Adelaide Racing Club Inc. v Federal Commissioner of Taxation
(1964) 114 CLR 517(Judgment by: Owen J)
Between: Adelaide Racing Club Inc
And: Federal Commissioner of Taxation
Judge:
Owen J
Subject References:
Income Tax
Judgment date: 13 October 1964
Judgment by:
Owen J
October 13.
The following written judgment was delivered: -
The appeals in these matters relate to the years ending 30th June 1960, 1961 and 1962 respectively. (at p519)
The appellant is a racing club incorporated under the provisions of the Associations Incorporation Act of South Australia. It has a large membership and was formed for the purpose of conducting horse-racing meetings in Adelaide. Its meetings are held on an area of about fifty-eight acres of park land which is vested in the Corporation of the City of Adelaide and leased by that Corporation to the Club pursuant to s. 854 of the Local Government Act. (at p519)
During the years under review the Club effected a number of improvements on the land leased. It built a new members' stand; it moved what was formerly the members' stand to another part of the land, re-erected it there and put it into use as a public stand; and it reconstructed part of the course so as to provide a straight five-furlong stretch, part of which lay outside the boundary of the leased land. It also effected some other improvements on the course such as a boundary wall and a new steeplechase fence. The details of these improvements and of the expenditure on them need not be discussed. The broad question is whether this expenditure or some part of it falls within s. 88 (2) of the Income Tax and Social Services Contribution Assessment Act. If it does a proportion of it is allowable as a deduction under that sub-section. Counsel stated that once the general matters raised in argument were decided, the parties would be able to work out the necessary details and the amounts, if any, allowable as deductions. (at p519)
The deductions claimed under the sub-section in each of the years in question were wholly disallowed by the Commissioner. In respect of the years ending 30th June 1960 and 1961 respectively, his decision was referred to the Board of Review which upheld, in part, the Club's claim but disallowed the remainder of it and against that disallowance the Club appeals. In the case of the year ending 30th June 1962, the Club's appeal comes direct from the Commissioner. (at p519)
The only matter raised on the appeals from the Board of Review relates to the claim to be entitled to deductions under s. 88 (2). The same question arises in the appeal from the Commissioner but in that case an additional and different matter also arises and I will refer to it later. (at p519)
It is convenient to state at once some of the facts which bear upon both the questions for decision. (at p519)
The Club has, as I have said, a large membership; in 1962 it numbered 956. These members pay an annual subscription which entitles the member to a member's ticket and two ladies' tickets. The holder of a member's or of a lady's ticket is entitled to enter any part of the course without payment of an entrance charge and to use the members' stand and a parking area. In addition a member may purchase for ten shillings a visitor's "privilege" ticket which permits him to take a non-member onto the course and into the members' stand on the race day for which it is issued. Members of the public who are not members of the Club or holders of ladies' or "privilege" tickets, are admitted to the course and the public stands on payment of entrance charges. They are not admitted to the members' stand. Facilities for betting, both on the totalizator and with bookmakers, are provided for members and for the public, as are refreshment rooms. In the members' stand there are refreshment rooms and a number of totalizator windows and to these members of the Club and holders of ladies' tickets and "privilege" tickets alone have access. All persons who use the refreshment rooms in the members' stand pay for their food and drinks. Bets by persons in the members' stand may be made with "rail" bookmakers who have their stands at the boundary of the members' stand and are able to do business with those in the stand and those outside it. The members' stand contains a room from which is operated all the totalizators on the course and, in that stand, there are broadcasting facilities used by broadcasting stations to broadcast the races to persons on the course and to listeners throughout the State. The Club's revenue is derived from many sources of which I mention some only. It includes, of course, the subscriptions paid by members (which are not part of the Club's assessable income) and the entrance charges paid by non-members. It includes also lump sum payments made by caterers for the right to sell liquor and food in the refreshment rooms on the course and fees paid by broadcasting stations for the right to broadcast the races. Under the Lottery and Games Act, 1936-1965 (S.A.) a betting turnover tax is imposed upon bookmakers which is paid to the Betting Control Board and out of the taxes so collected the Club receives a proportion from the Board. By the same Act a tax on winning bets is imposed and the Club receives a proportion of this from the Board, as it does also in the case of totalizator bets. Yet another source of revenue consists of nomination and acceptance fees paid to the Club by all those, members or non-members, who wish to race their horses. (at p520)
