Hill J

Federal Court of Australia

Judgment date: 8 July 1997

Hill J

Since the year ended 30 June 1952 the income of sporting clubs has been exempt from tax. That exemption was brought about by the Income Tax and Social Services Contribution Assessment (No 3) Act 1952 (Cth) which substituted a new s 23(g) into the Income Tax Assessment Act 1936 (Cth) (``the Act'') extending, for the first time, the exemption to societies or clubs established for the encouragement or promotion of an athletic game or athletic sport. The exemption in the years of income ended 30 June 1992 to 1995 respectively, with which the present appeal is concerned, was in the following terms:

``23 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 a game or sport;
    • ...''

The exemption has been amended from time to time. The last amendment was in 1990. The applicant, the St Marys Rugby League Club Ltd (``the Club'') claims that its income falls within that exemption. If it does, the Commissioner's objection decision, the subject of an appeal to this Court in its original jurisdiction, must be set aside.

The law governing the interpretation of the exemption was authoritatively settled in the judgment of a Full Court of this Court in
Cronulla-Sutherland Leagues Club Ltd v FC of T 90 ATC 4215; (1990) 23 FCR 82 where it was held that the exemption was available in the circumstances where the applicant had as its main object or purpose in the years of income the object referred to in the subsection, namely, as the section presently stands, the encouragement or promotion of a game or sport.

The parties agree that in the subsequent decision of
Terranora Lakes Country Club Ltd v FC of T 93 ATC 4078 I correctly stated the law when I quoted Lockhart J in Cronulla- Sutherland at ATC 4225; FCR 95 where his Honour said:

``... It may have other objects or purposes which are merely incidental or ancillary thereto or which are secondary and even unrelated to the main object or purpose without disqualifying the body from the exemption. But if it has two co-ordinate objects, one of which is outside the exemption, the exception cannot apply because it would be impossible to say that one object is the main or predominant object.''

The question is thus one which goes to the character and nature of the applicant. That question of characterisation is to be determined having regard to the objects, purposes and activities of the taxpayer.

As the present case illustrates, however, the fact that the law may be said to be settled does not remove the difficulties of the Commissioner or a club in applying the law to the facts of a particular case. The reason is simple enough. Many, if not all, sporting clubs commence in a small way and in circumstances where there can be no doubt as to the characterisation of the club as a sporting club. A consequence of the exemption of the income of that club from tax is often that the club grows and prospers. Particularly, it engages in activities which are designed to raise money to be used to further the sporting activities. Activities so undertaken may include poker machines, liquor sales, bingo games and the like. There may, as I said in my judgment at first instance in
Cronulla- Sutherland Leagues Club Ltd v FC of T 89 ATC 4936 at 4955, come a time when these other activities take on a life of their own. From being merely concomitant or incidental to the activities of sport, they become an end in themselves. That was the case in Cronulla- Sutherland. It had not happened to the Terranora Lakes Country Club. As each of those cases demonstrate and the present facts reinforce, the line to be drawn will be a difficult one. To determine on what side of that line the Club falls in the years of income in dispute, the years 1992 to 1995 inclusive, it is necessary to have regard, as Lockhart J observed in Cronulla-Sutherland at ATC 4225; FCR 95-96,

ATC 4530

to the constitution, activities, history and control of the body seeking the exemption.

The constitution

The Memorandum of Association of the Club contain the following six initial objects:

``(a) To manage conduct control and promote the game of Rugby League Football in the St. Marys District or elsewhere.

(b) To assist generally in the promotion conduct and propagation of Rugby League Football in the St. Marys District or elsewhere and to promote or assist in the provision of training and conditioning and teaching facilities for football played in accordance with the rules of the New South Wales Rugby Football League.

(c) To render aid either financial or by other means to clubs or associations in the St. Marys District or elsewhere which clubs or associations are playing or conducting football played in accordance with the rules of New South Wales Rugby Football League.

