On 14 September 2022, the ATO released The Commissioner of Taxation’s Ruling TR 2022/2: Income tax: the games and sport exemption (TR 2022/2). This replaces the views on these matters set out in the Commissioner’s longstanding prior ruling, TR 97/22.
Whilst some of the material expressed in TR 2022/2 will seem familiar, the ruling represents a comprehensive review and refresh of the ATO’s approach to self-assessing tax-exempt sporting clubs. Further, although expressly limited in application to clubs organised to promote a game or sport, TR 2022/2 also has application to similar organisations that self-assess as income tax exempt. Specifically, in the compendium to TR 2022/2, the Commissioner makes it clear that he considers most of the core concepts expressed in the ruling will also apply to animal racing clubs – meaning the views expressed in the ruling are relevant to thoroughbred, harness and greyhound racing clubs and authorities. Accordingly, in this article we refer to all relevant organisations as ‘Clubs’, unless otherwise stated.
TR 2022/2 is also a timely reminder for Clubs that self-assessing income tax exempt entities will need to lodge a return with the ATO from 2023, covering their operations, objects and ultimately, making an assessment as to whether the Club is eligible to remain tax exempt. More broadly, this also should prompt Clubs to consider how their corporate and tax governance processes work and what policies and procedures are in place to manage the various tax positions these organisations must manage – albeit not income tax, but there is PAYG, superannuation guarantee, GST, FBT and other touchpoints with the tax system all NFPs must manage.
On what basis can Clubs assess as tax-exempt?
Section 50-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97) provides for particular organisations to be tax- exempt where they are able to self-assess as belonging to a group described in Division 50 of the ITAA 97. Relevant to Clubs, section 50-45 of the ITAA 97 provides particular organisations may be tax-exempt where they are not-for- profit organisations that promote or encourage:
Sports, culture and recreation
|Issue Sports, culture, film recreation|
|Items||Exempt entity||Special Conditions|
|9.1||a society, association or club
established for the
|See section 50-70|
For completeness, Clubs must also satisfy the special conditions in section 50-70 of the ITAA 97, being:
Special conditions for items 1.7, 2.1, 9.1 and 9.2
- 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:
- has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or
- is a society, association or club that meets the description and requirements in item 1 of the table in section 30-15; or
- 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;
Note: Certain distributions may be disregarded: see section 50-75.
- the entity must:
- 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.
For the purposes of this article we assume that relevant Clubs are ‘in Australia’. However, subsection 50-70(2) of the ITAA 97 is particularly relevant and is explored below.
What is TR 2022/2 about? And what are the issues for Clubs?
TR 2022/2 sets out a number of factors that Clubs are required to consider in determining whether they are eligible to asses to become, or remain, tax-exempt. We set out below a summary of each core factor and relevant considerations for Clubs to take into account.
A game or sport
The concepts of a ‘game’ or ‘sport’ are not defined in TR 2022/2 and therefore take their ordinary meanings. Of note are observations in TR 2022/2 that a game or sport will usually be organised, have a clearly defined set of rules and practices, and be commonly understood as a being more than merely a leisure activity or as an activity undertaken as a means to some other end. Clearly, activities such as Australian rules football, rugby league or union, netball, cricket, baseball, basketball, athletics and similar types of activities should qualify. Other activities organised in accordance with similar principles would also be eligible, including shooting clubs, equestrian and pony clubs, sailing clubs and the like.
Importantly, it is recognised that competition whilst a good indicator of a game or sport, is not essential, ensuring that pursuits such as social sporting teams and leagues may be eligible to be exempt. However, pursuits that are private in nature or a means to other ends will not qualify – meaning bodybuilding, car clubs, non-competitive dancing and stamp and coin collecting would all fail to be exempt under these rules.
It is important then for Clubs to critically assess whether what they are doing (or propose to do) is eligible to be exempt or may fall outside the recognised concepts of what constitutes a game or sport.
For completeness, as ‘animal racing’ has its own category of exemption, these aspects of TR 2022/2 are not relevant to those Clubs. However, as with a ‘game’ or ‘sport’, the concept of ‘animal racing’ is undefined in TR 2022/2 and accordingly also takes its ordinary meaning. Whilst clearly thoroughbred, harness and greyhound racing would qualify within this category, other forms of animal racing (where relevant) would need to be carefully considered by the Club involved.
Main and ancillary purposes
The main purpose of a Club must be the promotion of a game, sport or animal racing. Other things a Club may do, concerning investing, commercial, political or other activities should only ever be ‘incidental’ to its main purpose and activities. It is important to note that this must be assessed on an ‘objective’ basis – that is, what would someone on the outside looking in consider is a Club’s main purpose, based upon what it actually does and how it spends its funds. This could potentially look at things like how and why certain funds are deployed, what amount of effort is put into sport/racing vs other activities, and whether the people employed by the Club are primarily concerned with sport/racing or with other things.
