BH Pascoe SM

Administrative Appeals Tribunal


Decision date: 28 June 1999

BH Pascoe (Senior Member)

This is an application to review a decision of the respondent to disallow an objection to a private ruling dated 11 November 1997. The ruling was that the income of the applicant, North Suburban Club Inc, was not exempt from income tax under section 23(g)(iii) of the Income Tax Assessment Act 1936 (``the Act'') in the years ended 30 June 1993 to 30 June 1996.

2. Pursuant to section 34B of the Administrative Appeals Tribunal Act 1975, the parties consented to the review being determined without a hearing and for the Tribunal to review the decision by considering the documents or other material lodged with the Tribunal.

3. In reviewing a decision on an objection to a private ruling, the Tribunal is limited to making a decision upon the basis of the arrangements, including assumptions, identified by the respondent in the ruling. The only question for the Tribunal is whether, on the basis of the material identified in the Notice of Private Ruling and with no other material, the taxation decision constituted by that Notice should not have been made or should have been made differently (
FC of T v McMahon & Anor 97 ATC 4986). In this case the material on which the ruling was based was that set out in a letter from the applicant's representatives dated 29 October 1996 to which was attached copies of press articles relating to the applicant dating from 1902 to 1985, copies of Annual Reports and Balance Sheets for 1991 to 1995 and a copy of the Rules on Incorporation dated 29 June 1989.

ATC 2255

4. The applicant, North Suburban Club Inc, was founded in 1895 as the North Suburban Cycling Club. At its height it was said to have been the second largest cycling club in the world. Cycling became less of a Club activity during the 1900s and, at least by 1985, the Club had ceased any current association with that activity. A squash facility was established in the 1930s and it was said that, as of 29 October 1996, eight teams representing the Club played pennant squash on Monday to Thursday nights during the squash season. Press articles in 1955 and 1956 refer to table tennis tournaments. A golfing group became active in 1975 with carpet bowls and angling becoming part of the activities of the Club over the prior 25 years. Two press articles relating to golf in 1985 refer to a foursome representing ``the North Suburban Club golf social club''. The 1994 Annual Report referred to the golf activity as ``a group of about 20-30 players who get together once a month on a Sunday morning at various golf courses and enjoy a social game of golf.''

5. The letter of 29 October 1996 stated that the sporting activities were supported by various fund raising measures with Bingo being popular until May 1994 when poker machines were installed. The annual reports indicate the introduction of poker machines on 20 September 1993 with a further 20 machines installed during the year ended 30 June 1995. The General Manager's Report in the 1995 Annual Report included the words ``whilst the Club's core business is Poker Machines, some of you will be aware that our functions and bistro business continues to grow.'' This same Annual Report summarised the trading results for the year ended 30 June 1995 as:

``Returns from Poker Machines                   2,131,615
less Tatts and Government                       1,423,635

other income (principally bar trading profit)      88,079

less Overhead expenses                            688,554
Operating profit                                  107,505''

A perusal of the detailed financial statements for that year shows that the only expenditure which appears to relate directly to any form of sporting activity was:

Billiards Expenses          370
Squash Expenses           2,969
Badges and Trophies       5,397

It may be accepted that some proportion of other expenditure on premises etc, may be relevant to sporting activities.

6. The Rules of the Club dated 29 June 1989 set out the object of the Club under heading ``Statement of Purposes'' as follows:

``The object of the North Suburban Club is to provide for members associated together for social, sporting, charitable, and educational purposes, and to promote and encourage friendly relationships between members, and, in particular, to establish and maintain accommodation and facilities for the playing of lawful games, and for musical, dramatic, and other social entertainments for members and their guests upon premises of which the Club is the bona fide occupier.''

No particular qualifications are required for membership or election to the Committee of the Club. Clause 112 of the Rules require assets of the Club to be disposed of in accordance with the Associations Incorporation Act 1981 in the event of a winding up or cancellation of the Club. The same clause prohibits any distribution to members although it is not clear that this prohibition operates generally or only in the event of a winding up. Clause 2 of the Rules provides:

``No member shall receive greater profit or advantage from the Club than that received by every member thereof, other than remuneration... for work done by the Secretary, Treasurer or other officer of the Club, or salary or wages paid to employees.''

7. Section 23(g)(iii) of the Act provided, so far as it is relevant:

``23 The following income shall be exempt from income tax:

  • (a) ...
  • ...
  • (g) the income of a society, association or club which is not carried on for the

    ATC 2256

    purposes of profit or gain to its individual members and is-
    • (i)...
    • (ii)...
    • (iii) a society, association or club established for the encouragement or promotion of a game or sport;
    • (iv)...
    • ...''