(d) To take over all the assets liabilities and to assume the functions of an unincorporated Club or Organisation known as the St. Marys Junior Rugby League Football Club.

(e) To provide for members and for members' guests a social and sporting Club with all the usual facilities of a Club conducting residential and other accommodation liquid and other refreshment and provision for sporting and other social and recreational facilities.

(f) To provide football grounds and ovals at or near St. Marys or elsewhere for the playing and practising of the game of football and for training for such game and to lay-out, prepare, construct, alter and maintain such grounds and ovals for football and other purposes of the Club and to provide, lay-out prepare, construct, alter and maintain Club houses, pavilions, dressing rooms, grandstands and other accommodation and facilities for spectators and other conveniences in connection therewith.''

Thereafter there are a number of general objects until par (k) refers to a registered club and pars (p) and (q) are concerned with liquor trading and refreshments. The Articles refer to Ordinary Members, Life Members, Provisional Members, Honorary Members and Temporary Members. The categories of membership were renamed by amendments made at the end of the period in question, but nothing turns on that renaming. The real distinction among members (apart from whether they are Life Members or otherwise) is to be found in the following categories of Ordinary Membership (Art 11):

``(i) Football Members

(ii) Supporting Members

(iii) Associate Members

(iv) Junior Sporting Members''

Football Members are persons who are or have been players in the Penrith competition and Supporting Members are persons who are or have been players of football but not in the Penrith competition. Persons who have been Supporting Members for two years are eligible to become Football Members. Associate Members are persons who satisfy the Board that:

``by reason of consistent attendance at football matches or personal effort in relation to the organisation, coaching, managing or otherwise carrying out work or duties in relation to the playing of football (whether by teams of the Club or not) such persons shall be regarded as giving substantial support to football.''

Junior Sporting Members are persons who have not obtained the age of 18 years but are interested in taking an active part in the sporting activities of the Club on a regular basis. Provisional Members are entitled to the social facilities and amenities of the Club but can not vote.

The apparent rigidity of these classifications is not observed in practice. There appears to be no real attempt on the part of the Board to investigate whether persons claiming to qualify as Associate Members by reason of consistent attendance at football matches, do so. In the result it seems safe to say that some persons become Associate Members without necessarily meeting the qualification required in the Articles.

The number of members and class of members in the years of income in question was as follows:

``Class of Member    1992    1993    1994    1995
Life                    7       7       7       7
Football            1,661   1,515   1,962   2,257
Supporting             64      70      54     251
Associate           1,512   1,991   3,038   3,953
                    -----   -----   -----   -----
Total               3,244   3,583   5,061   6,468''
                    =====   =====   =====   =====

No person is eligible to become a director unless either a Life Member or Football Member. Life Membership may only be conferred on persons who have rendered outstanding service to the Club. A Life Member need not, at least in theory, be a footballer. However, all members of the Board in the relevant time appear to have been footballers or close supporters. The Board, inter alia, has the administration, conduct and control of the rugby league activities, as well as the management of the business and affairs of the Club.


As is apparent from the comments made earlier, the Club has had a distinguished and extensive role to play in the game of rugby league, particularly in the St Marys/Penrith district. There is a great deal of material before me detailing the Club's activities in the competitions in which the Club played. That material demonstrates that clubs such as the applicant provide the nursery without which the professional sport over which media barons now fight could not be possible. The material shows, for example, that in 1995 the Club had twenty-six Saturday sides, from under sixes to under fourteens, of which sixteen were semi- finalists. Ultimately, eight sides participated in the grand finals, three teams winning premierships. Four of the six Sunday sides were also semi-finalists, these encompassing under fifteens, under sixteens and under eighteens. The A reserve grade apparently finished the competition rounds that year as minor premiers but lost in the grand final and the A grade team finished in the top three, winning the A grade premiership. The Club produces a Yearbook in which appear photos of the various teams with names of players, coaches and the like. The evidence makes it clear that the football activities of the Club are substantial, and involve considerable organisational time and effort.