Apart from the annual subscriptions paid by members, part of the Club's revenue comes directly or indirectly from members who attend its race meetings. The evidence shows, for example, that during the year ending 30th June 1960 the betting transactions by members with bookmakers represented about sixteen per cent of the total bets laid on the course and the Club's proportion of the Betting Turnover Tax and the Winning Bets Tax in that year amounted to nearly 63,000 pounds. In the same year, nomination and acceptance fees paid by members amounted to over 3,000 pounds. In the following year, members' bets represented about eighteen per cent of the bets laid with bookmakers on the course and about six per cent of the bets made on the totalizator. In that year the Club's share of the Betting Turnover Tax, the Winning Bets Tax and of the totalizator receipts amounted to over 67,585 pounds and 3,147 pounds was paid by members in nomination and acceptance fees. In the year ending 30th June 1962, about thirteen per cent of the total amount bet with bookmakers on the course came from members and they provided six per cent of the total amount of the bets made on the totalizator, the amount received by the Club from the Betting Control Board being 64,740 pounds. Nomination and acceptance fees received from members amounted to 3,251 pounds. The evidence shows also that about ten per cent of the caterer's total receipts was taken in the members' stand. The percentages I have mentioned are necessarily approximate. For example, the estimate of the percentage of the caterer's receipts coming from members is based upon the figures for the refreshment rooms in the members' stand and these rooms are used by holders of ladies' and "privilege" tickets. The estimate of the members' proportion of betting transactions is based upon the volume of business done at the totalizator windows in the members' stand and with "rails" bookmakers by persons in that stand, and in each case those betting would include holders of ladies' and "privilege" tickets. As against that, it is reasonable to assume that on occasions members take refreshments and make bets with bookmakers and on the totalizator when they are outside the members' stand and on other parts of the course. (at p521)
I turn now to the questions raised under s. 88 (2). To obtain the deduction for which that sub-section provides a taxpayer must establish, inter alia, that the land of which he is the lessee was used for the purpose of producing assessable income; that he incurred expenditure in making improvements on that land and that those improvements were not subject to tenant rights. As to this last requirement, the members of the Board of Review, in the two appeals with which they dealt, were of opinion that this had been established. They based their conclusion on cl. 5 (n) of the lease by which the Club covenanted to surrender and deliver up possession to the lessor, on the expiration or sooner determination of the lease, the land and premises together with all landlord's fixtures and all improvements made to or on the land demised. I have no doubt that their decision on this point was correct. I can find no other provision in the lease or in s. 854 (2) of the Local Government Act which would prevent that sub-clause from operating according to its expressed terms. (at p522)
The next question to which the Board addressed itself was whether the land on which the improvements were made was "used for the purpose of producing assessable income". On that the majority of the members of the Board took the view that, on its true construction, s. 88 (2) applied only where the production of assessable income was the sole purpose for which the land was used. They thought, however, that it was not necessary to look at the leased land as a whole but that regard might be had to each portion of the land upon which an improvement stood to ascertain whether that particular portion was used solely for the purpose of producing assessable income. If it was so used they considered that s. 88 (2) permitted a deduction to be made in respect of the expenditure on the improvements made on it. With this in mind they considered the improvements in respect of which the Club claimed a deduction and divided them into two classes. The first consisted of the new members' stand, the alterations to the five-furlong course and the new steeplechase fence; the second of the removal and re-erection of the old members' stand to which thereafter the paying public had access. The several parcels of land on which the improvements falling into the first class stood were, they thought, used for more than one purpose, one of which "related to members from whom the Club directly received no assessable income, the other one related to the paying public