Case W114 (Grand United Port Macquarie West Bowling Club v. F.C. of T.)Members:
PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The question to be determined upon this reference is whether the applicant is liable to pay income tax on certain income derived by it. The applicant is the Grand United Port Macquarie West Bowling Club. It has indicated its willingness to be identified in these reasons for decision. I shall refer to it by the name by which it is commonly known: ``West Port''. In contending that it is not liable to income tax it relies on the provisions of sec. 23(g) of the Income Tax Assessment Act 1936. That provision is one of many under the 1936 Act which identifies persons, institutions and associations exempt from liability to income tax. Although it is but one of many provisions now providing for such exemptions, it is not one with a particularly long history. Neither the original Income Tax legislation of the Commonwealth (the Income Tax Assessment Act 1915), nor its successor (the Income Tax Assessment Act 1922) made provision for exemption from liability for sporting bodies. Nor did the 1936 Act. When that Act came into force the most nearly relevant provision read:
``The following income shall be exempt from income tax: -
- (g) the income of a society or association not carried on for the purpose of profit or gain for the individual members thereof, and being a friendly society, or a society or association established for musical purposes, or for the encouragement of music, art, science or literature;
At the time of its enactment it was in terms identical with a comparable New South Wales provision and differed from the comparable Victorian provision only in that that State extended the exemption to:
``a club or an association established for the purpose of promoting, conducting or controlling horse-racing, trotting-racing or pony-racing.''
2. Then in 1952 the Act was amended (No. 90 of 1952) to comprehend in two sub-paragraphs the bodies previously provided for and in a third paragraph to make provision for sport and sporting bodies. As a result the relevant provision at the material times read:
``The following income shall be exempt from income tax: -
- (g)... 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; or
3. The subsection has since been further amended to provide exemption for non-profit bodies conducting horse-racing. Presumably clubs such as the Adelaide Racing Club Incorporated (cf.
Adelaide Racing Club Incorporated v. F.C. of T. (1965) 114 C.L.R. 517) are now exempt despite the extent and commercialism of their dealings with non-members.
4. The issue relates to the 1986 year of income but its proper determination calls for an understanding of the history of West Port. Port Macquarie is a regional town on the north coast of New South Wales. Its climate is such as to attract a large population of retired persons as permanent residents and an annual influx of tourists from the south in winter months. Many return year after year. Many are bowlers.
5. In the mid-1950s Port Macquarie had two lawn bowls clubs. Then a group of enthusiastic lawn bowlers came together to promote a new club. They secured land; they prepared two greens; and they constructed a small clubhouse. The purchase and construction were made possible with funds lent to the group by a Grand United Order of Oddfellows and the name ``Grand United'' is preserved in the name of the present body corporate in memory of that association. The founding members contributed substantially of their time and energies to facilitate the construction of the original greens and clubhouse.
6. The present body corporate was incorporated in 1958 in succession to the voluntary association which had preceded it. The principal objectives proclaimed by the original memorandum of association of West Port were:
``(a) to promote the game of bowls and such other sports, games, amusements, recreation, entertainments, pastimes and competitions as the company may deem expedient and offer and grant or contribute towards the provisions of prizes, awards and distinctions;
(b) to provide bowling greens and grounds at Buller Street, Port Macquarie or elsewhere and to lay out, prepare and maintain the same for bowls and other purposes of the company and to provide club houses, pavilions, lavatories, kitchens, refreshment rooms, workshops, stables, garages, sheds, and other conveniences in connection therewith and to furnish and maintain the same and to permit the same the property of the company to be used by members and other persons either gratuitously or for payment.''
Being the product of its time it was presumed that only male persons could be and would be ``ordinary members'' of the Club of whom it was proposed there would be no more than 150. Ladies could be ``admitted as restricted members as provided for by the rules of the Royal New South Wales Bowling Association'' and a lady could have the status of ``woman associate member''.
7. With the passage of the years changes occurred and at all material times the principal objects of West Port were declared to be:
``(a) To promote the game of bowls and such other sports, games and pastimes, indoor and outdoor as the Club may deem expedient and to provide trophies and prizes in connection therewith.
(b) In furtherance of the objects of the club to acquire and hold freehold or leasehold property (even permissive occupancies) or
ATC 893any rights or privileges which the Club may think necessary or convenient for its purpose.
(c) To construct and maintain grounds, greens, lawns, pitches and all or any such other grounds the Club may determine, and to construct and maintain a Club House or Pavilion in connection with the same containing such accommodation and conveniences as the Club may from time to time determine, and to further construct and maintain such other buildings as the Club may deem requisite...''
