• Legal database
Legal database

NORTH RYDE RSL COMMUNITY CLUB LTD v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2001] AATA 368

Decision date: 4 May 2001

J Block (Deputy President)

Introduction

1. (a) The objection decisions under review in this matter are the decisions by the Respondent to disallow objections by the Applicant against amended assessments in respect of the tax years ended 30 June 1993 to 30 June 1996, inclusive, (collectively the ``relevant years'' and each a ``relevant year'').

The relevant years relate (because the Applicant accounts on a substituted year basis) to the calendar years 1992 to 1995 (both inclusive). In the result the hearing related to the period which commenced on 1 January 1992 and ended on 31 December 1995, (the ``relevant period'').

(b) The Applicant was represented by Mr J W Durack SC, Mr KJ Burges and Mr JH Momsen of Counsel, instructed by Mr David Kennedy of Colin Biggers & Paisley, while the Respondent was represented by Mr DB McGovern of Counsel, instructed by Ms Tham Dao of ATO Legal Practice.

(c) The Tribunal had before it the T Documents tendered in accordance with section 37 of the Administrative Appeals Tribunal Act 1975. The Tribunal also accepted tenders of exhibits as follows:

  • Exhibit A1 consists of 4 volumes, each containing a large number of documents (labelled and referred to during the hearing as Volume 1, Volume 2, Volume 3 and Volume 6, respectively); Volume 3 contains the T documents, and also the Applicant's Statement of Facts, Issues and Contentions and the Respondent's Statement of Facts, Issues and Contentions, and even though the latter documents were tendered separately.
  • Exhibit A2 is an affidavit by Mr Christopher Raymond Jones dated 6 October 2000; Mr Jones has been the General Manager of the Applicant since May 1985 and oversaw the introduction of the game of chance known as ``Club Keno'' (``Keno'') into the Applicant's premises;
  • Exhibit A3 is an affidavit by Mr Philip Anthony McBride dated 9 October 2000; Mr McBride (who is also a tax agent) has been the Applicant's Finance Manager since 1985, and as such responsible for preparing the Applicant's tax returns during the relevant years;
  • Exhibit A4 is the Applicant's Statement of Facts, Issues and Contentions dated 28 June 2000;
  • Exhibit A5 is a cash flow diagram;
  • Exhibit A6 is a list of documents in the four volumes tendered as Exhibit A1, in the order in which it was intended that reference would be made to them;
  • Exhibit A7 is a document entitled ``The Mutuality Principle and its Operation in Relation to Registered Clubs'', prepared by the Applicant's Counsel;
  • Exhibit A8 is a document entitled ``Tax Consequences of the Applicant's Alternative Arguments on the Mutuality Principle'' prepared by the Applicant's Counsel;
  • Exhibit A9 is a letter by Mr Ronald James Chandler of the Australian Taxation Office (``ATO'') to Mr McBride dated 9 February 1998;
  • Exhibit A10 consists of two tables containing calculations of non-member receipts, and including handwritten remarks;
  • Exhibit A11 is a submission to the ATO on behalf of the Applicant dated 28 February 1997;
  • Exhibit R1 is the Respondent's Statement of Facts, Issues and Contentions dated 25 July 2000;
  • Exhibit R2 is an affidavit by Mr Chandler dated 3 April 2001; Mr Chandler was a member of an audit team, which audited the Applicant's financial affairs in 1995 and 1996;
  • Exhibit R3 is an historical company extract in relation to Club Keno Holdings Pty Ltd (``CKH'') generated on 5 April 2001.

(d) There is one matter of a preliminary nature which might conveniently be mentioned at this stage. The Tribunal gave a direction by consent (and without a directions hearing being

ATC 2165

convened) on 3 November 2000; the effect of that direction might have made it difficult for the Tribunal to write comprehensible reasons. It is unnecessary for me to refer in specific terms to that direction since (with the consent of all interested persons and companies) all confidentiality restrictions were removed, subject only to the proviso that the Tribunal must not refer to either percentages or quantum in relation to amounts derived by either the Minister (as defined later in these Reasons), or Club Gaming Systems Pty Limited (``CGS'' or ``Club Gaming''). In order to ensure compliance with the letter and substance of the proviso, the Tribunal considers it desirable to be less than precise in relation to another relevant percentage, and being the remainder percentage (also as later defined).

2. In addition to the T documents and exhibits, the Tribunal was also furnished with two further large volumes of documents (labelled and referred to during the hearing as Volume 4 and Volume 5, respectively), and which contained, in the main, recorded cases, tax legislation and other relevant materials.

3. The hearings commenced with a lengthy opening address by Mr Durack in which he took the Tribunal on what could be loosely described as a ``guided tour'' through the documents and exhibits. This was of particular assistance to the Tribunal, given that it had not been able to consider all of them prior to the hearing.

4. (a) The hearings in this matter lasted for 5 full days; it was originally anticipated that this matter could be dealt with in 4 days and the matter was listed to be heard on 3, 4, 5 and 6 April 2001. The Applicant tendered, inter alia, Exhibit A7 (an explanation of the mutuality doctrine in its application to registered clubs) and also a lengthy document entitled ``Applicant's Draft Notes for Address'', both of which were helpful to the Tribunal. In the event, and although the oral evidence by Messrs McBride and Jones did not take long, 4 days proved to be insufficient. At the end of the fourth hearing day (6 April 2001), Mr McGovern had not, at that stage, furnished written submissions; he was allowed a period within which to do so; the Tribunal also directed that the Applicant be allowed a period within which to file its final written submissions. Accordingly a fifth hearing day (27 April 2001) was scheduled, for the purpose of completing the closing submissions, and being in particular the concluding portion of Mr McGovern's submissions on behalf of the Respondent and Mr Durack's closing submissions in reply on behalf of the Applicant. The Tribunal thereafter and on 23 April 2001 received the Respondent's outline of submissions (``the Respondent's Written Submissions''), and on 26 April 2001 the Applicant's written submissions (``the Applicant's Written Submissions''). The Applicant's submission is in effect an expanded and edited version of the Draft Notes previously submitted and including the mutuality doctrine explanation (Exhibit A7).

