Illawarra Suburbs Lawn Tennis Association Limited v. Commissioner of Land Tax (N.S.W.).Judges:
Supreme Court of New South Wales
This is an appeal by the plaintiff pursuant to sec. 35 of the Land Tax Management Act, 1956, as amended, against assessments of land tax made by the Commissioner in respect of the plaintiff's land at Chappel Street, Hurstville. In all, twenty-five assessments were made, one for each of the years from 1957 (when the Act began to operate) and the Commissioner disallowed objections in each case. It has been agreed by counsel that the notice of objection given by the plaintiff to the Commissioner under sec. 35(1) is to be treated in para. 4 as an objection to each of the assessments upon the ground that the land in question was, during the particular year, within the exemption set out in sec. 10(1)(h) of the Act. (The notice of objection included also grounds 1, 2 and 3 which, however, were not relied upon in these proceedings.)
Section 10(1)(h) exempts from land tax:
``land owned by, or in trust for, any club or body of persons, and used primarily and principally for the purposes of cricket, football, golf, bowling, tennis or other athletic sports or exercises and not used for the pecuniary profit of the members of that club or body.''
The evidence shows that the plaintiff company was, on 4 July 1923, incorporated under the Companies Act 1899 as a company limited by guarantee and that it took title to land in Highgate Street, Bexley. In 1924 this land was sold and with the proceeds land was acquired in Chappel Street, Hurstville, being part of Lot 25 DP9591 and being the whole of the land in Certificate of Title Volume 4372 Folio 19. Over the ensuing years the club built upon the land six tennis courts, the last in 1934. It erected in 1928 a paling fence around the property and then seating accommodation for 200 people, shelter sheds and a dressing room. In 1934 it built a clubhouse which contained male and female toilets, a sink, cupboards and shelves and a room for meetings. A licence under the Liquor Act has not been held by the club nor are there any poker machines. In 1947 a caretaker's cottage was erected and thereafter this has been constantly used as a residence for the caretaker.
In 1965 the company caused to be registered Deposited Plan No. 225130 which provided for a subdivision of the land in to Lots 1, 2, 3 and 4. Shortly afterwards the plaintiff sold and transferred Lot 2 to the Illawarra Tennis Club Limited which erected a club house and has conducted a tennis club on the land since then. In 1981 the Metropolitan Water Sewerage and Drainage Board resumed part of Lot 4 in DP225130 and as a result of that resumption a further subdivision plan was registered, Lot 1 being transferred to the Metropolitan Water Sewerage and Drainage Board and Lot 2 being retained by the plaintiff. In the result, the land of the club at the present time comprises Lots 1 and 3 in DP225130 and Lot 2 in DP609102. Three tennis courts and the buildings earlier referred to are situated on these lands. The club land has always been used for the purposes of a tennis club. The courts are used night and day by the members and on occasions they are hired out to non-members.
It is conceded by the Commissioner that for the purposes of sec. 10(1)(h) the land in question was at all relevant times within the expression ``land owned by... any club... and used primarily and principally for the purposes... tennis...'' and that the land upon which the
ATC 4425clubhouse and the caretaker's cottage is erected is to be treated no differently from the land upon which the courts are erected for the purpose of determining whether the exemption applies.
The evidence shows that during the entirety of the club's existence no dividend or payment from the profits of the club has ever been made to any of the members and that there has never been any distribution amongst any of the members of any property of the club. The evidence establishes that the income of the club is and has been, since the incorporation of the company, applied to general running expenses of the plaintiff and that any excess has been added to accumulated reserves and applied from time to time to the improvement of the plaintiff's property and tennis courts. There has not been and is not at the present time any proposal to wind up the club.
The basis upon which the Commissioner contends that the land falls outside the exemption in sec. 10(1)(h) is that, by virtue of the memorandum and articles of association of the company and the provisions of the Companies Acts throughout the period under consideration, the members of the club have always had a legal right to share in a distribution of the club's property on a winding up. This circumstance, the Commissioner claims, prevents the land being treated as land ``not used for the pecuniary profit of the members of that club'' because the potential for the members to share in the distribution of the assets is within the expression ``pecuniary profit'' in sec. 10(1)(h). It is necessary to set out briefly the evidence in this regard and as the articles of association were altered in 1966, it will be necessary to consider their operation both before and after the alteration. It will be seen, however, that for the purposes of this case, there was no difference in operation.
When the company was incorporated in 1923, the relevant Companies Act was the Act of 1899. The memorandum of association of the club which was substantially in the form of Form B of Sch. 3 of that Act stated (inter alia) that the carrying on of a tennis club was an object of the company. The articles of association adopted were also those set forth in Form B to the Third Schedule. Those articles, although providing for a winding up on an extraordinary resolution, made no reference to the disposition of assets in a winding up. That matter was governed by sec. 134(a) of the Act which provided that in a voluntary winding up:
``The property of the company shall be applied in satisfaction of its liabilities pari passu, and subject thereto shall, unless it be otherwise provided by the regulations of the company, be distributed amongst the members according to their rights and interests in the company.''