8. By 1980 the concept of West Port as a male preserve had been abandoned. The articles of association were amended to provide by cl. 1 that:
``words importing the masculine gender only include the feminine gender''
and five classes of ordinary members were established: gentlemen ordinary members; lady ordinary members; gentlemen social members; lady social members; and gentleman associate members. There was no provision for ``lady associate members''. A ``gentleman associate member'' was to be a male person who was a full member of another bowling club affiliated with the association or with the Australian Bowls Council or with any district association recognised by the association or by the Australian Bowls Council. Such a person would have playing and club privileges but would not be eligible to take part in club championships or inter-club challenge or pennant matches.
Since incorporation West Port has generally followed a strong growth pattern but without registering an increase in membership in each and every year. By 30 June 1988 membership comprised:
Life Members 7 Bowlers 1,353 Social Members 1,081 Associate Members 23 Junior Members 12 ----- 2,476 -----
I accept that membership fees as such have always been small and smaller for social members than bowling members. The current membership fees are $15 p.a. for bowling members and $10 p.a. for social members. I accept the evidence that there are bowling members who do not bowl. I also find that many social members are the spouses of bowling members, but I am not persuaded that such persons constitute the majority of social members.
10. Having established its original clubhouse and two greens in the latter part of the 1960s the club extended its clubhouse facilities and by 1969 it was able to open up a third green. In doing so it effected the full potential of the site so far as green's construction was concerned.
11. None the less, membership continued to grow and in 1981 a further substantial extension of the clubhouse took place with the development of a second storey on the western end of the earlier buildings. The development upgraded the kitchen facilities on the ground floor; provided lockers for men and women bowlers and some storage facilities; and on the upper floor a dining room. This was the first occasion upon which the club had provided a dining room facility.
12. Having exhausted the bowls-playing potential of its existing site the club was concerned to acquire increased green facilities. I am well satisfied that throughout the period 1983 to 1989 the club has very actively pursued those endeavours, in particular in association with the Hastings Municipal Council. Throughout those negotiations it has been clear that any solution which would involve the re-location of the club, or expansion from its existing site, or any other solution to the restrictions now facing West Port will involve it in very substantial expense. In the same period the club has been developing substantial financial reserves to prepare itself for such an outlay. Those reserves have been invested at interest and have generated much of the income now in question.
13. The factor which has made the generation of those reserves possible has been the way in which the club has used the facilities of its clubhouse: generating profit by the provision of food through eating and dining facilities; liquor through its dining and bar facilities; and poker machines. Those facilities are enjoyed by bowling members as well as social members, whereas the bowling facilities are enjoyed only by the bowling members and bowling visitors. It is through the provision of
ATC 894those social facilities that the sport of bowls is subsidised for the players and, at the same time, a fund has been built up which will be available to provide increased bowling facilities in the future should the opportunity to acquire them present itself.
14. Prior to the hearing - but seemingly only shortly before it - the Commissioner conceded that the game of lawn bowls is:
``an athletic game or an athletic sport in which human beings are the sole participants.''
That being so, it is not necessary to consider in any detail the description of the game and the method of its organisation. It should suffice to say that I am satisfied that West Port does operate a substantial and continuous program of lawn bowls, putting its three greens to intense use. In doing so it makes its facilities available to visiting clubs in organised competition, just as West Port enjoys the use of facilities of other clubs on the occasion of such fixtures. It also makes its resources available to visiting bowlers. It has subsets of special interest groups among its bowlers such as the Men's Bowling Club, the Women's Bowling Club, the Travelling Club and the Sixties and Over's Club. It also caters for peripheral interests of its members through such groups as the Social Golf Club. Recognising too that the climate of Port Macquarie is not always such as to make it practical to play lawn bowls, it also maintains indoor bowling facilites. It promotes the game of lawn bowls in the community and, in particular, among its social members, thereby recruiting some younger persons to the game.
15. But alongside all of these things it also promotes its non-bowling facilities in the community, not only through its social members but also by making its premises available free of charge as a meeting place for other organisations in the Port Macquarie area such as the Rotary Club; the Lions Club; the Lions Ladies Club; the Hastings Probus Ladies Club; and the Port Macquarie Probus Ladies Club.