There are sub-clubs within the Club to cater for members who play golf, snooker, darts, softball or cricket or who fish. While, no doubt, all of these activities are relevantly sporting activities, none of them would give character to the Club and ultimately counsel for the Club did not seek to rely upon these activities as bringing the Club within the benefit of the exemption.

The clubhouse is built upon land owned by the Club being approximately thirty acres in area. In the years in question the clubhouse building included, in addition to a reception area, offices and meeting rooms for football club activities and club executives, a hairdressing salon, a small auditorium, restaurant and kitchens, a large auditorium, TAB area, poker machines and pool tables area.

The restaurant at the relevant time seated about 150 diners and was operated on a franchise arrangement for which the Club received a fee. Likewise, the Club received a fee from the TAB.

The small auditorium which held about 150 people, was used for rugby league presentations on Sundays during the football season as well as for disco nights and ``new faces'' nights. Otherwise, because children were allowed in it, it was used as a bistro area.

The main auditorium which seated approximately 300 people was used for bingo, disco, karaoke, rugby league functions and entertainment roughly six out of seven days. In the gaming area there were some ninety poker machines, as well as snooker tables and facilities for playing club keno. There was also a bar area in the auditorium which was glassed off and a dance floor.

Typically, at a weekend up to 600 people used the Club facilities. During the rest of the week between 300 and 400 people, members and non-members, enjoyed the facilities.

Outside the clubhouse was a sealed parking area for something in excess of 200 cars. At the rear of the Club there was a golf range which was leased to an independent operator who paid

ATC 4532

the Club a rental. A considerable part of the land owned by the Club was vacant. There had been a feasibility study to use some of the land for a football field with an initial cost of $1.8M, which was thought to be too expensive. The cost subsequently escalated to $3M in 1996 when a proposal was apparently still under consideration. There was also consideration given to using some of the land to build a motel to meet a perceived demand for accommodation in the area.

In the entrance area of the Club there were displayed framed photographs of Club Life Members and rugby league players, as well as framed blazers of former champion rugby league players and trophies.

The Club leased playing fields from the local council upon which competitions were held, being the Kingsway Playing Field, South Creek Park which is near the Kingsway Playing Field, and Blair Athletic Field. The Club also leased Boronia Park for training purposes.


An unincorporated club, the Club was formed with the advent of rugby league in Australia in 1908 when casual games against teams from the Sydney competition were played on Sundays, mostly at Hackett's paddock near where the St Marys High School now stands.

Between 1925 and 1947 the unincorporated club played in many competitions in the Western District Junior League competition. When Parramatta entered the Sydney competition, St Marys played in the Western District Junior League competition and was successful in winning the A grade competition in 1957, 1961, 1962, 1963 and 1965. Reserve grade premierships were won by the unincorporated Club in 1959 and 1964.

After the inclusion of Penrith in the Sydney competition in 1967, the unincorporated club fielded teams in the Penrith District Junior League and was one of the most successful clubs. In 1970, the Club joined the NSW Rugby League second division competition, later renamed the Metropolitan Cup in 1974. That competition lapsed in 1976 but was restarted in 1990. In all relevant years of income the Club fielded teams in that competition.

In December 1965 the unincorporated Club was incorporated by uniting the Leagues Club with the Junior League.

Attempts had been made to find a site for a club since the mid-1950s, when Penrith Council told the Club that its then playing field, Victoria Park, would be turned into a garden park. An art union was promoted to purchase a site at Shaw's Paddock. There were difficulties in building on this site and ultimately, after it was rezoned, it was sold in 1980 and a new site was purchased.

A conditional licence was obtained in 1982 and work commenced on the construction of the present club house which opened on Melbourne Cup Day, 1982. Since the club house opened there have been renovations and alterations. They continue beyond the years in question. The Club continues to field teams in the Penrith Junior League as well as Reserve Grade and Metropolitan Cup competitions.

