Spender J

Finn J
Merkel J

Full Federal Court


Judgment date: 25 March 2002

Spender, Finn and Merkel JJ

In 1988 the Lotto Act 1979 (NSW) was amended so as to permit the conduct under licence of the game ``keno''. Keno is a numbers game in which, from a field of 80 numbers, players can select from 1 up to 15 numbers and win a prize by matching the selections made with the 20 numbers randomly selected in a given game by a draw from the 80 numbers. It can be played at multiple locations that are connected electronically to a central operating location (or ``engine room'') at which draws are made and from which results are notified to the playing locations.

2. It was envisaged at the time of the amendment that the game would be run by the registered clubs industry and would be played in participating registered clubs. The scheme ultimately devised to enable club participation in the provision of the game and in its monetary rewards was one of some complexity. The primary issue in this appeal from the Administrative Appeals Tribunal is whether the rewards so derived by participating clubs were properly to be characterised as income for the purposes of the Income Tax Assessment Act 1936 (Cth) (``the ITA Act''), as the Tribunal held, or as ``mutual receipts'' to the extent that they were attributable to the playing of keno at a club's premises by club members, as the appellant, North Ryde RSL Community Club Ltd (``North Ryde'') contends [reported at 2001 ATC 2162].

3. Distinctly North Ryde challenges the Tribunal's imposition on it of a culpability penalty under s 226G of the ITA Act in respect of the last of the four years of income under review in this proceeding.

The statutory setting

4. The 1988 amendment to the Lotto Act deemed keno to be a game of lotto for the Act's purposes. By so doing it subjected the conduct of the game to the same statutory and administrative regime as applied to lotto and which included the following elements:

  • (i) The game of keno could only be conducted by a licensee: s 3(1);
  • (ii) The licensing authority was the relevant Minister who could (s 5(1)):
    • ``(a) subject to such conditions as he may determine and specify in the licence, grant a licence to the person making the application; or
    • (b) refuse to grant a licence.''
  • (iii) The conditions so imposed could include (inter alia) (s 6(1)):
    • ``(a) the appointment, by the licensee, of agents nominated by the Minister;
    • (b) the approval, by the Minister, of agents nominated by the licensee;

      ATC 4296

    • (b1) the withdrawal of any such nomination or approval by the Minister;
    • (c) the payment of commission to agents referred to in paragraph (a) or (b);
    • (d) the maximum amount or rate of any commission referred to in paragraph (c);
    • (d1) the application of and accounting for money received by the licensee from subscriptions, including the payment of prizes from such money, the banking of such money and the accounts to be kept in respect of such money;
    • (e) the rules in accordance with which games of lotto shall be conducted by the licensee.''
  • (iv) The licensee could make rules, not inconsistent with the Act, the regulations or the conditions of its licence for the conduct by it of games of keno but such rules were required to be approved by the Minister and published in the Gazette: s 11;
  • (v) In relation to the application of subscriptions for the game the Act provided (s 13):
    • `` (1) Out of the subscriptions received by a licensee in respect of games of lotto conducted by the licensee, the licensee must:
      • (a) pay into the prize fund kept in respect of the licensee an amount which, when added to any amount already applied by the licensee to the payment of prizes won in those games, is equal to a percentage, prescribed by the conditions of the licence, of the subscriptions for those games; and
      • (b) pay to the Minister, as duty, an amount equal to a percentage, prescribed by the conditions of the licence, of the subscriptions for those games.
    • (2) Until percentages are prescribed by the conditions of a licence, the percentages for the purposes of subsection (1)(a) and subsection (1)(b) are 60 per cent and 31 per cent respectively.''
  • (vi) The Act made express provision for the banking of the prize fund (s 14) and for the payment of duty.

The factual setting

1. The relevant actors

5. Apart from the individual participating clubs (of which North Ryde was one), the two principal actors in the provision of the game of keno were Clubkeno Holdings Pty Ltd (``CKH'') and Club Gaming Systems Pty Ltd (``CGS''). Each of these, as also North Ryde, require individual comment.

6. (i) CKH. Consistent with what was contemplated by the State Government in amending the Lotto Act, CKH was incorporated as a non-profit company by the Registered Clubs Association. That Association represented most of the clubs in New South Wales. CKH became the original licensee under the Act for the conduct of keno. Its memorandum of association included the following objects:


  • (i) to hold a license under the Lotto Act, 1979 and to implement, supervise, control, manage, maintain, promote and carry on the supply and provision of the game of Keno as defined in the said Act to Registered Clubs as defined in Section 4 of the Registered Clubs Act, 1976 of New South Wales.
  • (ii) to do all such lawful things as may be necessary incidental or conducive to the objects stated in paragraph (i) above or any of them.
  • (iii) to apply the profits (if any) or other income and property of the company wheresoever and howsoever derived solely towards the objects set out in paragraphs (i) and (ii) of this clause and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit, benefit or advantage to members of the company...

3B. On a winding up or dissolution of the Company if there remains, after satisfaction of all its debts and liabilities, any property whatsoever the same shall not be paid or distributed among the shareholders of the Company but shall be given or transferred to such institution or institutions having objects to promote or protect the interests of clubs registered under the Registered Clubs Act or for the purpose of promoting the Club Industry in New South Wales as the

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Minister responsible for the administration of the Registered Clubs Act may direct and in default of such direction by the Chief Judge in the Equity Division of the Supreme Court of New South Wales or such other Judge of that Court as may have or acquire jurisdiction in the matter and if and insofar as effect cannot be given to the aforesaid provision then to some institution or institutions having charitable objects.''

(ii) CGS. In 1989 CKH sought proposals from interested parties for the purpose of actually operating on its behalf the game of keno in registered clubs. A submission was made to CKH by AWA Ltd and the State Bank of New South Wales. Those two corporations incorporated CGS in May 1990. On 12 October 1990 CKH and CGS applied for a licence to conduct the game of keno. It was granted to them on that date, CKH's earlier licence being replaced in consequence. That 1990 licence was in turn replaced by a licence granted to CKH and CGS in September 1991 for a period of seven years. The relevant terms of that licence are set out below. Of note for present purposes, the licence (cl 26) required CKH and CGS to enter into a Management Agreement which (inter alia) was to:

``include terms and conditions assigning to CKH and CGS respectively, authority and responsibility, as the case may be in relation to the licence conditions.''

Put briefly and somewhat incompletely that agreement assigned to CGS the role of actual operator of the game of keno for the benefit of CKH and itself. By virtue of an ``Agency Deed'' (the terms of which were approved by the Minister), CKH and CGS authorised North Ryde to carry on a ``keno agency'' at its club premises in conformity with the terms of the ``Agency Operating Manual'' (again a document approved by the Minister). North Ryde was paid a ``commission'' for conducting that agency. The relevant provisions of the agency deed and of the agency operating manual will be referred to below.

(iii) North Ryde. The club is a company limited by guarantee and was registered as a club under the Registered Clubs Act 1976 (NSW). It was established as a non-profit making entity. It is a member of the Registered Clubs Association.

