Cronulla-Sutherland leagues Club Limited v. Federal Commissioner of Taxation

Hill J

Federal Court

Judgment date: Judgment handed down 15 September 1989.

Hill J.

The hard-fought matches run under the auspices of the New South Wales Rugby League (``N.S.W.R.L.'') are the modern-day equivalent of the gladiatorial sports of ancient times. Behind the gladiators of ancient Rome lay an infrastructure borne by the Roman State; behind professional rugby league lies the rugby league club. The insatiable needs of the football clubs for finance to buy or keep the top players has resulted in the development of a number of clubs known as ``leagues clubs'' associated with the football clubs and organised and run by loyal supporters of the football clubs. These leagues clubs together with advertising sponsorship form the backbone of the financial support of the football clubs. One such football club is the Cronulla-Sutherland District Rugby League Football Club (``the Football Club'') which fields a team with some success in the Winfield Cup competition (the N.S.W. Premiership Rugby League Football Competition) albeit that it has just been defeated in the sudden death semi-finals ironically by Canberra. Its associated club is the Cronulla-Sutherland Leagues Club Limited, the applicant in the present proceedings.

The issue between the parties is whether the income of the applicant in the income tax years 1979-1982 and 1985 and 1986 is exempted from tax by virtue of the provisions of sec. 23(g)(iii) of the Income Tax Assessment Act 1936 as amended (``the Act'') which section operates to exempt:

``the income of a society, association or club which is not carried on for the purposes of profit or gain to its individual members and is...

  • (iii) a society, association or club established for the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants;''

The Football Club, now an incorporated company limited by guarantee existed as an unincorporated body from approximately 1963. Prior to that year there had, for a number of years, been three junior rugby league clubs in the Sutherland Shire being the Cronulla-Caringbah Junior Rugby League Football Club, Sutherland-Woronora Junior Rugby League Football Club and Como Junior Rugby League Football Club each of which competed in the junior football competitions organised and administered by the St George District Junior Rugby League.

The idea for the establishment of the applicant originated with Mr Poulter who gave evidence before me. Mr Poulter had played competitive football since 1945 and in 1956 was one of the accountants working as an auditor of the then Port Hacking Business Men's Club in Caringbah. In that year the premises occupied by that club had become vacant and Mr Poulter formed the view that these premises could be used for a leagues club to raise money for the Cronulla-Caringbah Junior Rugby League Football Club and ultimately to support a team which could compete in the competitions run by the N.S.W.R.L. To that end he had discussions with a number of current and past players and officials with the Cronulla-Caringbah Junior Rugby League Football Club and there was founded the Cronulla-Caringbah leagues club limited. The name of the applicant was changed in or about 1967 to its present name.

The control of the applicant has always remained in the hands of persons interested in promoting the Football Club. All the directors of the applicant have since the formation of the present football club in 1963 members of that club.

the applicant was thus incorporated on 5 June 1957. Its memorandum of association contained a large number of ``objects'', most more appropriately described as powers. Relevant for present purposes are the following:

ATC 4938

``3. The objects for which the company is established are:

  • (a)(i) to establish equip furnish and maintain a club for the benefit of members and to promote social, sporting and educational undertakings for the advancement and benefit of members.
  • (a)(ii) to provide any or all of the facilities necessary to further the aims of the Cronulla-Sutherland district rugby league football club and the Cronulla-Caringbah Junior Rugby League Football Club and give whatever assistance the general committee may consider convenient for this purpose.
  • (b) to purchase and take on lease or otherwise acquire land at or near Caringbah or any other place that the company may deem expedient and provide a Club-house and/or Club-houses pavilions lavatories bathrooms refreshment rooms billiard rooms and other conveniences in connection therewith and to permit the use of the same by members and other persons on such terms as the Company shall determine.
  • (c) to hold matches games and competitions and offer and grant or contribute towards the provision of prizes, awards and distinctions.
  • ...
  • (e) to make buy sell and deal in all kinds of apparatus and all kinds of provisions either liquid or solid required by persons frequenting the company's property and premises.
  • (f) to purchase for cash or on terms and to take on lease or otherwise acquire any easements buildings or property real or personal which may be requisite for the purposes of or capable of being conveniently used in connection with any of the objects of the company.
  • (g) to raise money by entrance and other fees and subscriptions or in any other manner and to grant any rights and privileges to subscribers.''

In 1963 a local Cronulla-Sutherland team was included in the inter-district competition. A committee was formed to recruit players and coaches which committee thereafter continued to organise the matches and administer the teams. Out of this committee there grew the unincorporated body that became known as the Cronulla-Sutherland District Rugby League Football Club. It was separate from the junior football league.

Since the formation of the leagues club in 1957 the number of junior clubs based in the Sutherland Shire grew from three in 1957 to 12 in 1963. Around that year the N.S.W.R.L. consented to the Sutherland Shire teams organising themselves into their own junior football competition rather than competing in the St George District Junior Football League Competition. The funds for organising the Cronulla-Sutherland District Junior Rugby Football League emanated from the applicant.

In 1966 the Football Club applied to become a participant in what is now known as the ``Winfield Cup Premiership Competition'', the first grade competition organised and administered by the N.S.W.R.L. The submission to the N.S.W.R.L. At that time emphasised the assured financial capacity of the football club to build and support three grades of district football plus the full range of junior and school operations. Under the heading ``Finance'' in that application appears the following:

``The directors of Cronulla-Caringbah Leagues Club Limited uniquivocally [sic] state in the enclosed correspondence, the capacity and intention of the Club to supply finance adequate to develop and support a first grade district club, plus a full junior structure down to Schools Liaison levels. Corroborative evidence of capacity to do so is tendered in correspondence from the Club's auditors.

Cronulla-Caringbah Leagues Club at all times has acted in full accord with its primary objective of providing the facilities necessary to further the aims of the Cronulla-Sutherland DRLFC as evidenced in its football budget of $30,000 for the 1966 season.

With this level of support, the Cronulla-Sutherland DRLFC already is on record with an offer to take over from St George Club full financial and administrative responsibility for operation of the Cronulla-Sutherland Junior League, on

ATC 4939

which request a decision has been deferred. The club already has taken over from St George all responsibility for schools promotion and liaison within this District, including promotion of a first district All-Schools Knockout Carnival for 1966, with Mr Ken Kearney handling schools liaison activities.

the correspondence tendered and the detail listed provided clear evidence of financial backing for the proposed first division club and an adequate recognition of the levels of expenditure this backing will entail. Caringbah Leagues Club Limited and the District Football Club have a clear appreciation of this vital element of its first division planning.''

Supporting the application was a letter from the then secretary of the applicant addressed to the Football Club assuring that ``the necessary financial backing to operate your Club and its associated junior league and school boy liaison will be available''. By the date of this application there were 149 junior teams playing in the Sutherland Shire with 2,745 players.

the degree of financial commitment required of a rugby league club participating in the Winfield competition by 1988 was revealed in the N.S.W.R.L.'s guidelines for entry to the competition of that year. These reveal that a club had in that year to demonstrate:

``1. Finance - a minimum income of $900,000.

