Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation

Re: CRONULLA SUTHERLAND LEAGUES CLUB LIMITED
And: COMMISSIONER OF TAXATION
No. G665 of 1989
FED No. 108
Taxation
90 ATC 4249
23 FCR 82

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Beaumont(2) and Foster(3) JJ.

CATCHWORDS

Taxation - Income Tax - Exemption - Application of sub-para. 23(g)(iii) of the Income Tax Assessment Act 1936 - Whether the use of the word "established" in sub-para. 23(g)(iii) implies that the Court should only consider the circumstances existing at the time of the incorporation of the body concerned - Application of the "main purpose" test - Whether the purpose of promoting sport must be the sole purpose - Whether the existence of a secondary purpose which is not merely incidental or ancillary to the stated purpose precludes the exemption from applying - The relevance of the objects contained in the Memorandum of Association - Whether the subjective motives and intentions of the association's promoters are significant.

Income Tax Assessment Act 1936: sub-para. 23(g)(iii)

HEARING

SYDNEY

#DATE 30:3:1990

Counsel for the Appellant: C.V. Cullinan QC

with B.J. Ramsay

Instructed by: Freehill, Hollingdale and Page

Counsel for the Respondent: Sir Maurice Byers QC

with S.W. Gibb

Instructed by: Australian Government Solicitor

ORDER

1. The appeal be dismissed.

2. The appellant pay the costs of the respondent of the appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

Introduction and Facts

The question in this case is whether the income of the appellant, Cronulla Sutherland Leagues Club Limited, derived during the years of income ended 30 June 1979 to 1982, 1985 and 1986 is exempt from income tax pursuant to sub-para. 23(g)(iii) of the Income Tax Assessment Act 1936 ("the Act"). Paragraph 23(g) exempts 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 -

(i) a friendly society, not being a friendly society dispensary;

(ii) a society, association or club established

for musical purposes, or for the encouragement of music, art, science or literature;

(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

(iv) a society, association or club established

for the encouragement or promotion of animal races."

The appeals are from the judgment of a single Judge of this Court (Hill J.) who dismissed the applications of the appellant and upheld the assessments of the Commissioner.
The learned primary Judge found that the appellant was not carried on for the purpose of profit or gain to its individual members, but that the exemption was not available due to his finding that the social activities of the appellant were not merely concomitant and incidental to its activities of promoting or encouraging rugby league football; that at the very least those social activities were in the pursuit of a collateral or independent purpose; and that there was much to be said for the view that it was the social activities of the appellant as a members' club which gave to it its essential character of providing for the social needs of its members rather than for the encouragement or promotion of football.
The relevant facts are fully set out in his Honour's reasons for judgment, so it is necessary to state only those facts which are essential to the resolution of the questions argued on this appeal.
The appellant was incorporated on 5 June 1957 under the Companies Act 1936 (NSW) as a company limited by guarantee. Clause 3 of the memorandum of association described the relevant objects for which the appellant was established in these terms:
"3. . . .

(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.

(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. . . .

(k) To construct maintain and alter any buildings or works necessary or convenient for the purposes of the Club.

(l) To enter into any arrangements or co-operate with any Club or Clubs person or persons for the purpose of promoting any of the objects of the Company upon such terms and

conditions as shall be agreed upon."

There is a close association in New South Wales between clubs such as the appellant, which are generally known as "leagues clubs", and clubs devoted to the pursuit of rugby league football known as "football clubs" which conduct matches under the auspices of the New South Wales Rugby League. The leagues clubs together with advertising sponsorship provide most of the money needed by the football clubs for their purposes. One football club is the Cronulla-Sutherland District Rugby League Football Club ("the Football Club"). Its associated club is the appellant. The Football Club was incorporated in 1963 as a company limited by guarantee and it previously existed as an unincorporated body. For some years before 1963 there were three junior rugby league clubs in the Sutherland Shire, each of which competed in the junior football competitions organised and administered by the St. George District Junior Rugby League. Between the date of the incorporation of the appellant (1957) and 1963 the number of junior clubs based in the Sutherland Shire grew from three to twelve.
The control of the appellant has always been in the hands of persons interested in promoting the Football Club. All the directors of the appellant have been members of the Football Club since its formation in 1963.
During the years of income with which these proceedings are concerned the Football Club derived its revenue almost entirely from financial assistance given by the appellant in the form of direct grants, the provision of facilities at either no or nominal cost and the guarantee of expenditure of the Football Club. The other sources of the Football Club's revenue were prize money, grants from the New South Wales Rugby League and membership fees from the Football Club itself, gate money from rugby league matches, annual grants from what is known as the Caltex Sponsorship Agreement and ground advertising.
During the relevant years of income the policy of the appellant was to conduct its affairs so as to maximise the surplus of revenue over expenditure to enable it to support the Football Club. A significant part of the appellant's contribution to the Football Club was the grant to the latter of the right to use what was known as "Endeavour Field" (now known as "Caltex Field") for a nominal fee of $1 per year. The appellant purchased the land upon which the Caltex Field now stands in 1968 and developed one main playing field and two smaller fields. The playing fields now have a value of some $3m excluding the value of other improvements. Also on the site are a main stand for spectators, two grandstands, two large dressing sheds and a referees' dressing room, canteen facilities and a scoreboard. Adjacent to the main playing field is the club house which is occupied by the appellant. The appellant bears the cost of running and maintaining the fields and meets all necessary capital expenditure. The fields contain parking facilities for 2,000 cars and the parking revenue is collected and retained by the Football Club. During the relevant years the appellant made available to the Football Club two fully equipped offices in its premises for the exclusive use of the Football Club without charge and provided other facilities for its meetings.
On match days a part of the club house with a viewing window is dedicated for use by what is known as "The White Pointer Club", being a group of members each of whom pays approximately $1,000 per head annually to the Football Club in return for an entitlement to a reserved seat within the viewing area. Doubtless the name "The White Pointer Club" was selected because of its association with the name "The Sharks" by which the team fielded by the Football Club is popularly known. The appellant does not charge the Football Club for the provision of this facility and the profit is retained by the Football Club.
In 1987 the appellant guaranteed to the New South Wales Rugby League the Football Club's debts up to $150,000, which was paid by the appellant and impeded its ability to proceed with capital expenditure for its own benefit. The level of commitment to the Football Club has also from time to time necessitated economies in general maintenance of the club house, especially in respect of carpets, curtains and furniture.
If the appellant had not given continued support to the Football Club it could not have continued to play in the competitions organised by the New South Wales Rugby League. If the Football Club were to discontinue its participation in the competitions organised by the New South Wales Rugby League the probable consequence would be a loss of interest in and a decline of support for rugby league in the Sutherland Shire. It is quite likely that without the holding of first grade matches it would be difficult to encourage younger players to participate in rugby league and they would drift to other codes.
Some illustration of the level of support given by the appellant to the Football Club in the 1988 year, for example, is indicated by the fact that the Football Club received direct grants from the appellant of $250,000, other grants of approximately $230,000 arising out of the use of the facilities provided by the appellant to the Football Club, and match revenue of $223,000 which was earned by the Football Club solely because the appellant provided the playing fields and maintained them at no cost to the Football Club - a total of $703,000.
The club house occupied by the appellant has four levels. On the bottom level are squash courts, a gymnasium and training facilities available both to members and footballers. There is a bar area now called "The Garden Lawn" which adjoins the football ground. There is also on this level a receiving dock. The next level is the main trading area of the appellant where there are bars, one with poker machines, a bistro seating approximately 200 people and some office area. On the next level is an auditorium, a cocktail bar, a Chinese restaurant capable of seating 300 people and viewing areas overlooking the football field. The top storey consists of a mezzanine floor for the auditorium below, an office area, a games lounge used for table tennis, carpet bowls, cards and snooker, a function room and some further viewing areas overlooking the field. The appellant uses the auditorium for various forms of entertainment including discos and variety shows. It makes facilities available to its members such as a large video screen for viewing television programmes, 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 and squash. There are some 13,000 members of the appellant.
The primary Judge found that, but for the financial commitments of the appellant to the Football Club, there would be no doubt that the appellant would be described as a social club trading for the benefit of its members and that apart from certain of its recreational activities, which are peripheral, and many of which could not be properly referred to as involving athletic games or sports in which human beings are the sole participants, the appellant itself does not field any teams in any sporting competition.
There was evidence before his Honour consisting of the financial accounts of the appellant for the years in question together with evidence from accountants relating to the appellant's finances, but his Honour held that the accounting evidence was of only limited significance. The financial evidence appears to have been led by each party as providing some measure of the extent of the activities of the appellant. His Honour was critical of certain of this evidence; but he accepted that it showed that substantial amounts were contributed in all of the years in question by the appellant to the Football Club and that those amounts represented a substantial percentage of the appellant's after tax profit. His Honour found that the overall expenditure of the appellant on its social activities was far in excess of the expenditure for sporting activities irrespective of how that expenditure is calculated; but said that not too much weight could be placed upon this fact.
In recent years the appellant has derived revenue from poker machines, bar trading and the like in excess of $2m, income which 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. The appellant carries on very substantial business activities independently of any support it gives to football. However, this fact is not necessarily decisive since, as accepted by the primary Judge, the legislature did not intend to exclude from exemption income which might be described as income from a business where the body deriving that income otherwise met the statutory description in sub-para. 23(g)(iii). Furthermore, this business activity must be carried on so that the appellant may donate the sums needed to further football.
Submissions
The parties were in substantial agreement about many aspects of the interpretation of sub-para. 23(g)(iii) and the tests to be applied in answering the question whether the appellant was established for the encouragement or promotion of rugby league football. Counsel for each party submitted that the proper test to apply to answer that question is whether the main or predominant object or purpose of the appellant was one of encouraging or promoting rugby league football. Counsel for each party also submitted that, notwithstanding the use of the word "established" and the context in which it appears in the sub-paragraph, the relevant time to determine whether the appellant was established for the encouragement or promotion of rugby league football was during the relevant years of income, not at the time the appellant was incorporated, although the memorandum of association of the appellant and the history of its activities since its incorporation were all relevant considerations.
Whilst counsel for the appellant agreed that the proper test to apply is whether the main object of the appellant was one of encouraging rugby league football, he submitted that the primary Judge had misconstrued this test by interpreting it as requiring in effect that the appellant's sole object was the encouragement of football. Counsel submitted that when the correct test is applied the exemption is not necessarily precluded by the fact that the appellant has collateral or independent objects so long as the encouragement or promotion of sport is the main or predominant object.
Counsel for the appellant submitted that when all relevant matters are examined and consideration is given to the memorandum of association of the appellant, the control and management of the appellant, what the appellant has done in providing assets and funds of great value to the Football Club which could not carry on without that assistance, and the manner in which the appellant has sought to maximise its profits from trading with members and others, even at cost and disadvantage to the members because of the priority given to the requirements of the Football Club, the conclusion must be reached that the appellant has as its main or predominant object that of encouraging or promoting rugby league football. Counsel further submitted that, even if the more restrictive or sole object test is applied, it is also satisfied in this case as the social activities of the appellant are truly ancillary or incidental to the main purpose of promoting football.
It was submitted by counsel for the Commissioner that the dominant or main character of the appellant during each year of income was to carry on business for the benefit of its members and that the appellant was established and has been conducted to carry on activities for the benefit of its members and their guests. Reliance was placed upon the club house and the various facilities it provides and uses to which they are put, the fact that the appellant has 13,000 members and manifestly carries on a very substantial business as a social club trading for the benefit of its members which was said to be its intrinsic character. Counsel for the Commissioner submitted that sub-para. 23(g)(iii) is directed to a description of the nature of the institution, not what it does with the funds which it generates from its business and that the appellant has only one business, namely, that of carrying on a social club.
Findings
It was not disputed that rugby league football is "an athletic game or athletic sport in which human beings are the sole participants" within the meaning of sub-para. 23(g)(iii). Although it was argued before the primary Judge by the Commissioner that the appellant was carried on for the purposes of profit or gain to its individual members, this argument was abandoned before us.
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 s. 23 or the evident purpose of sub-para. 23(g)(iii) any reason for selecting different times for the application of the criteria.