2. The CKH-CGS licence

7. The principal provisions of present concern in the licence granted on 4 September 1991 related to (i) the responsibilities to be assumed by the licensees; (ii) the allocation of subscriptions; (iii) the constitution of a Keno Prize Fund and the payment of State duty; (iv) ministerial oversight of the licensees and the various approvals required to be obtained from the Minister; and (v) in recognition of there being two licensees, the need for the execution of a management agreement (referred to earlier) that assigned to CKH and CGS respectively, authority and responsibility in relation to the licence conditions.

8. Only two matters contained in the licence require elaboration. These relate to agents and to the allocation of subscriptions.


9. The licence defined ``agency'' to mean ``a place at which an Agent is permitted to accept subscriptions for games of keno'': cl 2(a). And it defines ``agent'' to mean ``a registered club nominated by the licensees and approved by the Minister to accept subscriptions for games of Keno'': cl 2(b). Before the licensees appointed an agent they were required to (cl 4(c)(i)):

``furnish to the Minister the terms and conditions of any such proposed appointment and shall obtain the Minister's approval of such terms and conditions of appointment.''

The licensees, further, were obliged to provide to agents (cl 4(c)(viii)):

``upon such terms and conditions as approved such approved devices and equipment to conduct games of keno as may be deemed necessary by the Minister.''

Clause 20 of the Licence required that ``[t]he procedures and system by which an Agent shall be concerned in the conduct of games of keno shall be approved [by the Minister]''. This requirement found its reflection in the ``Agency Operating Manual'' that was later approved by the Minister.

Allocation of subscriptions

10. The Licence defined ``subscription'' to mean ``the amount prescribed by the Minister which a subscriber shall be charged to enter a game of keno'': cl 2(x). It further provided that ``[t]he Licensees shall receive subscriptions and

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may authorise an Agent to receive subscriptions on behalf of the Licensees'': cl 4(c)(ii).

11. Clause 5 provided for the manner in which all subscriptions received by the Licensees or an agent in respect of games of keno were to be apportioned. This required that:

  • (i) an amount equal to 75% be paid to the Keno Prize Fund;
  • (ii) the payment of a varying percentage of duty to the Minister and a correspondingly varying percentage to CGS, the aggregate of the two percentages remaining constant at 11% but varying inter se according to a formula in the Licence under which the percentage of duty increased and CGS's return decreased as the quantum of the subscriptions increased; and
  • (iii) the payment to CKH of an amount equal to 14%.

The Rules

12. These were made by the Licensees pursuant to s 11 of the Lotto Act. They were declared (cl 3(b)) to be binding on all subscribers ``and by entering a Game of Club Keno subscribers agree to be bound by [the] Rules''. They provided (inter alia) that ``[a]n entry into a Game of Club Keno may only be made through an Agent'' (cl 7(b)) but that in the acceptance and processing of an entry, ``an Agent shall for all purposes be the agent of the Subscriber and not the agent of the Licensees'' (cl 7(i)). It is noteworthy in passing that the Rules describe CGS as the ``operating company''.

The CKH-CGS Management Agreement

13. This agreement, as previously noted, was required to be executed by cl 26 of the Licence. The relevant agreement for present purposes was that of 28 March 1991. Its principal provision, cl 3, provided insofar as presently relevant that:

``3.1 The parties hereto have entered into this Agreement pursuant to the Licence for the purposes of defining their separate authorities and responsibilities under the Licence and setting out their separate entitlements to the payments and moneys referred to therein. Subject to any other provision of this Agreement, the Specifications and the Keno Agency Deed authorities and responsibilities under the Licence are assigned as follows:

  • ...
  • (c) Club Gaming and CKH acknowledge that the terms and conditions of any proposed appointment of any Agent shall be as set out in or referred to in the Keno Agency Deed which is to be approved by the Minister prior to the appointment of any such Agent and Club Gaming shall forward the same to the Minister for such approval.
  • (d) Club Gaming shall receive the Subscriptions and Club Gaming and CKH shall in the Keno Agency Deed jointly authorise the Agent to receive the Subscriptions on behalf of Club Gaming.
  • ...
  • (o) Club Gaming shall be responsible for the apportionment of Subscriptions in accordance with Condition 5 [of the Licence].
  • ...

3.3 Nothing in this Agreement shall be construed as constituting a partnership between the parties or as creating a trust between them or (except in so far as this Agreement expressly authorises one of them to do an act on behalf of them both) as constituting either of the parties the agent of the other.''

14. Insofar as it dealt with ``Agencies'', the agreement provided (inter alia) that:

``8.1 The parties shall determine the terms and conditions to be included or referred to in the Keno Agency Deed within twenty-one (21) days of the date hereof and it is the parties' intention that the Keno Agency Deed be a standard document for all Agents.

8.2 The parties shall by agreement select registered clubs as Agents.

8.3 Club Gaming shall provide computer terminals and associated communications network and other devices and equipment to Agents and shall be responsible for the installation and maintenance of same. Club Gaming shall install and grant to Agents a royalty free licence to use the standard equipment as listed in the Specifications for the Keno Game in accordance with and on the terms of the Keno Agency Deed.

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8.4 The terms and conditions (including prices and costs) on which an Agent is appointed and provided with those things referred to in clause 8.3 shall be set out or referred to in the Keno Agency Deed.


15. The financial arrangements between CGS and CKH and their respective rights and responsibilities therein, were detailed in cl 10 of the agreement. Sub-clauses 10.1-10.7 gave CGS sole authority ``on behalf of the parties'' to operate the Keno Prize Bank Account and to make specified payments and investments from moneys in that account.