2. Administration - an ability to employ in a full-time capacity (that is, separate to any other duties such as Leagues Club administration) the following personnel:

  • (I) Administrator;
  • (ii) Clerical assistant;
  • (iii) Development manager;
  • (iv) Marketing manager.

3. Junior league - an ability:

  • (I) to field in a junior league competition, 100 teams from 7 years to A grade with 7-9 year olds playing Mini League and 10, 11 and 12 years olds playing Mod League;
  • (ii) to expend upon schools and junior league development no less than $50,000 per annum excluding any wages; and
  • (iii) to field three junior representative teams in the Ball; Flegg and Matthews cup.


5. Player Strength:

  • (I) an ability to generate 36 players of Grade competition standard;
  • (ii) for participating teams in the Presidents Cup Competition 20 players of competition standard.

6. Ground - to have available a playing ground:

  • (I) with lighting suitable for televised night games;
  • (ii) capable of development to comfortably accommodate a 20,000 crowd;
  • (iii) either owned by the Club or holding long term tennancy [sic] contract and containing progressive Rugby League exclusive usage rights clause;
  • (iv) of rectangular shape;
  • (v) with a surface that excludes a cricket pitch.


12. sponsorship:

  • (I) Major sponsorship for jumper identification be no less than $100,000.
  • (ii) Ability to attract sponsorship of not less than $200,000.''

The Football Club in the years in question except as hereafter discussed had no independent financial means other than prize money, grants from the N.S.W.R.L. and Football Club membership fees. Indeed the club was almost entirely dependent upon the applicant for financial assistance which financial assistance took the form of direct grants, the provision of facilities at no or nominal cost and the guarantee of expenditure of the Football Club.

In the relevant years I accept that the policy of the leagues club was to conduct its affairs so as to maximise the surplus that was available to enable it to support the Football Club. Until 1982 the Football Club called upon the applicant to make good the amount necessary to enable the football club to balance its books.

ATC 4940

since 1984 monthly grants have been made by the applicant and on occasions additional grants also have been made.

A significant part of the applicant's contribution to the Football Club lies in the grant to the Football Club for a nominal fee of $1 per year of the right to use what was known as ``Endeavour Field'' and what is now, as a result of a sponsorship arrangement with Caltex Refining Co. Pty. Limited known as ``Caltex Field''.

The applicant purchased the land upon which the Caltex field now stands in 1968, developing one main playing field and two smaller fields. Also built upon the site adjacent to the main playing field is the clubhouse now occupied by the applicant. The playing fields alone are now worth nearly $3,000,000 excluding the value of other improvements. On the site are also a main stand for spectators, two grandstands, two large dressing sheds and a referees' dressing room. Canteen facilities and a score-board are also available.

Notwithstanding the terms of the licence agreement to the Football Club for the use of the fields, the applicant bears the costs of running and maintaining the fields including electricity and costs of water and meets all capital expenditure required. The Football Club is thereby enabled to raise funds for ground advertising, to collect gate money and to receive annual amounts from the Caltex sponsorship agreement. The field contains parking facilities for 2,000 cars and the parking revenue is collected and retained by the Football Club.

In addition the applicant in the relevant years made available to the Football Club two fully-equipped offices in its premises for the exclusive use of the Football Club without rental and provided other meeting facilities.

On match days, a part of the clubhouse with a viewing window is dedicated for use by the ``White Pointer Club'' a group of members who pay approximately $1,000 per head annually to the Football Club in return for which they become entitled to a reserved seat within the service viewing area. The applicant does not charge the Football Club for the provision of this facility and the profit is retained by the Football Club.

In 1987 the applicant guaranteed to the N.S.W.R.L. The football club's debts up to $150,000 and payment under the guarantee impeded the ability of the applicant to proceed with capital expenditure for its own benefit. The level of commitment to the Football Club has also necessitated economies in general maintenance especially in respect of carpets, curtains and furniture.

The evidence makes it quite clear that in the absence of the continued support of the applicant in the manner set out above the Football Club could not have continued to play in the competitions organised by the N.S.W.R.L. I Accept without reservation that the consequence of the Football Club discontinuing its participation in the competitions organised by the N.S.W.R.L. Would be a loss of interest in and a decline of support of rugby league in the Sutherland Shire.

The level of support given by the applicant to the Football Club in the 1986 year, for example, is indicated by the following figures:

  • (a) The Football Club received direct grants from the applicant of $250,000.
  • (b) The Football Club received other grants of approximately $230,000 arising out of the use of facilities provided by the applicant to the Football Club.
  • (c) Match revenue was $223,000 in 1986 which revenue was only able to be earned by the Football Club because the applicant provided the playing fields and maintained them at no cost to the Football Club.

The clubhouse occupied by the applicant comprises four storeys. On the bottom level are squash courts, gymnasium and training facilities available both to members and to footballers. There is a bar area called now ``The Garden Lawn'' which adjoins the football grounds. There is also on this level a receiving dock. The next level is the main trading area of the club. Here there are bars, one with poker machines, a bistro seating approximately 200 people and some office areas. On the next level is an auditorium, a cocktail bar, a Chinese restaurant capable of seating 300 people and viewing areas looking over the football field. The top storey consists of a mezzanine floor for the auditorium, office area and a games lounge used for table tennis, carpet bowls, cards and snooker. There is also a function room and some further viewing areas overlooking the field.

ATC 4941

The applicant has some 13,000 members. It uses the auditorium for the provision of entertainment and it conducts discos and variety shows. It makes facilities available to its members such as a large video screen for viewing television programs, including the ``Sky'' television service beamed by satellite, and organises other recreational activities for members and their friends in the form of basketball, snooker, sailing, cricket, karate, table tennis, squash, etc. These recreational facilities were referred to in the evidence as ``intra-clubs''. That is to say there are apparently organised in respect of various sporting or recreational activities small clubs consisting of members or members and non-members, some of whom participate in competitive sport or activities in the district.

But for the financial commitment of the applicant to the Football Club there is no doubt that the applicant would be described as a social club trading for the benefit of its members. Apart from the activities of the intra-clubs, which were to say the least, peripheral, and many of which could not be properly referred to as involving athletic games or sports in which human beings were the sole participants, the applicant itself does not field any teams in any sporting competitions.

In evidence before me were the financial accounts of the applicant for the years in question. From those accounts had been prepared by the applicant a schedule purporting to show the net available funds and the extent to which such funds had been appropriated for sporting purposes in the years 1971 to 1986 inclusive. That schedule is as follows:

                         CRONULLA-SUTHERLAND LEAGUES
                               CLUB LTD.