The section was amended by Act No. 174 of 1997 applicable in relation to income derived on or after 1 July 1997. The amendment is not relevant to the decision under review, but would not produce any difference to such a decision in relation to this Club.

8. It would appear likely that the Club took the view that its purpose when established in 1895 as a cycling club was sufficient to show that it was established for the encouragement or promotion of sport. However, it is clear from decisions of the Courts that it is necessary to consider the purpose of the Club in the relevant years of income. In
Cronulla Sutherland Leagues Club Ltd v FC of T 90 ATC 4215, Lockhart J said (at page 4220):

``The question on appeal is whether the appellant is a society, association or club established for the encouragement or promotion of rugby league football. At first glance it might be thought that the use of the past tense `established', indeed, perhaps the use of `establish' in any tense, makes it necessary to look only to circumstances existing at the time of the incorporation or establishment of the body concerned to determine this question. This is not correct. Two criteria must be satisfied before the exemption from income tax is available: first, that the income is derived by a body that is not carried on for the purposes of profit or gain to its individual members, which necessarily looks to the circumstances existing in the relevant year of income; and secondly, that the body is a society, association or club established for the encouragement or promotion of the specified athletic game or athletic sport. I do not discern from the language of sec. 23 or the evident purpose of sec. 23(g)(iii) any reason for selecting different times for the application of the criteria.

It is not correct to construe sec. 23(g)(iii) as if the use of the present tense `is', where secondly appearing, governs only the words `a society, association or club' so that the subparagraph should be read as if it said `... and is a society, association or club which was established... for the encouragement or promotion of an athletic game'. The emphasis is mine. The syntax of the subparagraph and the choice of the word `established' are less than happy; but it is, I think, reasonably clear that the subparagraph looks to the year of income to determine whether each of its elements is satisfied.

Section 23(g)(iii) is concerned with the periodic or recurrent, not the static, purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the Memorandum of Association, and also any subsequent activities of the body which may throw light on its activities in the relevant year of income. A society, association or club is not a stationary entity. It may change its activities and perhaps its purposes during its life which together make up the body itself and enable the questions posed by the subparagraph to be answered in the year of income, namely, the identification of the objects or purposes for which the body is established.''

In a more recent decision of the Federal Court in
St Mary's Rugby League Club Limited v FC of T 97 ATC 4528, Hill J stated (at pages 4529-4530):

``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:

ATC 2257

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

In that case, his Honour found that the Club was exempt where ``there is an intensity of activity directed towards football which tips the balance in favour of the applicant.'' He found it significant that control of the Club effectively vested in persons who had been footballers and that persons were drawn to membership because of their interest in rugby league.

9. Much of the material provided with the request for the ruling of 29 October 1996 consisted of copies of press reports of the early 1900s. Whilst providing an interesting early history of the Club with the emphasis on cycling, they provide no assistance in determining the Club's objects, purpose or activities in the years ended 30 June 1993 to 1995. The words used in setting out the object of the Club in its Rules appear to indicate that encouragement or promotion of a game or sport is only one of several purposes and in no way a dominant purpose. A perusal of the Annual Reports for the five years to 30 June 1995 does not lead to any view that sporting activities are a significant aspect of the Club's operations. The Chairman's Report in each of the years makes no reference at all to sporting activities. The emphasis in these reports is on poker machines. In only one Treasurer's Report is there any reference to games or sport where, in the 1991 report, it states ``Billiards are down on previous years but the Squash Court is about even.'' A General Manager's Report is included in the 1994 and 1995 Annual Reports. The 1995 report concentrates on poker machines while the 1994 Report has three lines towards the end stating:

``The Sporting Activities of the Club in Squash, Billiards, Snooker and Pool as well as Golf are going as well as ever with member participation increasing all the time.''

10. While the history of the Club has a substantial sporting emphasis, the more recent constitution and activities appear to clearly show the Club as having its primary purpose that of providing gambling and social activities. Golf activity appears to be a part of the social activity and while squash, billiards, snooker and pool appear to have a significant competitive element there seems little doubt that they form a relatively minor part of the total activities of the Club. On the basis of the material identified in the Notice of Private Ruling it is not possible to see that the Club is one established for and

ATC 2258

having as its main object or purpose in the relevant years of income, for the encouragement or promotion of a game or sport. Any games or sporting activities would seem to have a minor role in the purpose and activities of the Club. Consequently, it does not satisfy the requirements of section 23(g)(iii) of the Act and the decision under review should be affirmed.


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