It is not correct to construe sub-para. 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 sub-paragraph 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 sub-paragraph and the choice of the word "established" are less than happy; but it is, I think, reasonably clear that the sub-paragraph looks to the year of income to determine whether each of its elements is satisfied.
Sub-paragraph 23(g)(iii) is concerned with the periodic or recurrent, not the static, with the 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, 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 sub-paragraph to be answered in the year of income, namely, the identification of the objects or purposes for which the body is established.
Another indication of the correctness of this interpretation of sub-para. 23(g)(iii) arises from the use of the present tense "is" before each of sub-paras. (i), (ii), (iii) and (iv) of s. 23. For example, sub-para. 23(g)(iii) exempts the income of a body that "is (i) a friendly society, not being a friendly society dispensary", which necessarily requires that the friendly society answers that description in the relevant income year. I can discern no reason why a different test should be applied to the bodies mentioned in the other sub-paragraphs.
Some assistance is derived from the use of the present tense "are" in the latter part of sub-paragraph 23(g)(iii) which speaks of the relevant game or sport as being one "in which human beings are the sole participants". This use of the present tense suggests to me consistency with the earlier word "is" and that they together make it necessary to consider the question whether the relevant body is one established for the encouragement or promotion of the requisite sport at the same time, namely, in the relevant income year. Incidentally, little assistance is derived from the dictionary meanings of "establish".
The view which I take is consistent with the judgment of the High Court in Brookton Co-Operative Society Limited v Commissioner of Taxation (1981) 147 CLR 441 and the cases cited in the judgment of Mason J. at 451 and of Aickin J. at 461-469; also with the approach of the Full Federal Court in Brookton (1979) 39 FLR 130 and with the judgment of Waddell J. in "The Waratahs" Rugby Union Football Club Limited v Federal Commissioner of Taxation (1979) ATC 4337. There is, however, a distinction between sub-para. 23(g)(iii) and sub-s. 117(i) of the Act, the latter having been the provision with which Brookton was concerned. In sub-s. 117(1) the verb "is" is used in juxtaposition to the word "established" in the phrase " . . . and which in either case is established for the purpose . . . "; but in my opinion this ground of distinction is not material.
It is necessary to look at the objects or purposes of the appellant to determine whether it qualifies for the exemption. The analysis of objects or purposes has attracted much discussion in the reported cases, some of which is in the context of the very provision which this case is concerned, whilst other discussion takes place in similar or related statutory provisions: c.f. Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436; Brookton's Case and the cases cited by Gibbs C.J. at 445, Mason J. at 453 and Aickin J. at 461-4; A. and S. Ruffy Pty. Limited v Federal Commissioner of Taxation (1958) 98 CLR 637; Revesby Credit Union Co-Operative Limited v The Commissioner of Taxation (1965) 112 CLR 564; The Social Credit Savings and Loans Society Limited v The Commissioner of Taxation (1971) 125 CLR 560; and see "The Waratahs" Case.
The judgment of the High Court in The Royal Australasian College of Surgeons Case is of particular importance to the question in the present case. Royal Australasian College of Surgeons was registered in Victoria as a limited company. Some of its objects as stated in its memorandum of association were for the promotion of the professional interests of its members and others were for the promotion of the science of surgery. The members of the College were all surgeons. Its principal activities included the holding of conferences of surgeons for the discussion and study of surgical matters and the dissemination of knowledge of surgery, the provision of a technical surgical library for the use of its members and the publication of a surgical journal, the conduct of examinations for admission to fellowship of the College and the administration of funds for surgical research and for the award of scholarships to medical students. The Commissioner assessed the College to tax on income received by it from investments. A case was stated before the Full Court of the High Court which asked the question whether the income of the College was exempt from income tax as being the income of a scientific, charitable or public educational institution within the meaning of para. 23(e) of the Act.
It was argued before the High Court by counsel for the College that it was a scientific or charitable institution within the meaning of para. 23(e) in that its main object was the advancement of surgery and that any benefit that may accrue to its members was secondary. Counsel for the Commissioner argued that a scientific institution is one which has for its sole or dominant object the enlargement of scientific knowledge; that if there are two co-ordinate objects, one of which is outside the exception, the exception cannot apply; that the College had two objects, namely, the advancement of science and the professional advancement of its members and that it was impossible to say that one predominated over the other.
Latham C.J. adopted with approval a passage from the judgment of the Lord President in Inland Revenue Commissioners v Aberdeen Medico-Chirurgical Society (1931) 16 Tax Cas 237 at 249 which included the following statement:
"But the question - difficult or easy to answer -

must always be - what is the true nature and the objects and activities of the particular society? If these objects and activities are of a mixed character, being partly professional and partly literary or scientific, then the question must be decided according to the prevalent or main character."