                         SCHEDULE SHOWING NET AVAILABLE
                          FUNDS AND THE EXTENT TO WHICH
                             SUCH FUNDS HAVE BEEN
                          APPROPRIATED FOR SPORTING

                                1971   1972   1973   1974   1975   1976   1977
                                 $      $      $      $      $      $      $
Audited Operating Surplus     213591 179628 140171 391628 308853 354536 525764
Sports Council Grants          16476  14877  18691  20678  25490  16396   4854
Surplus sale fixed assets        -      -      -      -      -      -      -
Perpetual memberships            -      -      -      -      -      -   129430
                              230067 194505 158862 412306 334343 370932 660048
Income tax exp. (Cred.)          -       -      -      -      -      -      -
Interest on loans                -       -      -      -  170289 253446 250860
Loss disposal fixed asset        -       -      -      -      -      -      -
Net available funds (A)       230067 194505 158862 412306 164054 117486 409188

Grants C.S.D.R.L.F.C.          97500  97000 113000 153504 100000  28756 150332

Expenses Endeavour Field       25058  32185  18420  33302  61554  28417  34269

Grants C.S.J.R.L.F.C.           3000   4000   2250   4289   7102    774    -

Sports Council Grants          16476  14877  18691  20678  25490  16396   4854
Capital exp. Endeav. Field       -      -      -      -      -      -      -
Total appropriation (B)       142034 148062 152361 211773 194146  74343 189455
Same year % (B) TO (A)         61.74  76.12  95.91  51.36 118.34  63.28  46.30
Appropriation sporting
purposes in the next   (1972)   (1973)   (1974)   (1975)  (1976) (1977)  (1978)
Subsequent year        148062   152361   211773   194146  74343  189455  173283
Next subsequent year
Basis percentage (B) to 64.36   78.33    133.31    47.09  45.32  161.26   42.35
                           CRONULLA-SUTHERLAND LEAGUES
                                  CLUB LTD.

                           SCHEDULE SHOWING NET AVAILABLE
                            FUNDS AND THE EXTENT TO WHICH
                                SUCH FUNDS HAVE BEEN
                              APPROPRIATED FOR SPORTING

1978      1979    1980     1981    1982    1983    1984    1985    1986   TOTAL
 $         $       $        $        $       $       $       $       $      $
807326  1205662  1367447  1021190  1060185 637142 793106 775861 822404 10604494
  -        -        -        -         -      -      -      -     -      117462
  -        8855     8808     -         -      -      -    49798   -       67461
19260     17000     8200    39656      -      -      -      -    45400   258946
826586  1231517  1384455  1060846  1060185 637142 793106 825659 867804 11048363
  -        -        -        -         -   192830 (14231) 12000  20606   211205
439502   379100   414820   390746   371022 438466 456009 449274 473915  4487449
 14290     -        -        -         -     -    138697    -      -     152987
 372794  852417   969635   670100   689163   5846 212631 364385 373283  6196722

123565  131469   150000   200000   250000 250000 *179782 161183 239228  2425319
 39944   51491    74832    87765   111050 100557 *  -    *  -     -      698844
  4935   11741    12984    12130     7213   7214    8317   5168 **-       91117
  4839   10500     9827    11620    15413   8334   15052  18712  12102   223861
   -     62623   185167   149314     5000     -     -       -      -     402104
173283  267824   432810   460829   388676 366105  203151 185063 251330  3841245
 46.48   31.42    44.64    68.77    56.40 6262.49  95.54  50.79  67.33    61.99

(1979) (1980) (1981)  (1982)  (1983)  (1984)  (1985)  (1986) (1987)
267824 432810 460829  388676  366105  203151  185063  251330   -       3699211

 71.84   50.77    47.53    58.00    53.12 3475.04  87.03  68.97    -      59.70

*Note From 1984 Grants & Expenses on behalf of CSDRLFC and Endeavour Field Combined.

**1986 Junior League Grants paid to CSDRLFC.

ATC 4945

The schedule was the subject of some criticism. The item ``sports council grants'' apparently represents the applicant's subsidy of the intra-clubs to which I have referred, not all of which would properly be described as falling within the exemption. As the amount however is insignificant, the percentage figures used can be taken as a guide at least to the amounts appropriated for sporting purposes.

Mr Leong, an executive officer with the Audit Group Compliance Branch of the Australian Taxation Office criticised the figures in the table and produced his own summary from the financial statements of the applicant of the total funds available or applied and funds expended on sporting activities in the same period. The document purports to be a source and application of funds statement but proceeds on the basis that it is proper to treat the total expenditure of the applicant in gaining its revenue as part of an application of funds statement. If the calculation is carried out in accordance with the method adopted by Mr Leong the applicant is shown as expending in the relevant period amounts expressed as percentages of the total funds available of as low as 4.95 per cent in the 1986 year and as high as 18.94 per cent in the 1982 year.

As conceded by Mr Jackman, a chartered accountant who gave evidence on behalf of the Commissioner, the method adopted by Mr Leong was deficient in a number of respects. In particular it did not show gross inflows and gross outflows as a proper source and application of funds would do but more importantly it was deficient in treating the operating expenses as being an application of funds. A source and application of funds carried out pursuant to the relevant accounting standard ASRB1005 would not have been so calculated.

In my view the information prepared by Mr Leong is both confusing and misleading. In order for the club to derive its gross income, for example from the sale of liquor, it had to employ people and pay them wages. Thus it was inappropriate in a source and application of funds statement to commence with gross profit. Mr Leong's reason for preparing the statement this way was that if the club was to provide an entertainment value to its club members the expenditure applicable to this entertainment should be seen as an application of its funds. Further, the expenses comprised a variety of expenses all of which Mr Leong assumed related to social activity but which in fact included the general costs of running and administering the club, some part of which related to the encouragement or support of sport.

Mr Jackman criticised the figures prepared by the club. He expressed the view that it was incorrect in a source and application of funds statement to include the capital expenditure on Endeavour Field as that was not an appropriation but subject to that agreed that the schedule reflected the sporting appropriations in relation to the net earnings of the club for the year. However in Mr Jackman's opinion the usefulness of the statement was limited to a statement of the amount of earnings available for distribution by the directors and to the extent to which those earnings had been in fact distributed. Mr Jackman prepared a schedule (Appendix 6) of expenses incurred or grants appropriated for sporting activities as compared with other activities. A copy of this appendix is reproduced below:

ATC 4946


Expenses incurred and Grants appropriated for years ended 30 June 1971 to 30 June 1988

                 1971    1972    1973    1974    1975    1976    1977    1978
                 000's   000's   000's   000's   000's   000's   000's   000's
                  $       $       $       $       $       $       $        $
Trading account expenses
Bar trading      370.33 368.43  384.89  441.28  445.59  480.90  672.79  1021.86
Catering trading 173.32 212.81  213.40  299.14  279.96  212.36  231.91   629.31
Poker machine
trading          180.55 175.43  181.61  308.67  379.50  375.69  368.46   789.97
Door and Bar       -      -       -       -       -       -       -        -
Endeavour Field
Account           25.06  32.19   18.42   33.30   61.55   28.42    -        -
Total Account
Expenses         749.25 788.86  798.32 1082.39 1166.68 1097.36 1273.16  2441.14
expenses         297.66 321.91  368.42  471.97  717.18  809.41 1095.23  1883.23
Income tax         -      -       -       -       -       -       -        -
Grants and expense to
& Council        101.91 104.93  118.45  157.79  107.10   50.77  189.46   173.28
expense            -      -       -       -       -       -       -        -
Total Expenses
& Grants      1148.82  1215.69 1285.19 1712.15 1990.96 1957.55 2557.84  4497.65
                1971    1972    1973    1974    1975    1976    1977    1978
Trading account expenses
Bar trading    32.2%   30.3%   29.9%   25.8%   22.4%   24.6%   26.3%   22.7%
trading        15.1%   17.5%   16.6%   17.5%   14.1%   10.8%    9.1%   14.0%
Poker machine
trading        15.7%   14.4%   14.1%   18.0%   19.1%   19.2%   14.4%   17.6%
Door and Bar    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%
Endeavour Field
account         2.2%    2.6%    1.4%    1.9%    3.1%    1.5%    0.0%    0.0%
Total Account
Expenses       65.2%   64.9%   62.1%   63.2%   58.6%   56.1%   49.8%   54.3%
expenses       25.9%   26.5%   28.7%   27.6%   36.0%   41.3%   42.8%   41.9%
Income tax      0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%
Grants and expenses to
& Council       8.9%    8.6%    9.2%    9.2%    5.4%    2.6%    7.4%    3.9%
expense         0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%    0.0%
Total Expenses
& Grants      100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%