(b) It was made clear to the Tribunal from the outset of this matter that an appeal to the Federal Court against this decision is virtually certain. (At a late stage of the hearings, there was also an indication that further appeals are also possible.) It is in these circumstances that the Tribunal thinks it desirable, for the benefit of the Federal Court, to include some of the (albeit lengthy) material and submissions tendered to it. Moreover, and as will be noted, to do so allows the Tribunal to incorporate, by reference, some of its content, and in particular extracts from certain decided cases. (Other readers of this decision might care to skim, or even by-pass, the quoted material in this paragraph 4.) However, the submissions by the parties do in fact deal in admirable detail with their respective cases. There is in fact, in broad terms, virtually no dispute of fact between the parties; on the contrary, the dispute relates, and so far as the substantive issue (as to whether mutuality applies) is concerned, to the manner in which the relevant documents (as defined later in these Reasons) should be interpreted. There is another issue between the parties, and that is as to the culpability component of the additional tax assessed against the Applicant, it being common cause that I have no jurisdiction as to the interest component of additional tax. I might note here, that when I asked counsel why, if an appeal is virtually a certainty, this matter had not gone to the Federal Court directly, I was told that it was brought before this Tribunal in the main because of its powers (standing as it does in the shoes of the Respondent) in relation to additional tax. I hope that my inclusion, in particular of the parties' written submissions, is not regarded as unduly burdensome; I do so in particular because they are so helpful and because consideration of them sets out, in the

ATC 2166

clearest possible terms and in detail, the respective contentions of the parties.

(c) Exhibit A5, which describes the money flow, is extracted as follows:


(d) The Applicant's Written Submissions, edited only, at the request of Mr Durack, to eliminate two minor typographical errors, read as follows:

[Applicant's written submissions substantially omitted.]

``Conclusion

There are only two main arguments advanced by the Respondent in its submissions.

The first is consistent with the Respondent Commissioner's original Determination in relation to Keno receipts and with the reasons for decision in this case which are repeated in the Respondent's submissions. The argument is that the Applicant's receipts came from the joint licensees, being `external sources', `independent of the Applicant'.

The foregoing analysis of the facts shows that proposition to be false. No part of the Applicant's receipts came from CGS. The receipts came from the share of subscriptions allocated to and paid by CKH or retained by the Applicant as part of CKH's share. CKH was a body to which participating clubs had contributed and the receipts thus represented their share of the remaining surplus.

The second main argument put forward by the Respondent purports to be based on the decision in the Chandler Investment Co Case. The argument is that because the Agency Deed called the first 10 percent of the relevant receipts `commission' to be received `in consideration of the Club's fulfilling all its obligations' under the deed, the receipts necessarily have a trading character and represent income. The foregoing analysis shows that it would be a mistake to attribute much significance to the label `commission' in the circumstances. In any event the mutuality principle makes it plain that receipts to which the principle applies will be receipts of capital, even if they are received in return for services rendered and thus are from activities which

ATC 2167

are `in some sense trading'. Such receipts remain receipts of capital.

The Respondent's arguments are thus shown to misconceive both the facts and the relevant legal principles. The amounts which CKH allowed the Applicant to retain or which it returned to the Applicant from the subscriptions which it collected are subject to the mutuality principle and represent receipts of capital in its hands.''

(e) The Respondent's Written Submissions have been edited in two respects; firstly to eliminate an inaccuracy in paragraph numbering, and secondly (in three places) to substitute the term ``CKH's fixed percentage entitlement'' (a term adopted from the Applicant's submissions) for the numerical percentage actually specified; this latter edit is made in conformity with paragraph 1(d); the Respondent's Written Submissions, edited on this basis, read as follows:

[Respondent's written submissions substantially omitted.]

``31. Summary

  • a. The respondent Commissioner says that subscriptions are made by individual members.
  • b. Factually that is the correct starting point.
  • c. The members as individuals pay over the subscriptions to the Club - not all members, nor in equal proportions; nor were they contributions made for a common benefit, although the payments were all made in relation to participation in a common activity, i.e. the game of Keno.
  • d. The Club operated the Keno game as an appointed agent. If it was not an appointed agent it could not run the Keno game in the Club.
  • e. The Club was authorised to receive subscriptions.
  • f. The Club received subscriptions as agent and was bound to pay monies received strictly in accordance with the Agency Operating Manual and the Rules (Agency Deed Clause 3.1(j). The agency operating manual makes provision for the Club to allow Club Gaming access to its bank account with provision for the payment of the agent's commission (see Volume 2/180, 208). In this way, Clause 3.1(d) of the Management Agreement is fulfilled.
  • g. The money obtained by Club Gaming by accessing the Club's bank account is then dealt with in accordance with Club Gaming's obligations under the Management Agreement which sets out its tasks as licensee. Those tasks include the undertaking of the payment of the various amounts required to be made under the licence, the Management Agreement and the Agency Deed, including the payment of agent's commission.
  • h. Club Gaming retains the residual player's receipts which it is then entitled to deal with under the Management Agreement. In particular it is entitled to invest or reinvest those monies and is entitled to all monies earned on such monies pursuant to Clause 10.13 of the Management Agreement. It is entitled to deduct from the residual player's receipts its percentage entitlement as set forth in the Licence Agreement and it is obliged to pay to CKH the monies due to CKH under Condition 5(a)(iii) of the Licence Agreement which is the balance of [ CKH's fixed percentage entitlement] less the amounts already paid by way of commission to agents. The monies received by CKH are monies due to it pursuant to its rights under the licence to a share of profits and the funds it liberates by way of payment to the Club each September represent income in the hands of the Club.''