from whom the Club did derive assessable income". Accordingly, they considered that expenditure on improvements falling within the first class was not within s. 88 (2) since they were used for several purposes only one of which was the production of assessable income. They were of opinion, however, that the expenditure on the removal of the old members' stand to another part of the course and its use thereafter by members of the paying public met the requirements of the sub-section because the portion of the land on which the re-erected stand stood was then used solely for the purpose of producing assessable income. To that extent they varied the assessments. The third member of the Board considered that the Club was entitled to a deduction of the appropriate proportion of the expenditure on all the improvements effected. He was of opinion that "the land was occupied by the taxpayer as an integral whole and the particular portions of land upon which the improvements were made were not occupied and used separately from the remainder of the leased land". He did not accept the proposition that the words "used for the purpose of producing assessable income" required that the use should be exclusively for that purpose. (at p523)
Other matters relating to s. 88 (2) were raised before the Board of Review. It was said, for example, that in respect of some of the improvements effected by the Club the requirements of par. (c) of the sub-section had not been complied with but these contentions were not repeated before me and need not be considered. (at p523)
Before me, counsel for the Club submitted that the area comprised in the lease should be regarded as an indivisible whole and not as a series of separate parcels of land, some of which were used for the purpose of producing assessable income and some not so used. He contended also that s. 88 (2) did not require that the production of assessable income should be the exclusive purpose for which the land, regarded as a whole, was used. It was, he said, sufficient if the production of assessable income was one of those purposes. Counsel for the Commissioner argued that neither of these contentions should be upheld. He submitted also that if the sub-section was not confined to cases in which the production of assessable income was the sole purpose for which the land was used, it must at least be the dominant or main purpose, and that this was not shown to be the fact. As to the improvement of the five-furlong course, he pointed out that some of the work was carried out outside the leased land and submitted that s. 88 (2) had no application to an improvement which was not wholly on the land demised. (at p523)
I agree with the submission of counsel for the Club that it is the land as a whole that is to be considered in determining whether it is used for the purpose of producing assessable income. The question then arises whether it is necessary, under s. 88 (2), that the production of assessable income should be the sole purpose for which the land is used. I think the provision should not be construed so narrowly. The sub-section does not speak of the "sole" or "exclusive" use for the purpose specified and, in my opinion, it should not be construed as though it did. It is, I think, at least sufficient if use for the production of assessable income is the chief purpose for which the land is used (Commissioners of Inland Revenue v. Forrest (1890) 15 App Cas 334) and that requirement is, as it seems to me, fulfilled in the present case. During the relevant periods, the land was used for the purpose of conducting race meetings and this is the first of the objects for which the Club was formed (see Rule 2 (a) of the Rules of the Club). Those meetings are intended to and do in fact attract the attendance of large numbers of the public who pay for admission to the course and for the use of its facilities and in that way contribute in large measure to the Club's revenue. It is true that that part of the total revenue which comes from the subscriptions of members is not assessable income but the proportion is a relatively small one. For example, in the year ending 30th June 1962, members' subscriptions amounted to 9,560 pounds out of a total revenue of 182,572 pounds, and to deny that, for that reason, the main purpose for which the land is used is that of producing assessable income seems to me to be unreal. It is true also that one of the objects for which the Club was formed was to promote the improvement of horse-breeding and horse-racing but that seems to me merely to emphasize the primary importance of the Club's income-producing activities. Without them, the other purposes for which the Club was formed would fail. I am of opinion, therefore, that the land demised, looked at as a whole, was used for the purpose of producing assessable income and that this was the chief purpose for which it was used. Leaving on one side, for the moment, the improvements to the five-furlong course, I am of opinion that the Club is entitled to the benefit of s. 88 (2) in respect of the expenditure incurred by it during the relevant years on the improvements effected by it on the course. (at p524)