1979   1980    1981    1982    1983     1984    1985     1986     1987    1988
000's  000's   000's   000's   000's    000's   000's    000's    000's   000's
  $      $       $       $       $        $       $        $        $       $
1423.19 1563.03 1710.90 1680.83 1407.93 1346.34 1454.43 1924.75 1836.14 1905.78
 808.46 1118.80 1126.86 1003.52   92.20   -      581.77  856.61  890.95  958.91
1024.85 1129.02 1361.52 1595.52 1253.28 1235.01 1250.56 1263.22 1372.09 1326.81
  -       -       -        -      -       -       -       -       -      426.84
  -       -       -        -      -       -       -       -       -       -
3256.49 3810.85 4199.28 4279.87 2753.40 2581.35 3286.75 4044.57 4099.18 4618.34
1835.65 2050.62 2418.97 2227.01 2161.63 1965.90 2321.95 2592.25 2693.94 2813.89
  -       -       -       -      192.83  -14.23   12.00   20.61   19.87   15.18
 205.20  247.64  311.52  389.15  367.74  204.25  187.24  254.38  219.57  314.31
  -       -       -       -       -      138.70  -49.80    -      46.29    -
5297.34 6109.11 6929.77 6896.03 5475.60 4875.97 5758.15 6911.81 7078.86 7761.72

 1979    1980    1981    1982     1983    1984    1985    1986    1987    1988

 26.9%   25.6%   24.7%   24.4%    25.7%   27.6%   25.3%   27.8%   25.9%   24.6%
 15.3%   18.3%   16.3%   14.6%     1.7%    0.0%   10.1%   12.4%   12.6%   12.4%
 19.3%   18.5%   19.6%   23.1%    22.9%   25.3%   21.7%   18.3%   19.4%   17.1%
  0.0%    0.0%    0.0%    0.0%     0.0%    0.0%    0.0%    0.0%    0.0%    5.5%
  0.0%    0.0%    0.0%    0.0%     0.0%    0.0%    0.0%    0.0%    0.0%    0.0%
 61.5%   62.4%   60.6%   62.1%    50.3%   52.9%   57.1%   58.5%   57.9%   59.5%
 34.7%   33.6%   34.9%   32.3%    39.5%   40.3%   40.3%   37.5%   38.1%   36.3%
  0.0%    0.0%    0.0%    0.0%     3.5%   -0.3%    0.2%    0.3%    0.3%    0.2%
  3.9%    4.1%    4.5%    5.6%     6.7%    4.2%    3.3%    3.7%    3.1%    4.0%
  0.0%    0.0%    0.0%    0.0%     0.0%    2.8%   -0.9%    0.0%    0.7%    0.0%
100.0%  100.0%  100.0%  100.0%   100.0%  100.0%  100.0%  100.0%  100.0%  100.0%

From this table he concludes that in each of the years the grants made in expenses paid for football purposes amounted to less than 10 per cent of the total expenses incurred and grants appropriated in each and every year. He concludes that the majority of the operating expenses were incurred predominantly for the administration and operation of the licensed club.

Mr Bryant, a chartered accountant, gave evidence on behalf of the applicant. He too prepared an application of profits statement from the accounting material which is hereafter reproduced.

ATC 4948


                                         1971    1972    1973    1974    1975     1976     1977     1978      1979   SUBTOTAL
Net available funds
     -    Mr Coleman's figures     (A)    230     195     159     412     164      117      409      373       852      2,911
Application of net profit for
sporting purposes
     -    Mr Coleman's figures            142     148     152     212     194       96      189      173       268      1,574
Deduct capital expenditure               -       -       -       -       -        -        -        -         (63)       (63)
Adjusted application of net profit
  for sporting purposes            (B)    142     148     152     212     194       96      189      173       205      1,511
% of net profit applied for
sporting purposes              (B)/(A)    62%     76%     96%     51%    118%      82%      46%      46%       24%        52%

                                    B/FORWARD    1980    1981    1982    1983     1984     1985     1986      1987      TOTAL
Net available funds
     -    Mr Coleman's figures     (A)  2,911     970     670     689       6      213      364      373       226      6,422
Application of net profit for
sporting purposes
     -    Mr Coleman's figures          1,574     433     461     389     366      203      185      251       218      4,080
Deduct capital expenditure               (63)   (185)   (149)     (5)    -        -        -        -         -         (402)
Adjusted application of net profit      -------------------------------------------------------------------------------------
  for sporting purposes            (B)  1,511     248     312     384     366      203      185      251       218      3,678
% of net profit applied for
sporting purposes              (B)/(A)    52%     26%     47%     56%   6100%      95%      51%      67%       96%        57%

ATC 4949

As can be seen that statement shows the percentage of net profit applied for sporting purposes varying from as high as 6,100 per cent in the 1983 year (not a year in dispute) brought about by a borrowing in that year to a low of 24 per cent in the 1979 year.

For the reasons which I shall hereafter set out, in my view this accounting evidence was of only limited significance.

I turn now to deal with the submissions advanced by both parties.

1. Was the applicant a club not carried on for the purposes of profit or gain to individual members?

There was no dispute between the parties that the memorandum of association of the applicant prohibited it from distributing moneys to its members. In the event of the winding up or the dissolution of the club surplus assets were to be transferred to some other institution with similar objects and income and property of the company was to be applied solely towards the promotion of the objects of the company and distributions of bonuses were prohibited. Nor was it suggested that the applicants did, save in one special sense to which reference will hereafter be made, carry on its activities for the purpose of profit or gain to its individual members.

However it was argued by counsel for the Commissioner that an association or club which habitually made donations not to its members but to another entity for sporting purposes could not fall within the words of sec. 23(g). This submission was based upon a comment of Barwick C.J. with whom the rest of the Court agreed in
F.C. of T. v. Cappid Pty. Ltd. 71 ATC 4121; (1970-1971) 127 C.L.R. 140.

Cappid's case concerned the question whether the respondent was for the purposes of sec. 103A(2)(c) a company which:

``has not, at any time, since its formation, been carried on for the purposes of profit or gain to its individual members and was, at all times during the year of income, prohibited by the terms of its constituent document from making any distribution, whether in money, property or otherwise, to members or to relatives of its members.''

Cappid Pty. Limited was a company the memorandum of which excluded the carrying on for the purpose of profit or gain to its individual members of any activity and prohibited the distribution to those members or the relatives of any moneys. The company was incorporated to take a transfer of assets from a trustee of a family trust and its shares were held by that trustee and a nominee for that trustee. The result of the transfer was that the company was obliged to pay interest on the purchase price and rent in respect of certain property, to the trustee.

