H venue predominantly as a social hub, including for a venue for post-match and post-training social events. 28. Broadly, services club activities conducted at Venues D and E are profitable, but Venues F, G, and H are loss-making. Club A's budget projections show these trends are expected to continue for the 2022 to 2025 income years. We summarise these trends in Tables 9 and 10. Table 9: net budged profit for Club A's services clubs and sporting activities Venue 2020 2021 2022 2023 2024 2025 Venue D 850K 4.5M 800K 2.5M 2.5M 2.5M Venue E 25K 700K 300K 350K 500K 550K Venue F -550K -450K -550K -350K -350K -350K Venue G -250K -500K -800K -700K -600K -600K Venue H -300K -350K -300K -250K -200K -200K Total budgeted profit from all league club venues -200K 4M -600K 1.6M 1.8M 2M Sports Centre -40K -10K -6K 50K 50K 50K Net Sport B expenditure -250K -50K -200K -250K -250K -250K Table 10: net cash flow projections for Club A's services clubs and sporting activities Venue 2020 2021 2022 2023 2024 2025 Venue D 4M 8M 3M 5M 5M 5M Venue E 500K 1M 600K 1M 1M 1M Venue F -40K 50K -150K 150K 150K 150K Venue G -100K 20K -300K -150K -100K -100K Venue H -150K -200k -150K -100K -50K -50K Sports Centre 80K 100K 100K 150K 150K 150K Net Sport B expenditure -250K -50K -200K -250K -250K -250K Total cash flow inwards 4M 9M 3M 6M 6M 6M Expected cash balance 2M 6.5M 5.5M 6M 8M 12.5M 29. Club A owns a butcher shop near one of its venues. The butcher shop supplies meat products for Club A's catering facilities and social raffles. It also supplies meat products to the public, but the majority of its supplies go to Club A. Club A submit that the butcher acquisition allows them to: • become their own supplier of product and manager supplier costs • increase their purchasing power to supply their venues and fundraising activities. See Table 11 for the butcher shop's net profit for the 2018 to 2021 income years. Table 11: The butcher shop's net profit for the 2018 to 2021 income years Item 2018 2019 2020 2021 The butcher shop's net profit ($) 6.5K 80K 14K 250K The butcher shop's net profit as a % of Club A's total profit (loss) 1% 15% (3%) 4% 30. Club A operates three social Sport I clubs based at Venues D, G, and F. They are social groups for people mainly over the age of fifty, that play fortnightly games subsidised by the club. They use a variety of facilities throughout Region C: they do not own any Sport I facilities. 31. Club A has a Club Grants Scheme through which it supports community and sporting groups, charities and charitable events in the Region C community. Grant recipients have included organisations which support homeless or disadvantaged people, and local sporting clubs in other sports. Club A's Constitution 32. Club A have given a copy of their current Constitution. [2] It lists Club A's objects as including: • To allow people to play and support Sport B • To promote Sport B • To participate in Sport B competitions • To promote and participate in other sports and pastimes • To provide a clubhouse, social amenities and other facilities to members • To hold a licensed club registration • To employ coaches and other assistants to help run Sports B events • To contribute to religious, charitable, or sporting organisations • To amalgamate with other registered clubs. 33. Other objects include purchasing/dealing in properties, building/repairing buildings or playing fields, paying costs and expenses, raising money, dealing in securities, instruments or properties, employing officers or employees, granting pensions, entering insurance contracts, or indemnifying officers. 34. It contains a 'non-profit' clause. 35. One of the clauses says that Club members (including board and committee members) shall not directly or indirectly derive any profit, benefit or advantage, unless it is either offered equally to all members, or it derives from dealings or contracts made in the ordinary course of its business. 36. Categories of club members include: • Sport B Members - broadly, to be eligible members need to satisfy the board that they give substantial support to Sport B (eg, attending matches, coaching or organisational duties etc) • Club Members - must pay membership fees, wish to use Club A's facilities and amenities, and be over 18 years • Junior Members - under 18 years, participate in Club A's sporting activities • Life Members - broadly, to be eligible, the Board must nominate a member, they must have ten years standing, and have rendered meritorious service to the club 37. One of the clauses says that the Board shall comprise nine directors, comprising a President, Vice President, and Treasurer, and six other directors: • a minimum of five directors who must be Life Members or Sport B Member • a maximum of four directors being either Life Members or from any class of Ordinary Members except Junior Members 38. If there are casual vacancies so that the Board is comprised of seven or eight members, a majority of Board members must still be Life Members or Sport B Members. 39. No employee can be elected to the Board. 40. The positions of President, Vice President and Treasurer must be Life Members or Sport B Members. 41. Members must have been a continuous member of the Club for two successive years to be nominated, elected, or appointed to the Board. Club A's annual reports 42. Club A supported their application with Annual Reports for the 2018, 2019 and 2020 income years. The Annual Report for the 2021 income year became available online sometime after Club A submitted their application. These reports contain President's Reports, reports for Sport B, notices of meetings and resolutions, and Financial Statements. 43. Broadly, the senior and junior reports give highlights from competitions, and movements in coaches or administrative support positions. 44. The annual reports give details of current directors, including years of service. Several current or recent directors have significant longevity. For example, according to the 2021 Annual Report, one director had around 60 years of service. Three others had 20 or more years of service. We summarise the President's Reports for the 2018, 2019 and 2020 income years in Table 12. Table 12: President's Reports for the 2018, 2019 and 2020 income years President's Report Summaries 2018 • Thanks to Club members, including outgoing President, Board, key officials/management/employees, volunteers etc. • Comment about 2018 financial result (group profit not as strong as previous years, but maintains a strong cash flow). • Comment about purchase/sale of real property, and opening of the Sports Centre. • Comments about profitability about trading performance: Venue D premises had a strong profit, albeit less than prior years; Venue E premises trading strongly; Venue F operates at a loss but is cash positive; Venue H had a substantial loss, but improved on 2017. • Comment about the Sports Centre 'operating very successfully' and hosting certain Sport B competitions. • Comments about junior membership numbers, support for other sporting groups and charities. 2019 • Comments about teams which won competitions. • Thanks to coaches, support staff, volunteers. • Comment about junior membership numbers. • Comments about financial performance: net assets; Venue D premises continuing to 'trade strongly'; Venue E premises delivered a profit; Venue F reported an overall loss but delivered 'improved cash flow'; Venue H reduced its loss. • Comment about the Sports Centre prospering and hosting certain Sport B competitions. • Comments about supporting other sporting groups and charities. • Comment about pending amalgamation with the Venue G - leading to substantial combined operations (200 employees, four clubs, Sports Centre, butcher). • Thanks to management staff/employees/Board/members. 2020 • Comment about amalgamation with Venue G. • Comment about COVID-19 impact, including restrictions, standing down employees, JobKeeper support, losses and cash flow. Comment about financial loss. • Thanks to members and visitors from dealing with COVID-19 related restrictions. • Comments about junior membership numbers. • Thanks to management team, staff, etc. 2021 • Mentions enforced closure of venues still in force in September 2021. • Discussion of the 'phenomenal' 2021 trading year, with a $5 million profit. Venues D and E premises recorded profits. Venues G, F and H struggled and haven't regained pre-March 2020 trading levels. • Discussion of COVID-19 restrictions and cancellation of junior and senior events. Thanks to coaches for effort in preparing for the cancelled seasons. • Thanks to management staff and board. Club A's cash reserves 45. Club A's Financial Statements show cash reserves - see Table 13. Table 13: Club A's cash and cash equivalents - 2018 to 2021 2018 2019 2020 2021 1.7M 1.5M 3.2M 8M 46. Club A submit that they have a policy to maintain cash reserves. This is because Club A: • think maintaining cash reserves is prudent management, having learnt from a history of reckless spending, which almost caused Club A to go under some decades ago • consider that gaming activities have political risk - the government might impose restrictions or introduce taxes • need to refresh food and beverage facilities to maintain and attract customers • allow it to support and advance Sport B and social sport in Region C. 47. Club A also submit that COVID-19 conditions have affected their cash reserves: • Club A submit the increase in their cash reserves in 2021 was unexpected, because COVID-19 caused unusual spending on gaming activities • cash reserves had reduced to approximately $4 to $4.5M by November 2021, as venues closed in the second half of the calendar year • Club A think it is appropriate to maintain a cautious cash flow management approach in COVID-19 conditions: there may be more lockdowns. Club A's strategy 48. Club A submitted a document about their strategy for the next decade. 