(f) It may be wondered how this decision comes to be issued so soon after the final hearing day. In the first place, I did have an opportunity after the first four days to consider the documents and exhibits; in the second place, this decision relates (as to the substantive issue) to the proper interpretation of the relevant documents; in the third place, I do not believe that this matter is nearly as complex as the weight of documentation would tend to suggest; lastly, and for reasons explained at the hearing, I had no option for practical reasons but to do so; this is because my appointment as Deputy President of this Tribunal ends on 30 June 2001. For reasons not here relevant I have been listed in (mainly) migration or similar cases

ATC 2168

(which invariably proceed) on nearly every day until and including 22 June 2001. It is necessary for obvious reasons that I endeavour to complete all outstanding decisions by 30 June 2001. To put parties to the expense of re- hearings (if I am not re-appointed) is to be avoided if at all possible. In this case in particular, four eminent and senior barristers were engaged; the costs involved must have been considerable, especially in the context of the sheer volume of paperwork involved. This, then, is why I was obliged to produce these Reasons as a matter of some urgency, even though I would have preferred to have had more time within which to do so.

5. I intend in these Reasons to use the abbreviations contained in the Applicant's submissions. I intend furthermore to use the following additional abbreviations:

  • • ``relevant documents'' means collectively:
    • (i) the Lotto Act and Regulations;
    • (ii) the Licence (which term includes both the 1991 version and the 1995 version);
    • (iii) the Rules (which term includes all versions from 1991 to 1995);
    • (iv) the Management Agreement (which term includes both the 1991 version and the 1995 version);
    • (v) the Agency Deed; and
    • (vi) the Agency Operating Manual (which term includes all versions from 1991 to 1994).
  • • ``relevant contractual documents'' means collectively the Management Agreement and the Agency Deed.
  • • ``Minister'' means the Minister for Administrative Services, both in relation to the ministerial function set out in the relevant documents, and also in relation to the duty payable to the Minister.
  • • ``Keno'' refers to the game of chance called ``Keno'' or ``Club Keno'', played by the players; ``players'' (and each ``player'') refers to the members of the Applicant (and other clubs) who played Keno during the relevant period.
  • • ``Clubs'' refers to the registered clubs who took part in the enterprise, and includes both registered clubs who were members of the RCA and registered clubs who where not.
  • • ``remainder percentage'' refers to the percentage of player subscriptions by which CKH's fixed percentage entitlement exceeds 10%.
  • • ``Applicant account'' means the bank account in the name of the Applicant into which player subscriptions were paid and which CGS had power to operate; the Applicant used a separate account for this purpose.
  • • ``prize account'' means the bank account in the name of the Minister into which 75% of all player subscriptions were paid by CGS from the residual account; again CGS had power to operate the prize account.
  • • ``residual account'' (referred to in the relevant documents as the Residual Receipts Bank Account) means the bank account in the name of CGS into which 90% of player subscriptions were paid; out of that account, CGS paid 75% into the prize account; it also (within 7 days) paid the duty to which the Minister was entitled; furthermore it paid the remainder percentage to CKH; the balance was retained by it as its own moneys; CGS was moreover entitled to any interest derived on money standing to the credit of the residual account.
  • • ``enterprise'' means the whole enterprise, in respect of Keno, covered by or referred to in the relevant documents, and including the joint venture between CKH (as agent of the clubs) and CGS, and including the clubs as agents under Agency Deeds, and (to the extent relevant) the Minister.

6. (a) Although the Applicant's Written Submissions refer to and indeed set out some provisions of the relevant documents, I intend (notwithstanding that there may be some degree of repetition involved) to set out some of such provisions, and being those considered by me to be of particular significance. I do so in particular because I anticipate that most readers of these Reasons will not read paragraph 4 in detail. Before doing so, a brief background is desirable.

(b) The starting point (in relation to the enterprise) is the Licence granted by the Minister to CKH and CGS as joint licensees. The Tribunal was furnished with lengthy extracts from parliamentary debates from which

ATC 2169

it was clear that it was intended, at the outset, that the game of Keno would be conducted by the registered club movement in New South Wales. The debates make it clear furthermore that it was originally contemplated that the prize fund would be 80% or 85% of player subscriptions and that the project would be conducted by the clubs. Although the documentation before me does not in its terms indicate that Keno would be exclusive to the registered club movement, it would appear that this was so, in fact, during the relevant period; at some point in time after the expiry of the relevant period, the right to conduct Keno was apparently granted also to the Sydney Casino.

(c) The original Licence had been granted previously by the Minister solely to CKH, which is a company wholly owned by RCA, a company incorporated under the Industrial Relations Act 1996 (NSW). It was important, as indicated by a number of provisions in the documents, that CKH be and remain a non- profit company. RCA (which changed its name after the relevant period to ClubsNSW) represents most but not all of the clubs in New South Wales; there are apparently some 1500 registered clubs.

(d) The original Licence referred to in paragraph 6(c) of these Reasons was replaced by the Licence (dated 4 September 1991) granted by the Minister to CKH and CGS as joint licensees. RCA decided to seek proposals from interested parties as to the conduct of Keno, and in the result concluded the Management Agreement (dated 28 March 1991) between CKH and CGS. CGS was originally owned by AWA Limited (``AWA'') and the State Bank of New South Wales (as it was then known), but is now owned by AWA alone.

(e) CGS might perhaps be aptly described as the senior joint venturer in a joint venture between it and RCA in relation to Keno. In relation to the Applicant (and this was so presumably in relation to other clubs) CGS provided it with free start-up equipment and also trained the Applicant's personnel (free of charge) at its (CGS's) own premises in Sydney. As Keno grew in popularity, CGS supplied other equipment (and in particular terminals and screens) to the Applicant, but for consideration.