16. The accounts of West Port as presented to its annual general meeting and as incorporated in its income tax returns lodged with the Commissioner analysed the different activities of West Port in a manner convenient to the club. I do not reproduce those accounts in their entirety but summarise the effect of them as follows:
BALANCE SHEET AS AT 30 JUNE 1986 -------------------------------- $ Share capital 000s Accumulated funds 1,637 Federal income tax (64) Profit for the period 223 ----- 1,796 ----- Fixed assets Freehold land 92 Greens 65 Buildings 773 Greens equipment 11 Parking area 18 Carpets, kitchen equipment, furniture and fittings 63 Poker machines 109 Plant 105 ----- 1,236 Current assets 975 Intangible assets 12 ----- 2,223 Less liabilities 232 ----- 1,991 -----
I note that the figures do not fairly reflect the net worth of the club because, quite correctly, many of the items were brought to account at historical cost (with or without adjustment for depreciation). The profit of the period was determined by bringing to account:
$ Gross profit 000s Liquor 489 Snack bar 111 Poker machines 712 Members' subscriptions 24 Green fees 25 Interest 88 Other (13) ----- 1,436 ----- Less expenses 1,153 ----- Net operating profit 283 Income tax 60 ----- Net profit 223 -----
As a result the profit and loss appropriation account presented the following:
Operating profit before income tax 283 Income tax expense applicable 60 ----- Operating profit 223 Extraordinary items -- income tax relating to prior year 64 ----- Operating profit and extraordinary items 159 Accumulated profits at 1 July 1,638 ----- Accumulated profits at 30 June 1,797 -----
17. Officers of the Commissioner analysed the records of West Port over a period of years and formed the view that a very small portion of ``funds available'' was applied to sporting activities. The conclusion reached was expressed in the following table:
---------------------------------------------------------------------------- Sporting expenditure Year ended Total Funds available Expended on as a percentage 30 June or applied sporting activities of total funds ---------------------------------------------------------------------------- $ $ % 1982 1,313,893 75,842 5.77 1983 1,390,800 95,223 6.85 1984 1,448,721 99,610 6.88 1985 1,629,690 111,266 6.83 1986 2,072,379 130,707 6.31 1987 2,600,275 157,279 6.03 1988 2,882,330 169,066 5.86 ----------------------------------------------------------------------------
On the basis of that analyis it was judged that the club was not entitled to the exemption it had claimed because it was not to be fairly characterised as:
``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.''
18. The contention was that it was in essence, or principally, a social club and as such not entitled to exemption. That having been decided by the Commissioner, the taxable income of West Port was calculated as follows:
Taxable income for the year ended 30 June 1986 $ $ Operating profits per accounts 283,938 Less: Loss on sale of fixed assets 15 Depreciation 88,336 Interest received 88,154 Members' subscriptions 23,897 200,402 ------ ------- 83,536 Add: Proceeds of sale of assets already written off 1,400 Free food provided after 19/9/85 5,300 Profit on sale of fixed asse 254 Free issues since 19/9/85 11,379 Depreciation per accounts 75,893 Provision for long service leave 7,218 Provision for sick pay 944 Provision for holiday pay 3,000 Welfare 1,800 Purchases adjustment 2,507 109,695 ------ -------
193,231 $ Visitors/Non-members proportion = 75% x 53,147 39,860 ---------------------------- = ------- = 22.66% (20% x 1,686 x 364) + 53,147 175,887 Visitors/Non-members proportion $193,231 x 22.66% 43,768 Add: Interest received 88,154 -------- Taxable Income Assessed $131,940 --------
19. In the terms of the Act the question to be resolved is whether West Port is ``a society, association or club which is not carried on for the purpose of profit or gain to its individual members and is... 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''.
20. It is contended for the Commissioner that it is not; that it is a social club which happens to have some sporting facilities and activities.
21. When the evidence was heard and argument presented, counsel advised that Hill J. of the Federal Court of Australia had reserved his decision in another case which called for the application of sec. 23(g) of the Act. Counsel requested that they be provided with an opportunity to make further submissions after his Honour's decision was handed down. The application was readily assented to and, when the decision did come to hand, the Tribunal sat to hear the further submissions. The decision so referred to is
Cronulla-Sutherland Leagues Club Limited v. F.C. of T. 89 ATC 4936. Counsel accepted, as does the Tribunal, that it is the duty of the Tribunal to apply the principles of law which find expression in his Honour's decision. In what follows I shall seek to do so. If any other interpretation of sec. 23(g) more favourable to taxpayers, or to would be ``non-taxpayers'' should happen to be more appropriate than the principles expressed by his Honour, it will be the responsibility of the higher courts to declare it.
22. Some introductory observations are appropriate:
- (a) The exemption provided for by sec. 23(g) of the Act was enacted in 1952 (No. 90 of 1952).