49. Club A submit that their immediate focus is surviving COVID-19 conditions. This is because COVI9-19 has had a negative impact on the club early in the 2022 financial year: • All premises were closed from late June 2021 to early October 2021. • In October 2021, only two club premises (Venues D and E) had enough staff to operate, because only half of employees were fully vaccinated and ready to commence. Some staff resigned or did not meet vaccination requirements. • Club A expects Venues G and F to open in early 2022. 50. Club A has two proposed developments for their main club site: • An approved development application to develop a car park and deck extension for about $4M. • A submitted expression of interest to buy adjacent land for $4M. The club intends to redesign the club, move the entry, add club, food offerings and gym facilities. The club is considering shared work space opportunities, and developing an 80 room boutique hotel. Club A submit these are just proposals which may not materialise. 51. Club A have been approached by developers for Venue G. Club A are considering selling the site to a developer, under an agreement where the developer develops a unit and office site, and returns some space in that site to Club A. The plan is to replace the current premises at a net zero cost. 52. Club A plans to operate and develop Sport B by maintaining cash reserves, diversifying away from gaming by developing facilities and becoming a landlord. Assumptions Club A will comply with its Constitution during the 2021 to 2023 income years. Club A will not make any substantive [3] (as opposed to procedural) amendments to its Constitution during the 2021 to 2023 income years.

Relevant legislative provisions: Section 50-1 of the Income Tax Assessment Act 1997 | Section 50-45 of the Income Tax Assessment Act 1997 | Section 50-47 of the Income Tax Assessment Act 1997 | Section 50-70 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Is Club A exempt from income tax under section 50-1 as a society, association or club established for the encouragement of a game or sport, under item 9.1(c) in section 50-45 for the 2021, 2022 and 2023 income years? Summary 53. Yes. Club A is exempt from income tax for the 2021, 2022 and 2023 income years, because it is a club established for the encouragement of a game or sport. It meets the requirements to be eligible under item 9.1(c) in section 50-45. • While Club A has multiple purposes, we think encouraging Sport B is its main purpose. While Club A runs substantial services club activities, we think it does this to fund Sport B. • Club A is a non-profit body which complies with its rules and carries out its activities principally in Australia. Detailed reasoning 54. Section 50-1 says: 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. 55. The relevant table is section 50-45, which is about 'sports, culture and recreation'. 56. Item 9.1(c) in section 50-45 says that 'a society, association or club established for the encouragement of a game or sport' is an exempt entity. The special condition for Item 9.1(c) is in section 50-70. Section 50-47 is a 'special condition' applying to all entities. 57. Therefore, to be exempt under Item 9.1(c), an entity must: • be a society, association or club established for the encouragement of a game or sport ('the first condition'). • comply with section 50-47 ('the second condition') • comply with section 50-70 ('the third condition'). 58. Therefore, Club A will only be exempt under Item 9.1(c) if it meets all three of these requirements. We consider each in turn. | Detailed Reasoning - The first condition: is Club A a society, association or club established for the encouragement of a game or sport?: 59. Taxation Ruling TR 2021/D6 Income tax: the games and sports exemption is the Commissioner's preliminary view on the 'game or sport' requirement in Item 9.1(c) in section 50-45. TR 2021/D6 replaces Taxation Ruling TR 97/22 Income tax: exempt sporting clubs , which contained similar views. 60. Paragraph 6 of TR 2021/D6 says that a club is a voluntary organisation of people associated together for a common or shared purpose. 61. Club A is a club, because it has voluntary members who associate to play Sport B and participate in licensed club activities. Sport B is both a game and a sport. [4] Is Club A established for encouragement of Sport B and other sports? If so, is that encouragement its main purpose? | Detailed Reasoning - A club with multiple purposes will only meet the 'main purpose' test if any non-exempt purposes are incidental to an exempt purpose.: 62. A club with multiple purposes will only pass the 'main' purpose test if non-exempt purposes can be characterised as incidental to the exempt purpose. Cronulla Sutherland Leagues v Federal Commissioner of Taxation [5] is accepted as a leading authority on the 'game or sport' condition. Broadly, Cronulla Sutherland shows that where a club has multiple purposes, only one of which is eligible for the exemption, it is necessary to characterise the taxpayer, considering its objects, purposes, and activities. A club may qualify if the non-exempt purpose is merely incidental or ancillary to the exempt purpose, but won't if the two purposes are 'coordinate'. [6] 63. Clubs like Club A often provide amenities (eg, dining and gaming/gambling activities) to members and visitors through a 'services club' type arrangement. Are these 'services club' type activities incidental to promoting sport? Here, Club A carries out Sport B activities, but also carries on a substantial services club operation. It also supports other community groups. The question is whether: • Sport B is its main purpose, and other activities (such as carrying on a services club) is merely incidental to Sport B, or • any of the other activities have become ends in themselves, [7] or are so significant that it should be characterised as a 'co-ordinate' object? [8] If the former, then Sport B is the club's main purpose. If the latter, then Sport B is not the club's main purpose, and Club A is not exempt under Item 9.1(c). 64. Federal Court and Australian Administrative Appeals ('AAT') decisions give other examples of how clubs with multiple purposes have been characterised for the sporting club exemption. We list a few which we have used as comparisons: • Terranora Lakes Country Club v Federal Commissioner of Taxation [9] • St Mary's Rugby League Club Limited v Federal Commissioner of Taxation [10] • AAT Case 1068 (Re Tweed Heads Bowls Club and Federal Commissioner of Taxation) [11] • Re South Sydney Junior Rugby League Club Ltd v Federal Commissioner of Taxation [12] We summarise these cases in the Annexure. 65. TR 2021/D6 explains the Commissioner's view about how the 'main' purpose test should apply to clubs relying on the 'game or sport'. To summarise a few points made in TR 2021/D6: • the club's main purpose in the relevant income year must be the encouragement of a game or sport (paragraph 29) [13] • encouragement isn't defined, and takes its ordinary meaning: to stimulate by assistance or approval (paragraph 29) • determining the club's main purpose requires objectively weighing all material facts and circumstances - there is no set formula (paragraph 30) • the club's stated purpose, and the subjective motives or intentions of the club's founders/members are relevant but not decisive (paragraph 31) • the club's main purpose must be determined in the income year, not when it is formed (paragraph 32) 66. At paragraph 33, TR 2021/D6 says a club that has both sporting and non-sporting purposes will not qualify unless the non-sporting purpose is: • merely incidental to its sporting purposes, or • secondary but of less importance than its sporting purposes. 67. Paragraph 35 of TR 2021/D6 says that determining a club's main purpose requires objectively weighing all the club's features. TR 2021/D6 lists factors at paragraph 36 which have been identified as relevant when considering a club's purpose. We apply the features listed in paragraph 36 of TR 2021/D6 to Club A in Table 11. 68. TR 2021/D6 explains some of these factors in other paragraphs. For example: • A club's activities are important, but can't be considered in isolation. Activities can be a means to an end. All of a club's activities must be weighed against the club's objects, history, and control to determine the main purpose (paragraphs 37-38). • Where a club derives revenue from commercial operations, it is necessary to objectively determine whether they are a means to advancing a sporting purpose, or some other purpose (paragraph 40). • A club can demonstrate a purpose of encouraging a game or sport where it provides contributions to other organisations that directly conduct those activities (paragraph 41). 