(f) It is important to note that the ``engine room'' (as it was referred to during the hearing) was and is the property of CGS. CGS provided all of the computerised equipment which is necessary in order to conduct Keno itself, and to draw the winning numbers and calculate the prizes. It also provided much of the administrative framework. CGS is entitled to all intellectual property rights, although the contractual documentation indicates that a royalty will be payable where that property is used elsewhere. These royalty provisions, at first vague and non- specific, and amounting in reality to no more than an agreement to agree, were later formalised into something more specific; (see clause 23.1 of the 1991 Management Agreement as strengthened by clause 22.2, read with clause 22.3, of the 1995 Management Agreement).

(g) Keno is a game of chance which is similar to Lotto; indeed, the relevant statutory provisions are found within the Lotto Act, which in its terms refers to both Lotto and Keno.

(h) Keno involves the selection by a player of up to 15 numbers. Keno entry forms (an example of which is contained at page 173 of Volume 2, Exhibit A1) and pencils to write on the forms were provided in special holders at designated places throughout the Applicant's premises. The player then chooses the amount of the bet and the number of games to be played and enters this information onto the entry form. The player hands his or her entry form to one of the trained personnel employed by the Applicant, who then inserts the entry form into the ``Club Keno Terminal'', which in turn issues a receipt ticket (an example of which is also contained at page 173 of Volume 2, Exhibit A1). The player's entry is then sent electronically to a central computer at CGS's premises. There is, in the engine room, a ``Ball Draw Device'' which contains 80 balls numbered 1 to 80 which mechanically selects at random, and one at a time, the 20 winning numbers in each game of Keno. The results in respect of any given game appear on a screen within a very short time (reduced during the relevant period to 3½ minutes). The actual draw takes place in the engine room at CGS's premises, although there have been a very few special occasion when the draw has taken place at the premises of the Applicant, (Transcript, 5 April 2001, pages 9-10). Draws at the engine room in the premises of CGS can be attended by members of the public, but only with the prior permission of CGS.

ATC 2170

(i) There was little evidence before me as to the precise intricacies of jackpot games as compared with ordinary Keno games. Jackpot games can involve an increasing amount of available prize money, and sophisticated players, so I was informed, watch with some care, the extent to which this occurs. An apparently simple game of chance is not always as simple as it appears, but precise detail is not necessary for the purposes of these Reasons.

7. Keno was throughout the relevant period played (and became increasingly popular) at the Applicant's premises and in the premises of numerous other clubs. I emphasise that in relation to any given game drawn at the engine room of CGS, there could at any one time be many thousands of players playing that particular game of Keno at the Applicant's premises and at the premises of the other clubs.

8. (a) Assume as an example one bet by a player of $100. That amount is paid into the Applicant account, which is in fact a separate account designed for this purpose, although there is no contractual requirement that this be so. CGS has power to operate the Applicant account. It draws $90, which is paid into the residual account. (This account is the account defined in the Management Agreement as the ``Residual Receipts Bank Account''). $10 is retained by the Applicant as commission; the correctness of the term ``commission'' is disputed by the Applicant.

(b) From the residual account $75 (not $80 or $85 as originally contemplated) is paid into the prize fund. It funds the prizes, which are paid directly to winning players (in the case of prizes above $10,000), or by way of reimbursement to the Applicant (and other clubs) who have disbursed them in the case of prizes of $10,000 or less. Within 7 days duty is paid out of the residual account to the Minister. Of the balance, CGS retains a part (and all interest derived) and pays the remaining amount (which is the remainder percentage) to CKH.

(c) The duty is calculated as a percentage which rises in accordance with amounts wagered over a given period. That rise is correlated with a corresponding fall in the percentage retained by CGS, and so that the aggregate of the duty and the CGS percentage remains constant. CKH, in relation to the remainder percentage (which is a comparatively small percentage) pays expenses (eg. royalty and interest obligations) and distributes the remainder to all participating clubs, whether or not members of the RCA, in direct proportion to amounts wagered by their respective members. The clubs expect their payments under this head in or about September in each year.

(d) In fact the $10 (or 10%) retained by the Applicant as commission is payable under the relevant contracts by CGS to CKH, but by direction is retained by the Applicant. Put in other words, CGS is directed to allow the Applicant to retain this amount, and so that that retention operates as a discharge pro tanto of CGS's obligation to CKH. CKH is clearly the agent of the clubs, even though in accordance with the Applicant's submissions, the Applicant became aware of the terms of Management Agreement only when these proceedings commenced. As to how the precise number for the remainder percentage was selected as appropriate was not in evidence before me. But it is clear that the retention by the Applicant of 10% ($10 in my example) occurred as a matter of administrative convenience, and it is for this reason that 10% did not find its way into the residual account.

(e) The commission received by the Applicant under the Agency Deed and also its share of the remainder percentage were both stamped with the character of income according to ordinary concepts, and are not taxable as such only if the mutuality doctrine protects them.

9. The prize fund is, as I have indicated, distributed in relation to each game (subject to accumulations in jackpot games) to the winners or by way of reimbursement of winnings (of $10,000 or less) disbursed by the clubs.

10. Over the years (and in particular during the relevant period), and as I have indicated previously, Keno has greatly increased in popularity. Revenues have grown consistently, and so much so that as a revenue earner for the Applicant, Keno rivals the Applicant's poker machines. Gross earnings derived from Keno in the relevant years were as follows: 

1992      $136,820
1993      $244,952
1994    $1,339,627
1995    $1,483,831

(1992, 1993, 1994 and 1995 Annual Reports, pages 65, 88, 111 and 138, Volume 1, Exhibit A1)

ATC 2171

The increase in revenue over the years arose in part because of the fact that Keno increased in popularity and in part (presumably) because of increases in the number of members. It is clear that to become a member of the Applicant is not difficult; it is relevant that it is possible to become a member for a day. There was also evidence before the Tribunal as to at least one ``high roller'' who placed bets in such large amounts that his activities became a matter of some concern to the Applicant.

