Will Entity X be an income tax exempt entity under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, if the proposed amendments to its governing rules are made?
No This ruling applies for the following periods : Year of income ending 30 June 20XX Year of income ending 30 June 20XX Year of income ending 30 June 20XX Year of income ending 30 June 20XX Year of income ending 30 June 20XX The scheme commenced on: 1 July 20XX
Entity X is a co-operative society registered in Australia and operates a club. Entity X has a board of directors and is currently governed by a set of rules (Governing Rules). The Governing Rules of Entity X relevantly provide that a member must comply must maintain active membership of the cooperative, by participating in or supporting the encouragement of certain sports or in the provision of accommodation facilities to encourage and support member and visitor participation in these sports at least once a year (its primary activity) . Entity X is currently not a not-for-profit entity as its Governing Rules currently do not prevent distribution to members both while it is operating and upon winding up and dissolution. Entity X proposes to make amendments to its governing rules to become a not for profit entity.
Entity X has a lease over a property and owns a property in Australia, which was purchased with funds provided from Members. These properties are used for the accommodation of Members and the general public. The general public pay a fee for the use of the properties. Members are entitled to stay at no charge for several nights and pay if they stay more than that entitlement. These properties are located in close proximity to areas appropriate for particular sports. Other relevant information • Participation by Members in organised sporting events is recognised at Entity X's annual general meeting. • Entity X uses any surplus funds towards the upkeep of its facilities which support participation in sports. • Entity X maintains a website for each of the properties. • There are xx family memberships in Entity X. • All members of Entity X's board are active participants in sporting activities supported by the club's facilities. • Entity X actively promotes a range of organised sporting competitions on its websites at each of its locations.
• The premises contain facilities for storing of equipment for those who wish to participate in sporting activities in and around the area. • There are a variety of externally organised sports events annually in the immediate proximity of the club's facilities which Members of entity X might participate in. • When non-Members stay at the accommodation owned by Entity X, a high proportion of these public bookings are by people who participate in the relevant sporting activities. • Entity X has xx qualified sports instructors among its Members. • Entity X has in the past provided financial support to a local sports club and also provided accommodation to the sports club director. The Profit and Loss statement for Entity X for the year ended XX reveals that its trading income is derived from fees for the use of the properties, which is generated through the provision of accommodation and hospitality, while the relevant operating expenses are derived from the upkeep of these properties.
Income Tax Assessment Act 1997 section 50-1 Income Tax Assessment Act 1997 section 50-45 Income Tax Assessment Act 1997 section 50-47 Income Tax Assessment Act 1997 section 50-70 Australian Charities and Not-for-profits Commission Act 2012 section 25-5 C harities Act 2013 section 12
Question 1 Will Entity X be an income tax exempt entity under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997, if the proposed amendments to its governing rules are made? Summary Entity X is not that is exempt from income tax under section 50-1 of the ITAA 1997 as it was not established as a society, association or club for the encouragement of a game or sport as described under item 9.1(c) of section 50-45 of the ITAA 1997. The main purpose of Entity X is to provide accommodation and hospitality for both members and non-members at both its properties. As such, the proposed amendments to Entity X's governing rules to prohibit distribution to its members both in operating and on windup, will not aid Entity X to satisfy item 9.1(c) of section 50-45 of the ITAA 1997
Therefore, Entity X does not qualify as an entity that is exempt under section 50-1 of the ITAA as a society, association or club established for the encouragement of a game or sport pursuant to item 9.1(c) of the table in section 50-45 of the ITAA 1997. Detailed reasoning A society, association or club which has been established for the encouragement of a game or sport under section 50-45 item 9.1(c) is exempt from income tax under section 50-1. Section 50-1 states: The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. (* as defined in section 995-1 of the ITAA 1997) The tables referred to in section 50-1 are contained in sections 50-5 to 50-45. Additionally, section 50-47 provides a special condition for all entities covered by section 50-1, it states: An entity that: a) is covered by any item; and b) is an ACNC type of entity; is not exempt from income tax unless the entity is registered under the Australian Charities and Not-for profits Commission Act 2012.
An entity is 'an ACNC type of entity' if it has a charitable purpose. An entity that does not have a charitable purpose, per the ATO Commissioner's view in Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities , is not required to be registered with the Australian Charities and Not-for-profits Commission (ACNC) to be exempt from income tax. 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. An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45 of the ITAA 1997 if it: • is not carried on for the purposes of its individual members' profit or gain, and • is established for the main purpose of the encouragement of a game or sport, • satisfies the special conditions in sections 50-47 and 50-70 of the ITAA 1997. Society, association or club
The term 'society, association or club' is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words. Based on the definitions provided in the Macquarie Dictionary a 'society, association or club' refers to a voluntary organisation of people associated together for a common or shared purpose. A society, association or club may be constituted as an unincorporated association or be formally recognised by incorporation. Entity X is a co-operative society registered in Australia. The Governing Rules outlines its purpose as: 1) The encouragement of certain sports. 2) The provision of accommodation facilities to encourage and support member and visitor participation in thesesports. Entity X has a board of directors, and a class of members who are governed by the Rules. It is accepted that Entity X is a society, association or club for the purposes of section 50-45 of the ITAA 1997.