69. Paragraph 42 of TR 2021/D6 lists examples of direct or indirect activities that indicate encouragement of a game or sport. • forming, preparing and entering teams and competitors in competitions in the game or sport • coordinating activities • organising and conducting tournaments • 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 • encouraging increased and wider participation and improved performance • marketing • initiating or facilitating research and development, and • facilitating the other activities in this list by making a financial or in-kind contribution to an organisation that performs them directly. 70. TR 2021/D6 says that how surplus funds are used, or retained for future use, is an important factor in determining the club's main purpose. • A club that uses surplus funds from commercial activities to support sporting activities will not necessarily have the main purpose of encouraging a game or sport (paragraph 44). • The extent of the activities and any other ends they achieve may result in a different characterisation of purpose (paragraphs 43 and 44). • If surplus funds are used for other commercial activities, or contingency funds, this factor is neutral (paragraphs 45 and 46). 71. TR 2021/D6 at paragraphs 60 and 61 says the club's main purpose can change over time. But isolated events do not necessarily mean that purpose has changed. 72. We apply some of the points made in TR 2021/D6 to Club A in Table 14. Table 14: features listed in paragraph 36 of TR 2021/D6 Feature Application to Club A Emphasis in club's constituent documents that the main purpose is to encourage a game or sport Here, Club A's objects are broad. They cover playing, supporting, promoting and participating in Sport B. They also extend to providing amenities and facilities to members, and supporting other community groups. Other objects include dealing in property, managing buildings or other property/equipment, raising money, meeting expenses, selling property, hiring/firing employees, and doing other things incidental to these objects. There is no hierarchy in the objects clause: none are given explicit preference or priority over the others. However, the first, second and third subclauses mention Sport B. Providing a clubhouse, amenities and facilities is fifth, while supporting other organisations is nineteenth. We think all the other clauses (eg, employing staff, selling or managing property) can be fairly characterised as being 'incidental' to the objectives of either Sport B or running a services club. The objects are consistent with Sport B being the main purpose. They are also consistent with Sport B being merely a co-ordinate purpose, alongside carrying on a services club for members. The conduct of activities directly related to the game or sport Unlike clubs featured in cases like Cronulla Sutherland and South Sydney, Club A undertakes sporting activities directly. It doesn't merely support activities undertaken by related bodies. Club A enters Sport B teams in competitions in Region C, from juniors through to a senior first grade team. It also conducts coaching and hosts various Sport B competitions and events. Extent of sporting activities Club A has over 30 teams entered in junior Sport B competitions, and fields teams in senior and reserve grade competition. In the last decade it has spent around $6M on a sporting facility, which has hosted many Sport B events and competitions of regional and national significance.. We think Club A has a high intensity of Sport B activity. This is consistent with Sport B being Club A's main purpose. A high level of member participation in the game or sport Club A had around 500 members as at in Sport B teams. While this is a substantial number, Club A had around 25K members. In other words, about 2% are active playing members. There is no requirement for ordinary members to participate in Sport B events (eg, as either a player, coach or spectator). It's possible that many ordinary members may simply attend the club to enjoy the facilities. Those members may have little or no interest in Sport B. This factor doesn't support Sport B being Club A's main purpose. Rather, it is consistent with Club A's having non-incidental purposes other than Sport B, like providing amenities to members through services clubs. Promotion of the organisation to patrons and the public as one that encourages a game or sport Club A submits that it is well known throughout Region C as encouraging Sport B activities. Club A's annual reports for the 2018, 2019 and 2020 years contain reports on junior and senior Sport B activities. The President's reports in the same years mention Sport B activities and developments. While there are no Sport B reports in the 2021 annual report, the season was cancelled because of COVID-19 restrictions. Three of Club A's venues have displays commemorating Sport B heritage in Region C. The evidence we have seen is consistent with Sport B being Club A's main purpose. Management committee involvement in the promotion of sport Club A is administered by its board. Club A's board is required to have a majority of Life Members or Sport B Members. Sport B Members must be regarded as giving 'substantial support to Sport B'. There is no corresponding requirement that Life Members must be involved in Sport B activities. Therefore, there is no formal requirement that most Board members must be involved in Sport B activities. However, the formal requirements wouldn't be decisive. All current board members have been involved in Sport B activities. It seems unlikely that this situation would change in the period covered by this ruling. On balance, we think this factor is consistent with Sport B being Club A's main purpose. Use of surplus funds for encouraging the game or sport The club's gross expenditure on Sport B activities was about $900K in 2018 and 2019. It reduced in the 2020 and 2021 income years, but we expect COVID-19 restrictions were a significant factor. Broadly, this expenditure exceeds the club's net profit or loss in the corresponding years. This is consistent with directing surplus funds to encouraging Sport B. Substantial sums are also spent on other activities, which aren't directly related to Sport B. In some circumstances, expenditure on other activities may suggest that another (non-exempt) purpose has become an end in itself. This may cause a club to fail the 'main purpose' test. Nevertheless, we conclude that the other (non-exempt) activities can be fairly characterised as incidental to Sport B in Club A's circumstances. This supports Sport B being Club A's main purpose. While we have some concerns about Club A's cash reserves (which reached $8M in 2021), we think this factor is neutral for characterising Club A's main purpose. Refer to paragraphs 73 to 97 for more discussion. Provision of financial and in-kind support for encouraging the game or sport Club A funds extensive sporting activities of its own: for example, maintaining the Sports Centre, hosting competitions, and fielding junior and senior Sport B teams. It also funds the Venue F juniors, and gives financial support to other sporting clubs including other sports. It also has social Sport M and Sport I activities, and Sport K and Sport J facilities. This supports Sport B (and sport more generally) being Club A's main purpose. | Detailed Reasoning - Club A's uses its funds consistently with Sport B being its main purpose: 73. While Club A generates substantial revenue from services club activities, this is arguably incidental to promoting Sport B. Their financial information shows that most (around 90%) of their income comes from services club type activities (bar, catering, gambling and similar), and also incurred most of its expenditure on those activities. However, the decisions in Terranora, St Mary's, and Tweed Heads show that merely generating substantial revenue from other activities doesn't prevent encouragement of a game or sport being the club's main purpose. Nevertheless, the other activities should serve to generate profits to fund the club's sporting activities. 74. We compare Club A's gross Sport B expenditure to its total revenue, total expenses, and net profit in Table 15. | Detailed Reasoning - Table 15: Gross Sport B expenditure (excluding depreciation) - % of total revenue, total expenses, and net profit: % of total... [14] | Detailed Reasoning - revenue: 2.50% 2.76% 2.36% 1.20% | Detailed Reasoning - expenses: 2.88% 3.15% 2.68% 1.59% | Detailed Reasoning - net profit (loss): 138.55% 175.39% (144.79%) 9.27% 75. While Club A's expenditure on Sport B activity is small compared to its total operations (revenue and expenditure), it exceeds its net profit. That is, the total amount spent on Sport B activity (including the Sports Centre) is greater than Club A's net profit or loss for the year. This is consistent with the characterisation that the services club activities are carried on to fund its Sport B activities. 