11. I referred earlier in these Reasons to the fact that CGS has power to operate on the Applicant's own separate account. CGS drew the 90% of subscriptions paid in; correspondingly it paid in prizes disbursed by the Applicant. (This is a simplified explanation of the applicable ``sweep'' arrangements.) The Applicant's commission can be used by it in such manner as it chooses.

12. As set out earlier, CKH receives the remainder percentage, and then, after deduction of expenses, pays what it receives to the participating clubs in proportion to the amounts wagered by their members. Of course clubs (including the Applicant) who are members of RCA have an indirect voice in the management of CKH, but CKH treated participating clubs, whether or not members of RCA, in the same manner. CKH contributes to the joint venture through the provision by the clubs of staff, and of course the members who will make the bets; each participating club also provides some of the equipment required for this purpose. It is also clear that CGS does not run the engine room as the agent of the participating clubs; it is unlikely that an agent would provide all of the engine room equipment at its own cost; nor would an agent provide start-up equipment and training, without cost to participating clubs. In addition, it is CGS who owns all of the intellectual property in the system. On the contrary, CGS is a joint venturer who has entered into a commercial transaction in order to derive a profit, which in the result proved to be substantial. I refer to CGS as the senior joint venturer in the sense that it furnished the expertise necessary; it provided, managed and ran the engine room, and indeed it had control of the vast majority of the funds involved. It controlled the prize fund, it accessed the bank accounts of participating clubs, and it managed the residual account. Put in succinct terms, the central role in the entire enterprise was played by CGS, who derived considerable profit from it. The fact that CGS accounted in its own accounts for only its share of the revenue so derived, is of no great significance. If the whole enterprise were looked at in military terms, CGS was the general officer in command; indeed it might be more accurate (in the same military vein) to say that, as regards the whole enterprise, CGS furnished the whole officer corps where the Applicant (and other registered clubs) furnished the enlisted personnel. This is a convenient juncture at which to note that the whole enterprise was just that, a commercial enterprise for profit. And (with the exception only of losing players) all concerned did profit. This applied to the Applicant, CGS, and also CKH, which was an agent for registered clubs, and to the Minister. The fact that the relevant documents do not in their terms require CKH to distribute the remainder percentage (less expenses) to registered clubs in any particular manner is not to the point; CKH is a non-profit company which as a matter of course, and as part of the enterprise, received the remainder percentage, paid expenses, (and particularly royalties and interest) and then distributed the balance to registered clubs, in accordance with the amounts staked by their respective members, does not in any way detract from the clear fact that it was properly stamped with the character of income. (Mr Durack sought in his closing submissions to suggest that the retention by CGS of interest derived was perhaps related to the non-profit nature of CKH; that admittedly tentative proposition is not, in my view, tenable.)

13. The following provisions of the Lotto Act (which was repealed after the expiry of the relevant period by the Public Lotteries Act 1996 (NSW)) are relevant:

[Lotto Act provisions omitted.]

14. (a) The following provisions of the first Management Agreement between CKH and CGS dated 28 March 1991 are relevant:

[First Management Agreement provisions omitted.]

(b) The following provisions of the second Management Agreement between CKH and CGS dated 12 May 1995 are relevant:

[Second Management Agreement provisions omitted.]

ATC 2172

16. The following provisions of the Club Keno Rules dated September 1991, pursuant to which Keno is conducted, are relevant:

[Club Keno Rules provisions omitted.]

17. The following provisions of the Club Keno Agency Operating Manual dated September 1991 are relevant:

[Club Keno Agency Operating Manual provisions omitted.]

18. (a) The relevant documents, read as a whole, are in some respects inconsistent. The Rules indicate that in accepting subscriptions the Applicant is the agent of the player. The relevant contractual documents indicate that the Applicant is the agent of the Licensees. The Agency Deed spells out that the Applicant receives 10% as an agent and as commission; (see clauses 1.2, 2.2 and 3.1(j) of the Agency Deed). There is no warrant, in my view, for treating the Applicant as anything other than an agent of the Licensees in relation to the enterprise, and notwithstanding the inconsistent provision in the Rules. (That some terms were sometimes capitalised and sometimes not is in my view irrelevant.)

(b) The Applicant contends that to describe it as an agent and what it derives as commission is inappropriate and that these are merely words of convenience which flow from the origins of Lotto and having regard to the role played in Lotto by newsagents. That contention is refuted by the reference in the Lotto Act to both Lotto and Keno.

(c) In fact, and as I have said, the 10% retention by the Applicant occurs as a matter of administrative convenience. Under the Management Agreement, CGS must account to CKH for 10%, plus the remainder percentage; however CGS is directed and obliged to pay 10% to the agent (directly) under the Agency Deed; (see in particular clause 2.2(b) of the Agency Deed).

(d) The Applicant referred in particular to the reference in the Rules to the Applicant as an agent of the subscriber; see clause 7(i) of the September 1991 version of the Rules (page 85, Volume 2, Exhibit A1). The Applicant contends that because the Rules and the Operating Manual must be approved by the Minister, they receive a form of recognition which moreover gives them precedence over the contractual arrangements to which I have referred. Such a contention cannot in my view be well-founded. The Agency Deed and Management Agreement are at least as significant and in my view more significant, and there is no warrant for a suggestion that they must, in case of conflict, yield precedence to the Rules. Nor does the Tribunal consider that the indemnity contained in clause 10.8 of the Management Agreement is of particular significance; the Tribunal accepts that indemnities of this nature are not unusual in betting transactions of this nature and where there may, for example, be a question as to the precise person entitled to claim a prize.

19. At the very core of this matter are the relevant contractual documents between the parties and in particular the Agency Deed and the Management Agreement, which make it clear that what the Applicant receives is commission as an agent; indeed the whole factual matrix makes it abundantly clear that this is precisely what was intended and precisely what was achieved. RCA could at least in theory have run Keno on its own; however it lacked the necessary expertise with which to do so and, through CKH, entered into a joint venture with CGS and pursuant to which the registered clubs (and including the Applicant) became agents of the joint licensees.

