CASE Y14

Members:
BJ McMahon

Tribunal:
Administrative Appeals Tribunal

Decision date: 25 March 1991

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BJ McMahon (Deputy President)

The applicant lodged income tax returns for the years 1983 to 1987 in accordance with amnesty arrangements and subsequently lodged a return for the 1988 year. The income as returned was dissected into mutual and non-mutual income. The non-mutual income was assessed in full as returned. The applicant claimed exemption under s 23(g)(iii) of the Income Assessment Act 1936. The claim was rejected after appropriate objections. This application is brought to review the objection decision.

2. At all relevant times, s 23(g)(iii) was in the following terms: -

``s 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;''

3. It was conceded that the applicant was a society, association or club which was not carried on for the purposes of profit or gain to its individual members. It is in fact the governing body concerned with the promotion and regulation of competitive motor cycling. In order to determine whether its non-mutual income is exempt from tax, it is necessary therefore to resolve the remaining three issues.

4. The first issue is whether it is a society, association or club ``established for the encouragement or promotion'' of competitive motor cycling. The second issue is whether competitive motor cycling is ``an athletic game or athletic sport''. If that is answered in the affirmative, then the third issue to be determined is whether competitive motor cycling is an athletic game or athletic sport ``in which human beings are the sole participants''.

5. The applicant was incorporated in New South Wales as a company limited by guarantee on 28 August 1932. The Memorandum of Association sets out the principal objects for which the company was established as follows: -

``...

3. The objects for which the Company is established are -

• (a) To act as the controlling body of the sport of motor cycling in New South Wales.
• (b) To foster the sport and past-time of motor cycling.
• (c) To promote and organise motor cycle competitions.
• (d) To conduct certified trials or tests of motor cycles, their parts and accessories.
• (e) To act as the representative of New South Wales on any council, union, federation, or other body or bodies

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  formed for the purpose of promoting and/or controlling the sport of motor cycling in any part of the world and to co-operate with any such body or bodies in any way that the Company deems conducive to the attainment of these objects, or any of them.
• (f) To acquire and take over the goods, chattels, credits, debts, moneys, books, documents, and other assets and liabilities of the unincorporated body known as [the predecessor] and the business thereof.
• (g) To grant affiliation to any Club, Association, Institution, or other body or section of such body connected with the sport of motor cycling.
• (h) To promote the physical enjoyment and recreation of its members...''

6. In
Cronulla Sutherland Leagues Club Ltd v FC of T 90 ATC 4215 at 4243, Beaumont J pointed out that it is not enough to look at the original purpose of establishment. One must look at the continuing activities of an organisation in order to find whether it was established for the statutory purpose. He said: -

``Several questions now arise. The first is the time at which the object or purpose for which the taxpayer `is established' must be considered. The settled course of authority holds that, in an income tax statute, it is necessary to look at the taxpayer, and its activities, year by year, and not merely at the time of its incorporation; and that, although the intentions of the promoters of the taxpayer may be relevant in determining the purpose for which the taxpayer was incorporated, it is necessary to look at the taxpayer's actual activities, since the purpose of its incorporation can be ascertained from what it did.''

7. The Articles of Association make provision for a competitions committee, a social committee and an appeals committee. An annual report, tendered as Exhibit B, sets out the activities of the applicant in the year 1987-1988 and evidence was given that it was typical of activities throughout the period in question. The report consists of an overall view from the general manager and of reports of activities from various divisions and regional organisations. Statistics are given concerning the number and nature of events held during the year and of the various licences issued to members. Between 1983 and 1988 the membership has varied from between 7,500 approximately and 10,900 approximately divided into 112 clubs. All the activities described in the report relate to the sport of competitive motor cycling in its various forms. Additional evidence was given by a director of the applicant to which reference will later be made. There was no real challenge to the bona fides of the applicant. Although there is provision for social members, the report hardly mentions them and one is entitled to infer that social activities do not play a major part in the applicant's affairs. Certainly there was no suggestion that its affairs were dominated (as was alleged in the Cronulla Sutherland Leagues Club case) by non-sporting activities.

8. I have no difficulty in finding as a fact that the applicant is a society, association or club, established for the encouragement or promotion of competitive motor cycling. The question is whether that activity complies with the other two criteria of the relevant paragraph.