So far as the five-furlong course is concerned, I can see no good reason why the amount expended on so much of the improvements as were made within the boundaries of the land leased should not be similarly treated. If, for example, a water pipe had been laid to bring water onto the course from a point outside the leased land or if a drain had been built on the leased land to carry surplus water from the course to a point of discharge outside the land, I would have thought it reasonably clear that so much of the expenditure as related to the work done on the land would be within s. 88 (2). An improvement on a parcel of land does not cease to be an improvement on that land merely because it extends beyond the boundary of the parcel. The appropriate deduction in respect of the expenditure on the leased land of altering the five-furlong course should therefore be allowed. (at p524)
The remaining question to be determined is, as I have said earlier, raised only in the case of the appeal direct from the Commissioner. It relates to the way in which the Commissioner apportioned the Club's expenditure for the year ending 30th June 1962 in relation to its assessable and non-assessable income for that year. A similar question was raised in the cases before the Board of Review and was decided against the Club but the notices of appeal to this Court in those cases relate only to the Board's decision on the matters arising under s. 88 (2). In making his assessment for the year under review the Commissioner treated an amount of 9,687 pounds of the Club's revenue as not being part of its assessable income since it represented the amount of members' subscriptions paid in that year together with a small sum derived from the sale of race cards to members. In treating these two items as not being part of the Club's assessable income the Commissioner acted in accordance with the principle applied in cases such as Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334 ; Carlisle and Silloth Golf Club v. Smith [1912] 2 KB 177 ; [1913] 3 KB 75 ; New York Life Insurance Company v. Styles (1889) 14 App Cas 381, and of this the Club naturally makes no complaint. The Commissioner went on to make a dissection of the Club's expenditure which, if I have understood the figures accurately, totalled 172,960 pounds. Of that amount he treated 2,249 pounds, described by him as "Direct Expenses", as having been wholly and exclusively expended on account of members on items such as wages of gatekeepers at the entrance to the members' stand, the cost of cleaning that stand and the printing of members' badges and ladies' tickets. This amount he disallowed as a deduction since it was not incurred in producing assessable income. Of the balance of the expenditure, amounting to 170,711 pounds, he treated 22,080 pounds as having been incurred exclusively in the production of assessable income in that it was used to provide facilities and amenities for members of the public and therefore was wholly deductible. He regarded the balance remaining, namely 148,631 pounds, as having been expended partly for the purpose of producing assessable income and partly for the purpose of producing non-assessable income. In order to apportion this amount and ascertain the figure allowable as a deduction from assessable income, he applied the following formula:
Gross income other than members' subscriptions and purchase of race cards/Total receipts from all * Apportionable income sources
and allowed the resulting figure as a deduction. (at p525)
In a case such as this, the Commissioner is faced with a difficult problem. Section 51 requires him to determine and allow as a deduction outgoings to the extent to which they are incurred in gaining or producing the assessable income. Where a taxpayer receives income part of which is assessable and part is not, he must dissect the expenditure and, to the best of his ability, estimate how much of it relates to the production of assessable income and how much to the production of non-assessable income. This the Commissioner did in the manner which I have sought to explain. Before me the method adopted by him was subjected to considerable criticism and several alternative bases were suggested by counsel for the Club. But they were, I think, at least equally open to criticism and produced varying results. It is unnecessary to detail the alternatives put forward on behalf of the Club or the various criticisms made of them. The Commissioner made what he regarded as a just apportionment of the Club's expenditure, allocating against assessable and non-assessable income respectively the proportions of that expenditure that seemed right and I am not satisfied that the course he followed was wrong or that the resulting assessment, except in so far as it related to the deductions claimed under s. 88 (2), was excessive. (at p526)
Each of the appeals should be allowed and the matter remitted to the Commissioner so that the assessment in each case may be varied so as to accord with the opinion I have expressed in relation to the deductions claimed under s. 88 (2). (at p526)