Changing ATO Guidance For Sporting Club Income Tax Exempt Status

Taxation Ruling Income tax: exempt sporting clubs (“TR97/22”) is the formal public ruling issued by the Australian Taxation Office (“ATO”) on 3 December 1997 and applies “to sporting organisations seeking to determine whether they are exempt from income tax”.

TR97/22 states it “is to assist a club’s office holders to determine whether their club is exempt from income tax”.

A club which has a main purpose of sport (or sports) will be exempt from income tax pursuant to section 50-45 Item 9.1(c) of the Income Tax Assessment Act 19997 (“the 1997 Act”) from the year commencing 1 July 1997. This provision succeeds section 23(g)(iii) of the Income Tax Assessment Act 1936 (“the 1936 Act”) in respect of years prior to 1 July 1997 but expresses the same ideas and interpretation and therefore applicable case law was not intended to change. The intention was to simplify the provisions of the 1936 Act as they were migrated to the 1997 Act.

The 1997 Act requires a club to satisfy the following tests:

1. is not carried on for the purpose of profit to its individual members; and
2. must be for the encouragement of a game or sport; and
3. the encouragement must be the club’s main purpose.

From the year commencing on or after 1 July 2013, the 1997 Act was amended to add further special conditions and therefore additional tests for clubs to satisfy in order to qualify for income tax exempt status (see Taxation Ruling TR2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt and Ruling Compendium 2015/EC).

The additional tests to be satisfied for sporting club income tax exempt status are:

1. the club has a physical presence in Australia; and
2. incurs its expenditure and pursues its objectives principally in Australia; and
3. complies with all the substantive requirements in its governing rules; and
4. applies its income and assets solely to the purposes for which the club is established.

The ATO has determined to review and re-write TR97/22 and has been conducting confidential and public consultations over the past 12 months prior to issuing the re- written TR97/22 for public consultation. The re-written TR 97/22 can assist clubs and office bearers, in our opinion, by the following improvements:

1. Explicitly stating that financial resources can be a form of encouragement as was stated in the draft TR95/22 which preceded the then final form TR97/22 but the reference to financial resources was omitted in TR97/22.

2. Explicitly stating that a separate entity conducting social activities to support a separate but allied entity which actually fields the sporting teams is not automatically disqualified from exemption. The ATO appears to have focused on the activities of a social club as its purpose rather than a means by which to financially support its sporting club associate, which in fact is the ultimate purpose.

3. Accepting that the High Court case of Commissioner of Taxation of the Commonwealth of Australia v Word investments Limited [2008] HCA 55 (“Word Investments”) has application to sporting clubs in that the purpose of fundraising is to be determined by the ends sought to be achieved rather than its fundraising activities. If the ATO does not accept this position for sporting clubs then it should unequivocally explain its reasoning.

4. A similar emphasis on ends (or the destination of fundraising) for determining purpose rather than activities (or means) be adopted if clubs seek to dispose or develop excess assets such as land.

5. That the current provisions of TR97/22 remain where the club’s constitution does not specifically deal with the application of a surplus on winding up but rather relies on the provisions of governing legislation which prohibit a distribution to individual members. Many constitutions in different state jurisdictions do not specifically state the prohibition relying on the provisions of the governing legislation.

6. The definition of a game or sport should be flexible enough to allow for change over time. Once such an activity which would now be considered a sport rather than a leisure activity is bodybuilding, given the highly competitive environment in which it features.

Annual Reviews

One area with which we do agree with the ATO, whether a club holds a current Private Binding Ruling (“PBR”) or not is for the club to annually review its income tax status. An annual board review prior to the signing of the annual financial statements is an easy time to remember but the outcome of the review should be noted in the board’s minutes.