Where there are risk areas for Clubs in this regard are where social facilities become dominant, where property development overshadows investment in sporting or racing facilities, where wagering and image rights become more substantial than core activities and where significant surpluses are accumulated rather than re-invested into the main activities of the Club.
Accordingly, each Club self-assessing under this exemption needs to be focused in its assessment of its status, when considering its principal activities and the deployment of surplus funds. In this regard, the ATO may have concerns where a Club suggests that it would not invest in particular facilities because it did not produce a particular financial return for that Club, whilst simultaneously selling assets and expending significant sums on property development activities.
Activities and purpose
This follows on from the assessment of what is the main purpose of a Club – the requirement to look at the actual activities being undertaken in order to determine the objective purpose of that Club. The subjective intention of the board or senior management are not the decisive factors – rather, which activities are undertaken and in what proportion will be determinative. In particular, where a Club organises and derives revenue from commercial activities, it must be considered whether these activities are ‘a means to and end’ or rather an ‘end in themselves’.
Where the ATO may have concerns with Clubs in this regard is where it is able to be ascertained that investment activities or other commercial activities are being undertaken at the expense of their core racing activities – ie where a large property development takes precedence over designing and building facilities or where entertainment or member leisure facilities (such as restaurants and pokie rooms) significantly overshadow sporting fields, racing facilities or other key infrastructure.
Surplus funds and purpose
The use of surplus funds is also relevant when considering purpose. For example, if surpluses are being accumulated by a Club, is there a clear understanding as to why each surplus is being accumulated and how and when it will be utilised? Or in the alternative, is the surplus being accumulated to use in commercial or ancillary activities – ie in acquiring non-racing related investments? Or even, are surpluses being accumulated and not being re-invested into principal sporting/racing activities, with no clear strategy or pathway to deploy those funds or the main purpose of the Club concerned?
Importantly though, Clubs are justified in building and holding reserves where there is a clear need to do so and the funds will be deployed at a later time to support the core activities of the Club. To that end, each Club should monitor and review its surplus position from time to time and as an organisation, understand why it may be holding a certain level of assets in reserve and what they may be used for in the future.
Where there is some concern in this regard may be where a Club has retained significant funds from a prior asset sale, and sought to make a commercial return on those funds, without having a particular strategy as to how and when those funds might be re-invested into core activities or facilities. The length of time surplus funds are retained (ie between the receipt of funds and when they are ultimately used) is also relevant in making this analysis.
Change in purpose over time
Whilst possibly self-evident, Clubs need to assess and be aware of where their main purpose has changed over time. This could concern, for example, a Club that has evolved into a hospitality or social venue.
To that end, Clubs should review their purpose and activities on a regular basis to ensure they remain comfortable they are entitled to remain exempt (we would suggest at minimum annually).
The requirements in section 50-70
As set out above, there are 2 requirement to meet here, namely:
- where an exempt organisation is complying with its governing rules; and
- whether its income and assets are being solely applied for the purpose for which it was established.
Accordingly, Clubs should remain concerned (from a governance perspective) to be aware of the requirements in their constitutions in respect of their management and use of funds, and that they are only applying our their income and assets for the purpose for which the Club was established.
The new NFP self-assessment regime – from 1 July 2023
From the year beginning 1 July 2023, self-assessing income tax exempt organisations (such as Clubs) will be required to lodge a return with the ATO outlining what they do and why they are entitled to remain exempt. This is not a tax return in the ordinary sense – rather, each organisation will need to consider and report on (non-exhaustively):
- its purpose and how it fulfils that purpose;
- the basis upon which it assesses itself as tax-exempt;
- how it is earning and spending its money in furtherance of its purposes; and
- the basis upon which the Club considers and reports on its fulfilling the purpose for which we have been established, and remain principally concerned with, being the relevant game, sport or racing activity they were established to promote or encourage.
This is an important development in the self-assessment regime for tax-exempt Clubs and accordingly, care should be given by the board and senior management of a Club to ensure the return will be able to be completed consistently with the requirement to remain tax-exempt.
Tax governance – what is it and what should Clubs do?
Tax governance is the umbrella term to describe how an organisation understands, approaches and manages its various tax obligations. In the case of an ordinary, for-profit entity those touchpoints with the tax system are relatively well understood. In the case of a not-for-profit, those touchpoints are still there but more nuanced.
For example, in the case of Clubs, whilst they may be not-for-profit and tax-exempt, they still pay GST, still have PAYG obligations for employees and still have FBT considerations to manage. Clubs also must, and particularly in light of the above, clearly understand their operations and activities and assess on an ongoing basis whether they are entitled to remain tax-exempt.
Practically, what this means is that the board of a Club must, at least annually (but preferably quarterly), consider its tax positions and whether it is in compliance or whether there are any particular risk factors it should consider and manage. Clubs should also consider the appropriateness of implementing a tax governance framework (similar to other risk policies that may already be in place) clearly establishing who from management and the board is responsible for which aspects of the Club’s tax governance profile.
This article was written by Timothy Stokes, Partner.