76. However, accumulating surplus funds without spending them on sport, might compromise a club's claim that sport is its main purpose. We discuss this at paragraphs 77 to 85. | Detailed Reasoning - Cash reserves, developments and club strategy: is Club A accumulating funds for a hotel development?: 77. While Club A has accumulated significant cash reserves, this factor doesn't necessarily prevent Sport B being their main purpose. Club A had approximately $8M in cash reserves in its 2021 financial statements. These reserves significantly exceed their annual gross Sport B expenditure. Club A haven't made any submissions that they are retaining funds for Sport B expenditure. However, paragraph 45 of TR 2021/D6 suggests putting aside surpluses as a contingency fund can be a neutral factor if the club has a reasonable need for it. Club A submit retaining surplus cash is a cautious risk management approach, developed partly in response to historical reckless spending, and maintained in COVID-19 conditions. 78. We think it appropriate to scrutinise Club A submissions to determine if their cash surplus strategy is consistent with Sport B being its main purpose. We discuss some considerations in paragraphs 79 and 80. 79. Some factors which could suggest that Club A cash fund may be a reasonable contingency fund include: • Ongoing or renewed COVID-19 related restrictions could threaten revenue. [15] Club A's may need the contingency fund to survive (by continuing to maintain venues, including the sports centre, and Sport B activities) in the short to medium term. • Actual recent fluctuations in cash. The first half of the 2022 income year (second half of the 2021 calendar year) has seen Club A's cash reserves reduced to $4-4.5M. This appears to vindicate Club A's cash management strategy to the extent the reduction was caused by COVID-19 conditions. • The need to renew services club equipment to maintain services club revenue. • Heavy reliance on gambling revenue exposing Club A to regulatory risk. Club A receives most of its revenue from gambling activities. Gambling activities are known to attract media and political attention. [16] Future government regulation or other political events may diminish Club A's ability to raise revenue from gambling activities. • History of reckless spending by Club A. We think it reasonable to question whether events from some decades ago would have a significant impact on current policies. However, we note that Club A's current board has significant institutional memory, with a current board member and former treasurer having served at the club for over 60 years. 80. However, we need to consider whether the cash reserve is being maintained for non-Sport B projects. Club A is considering significant developments at Venues D and G, which don't directly relate to Sport B. The Venue G proposal is expected to be cash neutral. However, Club A have submitted an expression of interest for a Venue D land purchase at $4M. It is considering using the new site to redesign the club, and develop shared work spaces and an 80 room boutique hotel. There's no suggestion the hotel will be reserved for Sport B related purposes (for example, accommodation for touring Sport B teams). The development is a significant proposal requiring substantial funds. We note that the developments are simply proposals - they may not go ahead. Nevertheless, they are arguably a factor pointing against Club A's main purpose being Sport B. 81. Redevelopment to modernise the Venue G premises suggests providing services club facilities to members is a significant club purpose. Venue G is a loss-making services club with no direct links to Sport B activity. While it was the former headquarters for the Region C District Sports B administration, it has never run a Sport B team. It doesn't appear to have attached playing fields. If Club A is considering major redevelopments to this venue, including dealing with developers, that suggests maintaining it has become an end in itself. In other words, it isn't just a means to make profits to channel into sporting activity. Providing high quality services club facilities to members through venues like Venue G may have become a stand-alone purpose for Club A. 82. The proposed development at Venue D is a substantial operation which also undermines Club A's claim that Sport B is its main purpose. • Broadly, encouraging sport can still be a club's main purpose if other activities (such as fundraising) are incidental to encouraging that sport. • The more significant the activity or operation, the less likely it is that they are incidental. • In St Mary's, [17] Hill J commented that he was concerned about a proposed motel development. The decision in that case was that rugby league was that club's main purpose, because of its rugby league intensity. (Much like Club A, it ran over 30 teams, including a first grade team and a reserve grade team in the local competition). However, Hill J said that if the club built a motel, it would be more difficult to reach that conclusion. We've included an extract from this judgment in the Annexure. • Acquiring land for over $4M and building an 80 room hotel is a large-scale operation which would be very unusual for a sporting club. • The scale of Club A's non-Sport B activities may drown out its Sport B activities. If Club A develops shared work and hotel accommodation alongside its existing services clubs, it would become a substantial and diversified commercial operation. The scale of those activities alone might disqualify them as being incidental to supporting Sport B, unless there was (at least) a corresponding increase in sporting activity. 83. Nevertheless, we think that the proposed developments aren't necessarily fatal to Sport B being Club A's main purpose: • Some of the developments are simply proposals at this point - they may not go ahead. For example, Club A might abandon either proposal if wasn't affordable or wouldn't achieve their objectives. • While the $4M carpark and deck extension has been approved, this seems more routine. It might increase venue capacity and convenience, allowing Club A to generate more profits to fund Sport B. • The Venue G development is expected to be cash neutral for Club A. If that turns out to be the case, it won't drain resources away from Sport B. Further, modernising the venue might attract new customers and allow it to turn a profit. • Developing the Venue D site may lead to new and diversified sources of revenue. Shared work and hotel accommodation might allow Club A to become less dependent on gaming activities. This could be a rational long-term strategy to make the club viable if changes to gambling regulation or social behaviour make gambling less profitable. 84. On balance, we think that the proposed developments (based on the information available at this point) are neutral to determining Club A's main purpose. 85. However, we might reach a different conclusion in future, depending on how any developments (if they go ahead) affect Club A's operations. Just for example, Sport B would be unlikely to be Club A's main purpose if it: • went ahead with development without plans to generate income from that development (in which case the development may be an end in itself) • generated revenue through diversified operations, while maintaining loss-making services club operations (in which case the development would subsidise loss-making services club activities) • decreased Sport B activities or expenditure while pursuing development • substantially expanded its scale (through development or new operations) without increasing Sport B activities or expenditure. | Detailed Reasoning - While several venues are running at a loss, we think this is compatible with Sport B being their main purpose: 86. Providing club facilities and amenities to members may sometimes become an end in itself, of comparable significance to Sport B. Club A has several services club venues. While overall they run a profit, some of the venues (Venues H, F, and G) run at a loss. Moreover, budgets for the 2022 to 2025 years suggest that these losses are expected to continue for the near future. If Club A merely conducts services club activities to fund Sport B activities, why is it running services clubs at a loss? Arguably, this suggests the services club activities conducted by these loss making venues are ends in themselves. If so, Club A will fail the main purpose test. 87. To evaluate this argument, we need to scrutinise Club A's submissions about its rationale for acquiring loss making clubs. Venues H, F, and G amalgamated with Club A. Why would Club A choose to acquire loss-making clubs? This would reduce its profits, and reduce the funds available to support Sport B. Arguably, this suggests that running services clubs has become an end in itself. However, we also need to consider whether running non-Sport B loss making activities could have indirect or long term benefits for Sport B. If there are significant indirect or long term benefits, the loss making activities might still be part of a strategy to promote Sport B. In that case, Sport B could still be Club A's main purpose. 