The Australian Taxation Office (ATO) has recently finalised and released its new tax ruling, Taxation Ruling TR 2022/2 Income tax: the games and sports exemption.
Following significant community consultation, the new tax ruling replaces the ATO’s longstanding previous taxation ruling TR 97/22 and aims to provide a clearer and more nuanced definition of when a society, association or club will be exempt from income tax under the games and sports exemption in section 50-45 of the Income Tax Assessment Act 1997.
Who qualifies for the exemption?
An organisation will qualify for the income tax exemption if it:
- is established for the main purpose of the encouragement of a game or sport;
- is not carried on for the purposes of its individual members’ profit or gain; and
- meets other special conditions referred to in the legislation.
An organisation need not be incorporated but must consist of a ‘voluntary organisation of people associated together for a common or shared purpose’.
A number of the key terms and requirements are unpacked in the Tax Ruling, including:
- Not-for-profit requirement: The organisation must not be carried on for the purposes of individual members’ profit or gain, either while the club is operating or on its winding up. This does not prevent members from receiving some benefits (such as the right to use facilities) as well as reasonable remuneration for services provided, however suitable protections must be put in place. This is best achieved by including robust not-for-profit clauses in the organisation’s governing document.
- ‘Game’ and ‘sport’ are each given their ordinary meanings and are specifically noted as being extended to activities whose characterisation ‘can be demonstrated by evidence of a competitive element and by participants’ compliance with the conventions and rules of the activity’. Non-athletic activities (such as chess or bridge), activities requiring the use of machines (such as motor racing) and non-competitive activities (like mountaineering) are expressly noted as being included in the definition as well.
- ‘Main purpose’ requirement: the organisation must be established ‘for the main purpose of the encouragement of a game or sport’. There is no set formula prescribed for determining how something can be a ‘main’ purpose, rather an organisation must assess all of its relevant materials and circumstances including its activities, resources, history, stated purposes and intentions, and how it uses any surplus funds. The purpose can change over time and the organisation must assess its ‘main’ purpose throughout the relevant tax year. This objective analysis must be carried out on an ongoing basis.
What your organisation should do
Organisations who self-assess under this income tax exempt category should carefully familiarise themselves with the wording of this new tax ruling, which includes lengthy and detailed examples. Particular focus should be placed on the ‘main purpose’ definition and how this is assessed based on the organisation’s purposes and activities over time.
The ATO has also published new material online via their website which is extremely helpful for organisations to be able to confirm eligibility. Importantly, legal advice should be sought about an organisation’s continued entitlement to the exemption should there be any major change to structure, activities or purposes.
This is a timely reminder as well of the new reporting requirements that will be in force from 1 July 2023 for not-for-profits that self-assess as eligible for income tax exemptions. Further details on these reforms can be found via our recent article.
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