16. The agreement contemplated the creation of a ``Residual Receipts Bank Account'' into which were paid ``Residual Player Receipts'' and ``Residual Investment Receipts''. These various terms were defined as follows (cl 1.1):

```Residual Player Receipts' means the balance of the Subscriptions remaining after making the payments into the Keno Prize Fund required under Sections 13(1)(a) and 14(1) of the Act and Condition 5(a)(i) of the Licence and after allowing for commission to Agents as provided for in clause 10.18.

`Residual Receipts Bank Account' means the bank account to be established by Club Gaming on behalf of the parties into which Residual Player Receipts and Residual Investment Receipts are to be paid and disbursed.

`Residual Investment Receipts' means the moneys earned on the investment of Residual Player Receipts and on the reinvestment of investment proceeds.''

Sub-clauses in cl 10 provided, insofar as presently relevant, that:

``10.11 Club Gaming shall have sole authority on behalf of the parties to operate upon the Residual Receipts Bank Account provided that CKH is informed by Club Gaming of the signatories to such account and of any changes thereto and that it will have access to all information concerning the account and Club Gaming will provide a weekly statement to CKH of all transactions in respect of that account and the current balance provided that after consultation with CKH such a statement shall be provided at more regular intervals where CKH demonstrates a particular need to the reasonable satisfaction of Club Gaming.

10.12 All Residual Player Receipts and Residual Investment Receipts shall be paid into the Residual Receipts Bank Account.

10.13 Club Gaming shall have sole authority on behalf of the parties to invest and re- invest all moneys from time to time forming part of the Residual Receipts Bank Account or constituting the investment thereof in such investments as approved by the Minister in the manner of approval contemplated by clause 2.2(b) and the parties agree that Club Gaming shall be entitled absolutely to any moneys earned on such moneys or investment thereof.


10.15 Club Gaming shall out of the Residual Player Receipts be entitled to deduct its moneys in accordance with Condition 5(a)(iv) and at the same time as the Minister has been paid the duty prescribed under Condition 5(a)(ii) in the manner set out in Condition 7(a), Club Gaming shall pay to CKH its moneys prescribed in Condition 5(a)(iii) to the extent that it has not already been paid or allowed directly by or on behalf of CKH as commission to the Agents.


10.17 CKH acknowledges and agrees that Club Gaming shall be entitled to receive and disburse the moneys referred to in the Conditions.

10.18 Out of the moneys which CKH is entitled to receive pursuant to Condition 5(a)(iii) it will allow to Agents an aggregate amount by way of commission to such Agents of not less than ten per centum (10%) of Turnover and for this purpose shall appoint Club Gaming its agent to pay such commission to each Agent on its behalf.''

The Agency Deed

17. This deed was approved as the intended standard document for all agents. Its scope and object were stated in cl 1:

``1.1 Each of the Licensees hereby authorises the Agent to conduct the Agency at the Premises on and from the Agency Commencement Date and upon the terms and conditions set out in this Deed. The

ATC 4300

Agency shall be personal to the Agent and have no goodwill value to the Agent.

1.2 The relationship between the Agent and each of the Licensees shall be that of principal and agent but only for the Purpose and in respect of each Licensee only to the extent expressly set out in this Deed and in particular the Agent shall have no right or authority to enter into any arrangements, understandings or agreements on behalf of either or both of the Licensees or to make commission or authorise any statements or representations on behalf or [sic] either or both of the Licensees whatsoever other than as may be specifically authorised or directed pursuant to this Deed. The rights and obligations of the Licensees hereunder are several and not joint.''

18. Clause 2.1 specified the obligations assumed by CGS to an agent ``[i]n consideration of the Agent fulfilling all its obligations'' under or in consequence of the deed. Those obligations related in the main to facilitating (by the provisions of equipment, instruction, manuals, etc) the Agent's conduct of its Agency.

19. Clause 2.2 focussed primarily on CKH's obligation to an Agent. It provided:

``In consideration of the Agent fulfilling all its obligations hereunder or arising herefrom:

  • (a) CKH shall pay or allow to the Agent the Commission in daily instalments in arrears within one (1) Business Day after the end of each successive day of operation of the Agency and for this purpose hereby irrevocably authorises and directs Club Gaming to make such payments or allowances (as the case may be) to the Agent on its behalf.
  • (b) CGS shall pay or allow to the Agent in daily instalments in arrears within one (1) Business Day after the end of each successive day of operation of the Agency an amount equal to the Agent's Payments properly and actually paid the Agent in accordance with clause 3.1(n) during such day of operation of the Agency in respect of which the Agent has not been previously reimbursed, by way of reimbursement to the Agent.''

The deed defined ``commission'' as follows:

```Commission' means the commission referred to in clause 2.2(a) which shall until and unless a higher commission may have been approved by the Minister and agreed with Club Gaming and CKH in writing be an amount calculated in respect of each day of live operation of the Agency according to the following formula:

  • C = ten per centum (10%) of T where:
  • C = the Commission to be paid or allowed to the Agent
  • T = Subscriptions received by the Agent during that day less
  • Cancellation Payments made by the Agent during that day''

20. Clause 3 prescribed the Agent's obligations in the conduct of the Agency. The deed clearly contemplated, as the Management Agreement envisaged, the Agent would be authorised to receive subscriptions. It defined ``subscriptions'' to mean ``any and all moneys paid by Players to the Agent to play Keno''. For its part cl 3.1(j) required that an Agent:

``(j) receive, account for, remit and pay all moneys (including without limitation Subscriptions, Prize Payments and Cancellation Payments) strictly in accordance with the Agency Operating Manual, Rules and Regulations and be solely responsible for and bear all risk associated with any deficiencies in such moneys whether by reason of theft, fraud, neglect, force majeure or otherwise;''

21. By cl 6 and Schedule 3 the deed was acknowledged to be subject to the Lotto Act and to the conditions of the Licence thereunder.

The Agency operating manual

22. This document prescribed operating procedures (often of a very mechanical kind) which were on occasion little more than restatements or elaborations of provisions in the Rules or the Agency Deed. It need only be noted that, while obliging an Agent to maintain a bank account to which CGS had access, the Manual did not in terms require an agent to maintain a trust account for CGS.

Additional facts found by the Tribunal

23. (i) Of the 14% of subscriptions allocated to CKH under cl 5 of the licence, 10% was retained as a matter of administrative convenience by the Agent on account of the

ATC 4301

commission payable to it by CKH under cl 2.2 of the Agency Deed.

(ii) The remaining 4% of subscriptions allocated to CKH was used by CKH, first to pay its own expenses, and then the balance was distributed annually amongst the participating clubs in proportion to the subscriptions accepted by each club. The sums so distributed were also described as ``commission''.

(iii) The two licensees were participants in a joint venture. CKH contributed through the provision by participating clubs of staff and playing members. CGS furnished the necessary expertise. It performed the central role in the enterprise which was itself a commercial enterprise for profit.

(iv) Though all of the agents appointed by the licensees were registered clubs, not all of those clubs were members of the Registered Clubs Association, the body that incorporated CKH.

(v) The game was one of increasing popularity. North Ryde's receipts in the relevant years were as follows:

1992                136,820.00
1993                244,952.00
1994              1,339,627.00
1995              1,483,831.00

The dispute with the Commissioner

24. Though North Ryde derived commissions from some number of activities conducted on its premises, the most significant source of commission was from keno. The club took the view that, while such proportion of the keno commission as was attributable to non-member spending on keno games was properly to be regarded as income for tax purposes, that proportion that was attributable to member spending was not. Rather it was considered to be a mutual receipt and was so treated by the club for taxation purposes.

25. On 31 March 1998 the Commissioner issued amended assessments to the club for the substituted accounting periods ending 31 December 1992, 31 December 1993, 31 December 1994 and 31 December 1995. Each of those assessments included the commission on keno that the club had considered was subject to the mutuality principle. Additionally, in the case of each amended assessment interest was imposed under s 170AA(1AA) of the ITA Act and a penalty was applied under s 226G of that Act.