20. There was much discussion of the manner in which the money flowed. The Applicant placed stress on the fact that when it flows upwards it goes into an account in the name of CGS on behalf of the parties and thus, so the Applicant contended, a trust account. The contractual arrangements, moreover, make it clear, having regard to the definition of ``Residual Receipts Bank Account'' that the 10% commission never reaches that account.

21. While the case law establishes that incorporation is no bar to the application of the mutuality principle, (and CKH was wholly owned by RCA of whom most but not all clubs were members), the fact that CKH accounted directly for the remainder percentage to member clubs and non-member clubs alike, may perhaps have a bearing on the applicability of the concept; however I do not think it necessary for me to come to any conclusion on this aspect.

22. (a) My own view is that resolution of this case is much easier than the volume of paper and the length of the hearing before the Tribunal would tend to suggest. Mr McGovern referred me, aptly, to a passage from the judgment of Hill J in
JB Chandler Investment

ATC 2173

Co Ltd v FC of T 93 ATC 5182, and quoted in the Respondent's Written Submissions.

(b) The Agency Deed meant exactly what it said. The Applicant was an agent who received commission. Mr Durack drew attention to Hill J's reservation as to the position when an arrangement is a sham. This arrangement was in no way characterisable as a sham and whether as referred to in
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; 82 ALR 530 or otherwise; on the contrary it documented a very real working arrangement, which was managed and conducted in accordance with the recorded contractual terms, and which resulted in substantial profit to all concerned, (except of course the losing players). The Applicant's share of profit consisted of its commission and its share of the remainder percentage amounts.

(c) The Applicant contended that the judgment of Hill J in JB Chandler Investment Company Ltd v FC of T (supra) applies only as between parties contracting at arm's length; this is not so in this case, so it contends, because CKH is merely the agent of the clubs (and including the Applicant). The argument, as I understood it, takes the following form. Of the amount subscribed by a player (who is a member) 10% is received immediately by way of retention and is in effect the retention of its own funds. The Applicant's share of the remainder percentage falls into the same category. Put in other words, the enterprise as a whole allows the club movement to retain 10% plus the remainder percentage, which thus is and remains at all times within the mutuality circle. What happens to the balance of the stake does not, so the argument proceeds, detract from this contention. The 10% commission never goes into the residual account. And the remainder percentage, although it does go through the residual account, is held in trust for CKH, which is an agent only. There are, according to the Applicant, no relevant arm's length or external parties.

(d) There were lengthy submissions before me as to trusts, and including as to constructive trusts. The Applicant account is not, so the Applicant contended, a trust simply because the money need not be held separately, even though this is factually the case. If the Applicant were to (unlawfully) retain the 90% which can be drawn by CGS operating the Applicant account, there would be a right to claim that amount, but not a right to take those moneys on bankruptcy in preference to other creditors. That argument, as I understood it, would have it that the residual account does by contrast constitute a trust, because the 90% is held by CGS for itself and others, (the others of course being the prize fund in the name of the Minister, the Minister (for the duty) and CKH). This is so, so it was contended, because it is a specific account. I was referred to Jacobs' Law of Trusts in Australia (6th ed.) and Ford & Lee's Principles of the Law of Trusts (3rd ed.); see also in this context of the Applicant's Written Submissions.

I have come to the conclusion that it is unnecessary for me to be concerned with aspects of trust law as referred to by the parties in their submissions. This is so because there were, in my view, arm's length or external parties involved in the enterprise, and JB Chandler Investment Company Ltd v FC of T (supra) does bind me. Although there was no evidence before me as to the manner in which the relevant documents came to be negotiated and concluded, it is clear that there were three parties vitally interested in the setting up of the enterprise. The Minister would have been concerned as to the level of the prize fund and as to the quantum of duty. CGS would have been concerned as to the level of its percentage of turnover. And of course the club movement would also have been concerned with its overall percentage and perhaps and in addition, in the interests of their members, the prize fund percentage. That there must have been negotiations can hardly be doubted. How otherwise could the prize fund drop from 85% or (80%) to 75%? How did the percentages for the Minister and CGS, which (although sliding) aggregated the same percentage overall come to be decided? And how did the division arrangements reach finality? They were of course external parties. To say that the club movement was not concerned cannot be accepted. It had a valuable asset - the rights to Keno. And it would have wished to maximise its own overall percentage. It may not have been concerned about whether CGS received more and the Minister less on a sliding scale basis of the (agreed) aggregate amount for both (and about which it would have been concerned), but the quantum of the prize fund would have been a concern; as it is, it was, in accordance with the relevant documents, less than was originally contemplated. It cannot be

ATC 2174

correct to seek to isolate a part of the enterprise and to say that that part is within the mutuality circle, and the rest is not. That the enterprise cannot properly be divided in the manner for which the Applicant contends is crucial to this decision. This was an enterprise negotiated between arm's length parties, and ex facie the relevant contractual documents what was received was commission in the case of the 10%; as to the remainder percentage, CKH received those amounts under the relevant contractual documents and there is no dispute about the fact that it was the non-profit company agent of the clubs. Once the enterprise had been set up and established, the Minister's role became passive, at least to an extent, in that she received the duty, although that is not to say that her supervisory role under the relevant documents was not important. However, even if the Minister is not aptly characterised as an external party, my decision would be unaffected, since CGS unquestionably is.

(e) At the risk of labouring the point, the Applicant received Keno income as part of an enterprise, and where external parties were (or at the very least one external party was) involved. It did not receive back its own moneys as surplus; it received through CGS, as the engine room controller and manager of the enterprise, 10% immediately, and its share of the remainder percentage (less expenses) thereafter. The fact that it received 10% immediately by retention does not detract from the fact that this was so because of the direction which in effect ``short-circuited'' the connection, and so that it obviated the need for the whole 100% to go into the residual account, and for the 10% to come back, through CKH.

