/tax-controversy-partners-pty-ltd/images/FinalTCPLogo-02-q5053.png "Tax Controversy Partners Logo")
Clubs, associations, and societies that generate income through their activities need to determine if their income is taxable or whether the ‘games and sports exemption’ from income tax applies. When we talk about clubs, associations and societies (collectively referred to as ‘clubs’), we are referring to community sports clubs, chess clubs, netball associations, local football club and the like.
A club qualifies for the games and sports exemption where it:
The ATO has released a new DRAFT Taxation Ruling: TR 2021/D6 Income tax: the games and sports exemption which provides updated guidance on circumstances where the exemption does and doesn’t apply.
What are the eligibility requirements?
Clubs can be unincorporated associations or formally recognised by incorporation. Generally, clubs will be voluntary organisations where people come together for a common/shared purpose (in this case, for a game or sport).
The first requirement is that the exemption is only available to clubs where the main purpose is to encourage a game or sport.
The second requirement is that the club is not for the profit of members (commonly called ‘not-for profit’). Where members receive benefits such as the use of facilities, these are generally considered as incidental to the club’s objective – encouraging the relevant sport or game. Similarly, a member who is remunerated for services at a reasonable rate, will not affect the eligibility for exemption.
To show that the club meets the not-for-profit requirement, the club’s actions and governing documents should include not-for-profit clauses.
What is include as a game or sport?
Game and sport take their ordinary meaning. We can all think of common example of sports clubs – e.g. netball, football, cricket, soccer, etc. The main requirement is that the game or sport has rules and conventions and sometimes a competitive element. The Draft Taxation Ruling extends the meaning of games to include non-athletic and non-competitive activities such as chess, bridge, motor racing, and mountaineering as some examples.
Regarding the game or sport that is central to the club, the ATO suggests that there would usually be rules that are followed and accepted by all members that indicate an element of organisation in the club.
The ATO has provided examples of activities that are sporting- or game-like that would not meet the requirement. These activities generally do not have rules and the activity could be a means to other ends. Examples provided in the ruling include: stamp/coin collecting, body building, train modelling, fishing, car owners clubs, and social dancing.
The ATO considers that these activities (whilst some may have a sport- or game-like nature) are mainly to promote sociability, relaxation and communal activity, even where they may be organised like a competition.
Is the encouragement of a game or sport the main purpose of the club?
The ATO has acknowledge that there is ‘no set formula’ for determining if encouraging a game/sport is the main purpose for the club. Answering this question instead needs to be determined by an objective examination of all available facts and circumstances throughout the year.
In some situations, a club can have both sporting/gaming and non-sporting/gaming purposes. Those clubs will not qualify for this exemption, unless the non-sporting game purpose is ancillary, incidental, or secondary (i.e. less important or less significant) to the main purpose of encouraging the sport or game.
An important indicator that a non-sporting/gaming purpose is ancillary or secondary is how surplus funds are used by the club – such as whether they are used to promote the relevant sport/game, encourage wider performance in the sport/game, fund conducting tournaments for the sport/game, etc.
A common example is where a Local Club which promotes a sport – e.g. AFL – has both playing football members and social members. The Local Club has social facilities for the social members including bar and pubs. This raises the question whether the Local Club’s is eligible for the exemption as it has both a non-sporting and a sporting purpose. Where the Local Club has a surplus, the Local Club needs to determine how those funds to be used. In the example provided by the ATO, it considers the situation where the Local Club is maintaining the surplus funds for the development of a future football field. According to the example, this would indicate the main purpose is thus a sporting purpose. Conversely, if the surplus were used for a non-sporting purpose, the Local Club may not be eligible for the exemption.
What do you need to do if you are involved in a Club?
Each year, the managing committee for such a club should objectively examine the events of the past year, to determine if the club is eligible for the exemption or not. As a club grows or undergoes structural change, the main purpose of the club can change, so this examination needs to be done regularly.
How can Tax Controversy Partners help you?
Firstly, it is important that you carefully consider your position as early as possible if you are involved in a game or sporting club, society or association. An unexpected taxation debt arising where the exemption is not carefully considered can affect the viability of a great community organisation. Further, where there are multiple purposes of the club, determining eligibility for the exemption is more important and can be a complex matter.
Obtaining legal advice before it is too late is important. As expert tax lawyers, we can provide you with detailed advice on your circumstances, guide you through making the best choices for your club and help you to manage any engagement with the ATO on Federal tax and superannuation issues.
At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and based on understanding likely ATO actions.
Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.