88. We think that Club A's decision to continue to run these venues at a loss can be explained without concluding that running services clubs is a non-incidental purpose. • Club A's annual reports evaluate each services club venue on financial performance, and suggest they aim to reverse loss-making trends • Club A may hope amalgamating with less viable clubs might reduce costs through economies of scale. For example, administration costs for each venue might be lower if they benefit from Club A's existing staff and structure. This could help loss making venues to run a profit in the medium term. • Venues F and G amalgamated with Club A recently, and it might take some years for Club A to turn them into profitable entities. • COVID-19 restrictions will have disrupted Club A's plans, operations and financial performance in 2020 and 2021. • Venue F and Venue G have significant Sport B heritage: if the venues closed that may damage Sport B's reputation in the community. • Club A gives financial support to 250 junior players managed by a separate Venue F committee: this arrangement might not have happened if Club A hadn't amalgamated with Venue F. • Amalgamating with non-viable Sport B affiliated clubs might promote the Club A brand and help it to promote Sport B. 89. Nevertheless, it is possible Sport B wouldn't be Club A's main purpose if some venues consistently reported losses for many years. This would tie up funds and resources which could have been redirected to Sport B. If 'Sport B' was really the main purpose, Club A would regard the funds and resources invested in the loss-making venues as wasted. Maintaining the loss-making venues indefinitely would be inconsistent with a strategy to generate profits to fund Sport B activities. Even if Club A was able to maintain the failing clubs without compromising Sport B, maintaining the failing clubs wouldn't help it to promote Sport B. In that case, running services clubs would have become a stand-alone purpose, which would cause Club A to fail the main purpose test. | Detailed Reasoning - Does the butcher shop demonstrate Sport B isn't Club A's main purpose?: 90. We have also considered whether Club A's butcher operation is a factor suggesting Sport B isn't its main purpose. While the butcher represents a small proportion of Club A's total operations, we think it's unusual for a sporting club to run a separate business selling meat products. 91. While the butcher acquisition is small, it may suggest that Club A's services club operations are a significant purpose. The acquisition supplies Club A's services club venues. Club A submit it helps the club manage supply costs for their venues and fundraising activities. Club A's focus is on providing high quality meals for its services club catering. The services club catering objective might become an end in itself - no longer merely incidental to generating profits for Sport B. 92. Here, we think the butcher is neutral to characterising Club A's main purpose. It's incidental to Club A's services club operations. We've concluded that the services club operations are themselves incidental to generating profits to channel into Sport B. We don't think the butcher is significant enough to change our characterisation or assessment. Controlling catering costs may be part of a strategy to increase Club A's total profits, and allow it to devote more funds to supporting Sport B. 93. However, we might reach a different conclusion if there was evidence that Club A catering operations went beyond a profit-making activity to fund Sport B. This could happen if Club A (for example): • was running catering operations in an uncommercial, loss-making manner • was investing substantial resources (disproportionate to its Sport B activities) to achieve culinary excellence [18] • promoted its catering activities and achievements (eg, catering industry awards) to an equal or greater extent than its Sport B activities and achievements. | Detailed Reasoning - Club A's other activities are best characterised as incidental to promoting Sport B: 94. We also need to decide whether Club A has any other purposes which cause it to fail the main purpose test. Club A spends significant amounts on community grants, and management compensation expenditure. These activities aren't directly related to Sport B activities. It could be suggested that these other items are so significant, compared to Sport B expenditure, that they are of similar or equal importance, and have become ends in themselves. If so, then Sport B would not be Club A's 'main' purpose. 95. We compare Sport B expenditure to management compensation and community grants in Tables 16, 17 and 18. Table 16: Club A's expenditure on Sport B, management remuneration, and grants in $ | Detailed Reasoning - 2021: Sport B expenditure (excluding depreciation) $899,128 $947,538 $693,553 $499,963 Key management personnel compensation $838,216 $1,009,712 $1,177,077 $1,363,281 Club grants $396,297 $368,699 $305,342 $462,706 Table 17: Club A's expenditure on Sport B, management remuneration, and grants, as a % of total expenditure (excluding depreciation) [19] | Detailed Reasoning - 2021: Sport B expenditure 2.88% 3.15% 2.68% 1.59% Key management personnel compensation 2.68% 3.35% 4.55% 4.34% Club grants 1.27% 1.22% 1.18% 1.47% Table 18: Club A's expenditure on Sport B, management remuneration, and grants, as a % of net profit (loss) [20] | Detailed Reasoning - 2021: Sport B expenditure 138.55% 175.39% (144.79%) 9.27% Key management personnel compensation 129.16% 186.90% (245.73)% 25.27% Club grants 61.07% 68.25% (63.74)% 8.58% 96. Management compensation could become an end in itself, but we don't suspect this for Club A. Some clubs might remunerate club or board members or their associates. If salaries exceed the value of services reasonably performed by the relevant employees, they might disguise profit extraction. However, here, key management personnel aren't board members, and don't appear to be connected to board members. The CEO receives about $350K, with the CFO and Food & Beverage manager's salaries reaching about $150,000 in the 2020 and 2021 years. While the CFO's remuneration rose to over $300,000 in 2021, this included a redundancy payment. Five other management positions are each paid about $100,000. The position titles include managing food preparation, food and beverages, gaming, operations, and marketing. These are significant functions, relevant to Club A's services. The salaries don't seem excessive or obviously inflated given the scale of Club A's operations. The management compensation doesn't suggest remunerating club members or their associates (through salaries) is a significant purpose for the club. 97. Supporting community activities could also be an end in itself, but we don't think it is here. Club A makes grants to community groups: some are other sporting clubs, others are charities. However, there may be indirect benefits to sport from sponsoring charities. Just for example, sponsorship or public support for other organisations may improve or maintain Sport B's reputation in Region C. This may indirectly lead to more people joining Club A, attending the club, playing, entering, or supporting Sport B activities. Therefore, while Club A's grants to other community groups are substantial, we don't characterise these grants as an end in itself, which has equal importance to Sport B activities. 98. For completeness, we don't think that Club A's non-Sport B sporting activities affect our analysis. One of Club A venues (Venue H) is a Sport M club, operating some social Sport M activities. Club A has three social Sport I clubs. The sports centre contains Sport K and Sport J facilities. These activities form a minor part of Club A's total operations. In an event, they are consistent with the encouragement of sport being Club A's main purpose. Conclusion on the first condition: we think Club A's main purpose is Sport B, because the intensity of their Sport B activities outweigh other factors pointing against that conclusion. 99. While we are concerned about several factors, we think that Club A's main purpose is encouraging Sport B. • Club A's carries out substantial Sport B activities directly, and also gives financial support to other Sport B activities. It fields over 30 teams, with over 450 players, including a first grade team and reserve grade team in the local competition. It also supports 250 players from a related club, maintains a sports complex, and hosts Sport B competitions and events. Echoing Hill J's comments from St Mary's, we think it has a high level of sporting intensity. • Sport B expenditure usually exceeds Club A's net profit, suggesting the services clubs are carried on for the purpose of supporting Sport B activities. • While Club A plans to develop venues (including by building a hotel), we think the proposals may be intended to diversify revenue sources. This is arguably consistent with a strategy to fund Sport B. However, we would be concerned if the way the developments were carried out didn't achieve that purpose (for example, if any profits were directed to other activities). • While several services club venues are running at a loss, we think this is consistent with a broader strategy to fund Sport B activities. However, we might form a different view if some services club venues keep making losses indefinitely. • Similarly, we think Club A's butcher operation is consistent with a strategy to fund Sport B activities. However, we might form a different view