The Chief Justice said at 444-5:
"Unless the promotion of surgical science is the

main substantial or primary object of the College, it cannot be described as a scientific institution. It is argued for the Commissioner that the College has another object than the promotion of surgical science, namely, the promotion of the professional interests of its members, and that this object cannot be described as subsidiary or secondary or auxiliary only to the promotion of surgical science."

His Honour referred to Institution of Civil Engineers v Inland Revenue Commissioners (1932) 1 KB 149 at 151 and said of that case at 446:

"The fact that the institution concerned itself

with the professional conduct of its members did not prevent the conclusion being reached that the Institution was exempt from tax as being carried on for the promotion of engineering science and not for the promotion of the professional interest or advantage of the members."

The Chief Justice then held that the College was a scientific institution within the meaning of para. 23(e) of the Act.

Rich J. looked to the objects and practice (in the sense of activities) of the particular institution. His Honour stated the test which he understood to be applicable in these terms:
" . . . as I understand the cases, the test is whether

it can be predicated that the College is in the main scientific. . . . I have come to the conclusion that the main or real object of the College is the promotion and advancement of surgery. By this I mean that its essential purpose is to enlarge and extend the boundaries or area of the science of surgery. Its other objects are not collateral or independent but merely concomitant and incidental to the main object. And the fact that some of the subsidiary or ancillary functions and purposes may indirectly and incidentally be of benefit to the members of the profession does not destroy the exemption claimed."

His Honour held that the College was a scientific institution and therefore entitled to the exemption.
Starke J. said at 448 and 449:
"The objects of the College are therefore of a

mixed character and the memorandum does not make it clear which are its main or dominating characteristics. The activities of the College must therefore be examined.

If it be found that those activities are mainly or predominantly directed towards the promotion or advancement of scientific knowledge or, in other words, the advancement of surgical knowledge and practice, then the authorities make it clear that a finding that the college is a scientific institution is in point of law correct: Commissioners of Inland Revenue v Forrest; Inland Revenue Commissioners v Aberdeen

Medico-Chirurgical Society; Inland Revenue Commissioners v Yorkshire Agricultural Society. . . .

The activities of the College may benefit its fellows, but the facts related speak for themselves and establish that the College is doing 'something higher and larger' than the mere promotion of professional interests. It is actively engaged in the promotion and advancement of science in the advancement of surgical knowledge and practice. And that, I think, is the main and prevailing and the characteristic nature of the activities of the College."

His Honour found that the College was a scientific institution.
McTiernan J. said at 450:
"It is not necessary, to satisfy the section, that

the object of the association should be exclusively scientific. But it is necessary that the promotion of the science of surgery should be its main object (Forest's Case; In Re Royal College of Surgeons of England; Institution of Civil Engineers v Inland Revenue Commissioners; Inland Revenue Commissioners v Aberdeen Medico-Chirurgical Society.)"

His Honour found that "the primary and dominant object of the activities carried on by" the College was devoted to the promotion of the science of surgery. He said:
"The facts do not show more than that its

activities were directed to the promotion of surgery merely as an art and to the protection of the professional interests of surgeons, as subordinate and merely concomitant objects."

Williams J. said at 451 that the question whether the College was a scientific institution within the meaning of para. 23(e) depended "upon whether the main and dominant object for which the College was incorporated is to promote the science of surgery" and referred to Keren Kayemeth Le Jisroel Limited v Inland Revenue Commissioners (1932) AC 650 at 658. His Honour found that the appellant was a scientific institution within the meaning of para. 23(e).
As I read their Honours' reasons for judgment they used the words "main", "prevalent", "substantial", "predominant", "primary" or "essential" in relation to the objects or activities of the College without any distinction between them and as being interchangeable one with the other in the context of para. 23(e).
The principles which I distill from the Royal Australasian College of Surgeons Case are that the question whether the College was a scientific institution within the meaning of para. 23(e) depended upon whether its main object was to promote the science of surgery and that the exemption was available even if its objects were of a mixed character, partly professional and partly scientific, provided that its main object was the promotion of science of surgery. Each member of the Court approached the question this way, though there are shades of difference of opinion between their Honours in their characterisation of the objects or activities of the College.
It is not clear whether Latham C.J. regarded the object of promoting the professional interests of the members of the College as merely ancillary or incidental to the main object of the promotion of science of surgery or as an independent object. But his Honour did not appear to regard that distinction as important.
Rich J., in finding that the objects of the College, other than those devoted to the main object of the promotion of the science of surgery, were not collateral or independent but merely concomitant and incidental to the main object cannot be regarded as having adopted the proposition that, if those other objects were not merely concomitant and incidental to the main object, but were secondary objects, the College would have been disqualified from the exemption. His Honour was simply characterising those other objects on the facts of that case as in his view being merely concomitant and incidental to the main object.
It is not clear from the judgment of Starke J. whether his Honour regarded the object of the College in promoting the professional activities of its members as being merely ancillary or incidental to the main object of the promotion of the science of surgery or as being a secondary object, but I glean nothing from his Honour's judgment to support the conclusion that the characterisation of the object of promoting the professional activities of its members as secondary would have operated to disqualify the College from the exemption.
McTiernan J. adopted the approach that the activities of the College directed to the protection of the professional interests of surgeons were subordinate and merely concomitant to the main activity of the promotion of surgery.
It is not clear from the judgment of Williams J. whether he regarded the promotion of the professional interests of the members of the College as being merely incidental or as being in some way independent of the main object of the College.
Each of their Honours agreed that the test is to determine the main purpose of the College. In none of the judgments do I see support for the proposition that, if the promotion of the professional interests of the members concerned was not properly characterised as concomitant, incidental or ancillary to the main object of the promotion of the science of surgery but was a secondary purpose, it would bar the College from the exemption offered by para. 23(e).
Nor do I see any support for this proposition from the other cases to which reference was made in submissions, of which there were many, including those mentioned earlier.
I have examined the decision of the High Court in Royal Australasian College of Surgeons Case in some detail because it was used in argument by counsel for the Commissioner to support the proposition that, even if the main purpose or object of the appellant was the promotion of rugby league football, on the assumption that the social club activities of the appellant could not be correctly described as being merely ancillary or incidental to the main object, they constituted a secondary object, whether independent or not, and that fact operated to prevent the appellant from falling within sub-para. 23(g)(iii).
In the Waratahs Case, which concerned sub-para. 23(g)(iii) of the Act and the Waratahs Football Club, Waddell J. said at 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."

His Honour proceded to apply that test and concluded at 4346 that the provision by the appellant of the social club and its activities in that case 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 activities cannot be regarded as merely concomitant and incidental to its sporting activities but were in pursuit of a collateral of independent purpose. Accordingly it cannot be said that the evidence establishes that the appellant comes within the statutory description."

The primary Judge adopted substantially the same approach as Waddell J. but the correctness of Waddell J.'s analysis of the Royal Australasian College of Surgeons Case was not challenged before him. The primary Judge said:
"However, having regard to the later decision of

the High Court in Stratton v Simpson (1970) 125 CLR 138 it now seems clear that Waddell J. had correctly construed the Royal Australasian College of Surgeons Case."