Entity X is currently not a not-for-profit entity as its Governing Rules currently do not prevent distribution to members both while it is operating and upon winding up and dissolution. However, if the Governing Rules of Entity X were amended as proposed, it would then be a not-for-profit entity. Established for the encouragement of game or sport TR 2022/2 describes the circumstances under which a society, association or club is considered to be established for the encouragement of a game or sport. Game or sport 'Game' and 'sport' are not defined in the ITAA 1997 and are therefore given their ordinary meaning. Paragraph 17 of TR 2022/2 explains that characterisation of some activities as a game or sport is obvious and for others it can be demonstrated by evidence of a competitive element and by participants' compliance with the conventions and rules of the activity. The participants must intend that the activities they perform are the activities of a particular game or sport and that the intention and activities must be shared by the other participants. TR 2022/2 at paragraph 19 also provides that:
A common feature of a game or sport is a set of conventions, expectations and rules. This contributes to the element of organisation that is commonly indicative of game or sport. While written or defined rules are not essential, the imposition of such rules and conventions in an organised group of participants can convert an otherwise ordinary leisure activity into a game or sport (for example, hunting, fishing and walking). Paragraph 27 of TR 2022/2 provides a non-exhaustive list of activities that are considered a 'sport' for the purposes of section 50-45 of the ITAA 1997. Paragraph 24 of TR 2022/2 explains that activities that could appear to be a game or sport may be merely a means to other ends. Where the activities are not organised in a sport or game-like way and some other purpose is predominant, the activity will not be a game or sport. For example., dancing can be organised in a game or sport-like way, but it is often a means of promoting sociability, participation and relaxation. In such cases, it does not constitute a game or sport. Further in paragraph 25 of TR 2022/2 provides:
25. The fact that a game or sport is undertaken by club members or within a club does not mean that the club is established for the encouragement of that game or sport. The activity must be considered in the context of determining the club's main purpose. For example, a fishing competition can be a sport. However, a fishing competition conducted by a club may be a minor activity incidental to its main purpose, such as promoting sociability, communal activities or some other purpose. This principle is illustrated in Example 2 at paragraph 26 of TR 2022/2 as follows: 26. The One That Got Away Club provides services and amenities for people who like to fish in the bay near the clubhouse and in surrounding watercourses. The services provided include weather and boating information, guest speakers and a bar and canteen which open daily. Members-only competitions are held once a month. While a fishing competition might of itself be a sport, it is conducted as a part of The One That Got Away Club's wider activities. As The One That Got Away Club was not formed for the main purpose of encouraging a game or sport, the fishing competition held is not a game or sport.
The relevant activities are included in TR 2022/2 at paragraph 27 as activities that would be considered a sport for the purposes of item 9.1(c) of the table in section 50-45 if they satisfy the features of a game or sport. By their very nature these activities can be a sport when they are organised in a game or sport-like way. In Entity X's circumstances some of the activities that is undertaken as part of competitions and training, are organised externally (and not by Entity X) and considered to be organised in a game or sport-like way as there is a set of conventions, expectations and rules. The wide range of sporting activities that take place at the 2 locations where the properties are situated are also advertised on Entity X's website. Conversely, other activities that may appear to be a sport are in fact merely a means to other ends. These activity undertaken as part of a family vacation that is not organised in a sport or game-like way and has another predominant purpose of leisure or recreational activity, will not be a sport.
Marketing material accessed from Entity X's website confirms a leisure or recreational intention in the way it promotes the accommodation as family friendly. Similarly, certain activities (such as bush walking) are not considered to be organised in a game or sport-like way. The marketing of the properties on the websites also indicates a recreational intention, rather than a sporting pursuit where it describes the various activities available at these locations (while also acknowledging that there is a year-round sporting event calendar available for those who wish to participate in those events). Activities undertaken in this way do not have the features of a game or sport. It is only those activities that have the features of a game or sport that can be considered for the purposes of item 9.1(c) of the table in section 50-45 of the ITAA 1997. The encouragement of sport must be the main purpose A society, association or club will only be exempt from income tax if it has as a main purpose the encouragement of a game or sport.
Paragraph 30 of TR 2022/2 provides guidance on the term 'encouragement'. 'Encouragement' is not a defined term and takes its ordinary meaning. The ordinary meaning of encouragement (or the act of encouraging) has been described as stimulating by assistance or approval, including through direct or indirect means. Direct or indirect activities relevant in determining whether the main purpose of the entity is the encouragement of a game or sport are listed at paragraph 43 of TR 2022/2. These include: • 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 activities above by making a financial or in-kind contribution to an organisation that performs them. Entity X supports the various sporting events that are held at the 2 locations throughout the year through its objects and activities, specifically: • Entity X's governing rules give its primary activity as to encourage particular sports, or to provide accommodation facilities to support and encourage Member and visitor participation in these sports. All of these sports are included in the examples of "sports" in paragraph 27 of TR 2022/2. • Entity X actively promotes a range of organised sporting competitions on its websites at each of its locations. • The premises contain facilities for storing of equipment for those who wish to participate in sporting activities in and around the area. • There are a variety of externally organised sports events annually in the immediate proximity of the facilities in which members and visitors might participate.