26. North Ryde objected to the inclusion of the additional keno commission in its taxable income in each of the four years and claimed, further, that the s 226G penalties should in each instance have been remitted in full. The Deputy Commissioner of Taxation disallowed the objection in respect of each amended assessment. The application to the Tribunal was to review those decisions both in relation to mutuality and to s 226G penalties. For convenience in exposition, these reasons will deal sequentially with the issues of mutuality and penalty.

The Tribunal's decision on mutuality

27. The Tribunal considered that the relevant contractual documents between the parties, and in particular the Agency Deed and the Management Agreement made it clear that what North Ryde received was commission as an agent of the joint venturers, CKH and CGS. That documentation reflected a very real working arrangement which was managed and conducted in accordance with its recorded terms and which resulted in substantial profits to all concerned. It was not a sham arrangement.

28. In its totality the enterprise was one involving, and was negotiated between, arm's length or external parties who were CGS (unquestionably) and the Minister (arguably). Both of these played important roles in the arrangement. What North Ryde received was keno income as part of an enterprise in which external parties were involved. It did not receive back its own (or its members) moneys as surplus. It received remuneration for its part in the enterprise measured by reference to subscriptions accepted by the club. The Tribunal emphasised that even though North Ryde in fact retained 10% of subscriptions it received, it did so as a matter of administrative convenience only, that 10% having and retaining the character of commission paid to an agent.

The appeal

29. The central question raised by the appellant in challenging the Tribunal's decision is whether the 14% of subscriptions allocated to CKH by the licence represented contributions from participating clubs to a common pool from which expenses were to be met and distributions of surplus made in circumstances

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where the mutuality principle applied, or whether those subscriptions represented trading receipts of CKH.

30. Recognising that North Ryde's receipts came in two different ways - the one via the 10% retentions of subscriptions from players; the other (near 4%) by way of an annual distribution from CKH - two consequential questions require resolution. The first, is whether the 10% retentions of subscriptions that CKH permitted North Ryde to make were to be characterised as merely appropriations by CKH of part of a ``mutual surplus'', or whether the amounts retained were trading receipts of North Ryde.

31. The second question is whether the annual distribution to North Ryde was to be characterised as a distribution of part of a mutual surplus (after payment of expenses), or whether it was a trading receipt of North Ryde.

32. The appellant contends that the Tribunal erred in law in deciding both of those consequential questions adversely to it.

33. The appellant's case, it should be emphasised, is a quite particular one. It does not rely upon there being a common fund of all of the subscriptions derived by clubs from club members and accounted for by the clubs to the licensees. Rather, reflecting the allocation prescribed in the licence, it is contended that the common fund is limited to the 14% apportioned to CKH. A consequence of its so ``partitioning'' one component of the overall arrangements for the conduct of keno, is that the only relationship North Ryde seeks to make relevant in its appeal is that of the clubs and CKH in relation to CKH's subscription entitlement. CGS is to be treated as a stranger to that relationship.

34. Likewise, the appellant's case does not involve any direct consideration (a) of the relationships between keno subscriber-members and the club-agent and the two licensees: cf
Petranker v Brown [1984] 2 NSWLR 177;
Brown & Anor v Petranker (1991) Aust Torts Reports ¶81-088; (1991) 22 NSWLR 717 and (b) of the possible significance of those relationships in this matter. Nonetheless the appellant's case necessarily is built, not only around subscribers and subscriptions as such (as the alleged common fund results from an apportionment of ``[a]ll subscriptions received by the Licensees or an Agent'': Licence, cl 5(a) (emphasis added), but also around the status of the subscribers as club members or non- members (the subscriptions of the latter being conceded to be outside the mutuality principle for tax purposes).

35. Further, the appellant does not rely upon any principle of trust law in seeking to make out its case, although it has suggested (a) that the subscriptions received by a club were not held on trust for the licensees; (b) that the moneys accounted for by a club to CGS were that club's own money; but (c) the moneys so received by CGS were held by CGS on trust for itself and CKH (after payment to the Keno Prize Fund account and of duty).

The applicable principles

36. The particular issue of characterisation raised by the unusual circumstances of this case is such that little purpose would be served by a lengthy consideration of the case law on the mutuality principle and the varying contexts in which it may be applied. Save in one respect, there is agreement between the parties on the frame of the principle to be applied in this appeal.

37. It may be accepted both that the expression the ``mutuality principle'' is a convenient one, though ``the situations it covers are not in all respects alike'':
Fletcher v Income Tax Commissioner [1972] AC 414 at 421; and that ``the concept of mutuality has not been definitively delineated'':
FC of T v Australian Music Traders Association 90 ATC 4536 at 4538; (1990) 94 ALR 407 at 409. Nonetheless, the following is well enough established: (i) Where a number of people associate for a common purpose and contribute to a common fund in which they all are interested, any surplus of those contributions remaining after the fund has been applied to the common purpose that is then distributed to the contributors, is a return of funds and not income or profit:
Social Credit Savings & Loans Society Ltd v FC of T 71 ATC 4232 at 4238; (1971) 125 CLR 560 at 571ff;
Sydney Water Board Employees' Credit Union Ltd v FC of T 73 ATC 4129 at 4134; (1973) 129 CLR 446 at 455ff. (ii) The principle may apply to contributions made and distributions received where the persons who so associate and contribute have incorporated to effectuate their common purpose, provided the company can properly be treated as an entity for their convenience: Social Credit Savings and Loans Society, at ATC 4238; CLR 571; Sydney Water

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Board Employees' Credit Union Ltd
; at ATC 4135; CLR 457;
Liverpool Corn Trade Association v Monks [1926] 2 KB 110.

38. Later in these reasons we will refer to one particular possible application of the principle. This relates to the receipts derived by an incorporated club that arise from services and facilities provided or made available to its members.

39. The one matter of legal principle on which there is disagreement between the parties relates to the respondent's submission that for the mutuality principle to apply, the common fund must be owned or controlled wholly by the contributors and that if it is owned or controlled by anyone else the principle can have no application. This submission is founded upon a general proposition stated by McTiernan J in
Revesby Credit Union Co-operative Ltd v FC of T (1965) 112 CLR 564 at 574-575. While contending that the authority cited does not, on analysis, support the proposition advanced, the appellant submits that the proposition is irrelevant in any event to the arrangements in this case. For reasons given below, it is unnecessary to express any view on the correctness of the respondent's submission.


40. The appellant's case, limited as it is to a consideration of the relationship of the participating clubs and CKH, has a certain simplicity. It starts with the proposition that CKH was a mutual body adopted as a ``convenient agent'' to represent and conduct the game of keno on behalf of registered clubs in New South Wales. Amounts received by or on behalf of it were contributions by participating clubs, the objective or outcome of which was not profits, but merely to cover expenditure and to return any surplus to the members of the group of participating clubs. The amounts retained or distributed to the clubs did not represent income. They came from a non-taxable surplus available to CKH and do not represent the proceeds of any trading relationship between the clubs and CKH.