In my opinion Stratton's Case does not support that proposition. Stratton's Case concerned an originating summons seeking a declaration that the residuary bequest contained in clause 15 of the testator's will was void and that there was an intestacy as to the residuary estate. The case turned on the terms of the will and the provisions of s. 134 of the Administration Act, 1903-1965 (W.A.) and s. 102 of the Trustees Act, 1962 (W.A.). For a body to be a charitable institution its main purpose must be charitable, although it may have other purposes concomitant and incidental to that purpose: Congregational Union of New South Wales v Thistlethwayte (1952) 87 CLR 375 at 442; and other cases cited by Gibbs J. in Stratton's Case at 160. Stratton's Case has, in my view, no application to the interpretation of sub-para. 23(g)(iii) of the Act which is a different area of discourse.
The approach adopted in the Waratahs Case was, as the passages extracted from the judgment demonstrate, that the existence of a secondary purpose is fatal to the claim for exemption under para. 23(g)(iii) notwithstanding the existence of the stated purpose as the main purpose. For the reasons which I have given I cannot distill that proposition from the Royal Australasian College of Surgeons Case myself and respectfully disagree with Waddell J. See also R.W. Parsons Income Taxation in Australia, para. 2.63.
The view that the existence of an independent or secondary purpose precludes another purpose from being the main purpose within sub-para. 23(g)(iii) is one which I reject. It implies that a purpose may not be the main purpose simply because some other purpose is regarded as secondary or independent. There are cases, however, where one can discern a main or predominant purpose and other purposes, not being merely ancillary or incidental thereto, but secondary and even independent of the main purpose, yet this would not detract from the former purpose being correctly described as the main purpose. To say that the presence of a secondary purpose prevents another purpose being the main purpose is really to say that the main purpose must be the sole purpose.

A further difficulty confronts this view, namely, that it requires the characterisation of the secondary purpose, not being ancillary or incidental to the main purpose, as being independent of the main purpose. This would doubtless be so in some cases, but there would be cases of a main purpose and a secondary purpose that is nevertheless related to the main purpose and not properly described as being either independent of it or ancillary or incidental to it. It is possible to have two independent objects or purposes that are not unrelated to each other, but one of which is predominant over the other.
In Stratton's Case Windeyer J. made an illuminating examination of this discussion at 148-9 where his Honour said:
"In itself the phrase 'main object', as used in

legal writings is ambiguous: but in any particular case the context or the topic ordinarily shews in which of two senses it is used. Sometimes it means the principal object of an institution having also secondary objects or activities which, although of less importance, are capable of being lawfully pursued independently of and without their having any essential bearing upon the pursuit of the main object. On the other hand the words 'can postulate a dominant object, other objects being all incidental, subservient and ancillary, only lawfully to be pursued to conducive to promoting the main object. This latter sense of the words 'main object' seems to have first come into currency in company law. It there became a rule for the construction of a company's memorandum of association. It is of little importance in that field today, because it is ordinarily excluded by the sophisticated form of modern memoranda of association: but it still makes an occasional appearance in arguments, as it did for example in Anglo-Overseas Agencies Limited v Green (1961) 1 QB 1."

In my opinion the question in a case such as the present must be what is the true character and nature of the appellant. It is a question of characterising the appellant having regard to its objects, purposes and activities.
For a society, association or club to qualify for the exemption granted by sub-para. 23(g)(iii) it must be one that has as its main object or purpose the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants. 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 exemption cannot apply because it would be impossible to say that one object is the main or predominant object.
The material facts and circumstances which should be examined to characterise the main purpose of the relevant body include its constitution, its activities, its history and its control. These may alter from time to time and the purpose of establishment may correspondingly change. It is not sufficient to look to the formation of the body and to ascertain what was at that time the purpose of its formation. The statute gives a periodic operation to the words and directs the inquiry to a particular time, namely, the year of income so that consideration must be given not only to the purpose for which the society was established but also the purpose for which it is currently conducted.
The question is therefore whether in all the circumstances of this case the main purpose for which the appellant was established during the income tax years in question was the encouragement or promotion of rugby league football.
It is necessary in considering the question to refer again to some of the facts mentioned earlier. There is a close relationship between the appellant and the Football Club. The control of the appellant has remained in the hands of persons interested in promoting the Football Club and all the directors of the appellant have since the formation of the present Football Club in 1963 been members of that club. Also, the directors of the appellant become directors of the Football Club. The Football Club has no independent financial means other than prize money and grants from the New South Wales Rugby League and membership fees and is almost entirely dependent upon the appellant for financial assistance in the form of direct grants, provision of facilities at no or nominal cost and the guarantee of expenditure of the Football Club. The appellant has assisted the Football Club with facilities such as the Caltex Field and other fields together with their associated facilities and the appellant allows the Football Club to use the Caltex Field for a nominal fee and to reap the benefits of sponsorship and advertising rights. The appellant bears all the costs of maintaining the fields and all capital expenditure. It also makes available to the Football Club without charge fully equipped offices and meeting facilities in the club house.
In the absence of the continued support of the appellant the Football Club could not have continued to play in the competitions organised by the New South Wales Rugby League, and, if that support were discontinued, the likely consequence would be a loss of interest and decline of support of rugby league in the Sutherland Shire. Without the holding of first grade matches it would be difficult to encourage younger players to participate in the sport and they may drift to other codes.
The policy of the appellant is to conduct its affairs so as to maximise the surplus that is available to enable it to support the Football Club. On occasions the level of commitment to the Football Club has necessitated the appellant in economies in general maintenance. Substantial amounts were contributed by the appellant to the Football Club which represented a substantial percentage of the appellant's after tax profit.
Notwithstanding these matters, in my opinion the appellant's main object is the provision for its members of a social and sporting club with the facilities previously mentioned, not the encouragement or promotion of football. I have already described the club building and its facilities and the uses to which they are put. The appellant has some 13,000 members and carries on a very substantial business as a social club.
The income of the appellant is derived from the provision of social activities for its members and its expenditure is in large measure to produce this income. The appellant carries on a large business activity independently of any support it gives to rugby league football. The assistance which the appellant has given to the Football Club and the provision of facilities for it demonstrate that the appellant's activities are related to rugby league football but those circumstances do not stamp the appellant's activities with the main purpose of encouraging or promoting rugby league football.
The appellant is under no legal obligation, whether under its memorandum of association or by contract, to support the Football Club at all except for the obligation under its guarantee to the New South Wales Rugby League in 1987 to guarantee the Football Club's debts up to $150,000. The existence of such an obligation is not essential to qualify the appellant for the exemption, but its absence is a relevant consideration. It could appropriate all its surplus profits in any year, indeed for many years, to some purpose consistent with the objects of the appellant yet inconsistent with the objects of the Football Club: for example, building and maintaining a country club for the enjoyment of the members of the appellant and their guests.
The absence of any such legal obligation is not fatal to the appellant because ultimately it is a question of characterising the appellant's purposes and activities in the light of the relevant facts as they exist in any given year of income. But the potential of the appellant to apply its surplus funds for purposes having nothing to do with the encouragement or promotion of rugby league football is a significant matter.
The word "established", as mentioned earlier, involves an examination of the purposes and activities of the taxpayer claiming exemption which together make up the body itself during the year of income, an inquiry which may legitimately rove over a number of prior years to support the tax exempt status of the body concerned in the relevant year of income.
The objects, or more correctly, the blend of objects and purposes and powers, which are stated in the memorandum of association of the appellant throw little light upon the question under consideration. Certainly the objects listed in the memorandum are not irrelevant and they probably assist the argument of the Commissioner more than that of the appellant; but in the end I do not think anything of significance turns on them.
In my opinion the encouragement and promotion of rugby league football and the provision of the amenities of a social club for its members are two objects or purposes of the appellant. Neither is correctly described as ancillary or incidental to the other or as necessarily independent of the other. The two objects and purpose overlap to some degree. The main object or purpose is the provision of the social amenities to its members, not the encouragement or promotion of rugby league football.
It is unreal to regard the appellant's club house and its social activities as being undertaken for the purpose of encouraging or promoting rugby league football and supporting the Football Club. This is a secondary purpose.
An alternative approach is to regard these two objects of the appellant as being co-ordinate so that it is impossible to say that one predominates over the other. I recognise some force in this approach; but I do not accept it in this case because in my opinion the provision of social amenities to its members is the main object of the appellant.
Finally, there is some difference of judicial opinion as to whether one can examine the subjective motives and intentions of the promoters of the appellant and its directors for the purpose of ascertaining if the statutory exemption from income tax operates: see Brookton per Gibbs C.J. at 445 who left the question open; per Mason J. at 453 where his Honour said that the intentions of the promotors may be relevant and can be examined. Mason J. said that a distinction is to be drawn between purpose on the one hand and motives and intentions of the promoters on the other hand, but his Honour said that he did not see why the intentions of the promoters may not be relevant in determining what is the purpose for which a company is established and drew support from Ruffy at 651. Aickin J. found that the subjective intentions of the promoters, the original subscribers or shareholders and the original directors, whether formed prior to or at the time of incorporation, were of no assistance in determining whether the taxpayer was a co-operative company within the meaning of s. 117 and that the purpose of the incorporation must be ascertained from what it did. Murphy J. expressed no view on the matter and Wilson J. agreed with Mason J.
Whether it is permissible to have regard to the subjective motives and intentions of the promoters of the appellant or those who have been its directors at any relevant time is not a question requiring decision in this case. Even taking into account evidence of that kind which was referred to by the primary Judge the conclusion would still be that the appellant's main purpose is that of carrying on a social club for the benefit of its members.
I would dismiss the appeals with costs.