(f) I also agree with Mr McGovern's contention that this case is indeed strongly comparable with
FC of T v Australian Music Traders Association 90 ATC 4536. To call it, as he did, a ``paradigm'' case, is in my view apt. In that case the taxpayer, an unincorporated non-profit association whose members were in the music trade, held a trade fair each year. Until 1985, income from the trade fair had been treated by the Respondent as exempt under the mutuality principle. From 1985 onwards, a private company organised the trade fair, received fees from participants, who were both members and non-members of the taxpayer. The private company paid the taxpayer a fee out of the moneys contributed by the taxpayer's members. The Respondent assessed the fee as assessable income. Davies and Wilcox JJ (Forster J dissenting) held that the fee paid by the company to the taxpayer was not one payable by members of the taxpayer into a common fund. The trade fair, though it benefited members of the taxpayer, was not a mutual, non-profit activity. Its essence was that of trading for profit by individual traders, though through the medium of a common activity, the fair. Their Honours held further that although it was not necessary to identify with precision the individuals contributing to a fund with the participants in that fund (for example, poker machine receipts in respect of owned poked machines are mutual despite the fact that not all members of a club participate in the activity) there must be a ``reasonable relationship'' between contributions and benefits.

23. In any event I cannot accept the Applicant's contention that in relation to Keno it was contracting with its own members, and that whatever it received was nothing more or less than their own money. The Applicant referred in this context to its poker machines which (leaving aside maintenance arrangements with the poker machine manufacturer) it owns and runs, on the basis that the Keno position is comparable. To do so would require me to ignore the vital role in the whole arrangement played by CGS (and also the Minister), each of whom is external. The money received by the Applicant emanates from and constitutes its percentage share for its participation as agent in the joint venture between CKH and CGS and in accordance with the Licence granted by the Minister. The fact that CKH (one of the two joint licensees) was required to be and remain a non-profit company, does not appear to me to be significant in this context. Nor does the fact that CGS produced accounts which reflected only its own share as income (rather than reflecting the gross with payments to CKH as outgoings) produce any different result. The manner in which a person presents its own accounts cannot be determinative. There was during the hearing some discussion as to joint ventures generally. As an illustration, reference was made by me to a coal mining joint venture between two parties where each of the parties is entitled to deal with its own share of the coal mined. On reflection I do not think that that analogy was apt; moreover, I do not think that

ATC 2175

my preliminary thoughts on the subject were correct. In a mining joint venture, the fact that one party takes and markets its own share of the coal does not detract from the fact that the product was derived through the activities of the joint venture, and in other words of all parties who are joint venturers. And in this case, in any event, there was no question of separate product. Mr Durack argued that the 10% commission was nothing more or less than the Applicant's own moneys; I do not agree; it was retained, as set out previously, as a matter of administrative convenience only, but nevertheless as commission and as an agent.

24. Mr Durack presented the Applicant's case ably and persuasively. But on close analysis it is Mr McGovern's contentions which in my view are correct. All of the income was properly characterised as income to which the mutuality principle did not and could not apply.

25. As indicated previously in these Reasons, I do not think that I need determine the question of whether each or either of the Applicant account or the residual account constitutes a trust. I accept that a trust can arise even where there are no express words to this effect. My attention was drawn to Jacobs Law of Trust in Australia (6th ed) as regards the essential elements of a trust. But as I have said it is not necessary for me to determine these questions. I note though (if only for the sake of completeness) that I incline to the view that neither of the accounts in question was a trust account.

Penalties

26. I gave an undertaking to the parties that, regardless of my finding on the substantive issue, I would furnish a finding on the culpability component of the additional tax, and in case the Federal Court holds that my finding on the substantive issue is correct.

27. As to the question of penalties, the culpability component was assessed at 25%. It is of course clear (as set out previously) that I have no jurisdiction as regards interest. The Applicant's Counsel provided comprehensive and useful written submissions on the issue of penalties, which are set out in full as follows:

[Written submissions as to penalties omitted.]

28. (a) The Respondent contended that the Applicant has a record of seeking legal advice and mention was made of the fact that it sought advice when a ``high-roller'' lost some $3 million within a specified period; why then, so the Respondent asks, were the Applicant's legal advisers not consulted about so important a question as mutuality? The Applicant in turn contends that for years it has been treating its (ever-increasing) Keno receipts as free of tax and that the Respondent knew that this was so. However, in July 1996 the Applicant knew that there was a very real likelihood that the Respondent would seek to exact tax on the Keno receipts. Mention was made of legal advice having been sought; I was told also that that legal advice would not be tendered. Mr McBride was the accountant during the relevant period; he was also a tax agent. One cannot say that his evidence in this regard was particularly helpful; he said simply that he believed that the revenue from Keno receipts was exempt. However, he did not appear to have any specialist or other knowledge which entitled him to form such a view. The Applicant contends that it had an arguable case throughout the relevant period and, moreover, that there was no lack of reasonable care; the Applicant contends furthermore that the Respondent was aware of the position and was not in any way deceived by its submission of its 1996 tax return in the same form as its predecessors. Mr Durack also emphasised that in recent prominent Part IVA cases the penalty culpability had been reduced below 25%.

29. Reference was made in the hearings to each of sections 226G, 226K and 226M of the Act. They are of course separate sections, and to be treated as such, but that is not to say that they are not in certain respects related. I have taken into account the following factors:

(a) In respect of all relevant years, the Applicant had an arguable case; an arguable case is not the same as a winnable case. And as the global settlement acknowledges, this area of the law is difficult. Section 226K of the Act could not have applied.

(b) As appears from the Applicant's penalty submissions, the ``reasonably arguable position test'' was intended to impose a more rigorous standard.

(c) The global settlement occurred in point of time after the last relevant year return has been submitted.