At first instance Menzies J. held that the company satisfied the tests of the section. In his Honour's view where a company was carried on for the purpose of profit or gain but that profit or gain was to enure for persons other than the members and for such persons exclusively, the special status conferred by the section was satisfied. In rejecting this view Barwick C.J. pointed out that on the facts of the particular case the purpose of the incorporation of the taxpayer was that profits or gains be made to be held on behalf of the trusts of which the shareholder was trustee and so as to be paid at the direction of the trustee direct to the beneficiaries. His Honour said at ATC p. 4124; C.L.R. p. 153:

``The first and principal question to be decided is whether it has been established that the taxpayer has not at any time since its incorporation been carried on for the purposes of profit or gain to its individual members. As I have indicated, my brother answered this question in the affirmative because of his view of the meaning of sec. 103A(2)(c). In my opinion, however, the function of the word `individual' in para. (c) is not to import the idea of `personal' or `beneficial' profit or gain. Its function, in my opinion, is to exclude from the operation of the paragraph those incorporated companies and unincorporated associations (see definition of `company' in sec. 6(1)) which are carried on for the profit or gain of the membership as a whole and those which are carried on for the profit or gain of some specified person or body not being a member. Section 23(g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporate which are carried on for the benefit of their members but not for the profit or gain of their members severally or

ATC 4950

individually. It is the same concept as underlies the expression `individual members' in para. (c). The exemption which sec. 23(g) offers is not co-extensive with all bodies which are not carried on for the benefit of their members severally or individually. Instances of corporate bodies which direct their profits or gains to the benefit of their members as a whole but not to their members individually readily come to mind. These not being covered by sec. 23(g), in my opinion, may fall within para. (c). The presence of the word `individual' in para. (c) does not, in my opinion, operate to exclude from the ambit of Div. 7 companies which include members who are in fact trustees or nominees, nor companies in which all the members are trustees or nominees.''

While there is room for argument as to what his Honour meant in the passage cited, it seems to me clear that his Honour was seeking to reject an argument that because the company was carried on for the purpose of profit or gain of the members who did not benefit individually (but only as trustee) from those profits, the company was able to bring itself within the benefit of the section. His Honour was clearly stating that a company could properly be said to be carried on for the individual benefit of the members notwithstanding that the member obtained no benefit at all having regard to his trustee capacity so that the profits were in fact to be dealt with by the trustee for the benefit of others not being members. It seems to me that that is probably what his Honour meant by the reference to a company carried on for the profit or gain of some specified person or body not being a member. In any event the context in which his Honour made the comments is quite remote from a case such as the present. In my view an association which exists to promote sport and which devotes its funds to that purpose by paying moneys to another entity for that purpose may properly be seen as being an association which is not carried on for the purposes of profit or gain to its individual members.

2. Whether the applicant exists to promote a spectacle rather than athletic sport

The next submission of the Commissioner was that the exemption had no application to a club such as the applicant in the present case which made grants to a football club where that club's main activity was the holding of professional football matches such as those involved in the Winfield Cup competition since the club really existed to promote those matches as a spectacle for reward, ``an entertainment'' rather than to promote athletic sport as such. Reliance was placed on the dictionary meanings of the words ``encourage'' and ``promote'' being in accordance with The Shorter Oxford English Dictionary (2nd ed.) respectively: ``to stimulate; to countenance;... to allow or promote the growth of'' and ``to further the growth, development, progress or establishment of (anything); to further, advance, encourage''.

It was said that the purpose of the applicant making payments to the Football Club was to fund the Football Club's business and activity of staging entertainment. A corollary of the argument was that the Football Club's income itself would also not fall within the exemption for the Club was merely carrying on a business activity of promoting spectacles. It was submitted that the policy of the exemption was not to benefit organisations that carry on a business.

Behind these submissions lie two distinct strains of thought both of which, in my opinion, are erroneous. The first is that there is a necessary dichotomy between the encouragement of sport on the one hand and the holding of a sporting spectacle on the other. The two are not in my view necessarily mutually exclusive. Perhaps the most important way in which sport in general and rugby league football in particular may be promoted is at the level of children. Unless schoolchildren are encouraged to play a particular sport that sport will quickly die out. That is why, no doubt, as the evidence in the present case shows, attention is given to schoolboy football. Thus it was an essential, for example for admission into the Winfield Cup premiership competition in 1988 that 100 teams be fielded in a junior league competition commencing with children aged seven to nine playing mini-league and children aged 10 to 12 playing mod-league. It was essential also that there be spent on schools and junior league development no less than $50,000 per annum excluding wages as well as there being fielded three junior representative teams in the Ball, Flegg and Matthews Cups. Children need sporting heroes and these are

ATC 4951

provided by the players of the first grade teams who do battle week after week in the football season. It seems to me quite likely that without the holding of first grade matches, it would be indeed difficult to encourage younger players to participate in the sport. They would drift off to other codes which did hold first grade representative matches. Additionally, I cannot close my eyes to the fact that the first grade match is not the only match played on a day.

The second difficulty with the submission is that there is no reason to suppose that the fact that a business is carried on necessitates the conclusion that the exemption could have no application. For example, I can see no reason why a professional football club which holds matches for which it charges an entrance fee and which could be said to be carrying on a business of holding those matches, could not fall within the exemption.

Counsel for the applicant emphasised that the history and context of sec. 23 and similar sections showed that the kind of income being exempted was irrelevant; that is to say that the legislature was not seeking to confine the exemption in sec. 23(g) to non-trading income. Indeed the very notion of clubs and associations carries with it the possibility, it was said, that the body in question could be carrying on a business.

Reference was made to sec. 14(1)(j) of the Income Tax Assessment Act 1922-34, the predecessor to sec. 23 which exempted:

``the income of any society or association not carried on for the purposes of profit or gain to the individual members thereof, established for the purpose of promoting the development of aviation or of the agricultural, pastoral, horticultural, viticultural, stock-raising, manufacturing or industrial resources of Australia to the extent to which the income is not derived from a trade or business carried on by the society or association, or from services rendered by the society or association to any person for reward ;''

The 1936 Act deleted the words which I have underlined. This change, according to the explanatory handbook published in 1936 showing the differences between the 1936 Act and the 1922 Act was made to avoid an argument that societies such as agricultural societies were taxable on their trading income, e.g. for holding agricultural shows.

The present exemption arose out of the recommendations of the Commonwealth Committee on Taxation in 1952 (the Spooner Committee Report on Exemption of Income of Certain Bodies and Funds (reference No. 25)). In recommending an exemption for sporting associations that committee placed emphasis on the need for the exempt association to be one established solely to promote the object of athletic sport. The actual recommendation was that the exemption from tax be extended to ``exempt the income of an association or club which is established solely for the purpose of promoting an outdoor athletic sport or game in which human beings are the sole participants, and which is not carried on for the purpose of profit or gain to the individual members''. However, the legislature in 1952 when the present exemption was introduced by Act No. 90 of that year did not adopt, at least in so many words, the same restrictive test. Thus it was said that a wider meaning should be given to sec. 23(g) than such as would confine it to a society established solely to promote the object of athletic sports.