9. Evidence was given by way of affidavit from three prominent motor cycle riders. All of them detailed their experience in the sport and emphasised the need they see for physical training and fitness. Each detailed the fitness course he undertook and the physical strain he felt in competitive motor cycling. One of them deposed that he had played both soccer and football when he was young and that he was aware of the fitness levels obtained by sportsmen in other areas. He added that when he trained, he frequently trained with some top level triathletes and believed that his fitness levels were at least as good as theirs.

10. Evidence was offered by way of affidavit and orally from the head of the Department of Physiology and Applied Nutrition at the Australian Institute of Sport. He detailed his expert qualifications in physical education, science and physiology and his practical experience in various sports. Attached to the affidavit was a paper entitled ``On the Athleticism of Motor Sport''. This was prepared on the basis of his own team's collection of physiological data gathered during laboratory testing on a group known as the National Squad of Motocross Participants (a

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team of highly proficient motor cyclists in this particular branch of the sport) and upon various measurements taken and observations made in relation to settled indices of fitness and effort. The paper also quoted from other studies made by other researchers in other countries. From these, he deduced that their sport activities required a high degree of physical fitness because they resulted in a high degree of physical stress. The paper acknowledges that, as in many sports, athleticism alone is not sufficient to be successful in high level motor cycling competition. There are psychological skills as well as physical skills that must be developed over years of practice. Nevertheless, success would not come without rigorous physical training. The witness concluded that ``following a review of physical assessments, and of the physiological responses of the motor cyclists to their sport, together with discussions with the champions themselves in relation to their preparation, [I] have no hesitation in testifying to the athleticism of these sportsmen. In some aspects the athleticism exceeds levels attained by sportsmen in other disciplines whose athleticism is never challenged''.

11. Evidence was given by a director of the applicant company by way of affidavit and orally. Some relevant parts of his affidavit are as follows: -

``... During 1983-88 the activities of the Applicant comprised -

• (a) The issuing of competition licences, as hereunder described;
• (b) The issuing of permits to affiliated clubs for the purpose of holding meetings, as hereunder described;
• (c) Dealing with disciplinary matters (this and the issue of permits were attended to by the Applicant's Competition Committee);
• (d) Administration of competition meetings organised by affiliated Clubs;
• (e) The conduct of the Annual General Meeting and the general administration of the Applicant's affairs;
• (f) The conduct of the Annual Easter Road Cycle race at Bathurst.

The applicant issues competition licences to those of its members who qualify for the issue of a licence. The licence is one to participate in competition events on licensed circuits at which activities are conducted in accordance with permits issued by the Applicant.

The Applicant also issues permits to affiliated Clubs to hold events at licensed circuits. During the years 1983-1988 all activities for which permits were issued in accordance with this procedure were competition events.

Members of the Applicant (including members of affiliated clubs) are not, under the Applicant's competition rules, permitted to participate in events which have not been the subject of a permit issued by the applicant. This is a provision of the General Competition Rules issued by the [National Body]. Folio 4 of the Exhibit is a copy of the relevant provisions of the General Competition Rules as in effect in 1990. The sanction imposed upon members who participated in events which had not been the subject of a permit from the applicant was to be summoned before the Competitions Committee of the Applicant, and in the event that they were found to have breached the competition rules, to be barred from participation in events administered by the Applicant for a period determined by the Competition Committee. Meetings administered by the Applicant may be organised by affiliated clubs, or by non-affiliated private promoters. Meetings which are administered by the applicant are open to entry only by riders who are licensed by the applicant to compete in the appropriate type of events and may only be conducted on circuits which are the subject of an approval issued by the Applicant...''

This evidence underlines the purposes for which the applicant was established and now operates.

12. The affidavit further sets out the procedures for regulating competitors and their cycles. All events organised under the supervision of the applicant are graded to either machine type or capacity, and to rider's skill level. The various grades are set out in the general competition rules from time to time. For the purpose of participation, riders, rather than cycles, are registered, even though the general competition rules provide for the entry of cycles rather than the entry of the names of

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riders. A registered rider may ride any cycle, which meets the requirements of the particular event in any event supervised by the applicant. As far as possible, the types of cycles are prescribed for the various events, so that fair competition will ensue and so that the skills of the rider will be given fair play. The members are licensed, so that they take part in events within their capacity. A system of licensing provides for promotion from grade to grade.