JUDGE2

The appellant, Cronulla-Sutherland Leagues Club Limited ("the taxpayer"), objected against assessments by the respondent Commissioner of Taxation in respect of the income tax years 1979-1982, 1985 and 1986, claiming that its income was exempted from tax by virtue of the provisions of s.23(g)(iii) of the Income Tax Assessment Act ("the Act"). The matter having been referred to the Court, it was held, at first instance, that s.23(g)(iii) did not apply in the present case (see the report of the decision at 89 ATC 4936). The taxpayer now appeals from that judgment.

Section 23(g)(iii) is as follows:
"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 an athletic game or athletic sport in which human beings are the sole participants; . . . "

The questions which arise on the appeal are, first, the proper construction of sub-para. (iii) of para.(g) of s.23 (it is accepted by the Commissioner that the first limb of para.(g) is satisfied, that is, that the taxpayer is not carried on for the purpose of profit or gain to its individual members); and, secondly, whether, in the facts and circumstances of the present case, the provisions of sub-para.(iii) are applicable.
There is no dispute about the primary facts. The taxpayer was incorporated in 1957 under the Companies Act, 1936 (N.S.W.) as a company limited by guarantee and not having a share capital. In its memorandum of association the following objects, inter alia, are specified:
"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.

(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 at 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.

. . . "

In the memorandum, it is also provided that the income and property of the taxpayer shall be applied solely towards the promotion of its objects and no portion thereof shall be paid or transferred by way of dividend bonus or otherwise to members (cl.4).
In 1968, the taxpayer purchased land upon which it developed playing fields used by the Cronulla-Sutherland District Rugby League Football Club ("the Football Club") at a nominal cost to the Football Club. On a site adjoining the playing fields, the taxpayer erected a large club-house. The building has four levels. On the bottom level are squash courts, a gymnasium and training facilities available to members and footballers. A bar area adjoins the football grounds. The next level, the taxpayer's main trading area, contains several bars, one with poker machines, a bistro seating approximately 200 people and an office area. On the next level, there is an auditorium, a cocktail bar, a Chinese restaurant capable of seating 300 people, and viewing areas looking over the football field. The top level consists of a mezzanine floor for the auditorium, an office area and a games lounge used for table tennis, carpet bowls, cards and snooker. There is also a function room and further viewing areas overlooking the football field.
The taxpayer has some 13,000 members. It uses the auditorium for the provision of entertainment and conducts discos and variety shows. It makes other facilities available to members; they include a large video screen used for screening television programmes, including the "Sky" television service beamed by satellite.
In the income years in question, the taxpayer made substantial grants and donations to the Football Club. In addition to this direct financial assistance, the taxpayer provided significant indirect financial support to the Football Club. It is common ground that, in the absence of this assistance and support from the taxpayer, the Football Club could not have continued to participate in the football competitions organised by the New South Wales Rugby League.
The taxpayer's statements of its income and expenditure in the relevant income years disclosed the following position:

1979 $ $ Net Profit on Machine Trading 1,768,924 Net Profit on Bar Trading 281,675 Commission on Cigarette Sales 8,330 Subscriptions and Entrance Fees 344,212 Sundry Income 22,793 Social Function Fees 241,936 --------- 2,667,870 Add: Profit on Catering Trading 3,198 --------- 2,671,068 Less: EXPENSES

Advertising and Promotion 82,257 Artists 285,029 Auditors' Fees - Audit of Accounts 8,210 - Other Services - Bad Debts 1,875 Bank Charges 2,746 Club Topics 20,283 Cleaning 111,182 Data Processing 25,763 Depreciation - Fixed Assets 112,043 Electricity, Gas and Fuel 80,058 Insurance 39,345 Laundry 4,966 Legal Costs 10,154 Management Fees - Members Amenities 80,362 Members Badges 5,427 Printing Stationery and Postage 34,399 Payroll Tax 65,838 Rates and Taxes 18,383 Repairs, Replacements and Maintenance 100,288 Salaries and Wages 199,931 Security Services 27,197 Staff Amenities and Services 3,958 Sundries 127,470 Telephone 18,242 ------- 1,465,406 --------- NET OPERATING SURPLUS BEFORE INTEREST AND EXTRAORDINARY ITEM 1,205,662 Less: Interest on Loan Commitments 379,100 --------- 826,562 Add: Surplus on Disposal of Fixed Assets 8,856 --------- 835,417 Less: GRANTS and DONATIONS

Cronulla Sutherland District Rugby League Football Club - - Grant 130,000 - Other 1,469 Other Grants and Donations 9,491 Expenses paid on behalf of C.S.D.R.L.F.C 51,491 Sports Council Grants 10,500 Junior League Grants 2,250 ------- 205,201 --------- 630,216 Add: EXTRAORDINARY ITEM

Perpetual Subscriptions - Note 2. 17,000 --------- NET PROFIT FOR YEAR $647,216 Add: Accumulated Funds 27th June, 1978 3,055,358 --------- ACCUMULATED FUNDS 26th JUNE, 1979 $3,702,574 --------- 1980 INCOME $ $

Net Profit from Poker Machines 2,111,880

Net Profit from Bar Trading 352,165 Members: Entrance Fees 44,220 Subscriptions 265,753 Social Booking Fees 219,020 Sundry 33,287 --------- 3,026,325 Less: Loss (Profit) from Catering Trading 14,272 --------- TOTAL INCOME 3,012,053 Less: EXPENDITURE

Advertising and Promotion 162,873 Artists Fees 203,556 Auditors Fees - Audit of Accounts 9,250 Bad Debts 610 Bank Charges 10,327 Cleaning 145,424 Club Journal 24,541 Data Processing 21,884 Depreciation 107,045 Electricity and Fuel 132,984 Insurance 40,793 Laundry 11,366 Legal and Consulting Fees 1,688 Members Amenities 54,657 Payroll Tax 74,753 Printing, Postage and Stationery 39,884 Rates 20,387 Repairs and Maintenance 117,999 Security 48,402 Sundries 136,297 Salaries and Wages 225,528 Staff Uniforms and Amenities 25,706 Superannuation 13,945 Telephone 14,707 ------- TOTAL EXPENDITURE 1,644,606 OPERATING SURPLUS - Before Interest and Grants 1,367,447 Less: Interest paid 414,820 Grant C.S.D.R.L.F.C. 150,000 Other Grants and Donations 7,580 Sports Council Grants 9,827 Junior League Grants 5,404 Expense on behalf C.S.D.R.L.F.C. 74,832 ------- 662,463 --------- 704,984 Add: Profit on disposal of Fixed Assets 8,808 --------- 713,792 Add: Perpetual Subscriptions 8,200 --------- NET PROFIT FOR YEAR $721,992 Add: Accumulated Funds 26th June, 1979 3,702,574 --------- ACCUMULATED MEMBERS FUNDS 1st JULY, 1980 $4,424,566 --------- --------- 1981 $ $ INCOME

Net Profit from Poker Machines 2,128,762 Net Profit from Bar Trading 371,122 Members: Entrance Fees 34,646 Subscriptions 296,101 Social Booking Fees 190,182 Sundry 48,808 Other Liquor Sales 21,642 --------- 3,091,263 Less: Loss from Catering Trading 41,847 ---------

TOTAL INCOME 3,049,416

Less: EXPENDITURE

Advertising and Promotion 152,949 Artists Fees 220,661 Auditors Fees - Audit of Accounts 9,550 Bad Debts - Bank Charges 3,090 Cleaning 169,945 Club Journal 34,900 Data Processing 21,265 Depreciation - Fixed Assets 120,929 Electricity and Fuel 174,497 Insurance 36,018 Laundry 17,773 Legal and Consulting Fees 19,380 Members Amenities 140,905 Payroll Tax 67,158 Printing, Postage and Stationery 61,570 Rates 44,417 Repairs and Maintenance 174,384 Security 62,449 Sundries 133,017 Salaries and Wages 280,289 Staff Uniforms and Amenities 29,205 Superannuation 16,107 Telephone 17,770 ------- TOTAL EXPENDITURE 2,028,226 --------- OPERATING SURPLUS - Before Interest and Grants 1,021,190 Less: Interest paid 390,746 Grant C.S.D.R.L.F.C. 200,000 Other Grants and Donations 5,322 Sports Council Grants 11,620 Junior League Grants 6,808 Expense on behalf C.S.D.R.L.F.C. 87,765 ------- 702,261 --------- 318,929 Add: Profit on disposal of Fixed Assets - ------- 318,929 Add: Non Trading Income 39,656 --------- NET PROFIT FOR YEAR 358,858 Add: Accumulated Funds 1st July 4,424,566 --------- ACCUMULATED MEMBERS FUNDS 30th JUNE $4,783,151 --------- INCOME AND EXPENDITURE STATEMENT YEAR ENDED 29TH JUNE, 1982.