Reference was made also to the fact that prior to 1952 the exemption in sec. 23(g) was confined to the income of associations etc. which were friendly societies. As so confined, it was said to be clear that the exemption was in no way restricted to non-business income. It is obvious that a friendly society could and would carry on business. That the legislature recognised this to be so can be seen from the provisions of Div. 8A of the Act introduced in 1984 which Division is concerned to bring to tax the total income other than premiums of a friendly society as are derived from ``eligible insurance business'' as defined in sec. 116E as meaning ``business of, or in relation to, the issuing of, or the undertaking of liability, under eligible insurance policies''. I accept the submission of the applicant that the legislature in sec. 23(g) did not intend to exclude from exemption, income which might be described as income from a business where otherwise the association or club deriving that income met the statutory description in sec. 23(g)(iii). It follows that I do not accept the submission of counsel for the Commissioner to the contrary.

ATC 4952

3. Does the applicant fall within the statutory description?

To be entitled to the exemption an association must satisfy the description contained in sec. 23(g)(iii) that is to say a disinterested observer asked to characterise the association would readily describe it as one established for the encouragement or promotion of an athletic game or sport and would not either more readily or equally readily characterise it as established for some other purpose.

For the applicant it was argued that the question of characterisation was to be determined by the principal object which the association served as reflected both by its objects but more importantly by what the association does. It was said that the club in the present case exists to make profits from its trading with members so as to apply those profits in support of the objectives for which the club was brought into being, that is in support of the activities of the Football Club and by extension of rugby league football itself.

By way of analogy it was argued that a group of enthusiasts might band together as an association to raise money in support of a football club. That association might initially raise money by conducting raffles and the like; it might thereafter raise money by running a canteen at football matches. Later it might sell at the canteen club memorabilia to raise money and if this was successful it might open a shop in the area to sell such memorabilia and sports clothes and that shop might expand further. It was said that the expansion in size would not change the character of the association which would still be the encouragement of the football activities at the football club. While I accept the question of characterisation will not be determined merely by reference to the size of an association, I do not think, with respect, that the analogy is a complete one. Even in the hypothetical fact situation given, there will be a question, which is ultimately a question of fact and degree, whether the retail activities of the hypothetical association become an end (not necessarily the end) in themselves. Ultimately, the approach to be adopted is that taken by Waddell J. in
``The Waratahs'' Rugby Union Football Club Limited v. F.C. of T. 79 ATC 4337. It was not submitted that that case was wrongly decided and although I am not technically bound by it, it is a case that has stood for more than 10 years and certainly it could not be said that the case was clearly wrongly decided. Counsel for the applicant did however submit that I should distinguish the facts of the present case from that in the Waratahs' case.

By way of background to the Waratahs' case, reference might be made to the earlier case, Case No. T53
(1968) 18 T.B.R.D. 278 where the No. 1 Board of Review had considered the application of the exemption to a leagues club established in the country to support a country rugby football club. The board unanimously held the exemption to be applicable on the facts of the case notwithstanding that the applicant in the reference had considerable social activity. Rather the board saw the social activity being undertaken to generate the funds necessary for the club to pursue its object of assistance to the football club. The board said at pp. 282-283:

``In the `social' and `sporting' club context of today the following suggest themselves as indicating the broad spectrum of situations likely to present themselves: (a) the social club, pure and simple, without any sporting affiliations existing exclusively, or almost so, for the benefit of its members; (b) the social club with pronounced sporting affiliations but which is found, on balance, to be established at the relevant time for social purposes rather than for the promotion of athletic games or sports. An example of such a club is to be found in that which was the subject of decision by this Board in Case No. T55,
18 T.B.R.D. 288; (c) the social club, such as the taxpayer club, which, on the balance of evidence, is found to have the promotion and encouragement of athletic games or sports as the dominant objective. In other words in the overall picture the club's social activities are recognized as being subsidiary to the sports promotion which they help to finance; (d) sporting clubs, such as golf clubs and bowling clubs, whose dominant objectives and activities would seem to satisfy the requirements of s. 23(g)(iii) (cf. Case No. R38,
16 T.B.R.D. 163, at p. 170) but which none the less conduct social activities as subsidiary to their main endeavours; and (e) sporting clubs, which mix the very minimum of `social' with their sporting pursuits and which, generally speaking do

ATC 4953

not maintain clubhouse facilities on a full time basis.

On a global picture of the club's activities and having regard to its expressed objects we are satisfied that during the period up to 1967 and in particular during the year ended 30th June, 1963, the club falls into category `(c)' above. It is true, as the Commissioner rightly points out, that the social demands of the members have been well catered for by the construction of a worthwhile clubhouse and the provision of commensurate amenities and entertainment. But these features, as we see it, are not fatal to the taxpayer's case if football sponsoring and promotion are rightly seen to be the predominant aim of the club in the years in question. The legislature, as Mr Cullinan points out, has by providing for exemption of `income' in the case of certain `clubs', acknowledged that social activity of itself is no bar to the application of the exemption. True it is, in the instant case, that the considerable social activity organized by the club generated the funds necessary for it to achieve its stated objectives. But as to those stated objectives the evidence leaves us in no doubt that this club has since its incorporation steadily pursued the policy that, in the words of its president, the football clubs `have No. 1 priority'.''

It was the same board, although, with the exception of Mr O'Neill, differently constituted, which originally considered the Waratahs' case, reported as Case K42,
78 ATC 378.

The Waratahs Club had a membership which in the years in question ranged from 248 to 861 members. A calculation, somewhat favourable perhaps to the taxpayer, showed sporting expenditure in the years in question increasing from $2,484 in 1969 to $117,470 in 1975, the last year being however more than $70,000 over any prior year. Unlike the applicant in the present case, the club had no football ground. Use was made of a council ground and some minor amount was spent on improvements to that ground. Also unlike the applicant in the present case the club fielded football teams. Like the club in the present case the Waratahs conducted a clubhouse which carried on a social club for the benefit of members. A substantial part of the income in the Waratahs' case came from poker machines as did a substantial part of the income of the applicant. Like the applicant in the present case the Waratahs Club made available facilities in its club for meetings of football teams etc. In the Waratahs' case assistance was given to teams travelling away as well as assistance being given for club uniforms and coaches. There was no doubt as in the present case, that those running the club were interested in football and considerable attention was given to promoting the sport in schools. Like the applicant in the present case the Waratahs Club had other sporting activities for the benefit of its members. It fielded for example, two cricket teams and had a squash club with nine teams engaged in a local competition.

The applicant's argument in the Waratahs' case is summarised in the following passage at p. 4342 of the report in 79 ATC 4337:

``The appellant's case in relation to its activities during the relevant period is that if these are looked at globally it will be seen that the appellant answers the statutory description; that in fact a great deal of time and energy is devoted to sporting matters by its office-bearers, members and employees, the significance of which is not to be assessed solely in monetary terms; that the sporting activities provide the real reason for its establishment and existence; that is social activities and the amenities which it provides for its members should be seen as part and parcel of the conduct of a strong and active sporting club; and that the provision of social amenities for its members, including poker machines, should be seen as a means of earning income for immediate or ultimate application for the promotion or encouragement of sporting activities.''