13. Beginners are graded as learners and are kept on machines of limited capacity for short races. After some time, they progress from D and C grades when they show that they have the ability to control their machine in a safe manner and that they have the wish to proceed higher. By B grade, they will be winning events occasionally and the classification allows them to ride all classes of cycles. An A grade classification allows the member to ride any cycle on any circuit. It also enables him to hold an international licence. Each of the various branches of the sport has a separate system of licensing. It is possible to move from one branch to the other but not always with the same level of grading. Naturally, the largest proportion of members is in the lower grades. The witness estimated that 75 per cent of all riders were either C or D grade. Nevertheless, he asserted that they would be more physically involved than some A or B grade riders as they would not manage their cycle correctly. They tend to expend energy unnecessarily.

14. The witness described some of the principal branches of the sport and the physical effort required of riders who participate. Road racing is carried out on a sealed surface in a continuous circuit. Various grades of cycles and riders participate in a range of events from club competitions to grand prix. Motocross is carried out on a continuous circuit on man-made or natural terrain. The circuit is designed so as to provide numerous jumps and dips. The type of cycle used in this event is quite different from the type of cycle used in road racing. They are made for different conditions. In road racing, the rider aims for an average high speed. Nevertheless, his ability to corner skilfully will decide whether he does well in the race. This manoeuvre involves transferring weight to the direction of the corner by shifting the entire upper body weight over the machine. The thigh rests on the seat, the remainder of the body attempts to lower the general centre of gravity. This results in the rider taking the weight on his leg. He must lift himself and resite the body on the seat once the corner has been completed. While this is taking place, the handle bars must be turned in the opposite direction to avoid spinning. This manoeuvre requires a great degree of strength in the rider's arms. The witness' evidence was that the initial movement on the cycle would be equivalent to squatting and then standing with a reasonably heavy back pack. The steering force could be compared with the force necessary to control a motor car that has power steering when the engine is not running. The physical strains are felt in the legs, the upper body and the arms. Constant exercise of these areas produces unusual strengths in them.

15. The physical exertions in motocross are considerably greater. Almost all the time, the rider is standing on foot pegs and holding the handle bars. As the races run for some 30 to 40 minutes, considerable leg strength is required. The terrain itself is designed to provide many jumps. A particular feature of motocross terrain is a progression of stutter bumps, that is unevenly spaced mounds for up to some 50 metres intended to jerk the body of the rider vigorously. There are also jumps that are flattened at the top so that the rider has to jump his cycle up to the pinnacle and down from the other side. There are also straight stretches on soft loamy sand providing poor traction on, so that a front wheel lift is required. Another type of competitive motor cycling is known as Enduro. This is similar to motocross but the circuits are much longer. It takes between 2 and 4 hours to complete a circuit of some 7 or 8 kilometres. The speeds are slightly lower as the circuits are used on an irregular basis and the rider is generally not familiar with them. The control of cycles required is of a higher standard. During a video that was exhibited during the hearing, an Enduro rider was seen to strike an obstacle of lantana bush, throwing him to the ground. It was then necessary for him to pick up his cycle, remount and try to ride through the obstacle.

16. Another branch of competitive motor cycling is known as Dirt Track. This is on a continuing circuit of smooth dirt which must have left and right bends. In this sport, the machines are designed to corner rather than to go straight. If released, they will turn. The back wheel is deliberately out of alignment

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with the front wheel. Consequently, a good deal of upper body control is needed to master the cornering technique required. The rider is required to stand on the outside foot peg, opposite to the direction of the cornering, lay the machine over at an angle of 45 degrees and support the machine and himself at speeds of between 95 and 110 kilometres per hour going around corners.

17. Speedway Racing is carried out on a continuous loop circuit anti-clockwise. No cornering is involved, and therefore machines have been developed to eliminate the surplusage on the left hand side. Alcohol-based fuels are allowed for this branch of the sport, resulting in a high degree of manual and physical skill needed to control the speeding vehicle.