if Club A's catering operations became more prominent or were obviously uncommercial. • While significant amounts are spent on other activities (like management remuneration and community activities) we don't think they have become ends in themselves. • Club A is run by a board, and most board members are former Sport B players, coaches or administrators. • Club A's reports, displays and reputation show it is promoted as a club which encourages Sport B. • While only about 2% of members are players, we think this is outweighed by the intensity of Club A's Sport B activities. We think that Sport B is Club A's main purpose because their Sport B activities are extensive: other activities are best characterised as supporting Sport B. | Detailed Reasoning - The second condition: does Club A comply with section 50-47?: 100. Section 50-47 applies an extra condition to entities which are an 'ACNC type of entity.' An ACNC type of entity will not be exempt from income tax unless it is registered under the Australian Charities and Not-for-profits Commission Act 2012 . Broadly, an 'ACNC type of entity' is a charity. [21] There is nothing to suggest that Club A is a charity, so this special condition is not relevant. | Detailed Reasoning - The third condition: does Club A comply with section 50-70?: 101. Section 50-70 imposes conditions relevant to an entity covered by Item 9.1. We list and apply them in Table 19. Table 19: conditions in section 50-70 | Detailed Reasoning - Application: 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: Met. Club A submits it is covered by Item 9.1. Club A's Constitution prohibits it returning the income or property of the Club to its members. We have no information to suggest Club A doesn't comply with its governing rules. (a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or Met. Club A owns property, incurs expenditure, and carries on Sport B and other activities in Region C, Australia. There is no information suggesting that Club A incurs expenditure, pursues its objectives, has undertaken any activities, or has any physical presence outside Australia. See discussion at paragraphs 102 to 104. (b) is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15 ; or Note: the table in section 30-15 is about deductible gift recipients. Item 1 includes funds, authorities or institutions covered by Subdivision 30-B. Subdivision 30-B includes several categories of deductible gift recipients: one relevant category is 'sports and recreation' in section 30-90.This section lists eight specific recipients. Paragraph (a) is met, so Club A doesn't need to meet this condition. For completeness, Club A isn't listed in section 30-90. It doesn't appear to be covered by subdivision 30-B. (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; Paragraph (a) is met, so Club A doesn't need to meet this condition. and the entity satisfies the conditions in subsection (2) Met. Subsection 50-70(2) The entity must: (a) comply with all the substantive requirements in its governing rules; and Met. We have no information to suggest Club A doesn't comply with the substantive requirements in its governing rules. See discussion at paragraphs 105 to 108. (b) apply its income and assets solely for the purpose for which the entity is established. Met. We have no information to suggest Club A doesn't apply its income and assets solely for the purpose for which it was established. See discussion at paragraph 109 to 112. | Detailed Reasoning - Club A carries out its activities principally in Australia: 102. As mentioned in Table 16, one condition is that the relevant entity has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia. Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax exempt entities explains the Commissioner's view on how the physical presence requirement applies to entities seeking exempt entity status under Division 50. 103. TR 2019/6 says that: • an entity has a physical presence in a place where it employ assets or people to conduct physical operations (paragraph 53) • where an entity has a physical presence in Australia only, it must incur its expenditure, and pursue its objectives, principally in Australia (paragraph 56) • where an entity has a physical presence in Australia and also overseas, only the expenditures incurred and objectives pursued which are attributable to that entity's physical presence in Australia are examined (paragraph 57). 104. Here, Club A has assets (such as club premises and the Sports Complex) and carries out operations (Sport B and services club activity) in Region C in Australia. There is no information to suggest it applies its assets or incurs expenditure outside Australia to any significant extent, if at all. Club A meets the physical presence requirement in paragraph 50-70(1)(a). | Detailed Reasoning - Club A complies with its governing rules: 105. Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt is the Commissioner's view on the requirements that the entity: • 'comply with all the substantive requirements in its governing rules' and • 'apply its income and assets solely for the purpose for which the entity is established'. 106. TR 2015/1 makes statements about the governing rules condition to the effect that: • the governing rules of an entity are rules that direct what the entity and its controllers are required and permitted to do (paragraph 9) • the written documents under which an entity was formed are usually the main source of governing rules, although those may be supplemented by other sources of rules (paragraphs 10-16) • 'substantive requirements' mean rules that define rights and duties (eg, the entity's purpose, non-profit status, directors' powers, admission of members, winding-up), as opposed to mere procedural requirements (paragraphs 17-20) • the governing rules condition is applied continuously throughout an income year (paragraph 21) 107. Here, Club A's governing documents would include its Constitution. That Constitution sets out both substantive and procedural requirements about how the entity will be conducted. The objects and non-profits clauses about the use of assets, clauses governing the admission of members, and the board's composition would be 'substantive' requirements. 108. We have no information suggesting that Club A doesn't comply with its substantive requirements in its governing rules. Club A meets the governing rules condition in paragraph 50-70(2)(a). | Detailed Reasoning - Club A uses its income and assets for its purposes: 109. TR 2015/1 makes statements about the income and assets condition to the effect that: • when determining the entity's purpose, key factors include: o the objects in the entity's constituent documents o its activities from formation up to the time the test is applied o policies, plan, administration, finances, history and control (paragraph 24). • where entities are established for more than one purpose, this condition tests whether the income and assets have been applied solely for the purposes for which the entity was established (paragraph 25) • the word 'solely' means exclusively - however, incidental or ancillary purposes can be permitted (paragraphs 26-28,33-35). 110. Example 9 in TR 2015/1 illustrates the Commissioner's view about how the income and assets condition would apply to a club with multiple purposes. The club's objects include encouraging a sport in the local area, and providing social and recreational facilities for members. The team conducts extensive sporting activities (coaching, teams, tournaments), and also provides facilities to members and visitors which generate income. It directs the majority of its profits to sporting activities, and the remainder to improve social facilities. TR 2015/1 concludes the income and assets condition is met because its income and assets have been supplied solely for the two purposes for which it was established. 111. Here, Club A's objects include: • promoting, and participating in Sport B • promoting, staging and encouraging other sports and pastimes • providing a clubhouse, sporting, social amenities and other facilities for the benefit of members • contributing or aiding religious, charitable, benevolent and sporting organisations 112. Similar to Example 9 in TR 2015/1, Club A conducts extensive sporting activities, and also conduct a substantial services club operation providing amenities to members and visitors. It also supports other community organisations. A substantial amount of its total expenditure is directed to conducting services club activities. However, amounts comparable to its profits are directed into sporting and community activities. All of these activities are consistent with its objects/purposes. We have no information to suggest that Club A applies income or assets to any purposes which aren't permitted under its constituent documents. Paragraph 50-70(2)(b) is met. | Detailed Reasoning - Conclusion on the third condition: 113. Club A meets all requirements in section 50-70. | Detailed Reasoning - Conclusion: Club A is an exempt entity under the 'game and sport' exemption: 114. Club A meets all requirements to be exempt under Item 9.1(c) in section 50-45. • It meets the first condition because it is established for the 'main' purpose of Sport B. While it runs services clubs, we think these clubs are carried on to fund Sport B activities. • The second condition is only relevant to charities: Club A isn't a charity. • Club A meets the third condition because it's a non-profit organisation which carries out its activities principally in Australia. 