- (b) Previously clubs such as West Port were only free of liability to pay income tax in so far as their activities fell within the scope of the principle of mutuality.
- (c) The principle of mutuality provided no exemption from tax liability for mutual associations on their trading activities.
- (d) Nothing in sec. 23(g) of the Act limited the exemption available to sporting clubs in relation to their trading activities to activities which were undertaken in an amateurish way, or confined to unsophisticated operations, or to trading of limited profitability. There is nothing in sec. 23(g) limiting its application to small clubs or modest profits.
- (e) In the present case it is accepted that the club was not carried on for the purpose of profit or gain to individual members.
- (f) It is also accepted that lawn bowls is ``an athletic game or athletic sport in which human beings are the sole participants''.
- (g) It was not argued for the Commissioner that the applicant was concerned to promote a spectacle rather than an athletic sport (cf. ATC p. 4950).
23. It is not appropriate to seek to find in his Honour's reasons for decision, findings of fact in relation to all matters which might be considered to be relevant in resolving the issues in question. For example, his Honour did not express any finding as to how many of the 13,000 members of Cronulla-Sutherland were rugby players - although one may suppose that, by reason of considerations of sex, age and physical capacity, the percentage would be far lower than the percentage of active bowlers to be found in the ranks of West Port. Similarly, there was not to be found in his Honour's reasons any indication as to the
ATC 897make-up of the board of directors, or as to such matters as their remuneration and their relationship to the sport of rugby, or as to their concern to ``encourage or promote'' the sport.
24. As to his Honour's criticisms of the financial models proposed as providing a fair analysis in evaluating the activities of the club, I respectfully agree with them. I find the percentage approach gives anything but a fair impression of the activities and concerns of West Port. If the figures had been based on gross turnover of poker machines they would have produced even more distorted results. But in particular, it needs to be realised that the provision of outdoor arenas calls for very substantial capital commitment but little (if any) structural development: at least in relation to bowls clubs. The evidence whereby to evaluate that commitment is very limited. On the figures presented before me the greens as well as the clubhouse structures were brought to account at cost rather than market value. Further, because those structures had been paid for, nothing was incorporated in the analyses of expenditure presented on behalf of the Commissioner to reflect the value of those facilities to the bowlers.
25. The passages in his Honour's decision which I find to be of particular significance are as follows:
``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.''
(ATC p. 4939)
``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 benefits 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.''
(ATC p. 4941)
``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.''
(ATC p. 4952)
``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.''
(ATC p. 4952)
``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.''
(ATC p. 4954)
``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.''
(ATC p. 4954)
``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
ATC 898engaged 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.''
(ATC p. 4955)
``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.''
(ATC p. 4955)
``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.''
(ATC p. 4957)
26. The disinterested observer alighting from his Clapham omnibus and entering the premises of West Port on a Friday evening would no doubt have been most aware of non-sporting activity but even so, he could hardly fail to appreciate that he was in the clubhouse of a bowling club with the clubhouse set beside bowling greens. Had he attended in hours of daylight and not limited his appraisal of what was about him, his overwhelming impression would have been of attendance at a bowls club. Indeed if the disinterested observer happened to be a bowler, his visits by day might well have been to avail himself of the bowling facilities and his visits by night to enjoy the facilities offered in the company of fellow bowlers. Had he inspected the rolls of membership he would have been struck by a high percentage of playing members and had he invited those in attendance on the occasions of his visits to say whether they were bowlers or not, I am satisfied that he would have found by day that a very high percentage of persons in attendance would have been bowlers - whether members or visitors - by night, a reduced but still substantial percentage of bowlers - whether members or visitors - and an even higher percentage on taking into account non-bowlers attending in the company of bowler-spouses. Had the disinterested observer attended meetings of the board of directors, I am satisfied that what he would have observed was that it was very much a matter of management ``by bowlers and for bowlers'' even if it involved utilising the willingness of ``non-bowlers'' as well as ``bowlers'' to avail themselves of the club facilities and thereby contribute to the sport of bowling.
27. The issue to be resolved is ``ultimately a question of fact and degree'' (Hill J. supra, at p. 4952). Having weighed all the evidence presented before me and applying the principles finding expression in his Honour's decision, I am satisfied that West Port is correctly to identified as:
``a society, association or club which is not carried on for the purpose of profit or gain to its individual members and is... 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.''
28. The Order of the Tribunal will be that the decision of the Commissioner under review shall be varied and the objection of the applicant wholly allowed.