18. Sporting Trials is a non-speed event. The terrain is designed to be as difficult as possible, but the rider must cover it without leaving the foot pegs. The effort is considerable in the balance as he is standing on these foot pegs at all times. It is also necessary for him to pull back on the handle bars while controlling the throttle.

19. A Hill Climb is a point to point race. One rider at a time advances through various obstacles to the top of a hill. The rider with the ability to get there in the shortest time, wins the competition.

20. All these events are carried out within clubs and at higher levels. Not all members are competitors in higher level events. The witness estimated that competing members in open events would be possibly, 3,500 to 4,000 persons, being about half of the applicant's membership. A further 1,000 to 1,200 members would participate in events at club level. The remaining members would consist of a large number of officials and social members, including wives, family and friends of riders. The sport requires the provision of an unusually large number of officials to flag down, inspect machines, take care of safety and so on. During the period in question there was a very small number of young children who were members. However since the enactment of the Motor Vehicle Sports (Public Safety) Act 1985 (NSW), the number of young members has tended to increase with official encouragement.

21. I turn now to a consideration of the meaning of the relevant paragraph. Its origin was referred to by Beaumont J in Cronulla Sutherland Leagues Club Ltd at page 4236. It was apparently enacted as a result of a recommendation by the 1952 Commonwealth Committee of Taxation. In paragraph 18 of its ``Report on exemption of income of certain bodies and funds'' it recommended that s 23(g) should be amended ``to exempt the income of an association or a 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 purposes of profit or gain to the individual members''. The resulting form of legislation is not exactly in accordance with the terms of the recommendation. The recommendation that the sport be an outdoor sport, for example, was not apparently followed.

22. By Act No 57 of 1990, the relevant paragraph was amended by deleting the words ``an athletic game or athletic sport in which human beings are the sole participants'' and by replacing them with the words ``a game or sport''. This has resulted in a widening of the exemption. In his Second Reading Speech, the Minister explained that the new words would extend to ``athletic games or sports, non-athletic games, such as chess or bridge, sports involving the use of machines or equipment such as motor racing and non-competitive activities such as mountaineering''. Counsel for the Commissioner submitted that this speech would be an aid in construing the terms of the pre-amendment paragraph. He submitted that the Minister clearly believed that motor racing (and by extension, as counsel suggested, competitive motor cycling) was not covered by the pre-amendment terms and that this should be taken into account in construing the paragraph. In my view, this is an incorrect approach. Extrinsic aids are of assistance only where obscurities exist. However, even if one required such assistance to understand the terms of the pre-amendment paragraph, it hardly seems to me to be appropriate to call in aid a Second Reading Speech of a subsequent Bill to understand the terms of its predecessor. Rejection of counsel's submission is also consistent with the reasoning of the Supreme Court of Queensland in
FC of T v Bill Wissler (Agencies) Pty Ltd 85 ATC 4626 at 4630. The words of the paragraph with which I am

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concerned must be interpreted according to their ordinary grammatical meaning.

23. Some dictionary definitions are of assistance. The Oxford dictionary defines athletic as ``pertaining to an athlete, or to contests in which physical strength is vigorously exercised''. An athlete is defined firstly as a ``competitor in the physical exercises, such as running, leaping, boxing, wrestling that formed part of the public games in ancient Greece and Rome'' but more importantly, as ``one who by special training and exercise has acquired great physical strength; one whose profession it is to exhibit feats of strength and activity; a physically powerful, robust, vigorous man''. The Macquarie dictionary defines athletic as ``(1) physically active and strong, (2) of, like, or befitting an athlete, (3) of a physical type characterised by long limbs, a large build and well developed muscles, (4) of or pertaining to athletics''. The first definition of athlete offered is ``anyone trained to exercises of physical agility and strength''. The most appropriate definition of sport in the Oxford dictionary is ``a game, or particular form of pastime, especially one played or carried on in the open air and involving some amount of bodily exercise''. The Macquarie dictionary gives a number of definitions of sport, the most appropriate being ``(1) an activity pursued for exercise or pleasure, usually requiring some degree of physical prowess, as hunting, fishing, racing, baseball, tennis, golf, bowling, wrestling, boxing etc., (2) a particular form of pastime, (3) a meeting for athletic competition, (4) the pastime of hunting, shooting or fishing with reference to the pleasure derived, (5) diversion; recreation; pleasant pastime''. Participant is defined in the Oxford dictionary as ``(1) one who participates in anything; one who takes part in, possesses, or experiences something in common with others; a sharer, partaker, participator''. The verb to participate is defined as ``to take part; to have a part or share; to share''. The Macquarie dictionary defines a participant as one who participates and defines the verb as ``(1) to take or have a part or share, as with others; share: (2) to take or have a part or share in; share''.

