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
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
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.
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
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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