$ $

INCOME

Net Profit on Machine Trading 1,919,292 Net Profit on Bar Trading 381,012 Subscriptions and Entrance Fees 333,604 Other Bar Sales 22,703 Rent Received 53,296 Social Booking Fees 195,141 Sundry Income 59,190 --------- 2,964,238 Less: Loss on Catering Trading 48,062 --------- 2,916,176 Less: EXPENDITURE.

Advertising and Promotion 78,417 Artists Fees 285,801 Auditor's Fees (Audit of Accounts) 10,450 Bank Charges and Interest 18,750 Club Journal 27,127 Cleaning 177,345 Data Processing 17,779 Debenture Fee, Licences and Subscriptions 13,376 Directors Allowances and Expenses 19,765 Depreciation 112,062 Electricity, Gas and Fuel 196,751 Insurance 46,616 Laundry 15,015 Leasing Charges 31,467 Legal and Consulting Costs 1,918 Payroll Tax 106,367 Printing, Stationery and Postage 47,501 Provision for Sick, Holiday and Long Service Leave 16,973 Rates and Taxes 40,263 Repairs and Maintenance 136,451 Salaries and Wages 302,540 Security Services 40,849 Staff Amenities 15,660 Sundries 30,280 Superannuation 18,971 Telephone 19,839 Travelling Expenses 8,089 Visitor Entertainment 19,569 ------- 1,855,991 --------- OPERATING SURPLUS BEFORE INTEREST and GRANTS. 1,060,185 Less: Interest on Loan Commitments 371,022 --------- 689,163 Less: GRANTS and DONATIONS.

Grant - C.S.D.R.L.F.C. 250,000 Expenses paid on Behalf C.S.D.R.L.F.C. 111,050 Sports Council Grants 15,413 Junior League Grants 7,213 Other donations 5,474 ------- 389,150 --------- NET SURPLUS FOR PERIOD. 300,013 Add: Other Income (Non Trading) - --------- 300,013 Add: Accumulated Funds 1st July, 1981 4,783,150 --------- ACCUMULATED FUNDS 29TH JUNE 1982. $5,083,163 --------- 12 Months to 2/7/85

INCOME

Net Profit (Loss) Bar Trading A/c. 368,843 Net Profit (Loss) Catering Trading (10,360) Net Profit - Poker Machines 1,818,183 Office Bar Sales 24,018 Rent Received 54,513 Social Booking Fees 147,966 Profit on Sale of Fixed Assets (2,014) Subscriptions and Entrance Fees 215,460 Sundry Income 29,913 --------- TOTAL INCOME 2,646,522 --------- LESS: OPERATING EXPENSES

Advertising and Promotion 197,104 Artists Fees 137,519 Auditors Fees 21,740 Bad Debts Written Off 1,030 Bank Charges 12,207 Cleaning 181,106 Club Journal 34,025 Data Processing 26,518 Debenture Fees, Licences and Subs. 14,345 Depreciation of Fixed Assets 68,105 Depreciation - Buildings 73,000 Directors Allowances and Expenses 19,785 General Expenses 15,750 Insurance 65,767 Laundry 6,289 Leasing Charges 41,267 Legal Fees and Consulting 11,477 Light, Power and Fuel 222,595 Motor Vehicle Expenses 11,428 Payroll Tax 91,576 Printing, Postage and Stationery 62,834 Rates and Taxes 53,926 Repairs and Maintenance 131,871 Salaries and Wages 268,741 Security Service 30,881 Staff Amenities 31,593 Superannuation 17,074 Telephone 13,657 Visitor Entertainment 7,451 --------- TOTAL OPERATING EXPENSES 1,870,661 --------- OPERATING SURPLUS

BEFORE INTEREST/GRANT 775,861 LESS: Interest on Loan

Commitments 449,274 --------- OPERATING SURPLUS/(LOSS)

After Interest 326,587 Less: Grants and Donations

Grants and Expenses re

Cronulla/Sutherland

District Rugby

League Football Club Ltd. 161,183 Sports Council Grants 18,712 Junior League Grants 5,168 Other Donations 2,179 --------- Total Interest, Grants and Donations 636,516 --------- Surplus/(Loss) before Income Tax 139,345 Less: Income Tax Expense - Note 8 12,000 --------- Surplus before Extraordinary Item 127,345 Deduct/(Add) Extraordinary Item

- Note 4. (49,798) --------- Net Surplus/(Loss) for the Period 177,143 Accumulated Funds

Brought Forward 4,729,648 --------- Accumulated Funds

Carried Forward $4,906,791 =========

INCOME 1986

Net Profit(Loss) Bar Trading A/C 456,152 Net Profit (Loss) Catering Trading 2,066 Net Profit - Poker Machines 1,899,193 Other Bar Sales 31,034 Rent Received 70,662 Social Booking Fees 241,304 Subscriptions and Entrance Fees 220,863 Sundry Income 22,313 --------- TOTAL INCOME 2,943,586 --------- LESS OPERATING EXPENSES

Advertising and Promotion - General 223,225 Artists' Fees 198,068 Auditors Fees 19,986 Bad Debts' Written Off 3,266 Bank Charges 16,998 Catering Promotion 6,364 Cleaning 189,534 Club Journal 38,630 Data Processing 15,272 Debenture Fee, Licences and Subs. 9,304 Depreciation of Fixed Assets 75,313 Depreciation - Buildings 73,000 Directors' Allowances and Expenses 27,478 General Expenses 26,944 Insurance 77,146 Laundry 2,038 Leasing Charges 36,642 Legal Fees and Consulting 10,235 Light, Power and Fuel 233,348 Loss on Sale of Fixed Assets 482 Motor Vehicle Expenses 12,022 Payroll Tax 106,399 Printing, Postage and Stationery 53,483 Rates and Taxes 55,133 Reception - Wages 81,152 Repairs and Maintenance 144,639 Salaries - Administration 256,504 Security Service 36,563 Staff Meals 46,946 Superannuation 15,929 Telephone 29,140 --------- TOTAL OPERATING EXPENSES 2,121,183 --------- OPERATING SURPLUS BEFORE

INTEREST/GRANT 822,404 Less: Interest on Loan

Commitments 473,915 --------- Operating Surplus/(Loss) After

Interest 348,489 Grants and Expenses re Cronulla-Suth erland District Rugby League

S.23(g)(iii) provides, so far as relevant, as follows:-

"23. The following income shall be exempt from

income tax:

. . . (g) the income of a . . . . club which is not carried on for the purposes of profit or gain to its individual members and is.

. . (iii) a . . . club established for the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants;. . ."

The section has a history which is, in my view, relevant to its construction. In the judgment under appeal the trial Judge referred to it as follows:-
"Reference was made to s.14(1)(j) of the Income

Tax Assessment Act 1922-34, the predecessor to s.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 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."