41. The reference to the payment being of a ``commission'' in the documentation and, in particular, in the Agency Deed was no more than a convenient label. The annual distribution clearly was not, and could not have been, a payment by way of commission. The Agency Deed limited any commission payment to 10% unless a higher percentage was approved by the Minister. The 10% of subscriptions retained by the clubs came from CKH's 14% share. Though the Agency Deed described the 10% as commission for services, the relationship between the clubs and CKH was not of an arm's length and trading character - CKH, as the Tribunal said, was ``clearly the agent of the clubs''. The retentions by the clubs were not distributions of profit to them or trading receipts derived by them. The provision for payment of commission was no more than a mechanism for the return to the clubs of their share of the anticipated surplus from contributions. They became entitled to their share of any surplus on their players' subscriptions, not because they performed services, (which in a sense they did), but because CKH existed for their benefit. CGS, though a licensee, was in substance the provider of technical services to the clubs for a fee. Its purpose was to operate the game on behalf of CKH which represented the clubs.

42. The respondent, for its part, contends that if there was a common fund, it was not the amount equal to 14% of subscriptions allocated to CKH. Rather it was what was left after the prize money had been removed and put into the prize fund. That fund was not owned or controlled by the participating clubs because of the interest of the Minister and of CGS in it. Satisfying the entitlements of the Minister and of CGS could not be said to be simply expenses of that common fund. The Minister and CGS had an interest in it and CGS, moreover, had control and management of it. Insofar as CKH and CGS were concerned, the subscriptions were received by them as co-principals from their agents, the participating clubs. The contributions were made in effectuation of the purpose of having the joint venturers (CKH and CGS) conduct keno in participating clubs, the clubs' participation in the effectuation of that purpose being via agency agreements with the venturers under which they were remunerated for services rendered. The word ``commission'' in the Agency Deed was apt to describe what North Ryde received. It was not an inappropriate label in the particular circumstances:
JB Chandler Investment Co Ltd v FC of T 93 ATC 5182 at 5189-5190; (1993) 47 FCR 588 at 598. The venturers were acting with a view to mutual profit.

43. Insofar as the 4% annual distribution to the clubs was concerned, it was merely a bonus

ATC 4304

or incentive paid to the participating clubs. They had no entitlement to it.


44. In Sydney Water Board Employees' Credit Union Ltd (at ATC 4131; CLR 450) Barwick CJ observed:

``... The description `mutuality principle' is used, unfortunately as I think, to express the reason for the conclusion that the return to a taxpayer of a share of the surplus of a fund to which he has contributed in common with others after its use for a purpose agreed between them is not income. There is, in my opinion, no independent principle involved in reaching such a result and the description of mutuality is apt to be misleading. The creation of such a fund, its intended use and the repayment of a surplus or unused amount to the contributors will have their origin in agreements governing the amount of contribution, the purpose for which the fund may be employed, and the occasions for and the extent of any refunds. What mutuality there is, is to be found in those agreements and, in some instances, in the purpose for which the fund is to be used, ie for some common benefit.''

45. The very distinctive feature of the arrangements governing the conduct of keno and the respective roles, rights and responsibilities of those engaged in it during the period of present relevance is that those arrangements were substantially mandated by the statutory and administrative umbrella under which they were made.

46. Under the Lotto Act only a licensee could conduct the game of keno: s 3; though the Act contemplated that, in relation to a licensee, agents could be appointed or approved by the Minister administering the Act and that commissions could be paid to them. Subscription to a game had to be paid for before or at the time the subscription was made: s 12B; those subscriptions were to be ``received'' by the licensee and out of them were to be paid sums equal to prescribed percentages of the subscriptions both to constitute a prize fund and to pay the Minister as duty: s 13.

47. The Lotto Act itself did not expressly mandate the tie between the game keno and registered clubs in New South Wales, though as the parliamentary debates at the time of the 1988 keno amendment made plain, the game was then intended to be run by the registered club industry and to its financial advantage. The manner in which that tie was secured was through the licensing power given the Minister. The party co-licensed by the Minister with the principal interest in the subscriptions derived from participation in the game was CKH. The company was a not-for-profit subsidiary of the Registered Clubs Association and, for a time at least, appointment to its board required ministerial approval: Articles of Association, Art 80A. As will later be indicated, CKH's Memorandum of Association ordained that it promoted etc the provision of keno to registered clubs. Similarly CKH's licence limited to ``registered clubs'' the agents that could be appointed by the licensees (subject to ministerial approval): Licence cl 2(b).

48. It is noteworthy that CKH's licence defined an agent as a club approved ``to accept subscriptions for games of keno'' (emphasis added). Given the terms of the Act to which we have referred, that acceptance necessarily was on behalf of the Licensees: s 3 and cl 4(c)(ii) of the Licence. See also cl 3.1(d) of the Management Agreement.

49. Insofar as concerned the benefits to be derived from the conduct of the game, the Act ordained that a Prize Fund be created and duty be paid in sums later set by the Licence. The license, in turn (a) recognised that it was the Minister who prescribed what a subscriber would be charged to enter a game: cl 2(x) ``subscription''; see also Lotto Act, s 6(1)(i); (b) ordained by reference to sums equal to percentages of subscriptions received the returns to be derived by CKH and CGS from the conduct of the game: cl 5; and (c) by subjecting the terms of appointment of agents to ministerial approval, regulated the remuneration of clubs as agents: see also Lotto Act s 6(1)(d).

50. The intendment of the scheme so structured was that, if an individual club wished to have the licensees CKH and CGS make the game of keno available to its members at the club's premises, it could (subject to ministerial approval) enter into an agency arrangement with the licensees. In consequence of that arrangement (i) subscriptions could be accepted at the club's premises, thus allowing subscribers to deal with CKH and CGS at the club; (ii) the club would provide agency services to the licensees; and (iii) the club would receive both facilities and commission

ATC 4305

from the licensees for conducting the agency for the licensees.

51. When one turns to the agreements entered into and instruments made to carry the scheme into effect, they reflected (though with some minor inconsistencies) the characteristics of the scheme. The Management Agreement between the licensees (the entry into which was prescribed by the Licence itself), while evidencing their separate responsibilities in the conduct of the game under the licence and their separate entitlements to the rewards allowed them by the licence, did not - and could not - in any way qualify their status as licensees. It provided for the creation of the Keno Agency Deed under which all agent clubs would be appointed. And it contemplated that out of its receipts CKH would pay agents not less than 10% of subscriptions by way of commission. The Agency Deed authorised, under the Lotto Act, the conduct of a keno agency at the premises of an agent-club. And it secured to the agent a 10% commission payable by CKH. Importantly, and consistent with the game being conducted by the licensees, the Deed provided for the agents receipt and accounting for to the Licensees of all moneys received.