That argument is in essence the same argument as is put by the applicant here. The Board of Review by majority upheld the assessment of the Commissioner. Mr O'Neill, who dissented, characterised the club as one where the main purpose of the club was the encouragement of rugby although also established for the purpose of promoting social amenities to members as a subsidiary purpose. Such a characterisation would seem to fall within category (d) as defined in Case T53 (ante).

Waddell J. held that the question was to be resolved by an application of what was said in

ATC 4954

the High Court in
Royal Australasian College of Surgeons v. F.C. of T. (1943) 68 C.L.R. 436, a case concerned with the question whether the college was a ``scientific institution'' for the purposes of sec. 23(e) of the Act. After citing passages from the judgments of Latham C.J., Rich, Starke, McTiernan and McWilliams JJ., Waddell J. continued at p. 4341:

``The conclusion which I draw from the Royal Australasian College of Surgeons is that, in order for the appellant to come within the statutory description in question in this case it must appear from the evidence that the main or real purpose for which it was established during the tax years in question was for the encouragement or promotion of an athletic game or athletic sport of the kind mentioned and that the purpose of a social club was not collateral to or independent of this purpose but merely concomitant and incidental to it.''

It might be argued that his Honour's test, while clearly echoing what had been said by Rich J. in the Royal Australasian College of Surgeons' case did not necessarily follow from what had been said by other members of the High Court. Indeed, when the matter had been before the Board of Review, Mr O'Neill in dissenting had taken the view that the exemption was available even if the club was established with a collateral object provided that the pursuit of that collateral object was subsidiary to or no more than jointly with and as an aid to the pursuit of its main or prevailing object. Mr O'Neill referred, inter alia, to the Royal Australasian College of Surgeons' case without suggesting that it required a contrary conclusion. However, having regard to the later decision of the High Court in
Stratton v. Simpson (1970) 125 C.L.R. 138 it now seems clear that Waddell J. had correctly construed the Royal Australasian College of Surgeons' case.

The issue in Stratton v. Simpson was whether for the purposes of a will a particular institution was within the meaning of the terms of that will ``a charitable institution''. Gibbs J. with whom Barwick C.J., Menzies and Walsh JJ. agreed (so far as the present matter is concerned) said at pp. 159-160:

``It is established that `an institution' is a charitable institution if its main purpose is charitable although it may have other purposes which are merely concomitant and incidental to that purpose... If however the non-charitable purpose is not merely incidental or ancillary to the main charitable purpose, the institution will not be charitable...''

Although Gibbs C.J. made no reference to the Royal Australasian College of Surgeons' case, that case was cited by Windeyer J. (albeit ultimately dissenting in the result).

Although what was involved in Stratton v. Simpson was the interpretation of a phrase used in a will, that phrase also involved a need to characterise an institution as charitable or not. It seems therefore to me that the context is sufficiently similar to reinforce the conclusion that for an association to fall within sec. 23(g)(iii) the main object of that association must be the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants and a taxpayer will be disqualified from being so characterised if it has any other main object or indeed any other subsidiary object unless that subsidiary object is ancillary to or dependent upon the statutory purpose i.e. is merely concomitant and incidental to it. If the other object, in the present case the conduct of the social club, is a collateral object or one independent of the statutory purpose then the exemption will be lost.

In applying these principles to the facts in the Waratahs' case, Waddell J. noted the various ways in which the club promoted and encouraged the sporting activity there involved, namely rugby union football. His Honour noted the social activities of the club, considered the way the club's funds were expended and concluded that the evidence did not justify the conclusion that the promotion or encouragement of sport was the main or real object of the appellant during the years in question. As his Honour said at pp. 4345-4346:

``There can be little doubt that in a practical sense the provision of social club amenities and the activities conducted there were of importance in achieving the appellant's sporting objectives in that the Club was virtually the sole source of income for the sporting activities and was an important factor in promoting the comradeship and loyalty necessary for successful sporting activities. However it would be unreal to

ATC 4955

regard the provision of the social club and its activities as having been undertaken purely for these purposes. Rather, they should be regarded as having been pursued for a second and independent purpose of importance, namely the provision for members of a social and sporting club with all the usual facilities pursuant to the objects set out in para. 3(d) of the appellant's Memorandum of Association. In my view the activities of the appellant in the years in question relating to its social club facilities cannot be regarded as merely concomitant and incidental to its sporting activities but were in pursuit of a collateral or independent purpose. Accordingly it cannot be said that the evidence establishes that the appellant comes within the statutory description.''

While the facts of the present case differ in detail from those of the Waratahs' case, the overall picture which they reveal compels me to the same conclusion as that reached by Waddell J. It would in my view be quite unreal in the present case to regard the social activities of the club with its dining rooms, bars, television room, auditorium and poker machine facilities as being activities engaged in solely for the purpose of providing funds for the Football Club. In my view the social activities became, if they were not originally, ultimately an end in themselves. They took on a life of their own notwithstanding that it was necessary that these activities be pursued to enable profits to be channelled to the Football Club so that that club could continue. No mere disinterested observer would describe the social activities of the applicant, its trading as a members' club, as being merely concomitant and incidental to its activities of promoting or encouraging sport. At the very least these activities were engaged in the pursuit of a collateral or independent purpose. Indeed there is much to be said for the view that it is the social activities of the applicant as a members' club which give to the club its essential character, which stamp it as a club which in the relevant years was established to provide for the social needs of its members rather than for the promotion or encouragement of football.

It is not necessary in my view to discuss in great detail particular matters of the evidence for ultimately it is the overall impact of the evidence which leads to the conclusion rather than particular matters. I wish however to address some matters to which reference has been made during the course of argument.

4. The significance of the memorandum and articles of association

Counsel for the Commissioner placed especial emphasis on the provision of cl. 3(a)(1) of the memorandum and its reference, inter alia, to the promotion not only of sporting matters but also of ``social and educational undertakings for the advancement and benefit of members''. To the extent that this reliance suggests that particular significance should be given to a particular paragraph of the memorandum of association, it is not in my view warranted.

The use of the word ``established'' at first blush might suggest that the issue in the present case is to be determined by looking at the main purpose whereby an association was set up. If that were the issue then no doubt regard would need to be had to the words of the memorandum and articles of association although even then these words may not necessarily be determinative: cf.
Bray v. F.C. of T. 78 ATC 4179; (1977-1978) 140 C.L.R. 560 per Jacobs J. at ATC p. 4187; C.L.R. p. 575 and per Aickin J. at ATC p. 4190; C.L.R. p. 581. However the use of the present tense in the phrase ``is established'' makes it clear that what is to be considered is ``the purpose for which the company was carried on in the relevant income year rather than at the time of its formation''; see per Gibbs C.J. in
Brookton Co-operative Society Ltd. v. F.C. of T. 81 ATC 4346 at p. 4348; (1980-1981) 147 C.L.R. 441 at p. 445. As Mason J. said in the same case at ATC p. 4352; C.L.R. pp. 450-451.