When the 1936 Act came into operation, winding up was governed by sec. 282 of that Act which was to the same effect. The members of the club were thus entitled to share in the distribution of the assets on a winding up. However, the articles of association made clear that no member of the club might take any profit or acquire any interest in the company's property whilst it was being carried on. Article 23 provided:
``No member of the Association shall have any transmissible or assignable interest (by operation of law or otherwise) in any of the real or personal property of the club nor shall any member retiring from the Association or ceasing by death or other cause whatsoever to be a member of the Association have any claim upon or be entitled to participate in any of the real or personal property belonging to the Association and all his or her interest shall survive accrue and belong to the Association.''
Article 24 provided:
``The whole of the profits (if any) or other income of the club shall be applied in promoting its objects and the payment of any dividend to the members is prohibited.''
I pause to mention here that even if these articles or either of them could be held not to be limited to the period whilst the club was carrying on business, and to be apt to apply in a winding up so as ostensibly to prevent members sharing in the club's assets, they would none the less be inoperative because they would be an attempt to exclude the express provisions of sec. 134(a) of the Act of 1899 and sec. 282 of the Act of 1936 (
Re Merchant Navy Supply Association, Ltd. (1947) 1 All E.R. 894;
Liverpool and District Hospital for Diseases of the Heart v. A.G. (1981) 1 Ch. 193).
In 1966 there was an alteration to the articles of association. By extraordinary resolution
ATC 4426passed on 8 September 1966 the existing articles were deleted and fresh articles adopted. The Companies Act 1961 now governed the matter of the rights of members in a winding up, and sec. 264 of that Act was to the same effect as the corresponding sections of the earlier Acts. Article 1 of the new articles of association adopted Table A so far as it was not otherwise provided and it is to be noted that art. 112 of Table A was not excluded. That article deals with the powers of the liquidator in a winding up in relation to the valuation and distribution of assets of the company amongst the members. However, notwithstanding that it was plainly contemplated that the members should share in a winding up, the fresh articles, like their predecessors, came down firmly against any right in the members, whilst the company was being carried on, to any share of the profits or the assets of the club. Article 7 provided:
``The income and property of the Association whencesoever derived shall be applied solely towards the promotion of the objects of the Association and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to or amongst the members or the Association provided that nothing herein contained shall prevent the payment in good faith of interest to any such member in respect of moneys advanced by him to the Association or otherwise owing by the Association to him or the payment of remuneration to any officers or servants of the Association or to any Member of the Association or other person in return for any services actually rendered to the Association or any allowance of an honorarium to any Member in respect of special honorary services rendered or reimbursement of a Member for out-of-pocket expenses incurred by him on the Association's account.''
Article 22 provides:
``No Member of the Association shall have any transmissible or assignable interest by operation of law or otherwise in any of the real or personal property of the Association, nor shall any Member retiring from the Association or ceasing by death or any other cause whatsoever to be a Member of the Association have any claim upon or be entitled to participate in any of the real or personal property of the Association and all his right, title and interest in the Association shall survive accrue and belong to the Association.''
Once again it can be said that if these articles or either of them is to be treated as not limited to the period when the company was carrying on its business and is considered apt to apply to a winding up, then, like their predecessors in the earlier articles, they would be inoperative because they would be an attempt to exclude the express provisions of sec. 264 (Re Merchant Navy Supply Association, Ltd.; and Liverpool and District Hospital for Diseases of the Heart v. A.-G.).
The articles of association to which reference has been made, taken with the relevant provisions of the Companies Acts over the period from 1957 thus, in my view, make plain that over the whole period there has always been a right on the part of members of the club to share in a distribution of the assets of the club upon a winding up, but that equally there has been no right at any time in the members to receive any profits or acquire any interest in any of the club's property whilst it was being carried on as a tennis club. The only other fact that needs to be mentioned is that the club's net assets as at 18 December 1984 totalled $327,777.89.
If sec. 10(1)(h) is to be construed as exempting a club which during the particular year of land tax has, as here, complied with its memorandum and articles which forbid payment of profit or distribution of property to members within the club, the plaintiff should succeed. But if, on the other hand, sec. 10(1)(h) intends that no exemption shall apply unless the members are excluded, both whilst the company operates and when it is wound up from the sharing in any profits which the company may make, then the Commissioner should succeed. I have referred to the evidence which makes clear that surplus profits of the club are to go to accumulated reserves and to be applied to improvements of the club property and the tennis courts and this, of course, would mean that in a winding up the members could get the benefit of the appreciation of the property from such expenditure - akin to profit of a capital nature.