115. Therefore, Club A is exempt from income tax under section 50-1. | Detailed Reasoning - Appendix - summary of selected cases: Case Cronulla Sutherland Leagues v FCT (1990) 23 FCR 82 (1990) 21 ATR 300 Tribunal/ court Full Federal Court (Lockhart, Beaumont, Foster JJ) Decision Not exempt (by majority, Foster J dissenting) - club's main purpose was providing services to members Facts • company limited by guarantee • objects clause included supporting local rugby league clubs, and providing a club-house and amenities to members, and selling to persons on the premises • League Club had a close association with the local football club - almost all the FC's revenue came from the LC • LC provided playing fields at a nominal fee to the FC, guaranteed $150K of its debts - without this support the FC couldn't have continued to play in the competition • clubhouse was extensive, included a gym, squash courts, poker machines, restaurant, bar, games lounge, auditorium • generated substantial revenue from poker machines and bar trading • contributed substantial percentage of its profits to the FC, but the overall expenditure on social activities exceeded the expenditure on sporting activities Reasoning Lockhart J (at 96-97) considered that even though the LC gave substantial support to the FC, its main object was the provision of a social and sporting club (with facilities) to its members, not encouraging or promoting football. It derived substantial income and incurred expenditure for carrying on a large business activity, independent of any support to the FC. While those business activities were related to rugby league football, those circumstances did not stamp the LC's activities with the main purpose of encouraging or promoting rugby league football. Beaumont J (at 117-118) considered that the intrinsic character, or main or predominant object which the LC promoted was the provision of the facilities of a licensed club for its members and visitors. This was the true character of the object or purpose, notwithstanding that there were incidental benefits to football in the form of grants. Foster J, in dissent, thought that the real test was the manner in which the LC used its surplus funds (124-125), and that the fund generated revenue from other activities but used them for the purpose of encouraging and supporting football. Case Terranora Lakes Country Club v FCT (1993) 25 ATR 294 Tribunal/ court Federal Court (Justice Hill) Decision Exempt - main purpose was rugby league Facts • company limited by guarantee • constitution said purpose was to promote golf, bowls, tennis and other games, to provide land with necessary accessories, and provide links, lawns, courts and other playing areas • 2 blocks of land, each with a clubhouse, golf course, bowling greens, tennis courts, hockey/football fields, cricket wickets/field • the clubhouses had poker machines, bar/lounges, auditorium, restaurant • provided accommodation through a 51% interest in a 'time share' resort • about 90% of its income was from social activities (pokies, bar sales) • about 80% of its expenditure was on social activities • promoted gambling, dining, entertainment and accommodation in its advertising Reasoning Hill J (at 306) considered that the other activities, while vital to its financial survival, were neither predominant to the sporting activities nor equal to sporting activities in importance. (at 304) The social activities were pursued as a means of financing the extensive sporting activities conducted by the club. Case St Mary's Rugby League Club Limited v FCT (1997) 97 ATC 4528; (1997) 36 ATR 281 Tribunal/ court Federal Court (Hill J) Decision Exempt - main purpose was rugby league Facts • constitution - purposes included promoting Rugby League, promoting or assisting training, aiding clubs in the district, providing sporting/social club and amenities, and providing playing grounds • football activities were extensive and involved considerable organisational time and effort • some sub-clubs for golf, snooker, darts, softball, cricket, fishing • had a clubhouse with offices/meeting rooms, hairdressing solon, auditoriums, restaurant, kitchens, TAB, poker machines, pool tables • also proposed to build a motel on vacant land • leased playing fields from the council • club made substantial profits from poker machines, bar sales, and investments • significant proportion (about 50%) of wages went to rugby league staff, as opposed to admin/social staff • all income was from social activities, mostly poker machines • lub was controlled by ex-footballers, and most members were footballers, ex-footballers or their parents Reasoning Hill J (at 4533-4534; 287-288) considered that the club's social or services activities, while significant, were subordinate to the activities of encouraging or promoting rugby league. Unlike Cronulla Sutherland, the club ran substantial sporting activities itself - over 30 teams and ran first grade and reserve grade teams in the local competition. The club was also run directly by former footballers. The intensity of the activity directed towards football tipped the balance. However, his Honour was concerned about: • the club's liquidity - $2.5M in deposits or short term investment, and • the proposed motel development in a recent annual report. Hill J suggested that it would be more difficult for the club to succeed if it built a motel. Extract from judgment Counsel for the Commissioner filed an affidavit from a consulting accountant seeking to analyse the accounts. So the accountant pointed out (it is not in dispute) that the whole of the applicant's income was derived from its social activities. He pointed out that the football grants represented, depending upon the relevant year, between 10.6 percent and 23.1 percent of the total expenditure of the applicant and between 20.7 percent and 22.3 percent of its net income. In this analysis the accountant sought to contrast various statistics obtained from the accounts with those referred to in the judgments in Cronulla-Sutherland and Terranora . There is no doubt that the financial information and an analysis of it will be relevant in determining the character of a club in a relevant year. But statistics do not necessarily tell the whole story. It is obvious that the majority of the profit of the Club came from poker machines. It requires little space and even less effort on the part of the Club to derive this profit. It takes a great deal more time and effort to put on the field week after week some 32 rugby league teams involving some 450 players, not to mention fielding a first grade team and a reserve grade team in the Metropolitan Cup competition. | Detailed Reasoning - Conclusions: It is obvious from the evidence that persons are drawn to membership of the Club because of their interest in rugby league. It is not without significance that the control of the Club effectively vests with persons who have been footballers. Parents of boys playing football are drawn to the Club, no doubt to support their sons. So, too, are persons who enjoy the social facilities which the Club provides, whether these be entertainment in the auditorium, dining in the restaurant, drinking in the bar or gambling with poker machines or keno. The social activities of the Club are significant, both financially and in number. They cannot be ignored. But the evidence | Detailed Reasoning - 97 ATC 4534: persuades me that while the social and gambling activities of the Club are significant in their own right, they are nevertheless subordinate to the activities of the Club in encouraging and promoting rugby league football in the St Marys area, particularly among children. The present case differs from the Cronulla- Sutherland case in a number of respects. It will be recalled that there were two clubs in the Cronulla-Sutherland area. One devoted to the pursuit of football and the other, the Cronulla- Sutherland Leagues Club, which assisted in financing the football club but which, in all the circumstances, was found to be a members' or social club rather than a club existing primarily to support or encourage football. The appellant in Cronulla-Sutherland had no football team. It organised no competitive football at all. Its only connection with football were the grants which it made to the football club and the provision of facilities to that club. The membership structure of the Cronulla- Sutherland Leagues Club did not, as the structure of St Marys Rugby League Club does, give emphasis and importance to present or previous footballers or supporters. In the Cronulla-Sutherland case control of the licensed club was, de facto , in the hands of those who were interested in promoting the football club. That was not a formalised structure. The sheer size and intensity of the social activities of the Cronulla-Sutherland club led to the conclusion that the social activity was of such great significance that it was impossible to reach a conclusion other than that the