``The Federal Court proceeded, in conformity with authority in this Court, according to the view that in ascertaining the purpose for which a company `is established' it is necessary to look, not only to circumstances existing at the time of incorporation, but also to the activities of the company at the time when its status as a co-operative company is to be determined. No doubt it was the presence of the words `is established' and the purpose of the section that led Fullagar J. in
A & S. Ruffy Pty. Ltd. v. F.C. of T. (1958) 98 C.L.R. 637, at p. 656 and Menzies J. in
Renmark Fruitgrowers Co-operated Ltd. v. F.C. of T.

ATC 4956

69 ATC 4135, at p. 4137; (1969) 121 C.L.R. 501, at p. 506 to adopt this approach. To my mind it is evidently correct, allowing, as it does, that the purpose for which a company is established may change in the course of time and that with the change of purpose there may come a change in status as a co-operative company. Moreover in Ruffy the Court explicitly rejected the suggestion that the objects of the business were to be gathered solely from the objects clause in the memorandum.''

In the same case Aickin J. at ATC p. 4361; C.L.R. p. 466 was dismassive of the memorandum of association as not being helpful to determine the objects of the business of a company and distinguished motive from purpose emphasising that the motive for doing something may be irrelevant to the purpose for which the company is established. That distinction at ATC p. 4362; C.L.R. p. 467 is, in my respectful opinion, apposite here.

Certainly to the extent that the objects listed in the memorandum of association are not wholly irrelevant, they assist the Commissioner's case and do not assist the applicant. The applicant argued that I should see the memorandum of association as being not inconsistent with the way in which the applicant was established in the relevant years. Given however the facts of the present case, the memorandum of association must be seen as consistent with the way in which the applicant was in truth established in the relevant years, that is as a club not only devoted to football but also devoted to promoting the social benefits of its members.

5. The relevance of subjective purpose

In the passage cited from the judgment of Mason J. in Brookton Co-operative Society Ltd. above, his Honour continued by pointing out that the Court in characterising the objects of a business looked to the business activities of the company after its incorporation as well as to the purposes of its incorporation. Reference was made by his Honour to the judgment of McTiernan J. in
Revesby Credit Union Co-operative Ltd. v. F.C. of T. (1965) 112 C.L.R. 564 at p. 576 where his Honour had said:

``The main test to be adopted in ascertaining the primary object is to ask what the actual activities of the appellant society indicate it to be.''

In discussing the matter further at ATC p. 4353; C.L.R. p. 453 Mason J. expressed the view that in determining the purpose for which a company is established it was permissible to look both at the activities of the taxpayer and the intentions of those who promoted it. In the same case Gibbs C.J. left the matter open. His Honour at ATC p. 4349; C.L.R. p. 445 said:

``It is clear that in deciding whether a company comes within sec. 117(1) the Court must consider the activities which it actually carried on: see A. & S. Ruffy Pty. Ltd. v. F.C. of T. (1958) 98 C.L.R. 637 at pp. 649-656; Revesby Credit Union Co-operative Ltd. v. F.C. of T. (1965) 112 C.L.R. 564 at p. 576;
Social Credit Savings & Loans Society Ltd. v. F.C. of T. 71 ATC 4232 at p. 4236; (1971) 125 C.L.R. 560 at p. 567. Whether it is permissible also to have regard to the motives of those concerned with the company is a question that need not be decided in the present case, since if the actual activities of the appellant alone are regarded it is clear that the appellant is not a co-operative company...''

Murphy J. expressed no view on the matter although his Honour's short judgment refers only to the activity of the appellant in that case rather than the motives of its promoters. Aickin J. was of the opinion at ATC p. 4359; C.L.R. p. 463 that the subjective intentions of the promoters were of no assistance in determining whether the taxpayer was a co-operative company within the meaning of sec. 117 but rather that what was of significance was the activities of the company itself. As his Honour put it at ATC pp. 4359-4360; C.L.R. p. 463:

``The purpose of its incorporation must be ascertained from what it did.''

Wilson J. agreed with Mason J.

I accept the evidence of Mr Poulter that the subjective motives of the promoters in establishing the club was to support the Football Club and that thereafter this motivation continued. However all members of the High Court agreed that in a similar context attention should be given to the activities of a taxpayer whether or not consideration could also be given to subjective purpose. The activities themselves show in my view

ATC 4957

resoundingly that the applicant is not entitled to the exemption. It can perhaps be said, as was argued on behalf of the Commissioner, that the donation of moneys for sporting purposes was a donation achieved after the results of the company's business activities were known, that is to say as it were, out of profits generated by the real business activity, namely, the social club. But it is not necessary to go so far. It suffices here to be said that it is the activities of the applicant as a significant social club, with all that entails, that stamps the club as outside the provisions of sec. 23(g)(iii).

6. The relevance of the fact that Football Club could not have survived without the assistance of the applicant

I accept without hesitation that the Football Club would not have survived, at least in the form which it presently is, without the financial assistance which it obtained from the applicant. That was made clear in a number of reports of Mr Poulter as Treasurer of the Football Club when giving thanks to the leagues club for its support. But that fact tells nothing of the purpose for which in any year the applicant is established. The donations represented the result of the applicant making a profit but could not be seen objectively as the sole business activity of the applicant. The same argument was made and rejected in the Waratahs' case.

7. The relevance of the financial evidence

The financial evidence was put forward by both sides as providing some measure of the extent of the activities of the applicant. The evidence of the applicant was not completely satisfactory in that the percentages were arrived at taking into account expenditure that would not fall totally within the section i.e. the expenditure on the intra-club activities. However I accept that the financial evidence does show that substantial amounts were contributed in all of the years in question by the applicant to the Football Club and further that those amounts represented a substantial percentage of the club's after tax profit.

While the figures prepared by Mr Leong were, if considered as a source and application of funds statement obviously erroneous for the reasons which I have already indicated, those figures did point out one significant fact, although not too much weight could be put upon it, that being that the overall expenditure of the applicant on its social activities was so far in excess of the expenditure for sporting activities, howsoever that expenditure should be calculated, that it was hard to characterise the activities of the applicant as falling within the statutory exemption. The fact that Mr Leong's figures did not take into account a percentage of overheads that could be said to relate to the sporting activities did not, in my view, materially affect the result. It is not necessary to reach a precise figure to see the trend which the figures in fact reveal.

However, I do not think that a conclusion can be based on financial information alone. It is ultimately more useful to take into account all of the evidence dealing with the nature and extent of the sporting activities as well as the nature and extent of the social club activities to form a view whether the main or real object of the applicant can be said to be the encouragement or promotion of rugby league football. In recent years the club has derived, so its profit and loss accounts indicate, income in excess of $2,000,000 from revenue from poker machines, bar trading and the like. Its income is generated from the provision of social activities for its members and its expenditure is geared in large part to the production of this income. There is no doubt at all from a mere look at the balance sheet and profit and loss accounts of the club that it carries on a very substantial business activity independently of any support it gives to football. Further the evidence would indicate that it must continue to carry on this activity if it wishes to donate the sums that are needed to futher football. The fact that the club has purchased the football field and made it available at no cost to the Football Club does not characterise the activity of the club. That fact of course points out, as counsel for the Commissioner submitted, that the club's activities are obviously related to football to a significant degree but such matters do not characterise the applicant's business activities to such an extent that it can be said that the club falls within the exemption.

It follows in my view that the applications must be dismissed with costs.

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