52. There is some controversy between the parties as to the extent of the agency relationship between a club and the licensees contemplated by the Act and licence, and created by the Agency Deed and rules. However, an agency permitted by the licence is an agency ``to accept subscriptions for games of keno'': cl 2 (emphasis added); and the ``Agency'' is the place at which the agent is ``permitted to accept subscriptions''. It is in our view clear that for the purpose of ``accepting subscriptions'', a club is the agent of the licensees: see Lotto Act ss 2(1), 13; ``agent'' in Licence cl 2(b) and also 4(c)(ii); Management Agreement cl 3.1(d); Agency Deed cl 3.1(j); and see generally
South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 at 645-647. The allegedly inconsistent provision in the rules that deem an Agent to be the agent of the subscriber (Rule 7(i)) does not have the consequence that subscriptions are not received and accepted by the clubs as agent for the Licencees.

53. For the purposes of this appeal it is unnecessary to further unravel the bases - ie as trustee or on a debtor-creditor account - upon which (i) North Ryde received and accounted for receipts to CGS; and (ii) CGS received subscriptions for the Licensees, the Minister and the Prize Fund. It is sufficient for present purposes that a participating club accepts and receives subscriptions as agent for and on behalf of the licensees and not in its own right.

54. The focus of the appellant's submissions, as already noted, is limited to the relationship of North Ryde and CKH. In so doing it has artificially sought to create an environment in which it can plausibly assert a role for the mutuality principle.

55. The formal relationship that existed between the club and CKH arises by virtue of each being party to the Agency Deed. North Ryde was not a member of CKH; CKH was not a trustee for the clubs (though the speculative submission was made at least to the Tribunal that CKH may have been a constructive trustee of its assets for the participating clubs). CKH clearly was formed and was intended to act in the interests of registered clubs in promoting etc the game of keno. In performing that function it may be able to be said, loosely, that it was doing so in the interests and for the benefit of the participating clubs. However, that aspect of CKH's activities cannot alter the agency capacity in which participating clubs receive subscriptions.

56. If it be suggested that CKH was the ``convenient agent'' of: Sydney Water Board Employees' Credit Union Ltd, at ATC 4135; CLR 457; or ``entity for the convenience of'': Social Credit Savings and Loans Ltd, at ATC 4238; CLR 571; the participating clubs, the descriptions do no more than proffer a label for the licensing and agency relationship envisaged by the Lotto Act. What the descriptions do not do is reflect the actual character of the relationships and dealings of the participating clubs and the licensees. One must look to the Lotto Act, the licence, the Agency Deed and the Management Agreement to determine those matters.

57. The final comment one should make of the alleged CKH-club relationship, is that CKH did not exist simply for the benefit of the participating clubs from time to time. Its objects extended to promoting and supplying the game to all of the registered clubs of New South Wales.

58. When the functions and dealings of all of the relevant actors who engaged in the playing and conduct of the game of keno are analysed -

ATC 4306

the subscribers, the agent-clubs and the licensees - it is erroneous to characterise the manner of participation of the clubs and CKH in the arrangements prescribed by the Act and the Licence as attracting the mutuality principle.

59. It is well accepted that the principle can apply to a club's receipts by way of subscriptions from members and to payments for goods and services provided to members:
Bohemians Club v Acting Federal Commissioner of Taxation (1918) 24 CLR 334; Fletcher v Income Tax Commissioner, above;
Royal Automobile Club of Victoria v FC of T [1974] VR 651. Importantly, though, not all receipts by a club from members or from a third party on account of services or facilities made available to members are necessarily mutual receipts: Royal Automobile Club of Victoria, above. They may be no more than trading receipts. It is the nature of the actual transactions in question, and not the fact that a benefit was received or a service used by members that will determine whether receipts derived are liable to, or are immune from, tax. Where, as in the present case, the service itself was provided to club members by a third party, a close analysis of the actual dealings between member, club and third party must be undertaken when ascertaining whether a club's monetary receipts - whether coming from members or from the third party - are properly to be characterised as mutual receipts.

60. When members paid subscriptions to North Ryde for the purposes of the keno game, they were availing themselves of a service provided at North Ryde's premises. But they were neither making a subscription to North Ryde as a club, nor playing a game operated by or on behalf of North Ryde. They were not ``paying for a mutual service to be rendered by the appellant'': Royal Automobile Club of Victoria, at 660. The members were subscribing to a game operated by CKH and CGS and the subscriptions received by North Ryde were accepted by it as agent of the Licensees. For the purposes of the Lotto Act (s 13) and of the allocation of percentages in the Licence to the individual licensees, etc (cl 5(a)), the source of subscriptions was the subscribers not North Ryde. The amount of each subscription, it should be noted in passing, was not set by North Ryde, nor by the licensees. It was prescribed by the Minister. Even if it were accepted that the subscription moneys received by North Ryde might become its own moneys on receipt (because of the size of the individual receipt, the terms of the agreement, the banking arrangements or the account kept between the agent and principal: cf
Van Rassel v Kroon (1953) 87 CLR 298;
Walker v Corboy (1990) 19 NSWLR 382; Dal Pont, Law of Agency, para 13.7ff (2001)), the moneys the club accounted for to CGS were not subscriptions or contributions being made by it. As explained above they were payments made in consequence of contractual agency obligations. North Ryde can properly be said to have made a keno playing facility available to its members at the club's premises. But the manner in which it did this, and could only lawfully do this - ie via an agency agreement - required that it perform services for the benefit of those who lawfully operated the game (ie CKH and CGS) for which it was provided both facilities, instruction, etc (by CGS) and 10% commission (by CKH). The Licensees, in other words, both facilitated performance of the club's agency and rewarded it for its performance. That agency clearly was not a sham arrangement nor in fraud of the requirements of the Lotto Act. It had its provenance in the statutory scheme (with its licensing and agency arrangement); its terms were approved by the Minister; and its performance brought the benefit by way of commission at a percentage approved by the Minister.

61. Because the appellant has pressed the view, we should indicate that we reject the contention that the true character of CGS's role in the arrangements entered into was that of a contractor which, for a fee, provided technical services to the clubs personified by CKH. CGS clearly was brought into the keno arrangements because an operator was needed. But if that was the explanation for its accession to the joint venture, it did not diminish or qualify its status or function in the arrangements entered into for the conduct of the game consequent upon the grant to it of a licence under the Lotto Act. It was no less a licensee than CKH. And neither could conduct the game of keno independent of the other.

62. It is the case that the commission was paid by CKH. But it was paid as one component element in the Agency Deed as a return for services performed in the agency. Though the 10% on subscriptions was in fact retained by

ATC 4307

North Ryde as a matter of administrative convenience, it was no more than a trading receipt on its part. It was, in our view, an integral part of the agency approved by the Minister and its receipt from CKH cannot be severed from the totality of the agreement itself. Entry into the agency agreement was the prerequisite for North Ryde being able to provide the facility of playing keno to its members. But when members subscribed to the game they did not make payment into a common fund for a particular purpose. Neither did North Ryde do so on their account. Each member played individual games for which individual subscriptions were paid. They were not constituting a fund for a purpose. Their purposes were exhausted in the playing of each individual game: cf Royal Automobile Club of Victoria, at 660-661. Likewise North Ryde was not, along with the other participating clubs, contributing in the relevant sense to a common fund. Providing the ``channel'' for the subscriptions: cf Royal Automobile Club of Victoria, at 661; it was accounting as agent to CGS which, in consequence of the Lotto Act, the Licence, the Management Agreement, and the Agency Deed had its own obligations to discharge in respect of the moneys so received.