It is to be observed that the legislature considerably widened the scope of the proposed exemption. As well as not adopting the recommendation that the stated purpose be the sole purpose of the club's establishment it widened the scope of the exempting activity to include "encouragement" of athletic games or sports (which were also allowed to take place indoors).
This history indicates, in my opinion, a clear legislative intention to encourage the establishment of clubs for the broad purposes so set forth by granting them immunity from taxation in respect of such part of their revenues as would otherwise be taxable. A similar result could, no doubt, have been achieved by making provision for their expenditure for such purposes to be an allowable deduction. It is, perhaps, ironic to note that had this method been adopted, the Taxpayer could have made no complaint in respect of the relevant years. Its expenditures in favour of its associated football club in fact exceeded, by quite a large margin, the amounts of its allegedly taxable income. Be that as it may, the legislative policy is so clear that in my view the court should be astute to avoid adopting a construction of the section which would militate against that policy.
Before I consider the construction of the section, it is necessary that I make reference to the facts relating to the Taxpayer's claim for exemption. These facts have been fully set out in the judgment under appeal and also in the judgments of my brethren, which I have had the advantage of reading in draft form. I shall not set them out in detail again but shall refer only to those which appear necessary for the resolution of the questions argued in this appeal.
In the first place it should be noted that it was not disputed on appeal that the Taxpayer was a club "not carried on for the purpose of profit or gain to its individual members." The sole issue was whether it could properly be characterised as a club "established for the encouragement or promotion of" Rugby League football, it being conceded that this code was a form of sport with the meaning of the section.
The evidence establishes that the Taxpayer is a typical suburban Leagues Club. It is conducted in close association with a local Rugby League Football Club which is dependent upon it for its financial existence and also, in this case, for the provision of an appropriate set of playing fields, grand stands, changing sheds, etc. Its history commences in 1957 when a Mr Poulter, an accountant, who had been a Rugby League player for a number of years, conceived of the idea of using certain vacant premises of which he was aware in the suburb of Caringbah for the purpose of establishing a Leagues club in order to raise money for the Cronulla/Caringbah Junior Rugby League Football Club. Mr Poulter and those with whom he discussed his plan also had in mind that the club, if so established, might ultimately support a team to compete in competitions in the New South Wales Rugby League. The persons who joined with Mr Poulter in this plan were all current and past players of Rugby League and were also officers in the football club referred to. There is no reason to doubt, and the trial judge appears to have accepted Mr Poulter's evidence unreservedly, that the original club was set up with these purposes. It was incorporated on 5th June 1957. Relevant portions of its memorandum of association are set out in the judgments of my brethren. I share their view that, in themselves, they cast little light upon the questions in this case. The relevant purpose or purposes for which the club was established, maintained and conducted over the years are best discovered by a consideration of its activities as disclosed in the evidence. In this regard, it is clear that the control of the appellant has always been exercised by officers interested in the encouragement and promotion of the associated football club and that all the directors of the appellant have also been members of the football club.
I think there can be no doubt that, at the outset, the Taxpayer was established for the purpose of earning monies with which to fund the growth of the Rugby League code in the area. Indeed I do not understand the contrary to have been argued. It is also clear that, through the activities of the Taxpayer, the number of Junior Football Clubs in the Sutherland Shire increased from three in 1957, to twelve in 1963. Additionally there grew up a further club separate from the Junior Football League, the Cronulla-Sutherland District Rugby League Football Club (the "Football Club"). It is clear that the Taxpayer and its officers were instrumental in the growth of this club. In 1966 this club applied to become a competitor in the first grade competition organised by New South Wales Rugby League now known as the "Winfield Cup Premiership Competition". As a condition of participation in this competition the club was required to have a very sizeable financial capacity sufficient to support three grades of district football plus junior and school based operations. This large financial commitment was undertaken by the Taxpayer as a part of its general sponsorship of the Football Club. It is clear that the Taxpayer over the years grew in membership and financial strength whilst at the same time supporting a corresponding growth in the Rugby League code in the area.
His Honour found that in the years in question the Football Club was for practical purposes almost entirely dependent upon the Taxpayer for its financial existence. It clearly appears that the Taxpayer provided financial assistance to the Football Club by way of direct grants of money, by guaranteeing its expenditure and by the provision of facilities such as its main playing fields at purely token cost. The expenditures involved were of very substantial size. His Honour held that "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."
It is clear that the acceptance of the obligation to provide this substantial level of support to the Football Club involved the Taxpayer club in foregoing from time to time expenditure upon itself which its management would otherwise have regarded as desirable. His Honour found that "in 1987 the applicant guaranteed to the NSWRL the Football Club's debts up to $150,000 and payment under the guarantee impeded the ability of 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". It is also clear on the evidence, and His Honour so found, that without the support of the Taxpayer, the Football Club could not have continued to play in the State competition. It is also important to note that had this event occurred, there would certainly have been a decline in the support of and playing of Rugby League Football in the Cronulla-Sutherland area, contrary to the evident policy of the legislature.
His Honour instances the level of support given by the Taxpayer to the Football Club in 1986. It was as follows:-

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 1966 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 evidence clearly establishes that over the years there was a very considerable development in the Taxpayer club. The membership grew to 13,000. The club premises grew in size and in equipment. In addition to areas clearly devoted to the Rugby League code there were other substantial areas of the club premises developed for purposes which had no direct relationship to the code. These areas of activity are detailed in the evidence. It is fair to say, probably, that they have their counterpart in all clubs of the same kind in the State. The club developed bar facilities, poker machine facilities, squash courts, an auditorium, restaurant facilities and the like. It is clear that quite a large percentage of its membership would probably have little or no interest in the Rugby League code. These members would use the Taxpayer's facilities for their own pleasurable purposes. Also, visitors who use the club's premises and facilities might well do so for personal reasons rather than out of dedication to the sport. However, such persons, of course, would, by the purchase of the goods and services offered by the club, add to the club's revenues.
In the light of the facts as to the size of the club's facilities, its membership and the use made by its members of the facilities, His Honour felt unable to characterise the Taxpayer as being a club established for the relevant purposes. He felt, rather, that the evidence indicated that it was an institution established, in the relevant years of income, for the purposes of providing facilities, goods, and services to its members with a merely collateral or incidental purpose of assisting the Football Club and the sport in general.
It is, therefore, necessary to consider the construction of the section in order to determine whether the Taxpayer's undoubtedly high level of assistance to the Football Club and the Rugby League code in general in the relevant years was sufficient to bring it within the benefit of the section. It should be noted at the outset that the section clearly contemplates that a members' club can be covered by its terms. That being so, it follows that the club's "income" contemplated by the section is not the whole of the nett revenue of the club but simply that part of it which falls outside the operation of the principle of mutuality. The revenue which falls within the purview of that principle is simply not "income" according to the ordinary usage of the word (Sydney Water Board Employees' Credit Union Limited v F.C. of T. 1973 129 CLR 446). So far as a members' club is concerned, then, the section is concerned only with the question whether a proportion of its revenue should be exempt from taxation. That proportion could, conceivably, be quite a small one or even non-existent. As already indicated, in the present case it has been accepted as being the percentage of operating profits attributable to the use by visitors of the club's facilities, which is estimated as being 20%.
The next question is what is required to enable a members' club to be "established" for the purposes set out in this section. Although, having regard to the ordinary meaning of the word "established" as being "set up permanently at a particular point of time" it would be easy to read the section as referring to the income of a club which had been established in the past for the stated purposes, I feel that such an interpretation cannot be the preferred one. Undoubtedly the Act focuses attention on a taxpayer's income situation in relevant fiscal years with the result that it would ordinarily be expected that the situation of the club in the relevant fiscal year would be the subject of examination under the section. Moreover, the decision of the High Court in Brookton Co-operative Society Limited v Commissioner of Taxation 147 CLR 441 requires that the word "establish" be given in the section a meaning more akin to "maintained" or "conducted" in the relevant year of income. I respectfully agree with what Lockhart J. has written on this subject. Accordingly the matter must be approached on the basis of the characterisation of the Taxpayer club in the relevant years of income. However, in my view, this is not to say that the circumstances of the actual establishment of the Taxpayer are not without some significance. Where it can be seen that a firm purpose of relevant encouragement or promotion attended the actual creation of a club it must be relevant to observe whether there is evident a continuation of that purpose over time albeit there be a change in the overall size and activities of the club or in the size and activities of the sporting organisation the object of the club's encouragement or promotion.
In the present case, as I have indicated, I do not understand it to be challenged that the Taxpayer club was, in effect, called into being through the motivation of its founders to provide a vehicle for the encouragement and promotion of the sport of Rugby League football in the Cronulla-Sutherland area through the provision of aid in money or money's worth. The question for decision was whether there was a fundamental alteration in the raison d'etre of the Taxpayer club as it increased in size of membership and diversity of club activity.
I respectfully agree, again, with Lockhart J.'s analysis of the effect of the decision of the High Court in Royal Australasian College of Surgeons v F.C. of T. (1943 68 CLR 436) and in his disagreement with aspects of the decision in the Waratah Rugby Union Football Club Limited v F.C. of T. (79 ATC 4337). I also agree with him that the decision of the High Court in Stratton v Simpson (1970 125 CLR 128) has no bearing on the true construction of the words "established for the encouragement or promotion, etc" in s.23(g)(iii). I agree that the correct construction of the section requires the interpolation of the words "mainly" or "predominantly" before the words "for the encouragement". I also agree that neither the Surgeon's case nor Simpson v Stratton produce the result that a purpose within the meaning of the section cannot be a main or predominant purpose if it co-exists with some secondary purpose which is not concomitant or incidental to it. I am satisfied that, on a proper analysis of the authorities, the subsection is satisfied if a club is shown to have a main purpose of relevant encouragement or promotion even if there exist a secondary and non-subservient purpose of conferring unrelated benefits upon members and visitors.
How does one determine on the evidence whether the Taxpayer was, in the relevant years of income, "established" mainly for the encouragement or promotion of Rugby League football? The respondent's case is that in the relevant years, whatever may have been the original position, the physical growth of the club, its substantial membership, the diversification of its facilities and the use by them of members and visitors clearly show that the primary, main, or predominant purpose of the club was that it be conducted for the benefit of its membership and only secondarily for the benefit of the football Club and the Rugby League code.
I find myself unable to accept this submission. I do not think that the question can be decided simply by having regard to the size of the club and its membership and the large variety of activities and benefits provided by it, in its day to day operations, to its members and to their visitors. In my opinion the proper construction and application of the section leads to a different result.
Firstly, the section itself clearly contemplates that a members' club is capable of being established, conducted and maintained for the predominant purpose of encouragement or promotion of a sport. This must follow from the inclusion of such clubs within the ambit of the section. It must also have been accepted by the legislature that such clubs would, in the ordinary way of social clubs, trade with their members and their visitors, this latter trade being a source of the "income" referred to in the section. It must also have been contemplated that such trading could lead, in any fiscal year, to a trading surplus capable of being expended as the club management saw fit in accordance with the constitution and rules of the club or its memorandum and articles, if it were incorporated.
Secondly, it is clear that the section does not require that the members of a club should be participants in the relevant game or sport. It does not even require that the members participate in the activities of encouragement or promotion of such games or sports. Indeed it does not require that the members have the faintest interest in the game or sport. It simply contemplates that the income producing entity shall be a club with members.
Thirdly, the section does not prescribe the means of "encouragement" or "promotion"; they are at large. Therefore the legislature must have intended that a club might adopt as its only method of encouragement or promotion, the provision of financial assistance in money or money's worth. Such assistance might, of course, be provided in the simple form of donations by the members to a fund established by the club for that purpose. Such a method would clearly fall within the section; but it is not the only method by which a club can provide finance to encourage or promote a chosen athletic sport. It can also achieve this object by making provision from any revenue surplus which it has achieved in trading with its members and their visitors. Furthermore, in my view, the section clearly envisages the setting up of a club for the purpose of its achieving a trading surplus and for its devoting of the whole or part of such surplus to the provision of financial assistance to a chosen sport.

