We recently wrote an article commenting on the Consultation Paper – “Better targeting of Not for Profit tax concessions’ recently released by the Government. The ATO released today TR 2005/22DA – Taxation Ruling Draft Addendum which includes an Education example and a Club example that takes a pretty tough view of the availability of the income tax exemption, considering the decision in Word Investments.  We were not expecting this. 

The examples are too simplistic and if anything, are weighted far too heavily in favour of protecting the revenue.  If the fact pattern changed slightly, which is the more common example in practice, then the opposite outcome would be achieved.  What it does show is that the ATO has not rolled over on Word Investments and has the taxation of subsidiary entities and in particular the Not for Profit Clubs clearly in its sights.

I have included the relevant examples from TR 2005/22DA below: 

Education Example

73. A college and its seven related entities, which are all charities, set up and control a non-profit corporation to provide business support services, such as labour hire, office services and publicity. Its constitution states that its object is to provide business services to the not for profit sector generally. The corporation provides at-cost services to the eight charities and provides its services to other organisations in the not for profit sector at commercial rates and on a commercial basis

74. The non-profit corporation is not a charitable institution in terms of item 1.1 in section 50-5. While it provides at-cost services to the related charities and is controlled by them, this does not in itself mean that it has a sole charitable purpose. Its purpose is broader than providing services to related entities which are charities.

Club Example

Example 5

81A. A not for profit company is set up and controlled by four exempt sports clubs. Its constituent documents state that its objects are to promote and encourage the four sports, to provide a social and sporting club for members, and to provide funds to the four sports clubs.

81B. The company operates a club with bars, bistro and gaming machines to provide social amenities to club members and their guests. Club members may or may not be involved in the relevant sporting activities. It uses a significant proportion of its surplus funds in operating the club and to enhance the amenities for its members. It also distributes some of its surplus to support sporting purposes proposed by the sports clubs. It seeks exemption on the basis that it is a society association or club established for the encouragement of a game or sport (item 9.1(c) of section 50-45 of the ITAA 1997).

81C. The company has two purposes: one is the provision of a club for members and their guests and the other is the encouragement of sport. The fact that the company is controlled by the four sporting clubs is not determinative of whether the company's main purpose is the encouragement of a game or sport and therefore exempt under item 9.1(c) in section 50-45. It is necessary to examine all of the features of the company, including its objects and activities, in order to determine its purpose (see paragraphs 29-36 of Taxation Ruling TR 2011/D2 in relation to 'Finding purpose'). The company's main purpose in this case is to provide members with club facilities, not to encourage a game or sport.

Should you wish to discuss TR 2005/22DA further please contact Stephen O’Flynn or your Moore Stephens Relationship Partner.

Author: Stephen O’Flynn, Moore Stephens Melbourne


Contact

Stephen O'Flynn
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