63. While we do not consider it useful at all to speak in this setting of a common fund, let alone of one contributed to by the participating clubs which have associated for a common purpose, it can plausibly be suggested either that a notional common fund was created of all of the subscriptions received through the device employed by the Licence in apportioning subscriptions, or alternatively as the respondent suggests, that a notional fund was what was left after the removal of prize money, which was to be divided amongst the Minister, CKH and CGS according to the Licence's formula. But to describe either fund as a common fund does no more than identify what it was that was to be appropriated in accordance with the Licence, either before or after the allocation to the prize fund. It does not assist in any way in attracting the mutuality principle. It merely identifies funds in which parties (not being the clubs) with differing interests could nonetheless be said to be interested. Those funds were neither owned nor controlled by the clubs. Consequently, there is absent the essential element that attracts the mutuality principle; the refund or recoupment by the clubs of what, in substance, are their own moneys contributed by them to the common fund (see Sydney Water Board Employees' Credit Union Ltd at ATC 4131 and 4135; CLR 450 and 456-457). Put simply, there is no return to the clubs on their own (or their members) money. We consider it artificial to segregate CKH's 14% appropriation and to characterise it as a common fund from which surpluses are distributed.

64. We are satisfied then that the Tribunal correctly characterised both the dealing in which North Ryde engaged with the Licensees and the 10% commission it received therefrom. The commission was a trading receipt and no more. There was nothing mutual about it.

65. We are similarly satisfied that the annual distributions paid to North Ryde cannot properly be characterised as mutual receipts. As we have already indicated, we consider that, when subscribers to keno made their individual subscriptions in respect of a game, they were not contributing together to a common fund. They were acting individually, paying an amount prescribed by the Minister and having no greater interest in the subject matter of the payment than the outcome of the game itself. The character of such subscriptions did not change, by virtue of the distinct member-club relationship that also existed between most subscribers and their club-agent, or because the subscriptions were aggregated by the agent in accounting for them to the licensees. They were, after satisfying the statutory and licence requirements relating to the prize fund and the payment of duty, trading receipts of the licensees apportioned between them in accordance with cl 5 of the licence.

66. There is, in our view, nothing in the licence itself to suggest that the allocation made to CKH was intended to be made otherwise than for CKH's own purposes. The scheme of the Lotto Act and of CKH's licence enabled CKH to apply its funds directly to participating clubs through the Agency Deeds. At the relevant times this absorbed 10% of CKH's 14% allocation. Such additional profits as the company possessed could be applied in furtherance of objects 3A(i) and (ii) of its Memorandum of Association. At the risk of needless repetition, those objects were:

  • ``(i) to hold a license under the Lotto Act, 1979 and to implement, supervise, control, manage, maintain, promote and carry on the supply and provision of the game of Keno as

    ATC 4308

    defined in the said Act to Registered Clubs as defined in Section 4 of the Registered Clubs Act, 1976 of New South Wales.
  • (ii) to do all such lawful things as may be necessary incidental or conducive to the objects stated in paragraph (i) above or any of them.''

67. The furtherance of those objects would clearly authorise the making of additional payments by way of bonus to agent-clubs for their participation in keno and in recognition of their subscribers part in generating CKH's profits. But the making of such payments could not properly be characterised as being in substance a return to the agent-clubs of their own (or their members) moneys or of moneys acquired for them by CKH in a representative capacity. It was open to the board of CKH to decide that making annual distributions was an appropriate way to effectuate CKH's purposes. There clearly were also other options open to it. But the distributions so made were not of moneys to which the clubs had antecedent rights arising from contract or from any principal and agent or trustee and beneficiary relationship. Nor did the distributions emanate from a fund to which the clubs had contributed or which they owned or controlled. The participating clubs as such were not able to control the company. They were not members. They did not, as such, control the composition of the board of the company. Further, they could not claim that CKH could only expend its funds for the benefit of the participating clubs from time to time. Clause 3A(i) of the Memorandum clearly authorised otherwise. The company's objects made the registered clubs of New South Wales CKH's constituency. At best the annual subscription could be described as a return on (not of) the members' subscriptions.

68. We do not, then, consider that the appropriation made to CKH by the Licence could be said to have constituted a fund contributed to either by the subscribers or by the clubs, such that a voluntary return of a part of CKH's funds to the agent-clubs could properly be said to constitute a return to them of their own or their members' moneys. We would say additionally of this, that the notion of there being a ``surplus'' on subscriptions that could be returned informally to clubs, sits oddly with a highly regulated game the financial arrangements of which were subject to ministerial control and/or approval, and in which the amount to be paid by way of subscription both was set by the Minister and prescribed the level of return to the interested parties through the percentages employed in the allocation formula in the Licence.

69. Additionally, we do not find it useful to speak of CKH acting in a ``representative capacity'' when deriving its allocation, if this is meant to imply that the participating clubs thereby secured some entitlement to participate in the sums available for annual distribution. It is probably appropriate to describe CKH as a company that existed for the benefit of registered clubs in New South Wales. Consistent with the scheme of the Lotto Act and the terms of its licence, it provided the vehicle that enabled registered clubs to benefit from the game of keno by availing (subject to ministerial approval) of the agency arrangements contemplated by the Act. And its objects included promoting the provision of the game in registered clubs. But what cannot be said accurately of CKH is that it acted as the representative of the participating clubs alone in deriving its returns from its licence. It incurred obligations to those clubs (via the Agency Deeds) which it was required to satisfy out of its own returns. Beyond that its funds were available to be used in furtherance of its objects. They were not held in some representative capacity for the participating clubs. And those clubs clearly had no rights to participate in the funds of CKH in the event of its winding up or dissolution: Memorandum of Association, cl 3B.

70. The Tribunal was correct in characterising the appellant's receipt of the annual distributions as being in the nature of income in the relevant years. They were not mutual receipts.

71. It doubtless would have been possible for the New South Wales legislature to have created a statutory and licensing scheme for the playing of keno which would have enabled participating clubs (a) collectively to have been a licensee and (b) individually to have been able to avail of the mutuality principle in respect of subscriptions attributable to their respective members. It chose a different course.


72. The respondent, in his assessments, imposed penalties at the rate of 25% under s 226G of the ITA Act in respect of the four relevant years of income on the ground that the

ATC 4309

appellant had failed to take reasonable care to comply with the ITA Act and regulations. The Tribunal remitted the penalties in full in respect of the first three years under review and reduced the penalty to 7.5% in respect of the fourth year under review.

73. Relevantly, s 226G provides that where a taxpayer's tax shortfall for a year was caused ``by the failure of the taxpayer or of a registered tax agent to take reasonable care'' to comply with the ITA Act or regulations the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall.