Cabramatta Golf Club Ltd. v. Commr of Land Tax (N.S.W.) (1977) 7 A.T.R. 659, the
ATC 4427construction of sec. 10(1)(g)(iii) and sec. 10(1)(h) was considered by Meares J. One of the objects set out in para. 2(bb) of the memorandum was ``to distribute any of the property of the Company for the time being in specie among the members''. Subsequently the memorandum was altered and a new paragraph inserted:
``The Income and Property of the Club whencesoever derived shall be applied solely for the promotion of the objects of the club as set forth in the Memorandum of Association and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise howsoever by way of profit to the members of the club...''
Paragraph 5 of the Memorandum of the Club provided:
``If upon the winding up or the dissolution of the Company there remains after satisfaction of all debts and liabilities any property whatsoever, the same shall be disposed of in such manner as shall be determined by a resolution passed by a majority of not less than three-fifths of the members of the Company entitled, according to the Articles of Association of the Company for the time being to vote...''
This provision thus gave the members power to provide for distribution of the assets amongst the members.
Meares J. held that since the whole or part of the property of the company, including any profits, could have been distributed by the club to its members up until the time when the memorandum of association was altered, the club was ``carried on for pecuniary profit'' up until that time and thus not within sec. 10(1)(g)(iii). Accordingly land tax was payable. His Honour, however, held that the alteration made to the memorandum had the effect of preventing the members from receiving any pecuniary profit:
``while the club was being carried on and I do not think that paragraph 5 of the Memorandum of Association takes away the exemption in s. 10(1)(g)(iii) which speaks, as I understand it, of a profit situation whilst the club is carried on and not after it ceases to exist.''
Earlier in his judgment his Honour had referred to the remarks of Sugerman J.A. in
Theosophical Foundation Pty. Ltd. v. Commr of Land Tax (N.S.W.) (1966) 67 S.R. (N.S.W.) 70, when that learned Judge said at p. 85, in reference to sec. 10(1)(g)(iii):
```And some guidance is to be had from the general context of s. 10. I agree with Mr. Fox that in general context the exclusion of pecuniary profit refers to the pecuniary profit of individuals. The object is to accord exemption to those societies, clubs and associations, and institutions and bodies of various kinds, whose profits, if any, are applied solely to the advancement of their objects and cannot find their way into the pockets of individuals. For instance, it is not, I think, required that a club, in order to gain exemption, should be carried on at a loss as regards its trading activities with its members or the paid services which it renders them, or should refrain from such activities and from charges to its members and rely for its support entirely upon membership subscriptions and donations...
In the present instance, in my opinion, it appears that the profits which the respondent company derives from its commercial letting of part of Savoy House cannot find their way into the pockets of individuals; the respondent company, that is to say, is not `carried on for pecuniary profit' in the relevant sense.' (The emphasis is my own.) The abovementioned passages were concurred in by Heron, C.J. and McClelland, J.A.''
Meares J. in dealing with sec. 10(1)(h) of the Act stated at p. 662 that in his opinion the observations of Sugerman J.A. applied also to that section, and held that the alteration to the memorandum preventing distribution or right to profit whilst the company was carried on operated to exempt under sec. 10(1)(h) the land upon which golf was played (as distinct from the clubhouses).
The decision in Cabramatta Golf Club Ltd. v. Commr of Land Tax (N.S.W.) is, in my view, a decision directly in favour of the proposition that, provided the articles exclude the members from any right in the profits or assets of the company whilst it is being carried on, sec. 10(1)(g)(iii) and 10(1)(h) will not be prevented from applying merely because the
ATC 4428memorandum or articles, or the operation of the Companies Act, sec. 264 may permit the members to share in a distribution of the club's assets in a winding up.
The Crows Nest Club Ltd. v. Commr of Land Tax (N.S.W.) 78 ATC 4408, the construction of sec. 10(1)(g)(iii) again came under scrutiny. In that case the memorandum and articles of the club authorised the distribution of assets amongst members. The club, however, acting under another article which conferred power so to do, made a rule that provided that the profits and other income of the club should be applied solely for the promotion of the objects of the club, and that no part thereof should be paid or transferred by way of dividend, bonus or otherwise to any member of the club. At no time were any profits or distributions made to any members. The Court of Appeal held that the rule could not cut down the effect of the memorandum and articles or take away those rights which were given to the members under the memorandum and articles and that, as the club had the legal power to distribute profits or gains between members, it was not a club ``not carried on for pecuniary profit'' within sec. 10(1)(g)(iii). In arriving at this conclusion, express reliance was placed upon the remarks of Sugerman J.A. in Theosophical Foundation Pty. Ltd. v. Commr of Land Tax (N.S.W.) which are set out above. Hutley J.A., with those judgment Moffitt P. and Glass J.A. agreed, stressed the significance of the requirement that the object of the section is to ensure that the profits ``cannot find their way into the pockets of individuals,'' and he went on to say:
```Cannot' has nothing to do with what has been done, and `cannot be done' has nothing to do with what is done; and what can or cannot be done can only be found by reference to the powers and authorities found in the instruments which create the corporation.