(d) Mr Chandler's affidavit (Exhibit R2) was accepted as truthful in that he was not required for cross-examination. It indicates that following the audit, the Applicant knew by the

ATC 2176

middle of 1996 that the mutuality concept in relation to Keno was under investigation. Mr Chandler spoke of a number of discussions and conversations relevant to this aspect.

(e) An expert in this area of the law (Mr Lindsay Somerville) was consulted, but his views were disregarded to some extent, because the Applicant came to feel that his advice was not as reliable as the Applicant would have preferred.

(f) Legal advice was in fact obtained; however it was not tendered before the Tribunal, which leads me to infer that it would not have been likely to assist the Applicant in these proceedings.

(g) Mr McBride may be a registered tax agent, but so are numerous others who have little or no knowledge or understanding of the mutuality principle. He nevertheless pressed on and presented the 1996 return in the same way as had occurred previously.

(h) Section 226M of the Act provides a 25% culpability component where a taxpayer does not observe an unfavourable private ruling. This is not such a case, but nevertheless, the culpability component was assessed at 25%.

(i) I think that it was imprudent not to have sought a ruling after the Applicant became aware of very real pending problems in mid-1996. But at the same time, I do not think that it was not serious enough to warrant a 25% penalty.

(j) I do not think that (as contended by the Respondent) a taxpayer is obliged to seek rulings when it embarks on a new business undertaking.

30. In all the relevant years, save the last, I do not think that it can be said that the Applicant did not take reasonable care. Clubs generally treated their Keno income as analogous to poker machine income. They were wrong but they were not in breach of section 226G of the Act. In the last relevant year the position was different. I was informed that in the global settlement the amount paid included a penalty element but the quantum or percentage was not known. It is reasonably possible that it was 5%, in line with other settlements of a comparable nature. In this case, the culpability component should be well below 25% but above 5%. I have decided that 7½% is appropriate.

31. I have in these Reasons, and as set out in the preceding paragraphs, dealt in the main with matters and arguments canvassed during the hearing. I consider it desirable, if only for the sake of completeness, and because this decision is likely to be appealed, to refer, albeit briefly, to certain other aspects referred to in the submissions furnished to me by the parties.

32. (a) It will have been noted that I have found against the Applicant on the main issue (as to whether the Keno receipts fall within the mutuality principle) in accordance with the contractual documents and, in particular, the Management Agreement and the Agency Deed, and having regard, in particular but not only, to the judgments in JB Chandler Investment Co Ltd v FC of T (supra) and FC of T v Australian Music Traders (supra). It is my view, as has been shown, that the income was derived from an external and not an internal (or mutual) source and thus falls outside the mutuality principle.

(b) But that said, the fact that I do not deal with certain contentions advanced by the Respondent should not be construed as meaning that I do not agree with them. In particular, in the context, I should make specific mention of clauses 11 to 21 (inclusive) of the Respondent's Written Submissions (with which I agree) and which have been quoted in these Reasons previously.

Put in succinct terms, the essential test is that propounded by Lord Wilberforce in
Fletcher v Income Tax Commissioner [1972] AC 414 and moreover trading transactions can, as demonstrated by
Sydney Water Board Employees' Credit Union Ltd v FC of T 73 ATC 4129, exist as between mutual organisations and their members. (Mr Durack indicated that he does not disagree with this proposition.)

(c) The fact that the Licence is expressed in permissive terms is not relevant; the enterprise was in fact conducted in accordance with the relevant documents.

(d) I note specifically that I do not agree that the clubs were receiving what was their own money or that of their members; on the contrary, they were receiving remuneration for their part in the enterprise, measured by reference to subscriptions by their own members. This was not then a refund or distribution of surplus. It will be clear then, that I agree with the Respondent's contention that

ATC 2177

this is not a matter where the mutuality principle applies.

(e) I would also like to express my own appreciation of the helpful and courteous manner in which this matter was dealt with, at all times, on both sides. Written submissions were invariably thorough and helpful. The Applicant's solicitor, Mr Kennedy, deserves to be commended for the manner in which he put together and indexed vast amounts of material, which were presented to me and referenced with great clarity.

33. I trust that I may be forgiven if I mention one matter which has nothing to do with the case (and which did not in any way influence my decision), but which was discussed during the hearing and which I find disturbing. Poker machines are an ever-increasing feature of ordinary life. It is surely one thing to allow poker machines in licensed casinos, where, at least in theory, gamblers may be presumed to know the risks. But to allow them in clubs and hotels where it is all too likely that they may be played after sport and after a few drinks is surely a different matter. Indeed the value of hotel licences over recent years has risen precisely because of this phenomenon. One has only to compare the current value of any hotel which has poker machines with its value before their introduction, a factor of course directly related to the profit so generated. But then not content with poker machines alone, Keno was introduced, with the support of both sides of parliament, into precisely the sort of clubs where families are likely to spend leisure time. In addition then to poker machines, Keno is added as a temptation and one in which over time the vast majority of players must lose, if only because of the pay-out percentage, (below that originally contemplated). Is this really what is desirable for clubs and for families, no matter that tax revenue is thereby generated? Is the social cost irrelevant? The profits generated from Keno alone, if consistent throughout the club movement, are very large. It is true, of course, that the profits so generated allow the clubs to provide other facilities at a lower cost, but one questions whether those other benefits genuinely compensate for the social cost of gambling. Recent debate as to the possibility of placing limits on credit in casinos or banning internet gambling appear to me to be likely to be futile in the face of the ever-increasing popularity of games which are not only made available, but are actively encouraged, in precisely the sorts of places where activities of this nature might be thought worthy of discouragement. Ordinary families may not appreciate the extent to which a pay-out rate of 75% is likely to be adverse over anything other than a very short period of time.

34. In all the circumstances, the objection decisions under review are affirmed, excepting only that the culpability component of the additional tax is reduced to nil for all relevant years except for the last relevant year, where the rate is reduced to 7½%.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.