It follows therefore that, in seeking the predominant purpose of a club's establishment in any fiscal year, little or nothing is achieved by paying heed to those trading activities with members which can be seen to be part and parcel of its essential nature as a members' social club. They may be seen as having been taken for granted in the section by the use of the word "club". It is to be expected that they will occur. The very existence and continued viability of the club depends upon them. It is also to be expected, if success attends the club's activities, that from such activities surplus funds will be generated which will be available for the benefit of members and which may be utilised, inter alia, in the provision of new facilities or in the upgrading of old ones. Such operations can enhance the attractiveness of the club and lead to increase in its membership with the likelihood of a corresponding increase, through augmented trading activity, in the surplus funds. These earnings will be further enhanced if the club trades with visitors as well as members with the result that the available profit pool will be the larger. The significant point, as I see it, is that a members social club cannot properly be said to be "established" for the purpose of carrying on these activities. It carries them on because it is in its nature to do so. It is a "club".
Consequently the fact that a club offers a diverse range of activities to its members having nothing to do with the relevant sport or game does not prevent the club having as its main purpose the encouragement or promotion of that sport or game. Indeed where the means of encouragement and promotion are the provision of money or money's worth to the appropriate sporting body it may truly be said that the greater the size of the club and the more diverse and profitable its trading activities and its resultant profit pool, the greater is its capacity to render such financial assistance. It may well be that to a very large proportion of members the provision by the club of facilities to them for their use and enjoyment is an end in itself, they having no interest in the outside aims of the club; but from the club's point of view, the provision of those facilities for profit, may well be the very means by which it can serve its major object of furthering a chosen sport.
In the present case, given that the Taxpayer club had the necessary purpose at the time of its creation, the facts that it increased the size of its premises, its membership, its facilities and its activities are in my view quite equivocal in the determination of its predominant purpose in the relevant fiscal years. Its successful growth does not necessarily mean that its basic purpose has changed. Were this so, the policy of the section would surely be defeated. A club set up to generate funds for the assistance of sport could lose its exemption and its incentive to do so by becoming increasingly successful in the generation of those very funds. The real test of the application of the section, in my opinion, involves the consideration of the manner in which the club's surplus funds are utilised. This is so whatever the size of the club and however the funds are generated, providing, of course, that some portion of the funds would be taxable if not exempt.
If the whole of the surplus were donated to the relevant sport in a given fiscal year, then, in my view, the section would be fulfilled and the club's otherwise taxable income would be exempt. When the whole is not donated then the question must be answered by looking to the manner of distribution of the available funds. Obviously amounts expended in maintenance of the club's ordinary facilities can properly be regarded as necessary expenditure on the maintenance of the profit earning apparatus of the club.
When amounts are spent on the provision of new facilities at the expense of funds which might otherwise be available for financial assistance to the sporting body, a nice question must arise as to whether this erodes such assistance to the extent that the club's purpose of rendering it ceases, in that year, to be properly characterised as predominant. Arguably the provision of new and better facilities is necessary to maintain existing membership and existing revenue and also to attract new membership and increase potential revenue. It must obviously be a matter of fact and degree in any year.
So far as the present case is concerned such considerations do not arise. The facts establish that the Taxpayer, in the relevant years, rendered financial assistance to the sporting body to such an extent as to prevent it making expenditures on maintenance of club facilities which would otherwise have been deemed desirable.
In my view the Taxpayer qualified for the exemption under the section. Accordingly the appeal should be upheld with costs.

JUDGE3

The appellant Cronulla-Sutherland Leagues Club Limited ("The Taxpayer") was assessed to tax by the respondent in respect of the income years ending 30th June 1979 to 1982, 1985 and 1986. It objected to those assessments on the basis that the income so sought to be assessed was exempt from tax by virtue of the provisions of s.23(g)(iii) of the Income Tax Assessment Act 1936 ("the Act"). The matter of the objection was referred to a single Judge of this Court, who held that the section did not apply. The used for its purposes. But, as Rich J. pointed out in the College of Surgeons' Case, the fact that benefits may result for others (in that case, surgeons; in this case, footballers) does not detract from the intrinsic character of the object sought to be promoted by the taxpayer. In Forrests' Case, the main or predominant object of the institution was the promotion of science and this was its intrinsic character, notwithstanding that professional engineers may have received some incidental benefit from its activities. In the College of Surgeons' Case, the main or predominant object of the College was the promotion of science, notwithstanding that practising surgeons may have received some incidental benefits. In the present case, the main or predominant object of the taxpayer was to provide for its members, and others, the facilities of a licensed club. This was the true character of the object or purpose for which it was and is established, notwithstanding that footballers may have received some incidental benefits in the form of the grants made to the Football Club. Although these benefits may have resulted from transactions entered into by the taxpayer, as Rich J. put it, "the inclusion of (the taxpayer) in the exemption clause depended upon the intrinsic character of the object which it promotes and not upon the scope of the benefits which may result from its transactions."

The appeal should be dismissed, with costs.

[1990] FCA 108

30 MARCH 1990

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