Financial data

In evidence were the Annual Reports of the Club for each of the years in question. In each year the Directors' Report describes the ``principal activity of the Company'' as being ``promotion, conduct and propagation of the game of Rugby League and the Licensed Club''. This is not, of course, determinative, but demonstrates the prominence which the Club gives to the promotion, conduct and propagation of rugby league and to the conduct of the licensed club from which, of course, the revenue of the Club stems.

From these reports I have prepared a table setting out some relevant figures which have implications for the characterisation of the Club in the years in question. I have included in the table the total membership of the Club in each of the relevant years.

The headings ``Keno Profit'', ``Bar Trading Profit'' and ``Poker Machine Profit'' in the table are self-explanatory. The figures under these columns represent the net profits from each of these non-football activities. The figure ``Net Profit Before Tax'' is arrived at after there has been subtracted the grants which the Club made in each year for football. Thus, if it is desired to find the significance of the football grants as a percentage of net profit, it is necessary to add the amount of the grants into the net profit figure before calculating the percentage. The column headed ``Investments'' represents cash and short term investments (for example, money market bank bills or deposits). What that column shows is that there has been a steady growth in the cash liquidity of the Club

ATC 4533

from $300,000 as at 30 June 1992 to $2,401,900.69 as at 30 June 1995. That increase has, no doubt, come about as a result of the steadily increasing net profit of the Club in the period after allowing for the football grants.
Year  No of  Invest-       Keno       Bar         Poker         Net Profit    Football
      Mem-   ments         Profit     Trading     Machine       Before        Grants
      bers                            Profit      Profit        Tax
1992  3253   300,503.00    16,627.48  415,898.76  1,885,783.83  664,471.94    151,035.00
1993  3583   755,544.49    38,117.23  411,259.96  1,992,737.69  691,038.07    243,993.00
1994  5061   1,448,320.17  59,434.91  415,863.98  2,307,951.49  911,554.99    354,664.75
1995  6468   2,401,900.69  77,785.94  385,905.78  2,988,648.61  1,494,203.59  425,700.00

There is mention in the 1993 Annual Report of the possibility of the Club building a motel on the land adjacent to the Club premises. That possibility is not referred to again in either the 1994 or 1995 reports. No evidence was given to demonstrate whether that proposal had languished or whether it was still under consideration.

The accounting material in these reports form the basis of submissions made by the parties. Thus, counsel for the Club said that a comparison of the amounts spent on rugby league as against amounts spent on wages and social amenities illustrated the dominance of the rugby league activities. The figures to support this submission were as follows:

``Year    Rugby League    Wages -- Admin    Social Amenities
          $'000           $'000             $'000
1995      487             291               238
1994      477             270               244
1993      335             243               243
1992      299             250               217''

Counsel for the Commissioner filed an affidavit from a consulting accountant seeking to analyse the accounts. So the accountant pointed out (it is not in dispute) that the whole of the applicant's income was derived from its social activities. He pointed out that the football grants represented, depending upon the relevant year, between 10.6 percent and 23.1 percent of the total expenditure of the applicant and between 20.7 percent and 22.3 percent of its net income. In this analysis the accountant sought to contrast various statistics obtained from the accounts with those referred to in the judgments in Cronulla-Sutherland and Terranora.

There is no doubt that the financial information and an analysis of it will be relevant in determining the character of a club in a relevant year. But statistics do not necessarily tell the whole story. It is obvious that the majority of the profit of the Club came from poker machines. It requires little space and even less effort on the part of the Club to derive this profit. It takes a great deal more time and effort to put on the field week after week some 32 rugby league teams involving some 450 players, not to mention fielding a first grade team and a reserve grade team in the Metropolitan Cup competition.


It is obvious from the evidence that persons are drawn to membership of the Club because of their interest in rugby league. It is not without significance that the control of the Club effectively vests with persons who have been footballers. Parents of boys playing football are drawn to the Club, no doubt to support their sons. So, too, are persons who enjoy the social facilities which the Club provides, whether these be entertainment in the auditorium, dining in the restaurant, drinking in the bar or gambling with poker machines or keno.