Counsel for the respondent contended the passage did not exclude the reference to the way in which the club actually carried on its business. In my opinion it does. Any other contention ignores the significance of the word `cannot', which was not put in lightly. This is a fundamental passage of the judgment directed to a fundamental issue. In my opinion, as both counsel have relied upon this judgment and it has been accepted as correct, it concludes the issue. That was the view of Meares, J. in Cabramatta Golf Club Ltd. v. Commr of Land Tax (N.S.W.) (1977) 7 ATR 659 and in that regard, in my opinion, his Honour was correct.''
I find it impossible not to conclude that it was the opinion of the Court of Appeal that the decision of Meares J. in Cabramatta Golf Club Ltd. v. Commr of Land Tax (N.S.W.) was correct at least so far as it related to sec. 10(1)(g)(iii). The case was directly before the Court and it could hardly have escaped their Honours' attention that Meares J. had restricted the operation of sec. 10(1)(g)(iii) to the period whilst the company was actually carrying on its business, that is before the period of winding up, if one occurred. Their Honours can hardly have been unaware that the very remarks of Sugerman J.A. to which Hutley J.A. referred could be used as the foundation for a contention that if excess profits were not distributed among members but accumulated and applied to club improvements they would in that way be received by members sharing in the distribution of assets in a winding up. In these circumstances it seems to me that the proper course for me to take is to regard myself as bound to hold that Cabramatta Golf Club Ltd. v. Commr of Land Tax (N.S.W.) so far as it relates to sec. 10(1)(g)(iii) has been approved in the Court of Appeal.
The question which then remains to be answered is whether the same construction should be put upon sec. 10(1)(h) as had been put upon sec. 10(1)(g)(iii). Section 10(1)(g)(iii) deals with the land on which club buildings are erected - I use the word ``club'' here to include a society or an association or a body - whilst sec. 10(1)(h) deals with the land upon which sporting activities and exercises are conducted, and no reason in logic or commonsense presents itself for making a distinction between the interpretation of the sections so far as concerns the significance to be given to the requirement that in each case the members shall be shut out of all right to ``pecuniary profit''. In my view, the expression ``not used for the pecuniary profit of the members of the club'' in sec. 10(1)(h) is to be given the same meaning as the expression ``not carried on for pecuniary profit'' in sec. 10(1)(g)(iii). What is to be looked for in each case is whether the club has in law and in fact created the circumstance that the members
ATC 4429cannot and do not whilst the club body is being carried on receive any pecuniary benefit from the profits or property of the company (
Australian Kafarsghab (Lebanese) Association Ltd. v. Commr of Land Tax (1976) 6 A.T.R. 650;
F.C. of T. v. Royal Sydney Golf Club (1943) 67 C.L.R. 599; Theosophical Foundation Pty. Ltd. v. Commr of Land Tax (N.S.W.)). Just as the words ``carried on'' confine the operation of sec. 10(1)(g)(iii) to the time during which the club is carried on for whatever its purposes may be, so the expression ``not used for...'' in sec. 10(1)(h) confines the operation of the section to the period during which the land is used for the relevant sporting activity or exercise referred to in the earlier part of the section i.e. confines it to the period during which the club is carried on as such. Upon a winding up a company ceases to carry on business except as may be beneficial for the winding up (Companies Act 1899, sec. 132, Companies Act 1936, sec. 263, Companies Act 1961, sec. 256). It may, of course, be said that it is anomalous that clubs owning land and carrying on sporting activities thereon should be free of land tax when worthwhile financial gain may be enjoyed by members if a winding up occurs, but as against this, it may be thought that winding up is but a contingency, and the essential matter from the point of view of taxation of land, is that clubs do not, whilst their members are enjoying their facilities, permit the members to receive any profit or any share in the assets. The latter is the view adopted by Meares J. in Cabramatta Golf Club Ltd. v. Commr of Land Tax and the Court of Appeal in Crows Nest Club Ltd. v. Commr of Land Tax so far as sec. 10(1)(g)(iii) is concerned and unless that view is changed, any other view of sec. 10(1)(h) would create an obvious anomaly.
In the result then the appeal succeeds. The plaintiff's objection number 4, set out in the notice of objection dated 8 August 1984 is allowed in respect of all the assessments set out in the Schedule to the notice of objection. The defendant is to pay the plaintiff's costs.