74. The facts found by the Tribunal to be relevant to its decision on penalty may be summarised as follows. From the time keno was introduced in New South Wales it was understood by the clubs, and accepted by the respondent, that revenue from Club Keno was to be treated as subject to the principle of mutuality in the same way as poker machine receipts. In August 1996, after the appellant had lodged its returns in respect of the 1993, 1994 and 1995 years of income and during the course of a tax audit of the appellant's affairs, officers of the respondent first raised the issue of whether the mutuality principle was applicable. By that time disclosure had been made by the appellant to the respondent's officers of full details of keno receipts. When the appellant lodged its return for the 1996 year on 4 October 1996 no formal indication had been received from the Australian Tax Office (``the ATO'') that it proposed to treat receipts from keno as non-mutual receipts for previous periods. Although the appellant was aware that this issue was under consideration its officers were still of the view that it was proper to treat keno receipts as mutual receipts for the 1996 year.

75. During 1997 the respondent negotiated a proposal for a global settlement, which treated keno receipts as taxable income, with advisers to CKH and the Registered Clubs Association. The appellant adhered to its previous view that the receipts were not taxable and did not accept the settlement because it did not agree with the ATO's interpretation of the law. Although the appellant did not seek to settle the matter it fully cooperated by providing all information necessary for the ATO to determine what, in its view, was to be regarded as taxable income derived by the appellant from keno receipts. The Tribunal accepted that during 1997, when there was an ongoing dialogue concerning the ATO global settlement proposal, it would have been ``pointless'' for the appellant to lodge amended returns.

76. On 24 March 1998 the ATO informed the appellant that the audit had been completed and, enclosing adjustments sheets, advised that a culpability component of 25% had been imposed in accordance with s 226G. Assessments for the four relevant years incorporating the penalties were issued on 31 March 1998.

77. In the course of negotiations between the appellant and the ATO for funding for a test case, the ATO advised that the test case litigation panel recognised that there was merit in the appellant's application for funding but preferred to fund applications to the Court, rather than the AAT, because of greater precedent value.

78. The Tribunal, relying on the Treasurer's Second Reading speech and the Explanatory Memorandum in respect of s 226G, appeared to accept that the ``reasonable care'' standard required taxpayers to make a reasonable effort to comply with their tax obligations, commensurate with the taxpayer's circumstances.

79. In considering the appellant's efforts to comply with its tax obligations the potentially adverse findings by the Tribunal were:

  • • as the appellant had obtained legal advice concerning the applicability of the mutuality principle, which was not tendered before the Tribunal, it was entitled to infer that the advice ``would not have been likely to assist the Applicant in these proceedings'';
  • • it was ``imprudent'' for the appellant not to have sought a ruling from the ATO after it had become aware of very real pending problems in mid 1996.

80. The Tribunal, however, was satisfied that no culpability penalty could have been imposed under s 226K on the ground that the appellant's case was not ``reasonably arguable'', which was, in substance, defined in s 222C as a legal argument which was ``as likely or not'' to succeed. In that context the Tribunal concluded that the global settlement acknowledged ``this area of the law is difficult'' and, as the applicant had a reasonably arguable case in respect of all of the relevant years, s 226K could not have applied.

ATC 4310

81. Fairly read, the Tribunal appears to have found that in the second half of 1996, when the appellant was aware that there were reasonable grounds for concluding that the mutuality principle might not apply to keno receipts, it acted ``imprudently'' by failing to seek a private ruling on that matter under Pt IVAA of the Taxation Administration Act 1953 (Cth). The Tribunal concluded [at 2176]:

``In all the relevant years, save the last, I do not think that it can be said that the Applicant did not take reasonable care. Clubs generally treated their Keno income as analogous to poker machine income. They were wrong but they were not in breach of section 226G of the Act. In the last relevant year the position was different. I was informed that in the global settlement the amount paid included a penalty element but the quantum or percentage was not known. It is reasonably possible that it was 5%, in line with other settlements of a comparable nature. In this case, the culpability component should be well below 25% but above 5%. I have decided that 7½% is appropriate.''

82. Save for the failure to apply for a private ruling the Tribunal did not identify any other step that the appellant ought to have taken but did not take, or any step it did take that it ought not to have taken.

83. The private ruling system in Pt IVAA affords an alternative procedure to ascertaining the taxpayer's liability to tax in a past, current or future year of income (s 14ZAH). The ruling may be the subject of the taxation objection procedure (s 14ZAZA and s 14ZAZB) and review (Pt IVC). In the present case the Tribunal accepted that it was only after the appellant lodged its return for the 1996 year that it became aware that the ATO had changed its view from non-assessability to assessability of keno receipts. By that stage the appellant had fully co-operated with the ATO which had been provided with all of the information it required to decide whether the appellant's keno receipts were assessable. The Tribunal considered that in these circumstances it was ``pointless'' for the appellant to lodge an amended return. Even if it were accepted that the appellant's legal advice was not helpful to its case that is to be viewed in the context of the Tribunal's acceptance that that case was reasonably arguable.

84. In all the circumstances we can see no basis for a finding that the appellant failed to take reasonable care to comply with its obligations under the ITA Act or the regulations. The difference of view that had emerged between the appellant and the respondent as to the assessability of the keno receipts was able to be resolved by either the assessment or the private ruling procedures. Each of those procedures was likely to lead, ultimately, to a review of the respondent's decision in the Court. We see no basis, on the facts found by the Tribunal, for its conclusion that the failure to apply for a private ruling constituted a ``failure to take reasonable care'' to comply with the ITA Act or regulations.

85. The error made by the Tribunal in arriving at its conclusion is one of law as the question of whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law:
Hope v The Council of the City of Bathurst 80 ATC 4386 at 4389; (1980) 144 CLR 1 at 7 per Mason J.


86. For the reasons set out above the appeal is to be dismissed, in so far as it relates to the assessability of keno receipts, and is to be allowed, in so far as it relates to penalty. The Tribunal's decision to reduce the penalty to 7.5% is to be set aside and, as the decision to reduce penalty is usually a matter for the Tribunal rather than the Court, it is appropriate to remit that matter to the Tribunal to be determined in accordance with law.

87. As the respondent has succeeded on the substance of the appeal but failed on the penalty issue, it is appropriate to order that the appellant pay 75% of the respondent's taxed costs.


1. The appeal against the decision of the Administrative Appeals Tribunal to affirm the objection decisions under review in relation to the income tax assessed to be due and payable be dismissed.

2. The appeal agains the decision of the Administrative Appeals Tribunal to reduce penalty from 25% to 7.5% in respect of the year ended 30 June 1996 be allowed.

3. The decision of the Administrative Appeals Tribunal to reduce the penalty to 7.5% be set aside.

ATC 4311

4. The matter of penalty to remitted to the Administrative Appeals Tribunal to be determined in accordance wiht law.

5. The appellant pay 75% of the respondent's costs of and incidental to the appeal.

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