The social activities of the Club are significant, both financially and in number. They cannot be ignored. But the evidence

ATC 4534

persuades me that while the social and gambling activities of the Club are significant in their own right, they are nevertheless subordinate to the activities of the Club in encouraging and promoting rugby league football in the St Marys area, particularly among children.

The present case differs from the Cronulla- Sutherland case in a number of respects. It will be recalled that there were two clubs in the Cronulla-Sutherland area. One devoted to the pursuit of football and the other, the Cronulla- Sutherland Leagues Club, which assisted in financing the football club but which, in all the circumstances, was found to be a members' or social club rather than a club existing primarily to support or encourage football. The appellant in Cronulla-Sutherland had no football team. It organised no competitive football at all. Its only connection with football were the grants which it made to the football club and the provision of facilities to that club.

The membership structure of the Cronulla- Sutherland Leagues Club did not, as the structure of St Marys Rugby League Club does, give emphasis and importance to present or previous footballers or supporters. In the Cronulla-Sutherland case control of the licensed club was, de facto, in the hands of those who were interested in promoting the football club. That was not a formalised structure. The sheer size and intensity of the social activities of the Cronulla-Sutherland club led to the conclusion that the social activity was of such great significance that it was impossible to reach a conclusion other than that the main purpose of the club was the encouragement or promotion of rugby league.

In the present case each of the matters said by Lockhart J in Cronulla-Sutherland to be significant, namely ``constitution, activities, history and control'' point to the characterisation of the Club as one having as its main object or purpose ``the encouragement or promotion'' of rugby league within the meaning of s 23(g)(iii) of the Act. The Memorandum of Association records the significance of rugby league as the major object of the Club. The Articles of Association, both in the membership categories and in the conferring of control upon Football Members (or Life Members), point to the significance of the football activities over the social activities. The activities of the Club involve both social and football activities. Were this not so then, no doubt, the case would not be before the Court. But, although income is derived from the social activities and the football activities constitute an outgoing, there is an intensity of activity directed towards football which tips the balance in favour of the applicant. The history of the Club is one of close association with rugby league from its inception and again points to the correct characterisation as being one for ``the encouragement or promotion'' or rugby league.

Finally, the control of the Club rests in the hands of former footballers (or Life Members) whose task it is not merely to run the Club but also to promote the competitions in which the Club participates in the rugby league season.

The combination of these factors leads me to the conclusion that the application should succeed.

I would, however, mention one matter which has given me some concern. That is the increase in liquidity in the Club over the years to 1995 when the Club had almost $2.5M of funds on deposit or short term investment. No evidence was led as to the use which the Club intended for these funds. In his oral testimony Mr Smith, the President of the Club in the relevant years, referred to the Club's desire to build two football fields on the Club's land and feasibility studies which had been undertaken with a current estimated cost of $3.5M. That evidence suggests that the funds accumulated were being kept liquid for the purpose of developing a football oval, a circumstance which would be favourable to the Club's claim. The other possibility, however, is that the Club was accumulating funds for a possible motel development. I do not think that the evidence permits me to reach a conclusion, one way or the other, as to the proposed use of the funds. I should say, however, that if the Club were to proceed with the building of a motel, as foreshadowed in the 1993 Annual Report, the conclusion that it was established for the purpose of ``the promotion or encouragement'' of rugby league would become progressively more difficult to arrive at.

In the result I would allow the application, set aside the objection decisions and in lieu thereof direct that the objection be allowed and the assessment amended in accordance with these reasons. The Commissioner should pay the applicant's costs.

ATC 4535


1. The application be allowed.

2. The Notices of Objection Decision, dated 2 February 1996, relating to the income tax years ended 30 June 1992 to 30 June 1995 inclusive be set aside, the objections for those years be allowed and the assessments amended in accordance with these reasons.

3. The respondent pay the applicant's costs.

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