• When non-Members stay at the accommodation owned by Entity X, a high proportion of these public bookings are by people who participate in the relevant sporting activities. • . • Entity X has XX qualified sports instructors among its members). • Entity X has in the past provided financial and in-kind support in the form of accommodation stay to a local sports club. These activities of Entity X indirectly encourage the relevant sports. Main purpose For an entity to be established for the encouragement of a game or sport, the main purpose of the entity in the relevant income year must be the encouragement of a game or sport. Paragraph 31 of TR 2022/2 states that determining the main purpose of an entity requires an objective evaluation of all material facts and circumstances. There is no set formula for weighing up the characteristics of an entity to determine its main purpose. It is the main purpose of the entity in the year under examination rather than at the time of formation.
An entity with both a sporting and non-sporting purposes will not qualify for the games and sports exemption unless the non-sporting purpose is merely ancillary and incidental or secondary to its sporting purpose. Paragraph 37 of TR 2022/2 lists factors that have been identified by courts and tribunals as relevant when considering purpose. These include: • emphasis in the club's constituent documents that the main purpose is to encourage a game or sport • extent of sporting activities • the conduct of activities directly related to the game or sport • a high level of member participation in the game or sport • promotion of the organisation to patrons and the public as one that encourages a game or sport • involvement of the committee of management in the promotion of sport • the use of surplus funds for encouraging the game or sport • the provision of financial and in-kind support for encouraging the game or sport. The activities and purpose are further explained in paragraphs 38 to 42 of TR 2022/2;
38. The activities undertaken by a club are an important consideration in determining whether it qualifies for the games and sports exemption. However, activities considered in isolation do not demonstrate the purpose of a club. 39. Activities are commonly a means to an end. Activities can serve the purpose of encouraging a game or sport and other independent non-sporting purposes. All of the club's activities must be objectively weighed against the objects, history and control of the club to determine the main purpose for which it is established in a particular year. 40. An activity like the organisation of, or participation in, sporting competitions can be readily understood as advancing a purpose of encouraging a game or sport. 41. Where a club derives its revenue from commercial operations, the club needs to objectively determine the extent to which commercial operations are a means to the end of advancing the sporting purpose, or are advancing some other purpose.
42. A club can demonstrate a purpose of encouraging a game or sport where it provides financial and in-kind contributions to other organisations that directly conduct those activities. To demonstrate a main purpose of encouraging a game or sport, a club that does not directly conduct any games or sports will need to objectively show that the activities it carries out are a means to that end. As Entity X has both a sporting and non-sporting purposes it will not qualify for the games and sports exemption unless the non-sporting purpose is merely ancillary and incidental or secondary to its sporting purpose. Entity X's primary activity in its Governing Rules is participating in or supporting the encouragement of certain sports, and the provision of accommodation facilities to encourage and support member and visitor participation in these sports .
While the objects of Entity X indicate a sporting purpose, a significant proportion of the activities have a recreational purpose, in the form of providing accommodation and hospitality to both members and non-members undertaking activities for recreational purposes rather than as part of a sport. This is supported by the promotional material in relation to Entity X's accommodation at both properties that indicates a non-sporting, recreational and leisure purpose to the activities undertaken. Entity X has two distinct purposes, that is the encouragement of relevant sports and the provision of accommodation to members and guests to follow a recreational pursuit. The Profit and Loss statement for Entity X for the year ended XX reveals that its trading income is derived not from participation in sports, but rather from fees for the use of the properties, which is generated through the provision of accommodation and hospitality, while the relevant operating expenses are derived not from participation in sports, but from the upkeep of these properties.
The provision of accommodation facilities is not incidental and ancillary to the purpose of encouragement of sports; it is the main activity of Entity X at both the properties. Although it is acknowledged that Entity X encourages participation in certain sports, from the evidence provided and weighing up all the facts, the main purpose is to provide accommodation facilities that enable members of Entity X to follow a recreational pursuit or a sporting pursuit, so that Entity X indirectly encourages participation in sport as a result. The purpose to encourage sports is an independent secondary purpose, and the main purpose is to provide accommodation benefits to Entity X members to pursue recreational activities. As a result, Entity X's non-sporting purpose is not merely ancillary and incidental or secondary to its sporting purpose. The main activity of Entity X is a non-sporting purpose, the provision of accommodation and facilities for its members and other groups to pursue various outdoor activities at their facilities/premises. Conclusion
After reviewing the information provided about Entity X's features and operations, it is considered that Entity X has a dual purpose, and its substantial recreational activities are not minor or ancillary. The main purpose of Entity X is to provide accommodation and hospitality for both members and non-members, not encouraging a game or sport. Therefore, Entity X does not meet the requirements to have its status as tax exempt for income tax under section 50-1 of the ITAA 1997, as it is not a society, association or club established for the encouragement of a game or sport as described under item 9.1(c) of section 50-45 of the ITAA 1997. For this reason, it is not necessary to consider the special conditions in section 50-47 and section 50-70 of the ITAA 1997.