The ATO has released new guidance on the games and sports income tax exemption for eligible not-for-profit clubs.
The ATO has finalised Taxation Ruling TR 2022/2 Income tax: the games and sports exemption, which provides guidance for not-for-profit clubs on that income tax exemption. The Ruling replaces Taxation Ruling 97/22 and provides further examples and references to Commissioner of Taxation of the Commonwealth of Australia v Word Investments Limited  HCA 55.
The Ruling does not impact the application of the exemption. The exemption is still available to clubs, societies or associations where it:
- is established for the main purpose of the encouragement of a game or sport
- is not carried on the purposes of its individual members’ profit or gain, and
- meets other special conditions under section 50-70.
Not-for-profit society, association or club
The Ruling specifies that the description of the phrase ‘society, association or club’ is consistent with the Macquarie Dictionary definition of each word and provides examples of organisations that do not fall under the accepted description.
The club must not have a profit motive for its individual members, either while the club is operating or on its winding up. Clubs that are involved in commercial pursuits are required to establish the degree to which the pursuits are a means to the required main purpose of the encouragement of a game or sport.
Club members may obtain communal membership benefits and may also receive reasonable remuneration for services they perform for the club. The Ruling further provides that clubs can utilise various methods to ensure they meet the not-for-profit requirement, with ‘not-for-profit’ clauses in governing documents generally being the preferred mechanism.
Encouragement of a game or sport
To be considered for the exemption, a club’s primary purpose must be the encouragement of a game or sport.
Evaluating the primary purpose of a club requires an objective assessment of all relevant facts and circumstances. Encouragement takes its ordinary meaning and is described as ‘stimulating by assistance or approval, including through direct or indirect means’. In circumstances where another purpose predominates, such as promoting sociality, participation or relaxation, the activity will not be considered a game or sport.
The terms ‘game’ and ‘sport’ can cover a broad range of activities, including non-athletic pursuits such as chess or bridge. The Ruling outlines some common features of games or sports, such as the presence of conventions, expectations and rules. Competitions are also considered very common features of a game or sport, but are not essential.
Although the ruling provides new and helpful examples, it can still be difficult to determine when the games and sport exemption applies – especially when the club has significant commercial activities. Clubs should ensure that their objectives are clearly documented and should focus their plans on how the organisation promotes a game or sport.
If a club has significant revenue from commercial activities, it should:
- have a clear plan as to how the funds will be applied to support the encouragement of a game or sport, and
- ensure that it is clear that the commercial activities are not ‘a means to an end’.
If you are seeking advice regarding the exemption, please contact Carly Ashwood or a member of our corporate advisory team.