We are a not-for-profit (NFP) sports club. We currently self-assess that we are income tax exempt.
We have the opportunity to lease and operate a local café (located away from our sports facilities and open to the public). We expect that new café revenue will be equal to the existing sports club revenue, and we expect to make healthy profits from operating the café which will be used to improve the sports club facilities and resources.
We also hope to employ members of the sports club to work at the café.
Will this initiative jeopardise our income tax exemption?
Where new activities are proposed to be undertaken by a not-for-profit the potential impact on matters such as income tax exemption should be fully considered in advance.
In the case of a not-for-profit sports club, income tax exemption may be available under item 9.1(c) of section 50-45 of the Income Tax Assessment Act 1997. Item 9.1(c) also requires special conditions in section 50-70 to be satisfied.
In terms of the issues raised two matter require consideration:
Is the item 9.1(c) exemption jeopardised?
Item 9.1(c) exemption requires an organisation to be established for the encouragement of sport.
Case law is reflected in the ATO ruling TR 2022/2 ‘Income Tax: the games and sport exemption’ confirming that to be established for the encouragement of sport the organisation’s main purpose must be the encouragement of sport. Where an organisation proposes to lease and operate a café regard should be had to the organisations purposes which permit such an activity to be undertaken.
Specifically, is such an activity pursued as an independent (and main?) purpose (distinct from the sporting purpose) or is it pursued ancillary to the sporting purpose.
Whilst each scenario should be treated on its merits in the current case the apparent intention to use café profits to improve sports club facilities and resources suggests that any purpose evident in the conduct of the café may be ancillary to the sporting purposes and unlikely to jeopardise exemption. The main purpose of the organisation is likely to continue to be the encouragement of sport.
Can we pay members to work in the café?
One of the special conditions in section 50-70 is that the organisation is not carried on for the purpose of profit or gain of individual members.
Where members are merely remunerated for services provided (such as for working in the café) this would not ordinarily contravene section 50-70. This view is confirmed at paragraph 12 in the ATO’s ruling TR 2022/2.
The ATO has recently issued TR 2022/2 which examines when income tax exemption is available under item 9.1(c). A NFP that self assesses income tax exemption under the item 9.1(c) encouragement of sport exemption should review it’s circumstances in light of TR 2022/2.
As we have previously alluded to in a past article, NFPs that rely on self assessment income tax exemption categories (as opposed exemptions conditional on being registered such as, as a charity with the ACNC) should also be aware the ATO will be introducing a requirement (applicable to the 2023/24 year) for an annual self-review return, to be lodged with the ATO, confirming the organisation has reviewed and confirms its entitlement to income tax exemption. We will provide more detailed information as it comes to light from the ATO.
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