main purpose of the club was the encouragement or promotion of rugby league. In the present case each of the matters said by Lockhart J in Cronulla-Sutherland to be significant, namely ''constitution, activities, history and control'' point to the characterisation of the Club as one having as its main object or purpose ''the encouragement or promotion'' of rugby league within the meaning of s 23(g)(iii) of the Act. The Memorandum of Association records the significance of rugby league as the major object of the Club. The Articles of Association, both in the membership categories and in the conferring of control upon Football Members (or Life Members), point to the significance of the football activities over the social activities. The activities of the Club involve both social and football activities. Were this not so then, no doubt, the case would not be before the Court. But, although income is derived from the social activities and the football activities constitute an outgoing, there is an intensity of activity directed towards football which tips the balance in favour of the applicant. The history of the Club is one of close association with rugby league from its inception and again points to the correct characterisation as being one for ''the encouragement or promotion'' or rugby league. Finally, the control of the Club rests in the hands of former footballers (or Life Members) whose task it is not merely to run the Club but also to promote the competitions in which the Club participates in the rugby league season. The combination of these factors leads me to the conclusion that the application should succeed. I would, however, mention one matter which has given me some concern. That is the increase in liquidity in the Club over the years to 1995 when the Club had almost $2.5M of funds on deposit or short term investment. No evidence was led as to the use which the Club intended for these funds. In his oral testimony Mr Smith, the President of the Club in the relevant years, referred to the Club's desire to build two football fields on the Club's land and feasibility studies which had been undertaken with a current estimated cost of $3.5M. That evidence suggests that the funds accumulated were being kept liquid for the purpose of developing a football oval, a circumstance which would be favourable to the Club's claim. The other possibility, however, is that the Club was accumulating funds for a possible motel development. I do not think that the evidence permits me to reach a conclusion, one way or the other, as to the proposed use of the funds. I should say, however, that if the Club were to proceed with the building of a motel, as foreshadowed in the 1993 Annual Report, the conclusion that it was established for the purpose of ''the promotion or encouragement'' of rugby league would become progressively more difficult to arrive at. Case AAT Case 1068 (Re Tweed Heads Bowls Club and FCT) (1992) 24 ATR 1068 Tribunal/ court AAT - Dr P Gerber Decision Exempt - main purpose was rugby league Facts • company limited by guarantee • constitution: objects included leasing, purchasing property, promoting the game of bowls and other sports and games, amusements, recreations; constructing and maintaining buildings; conducting sports/tournaments; carrying on a business of catering; providing a social and sporting club and amenities to members • clubhouse had a bar, cold room, sauna, indoor bowling green, bottle shop, and admin offices, restaurant, auditorium, dining room, kitchens, and poker machines • substantial profits from poker machines - attracted 400K visitors each year for that purpose • ran the bowling activities at a loss • conducted substantial bowling activities, hosted major bowls tournaments, including the Australian Indoor Championship • had a long term plan to develop the club's sporting and club facilities Reasoning Dr P Gerber (at 1082) "That leaves the issue of the poker machines, which earn substantial revenue, only a relatively small proportion of which was, in the years now before me, used for bowling. In the vernacular, the Club has money pouring out of its ears and doesn't know what to do with it all. So what? Provided its main object is the promotion of bowls, the fact that it also produces repetitive strain injury (RSI) in some 400,000 non-bowling poker machine players whilst at the same time emptying their pockets seems to me to be utterly irrelevant." (at 1084) "In the result, I am satisfied on the evidence that what may be termed the "non-bowling" activities of the Club - however lucrative - have not overtaken the Club's main object - bowling - so as to attain an independent purpose to the point where the Club's object - the encouragement of the sport of bowls - has become a mere incident, subsumed in poker machines and other entertainment. I am satisfied that the Club's vast reserves have been earmarked for further development of the Club, identified as stages 4, 5 and 6, all involving improvements to the sporting and Club facilities." Case Re South Sydney Junior Rugby League Club Ltd v FCT (2006) 62 ATR 1123 Tribunal/ court AAT - J Block Decision Not exempt Facts Club didn't directly carry out football itself, but the 'junior football league' was dependent on the applicant, and couldn't survive without its support. Club didn't field any teams itself, or provide a field for use in football. Club put substantial expenditure on building a start of the art swimming pool, lounge, poker machines, new bar, specialty restaurant, 2 gyms, holiday premises including holiday flats; marine vessels. The Annual Report said the entity operated predominantly in the licensed club industry, and the principal activities of the parent entity were to provide club facilities and services to members. Many of the members were for other activities (eg, gym, bridge, bowling, squash, fishing, art). Committed $175K to upgrade an oval. Reasoning Actual figures in amounts distributed would not be determinative. Club had a large membership, offered a large range of activities and facilities and entertainment, much of it subsidised, the emphasis on gambling as a source of revenue comes through the annual reports. 'The pervading importance of gambling was altogether evident.' Very large undertaking profitable in its own right, independently of rugby league, although it undoubtedly contributed to it. There was a great deal of interest at the board level in rugby league, but no evidence as to the level of involvement in rugby league from the members may have been only peripheral interest to many. Cronulla Sutherland was not distinguishable. [1] Figures in all Tables have been approximated for this edited version. Approximations may have caused errors or inconsistencies in totals and percentages. [2] This edited version has heavily paraphrased the relevant clauses. [3] For the difference between 'substantive' and 'procedural' rules, see Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt at paragraphs 17 to 20. [4] For completeness, TR 2021/D6 says that the words 'game or sport' should be given their ordinary meaning (shaped by the statutory context): paragraph 16. TR 2021/D6 explains (at paragraphs 16 to 28) some general features of games and sports (intention to participate, rules and conventions, competitive element). Paragraph 26 lists Sports B, M, I, K and J are all listed. [5] (1990) 23 FCR 82; (1990) 21 ATR 300; (1990) 90 ATC 4215. [6] Cronulla Sutherland (1990) 23 FCR 82 at page 95 (per Lockhart J), and page 117 (per Beaumont J). [7] See for example, Terranora Lakes Country Club v Federal Commissioner of Taxation (1993) 25 ATR 294 at page 304 (per Hill J). [8] Cronulla Sutherland (1990) 23 FCR 82 at page 95 (per Lockhart J). [9] (1993) 25 ATR 294; (1993) 93 ATC 4079. [10] (1997) 36 ATR 281; (1997) 97 ATC 4528; [11] (1992) 24 ATR 1068; (1992) 92 ATC 2087. [12] [2006] AATA 265; (2006) 62 ATR 1123 (2006) ATC 2150. [13] The interpretation that the encouragement be the 'main purpose' was adopted by the Full Federal Court in Cronulla Sutherland Services Club Limited v Federal Commissioner of Taxation (1990) 23 FCR 82 at pages 92-95 (per Lockhart J), and page 117 (per Beaumont J). [14] Compared to total income, total expenses, and net profit (loss) - see Table 5. [15] Club A had several venues close during COVID-19 conditions, which is a threat to Club A's revenue. COVID-19 restrictions caused two of Club A's venues to close for over 5 months in the second half of the 2021 calendar year. [16] Just for example, see Smith A, 'Casino regulator for NSW as government looks at pokie boost for Star', Sydney Morning Herald, 18 August 2021, published online at www.smh.com.au , accessed 8 December 2021; Smith A, 'NSW cabinet to consider an extra 1000 pokies for Star casino', Sydney Morning Herald, 12 August 2021, published online at www.smh.com.au , accessed 8 December 2021. [17] 1997) 36 ATR 281; (1997) 97 ATC 4528. [18] Examples might be hiring highly paid, high profile chefs, or systematically acquiring food or beverage suppliers. [19] Compared to total expenses excluding depreciation - see Table 5. [20] Compared to net profit (loss) - see Table 5. [21] See section 995-1, read with subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 unless another act is mentioned.