24. The relevant paragraph was considered in Case L37 reported at 11 TBRD 213. The Chairman of Taxation Board of Review Number 3 made reference to abbreviated dictionary definitions and considered them in relation to both motor car and motor cycle racing. It is not clear from the report whether the Board had the benefit of argument from counsel. The reference to ``the club's representative'' seems to indicate the contrary. The reasons given by each of the three members of the Board are very brief. As far as one can judge from a reading of them, not a great deal of evidence was put forward. The taxpayer in that case appeared to rely on submissions and general knowledge rather than on hard evidence. On the basis of the material put before him, the Chairman said at page 215: -

``In my opinion, where motor car and motor cycle racing is concerned, the important factor is the capability of the car or cycle, and I find it difficult, therefore, to find that motor car and motor cycle racing can be regarded as an athletic game or athletic sport. I do not deny that the driver or rider must have considerable ability.''

25. Mr McCaffrey (member) was careful to limit his views to those based on the evidence before the Board. At page 215 he said: -

``On the facts of this reference, motor car and motor cycle racing generally call for a certain degree of skill and experience, as well as physical fitness and perhaps endurance. The actual physical force exerted by the driver is in keeping the vehicle on course, braking, changing gears, etc., and is merely directed towards superintending and controlling a far more preponderant force, alien to that of which he is capable by solely using his own physique. The attainment of the objective ultimately depends preponderantly on the `horse power' rather than the `man power' exerted. The relative degree to which the latter is used, to my mind, is not sufficient to swing the subject sports into the `athletic' category. The distinction which I am endeavouring to draw becomes obvious enough, I think, if one compares an ordinary bicycle race with a motor cycle race. In my opinion, the former is preponderantly an `athletic sport' whilst the latter is not.''

26. Mr Dempsey (member) was principally concerned with the taxpayer's Memorandum of Association and with its application in the

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manner discussed by the High Court in
Royal Australasian College of Surgeons v FC of T (1943) 68 CLR 436. On a perusal of the documentary evidence, Mr Dempsey concluded: -

``My conception of an `athletic game' or `athletic sport' is an activity where the main consideration is the development of the physical fitness of the human competitors and where success goes to those who have developed the highest degree of such fitness and aptitude for the particular contest.''

27. I would not readily depart from a decision of any Board of Review or of this Tribunal on a question of principle. I read the decision in Case L37, however, as one based entirely upon the facts that were placed before the Board. I have no information as to the stage of development of motor cycle racing in 1960 when this case was decided, nor have I any way of knowing what evidence was available to the members. Furthermore the reasons do not make it clear whether members considered motor car and motor cycle events in the same light. On the evidence before me, there would be significant differences in the degree of athleticism involved in each motor sport. For these reasons I have derived little assistance from the decision. In my view, it cannot be read as an immutable declaration that all motor cycling racing, no matter when it occurs, or under what conditions it is held, has been, is and always will be non-athletic. Although the Board used some generalised phrases in relation to the sport, its decision cannot be given such a wide and all embracing meaning. I do not, therefore, regard it even as persuasive authority for some of the general propositions which the members enunciated. I will therefore approach the paragraph at first impression.

28. The evidence leads me to believe that successful riders depend on a number of attributes. It is true that success will go to the skilful, but the evidence establishes to my satisfaction that the successful competitor will also need strength and endurance to cope with the pounding, balancing, physical handling of cycles, cornering and general management of the machine. Athleticism is not the only quality required of a rider. It is however a significant element in the formula for success. The activity, in the words of the Oxford dictionary, is a contest in which physical strength is vigorously exercised, even though other elements form part.

29. In order for a sport to be correctly described as ``athletic'' it is not, in my view, necessary for the athleticism to be the exclusive characteristic of the pastime. It is sufficient if the element of athleticism is significant in the activity of the participator. The degree of athleticism will vary from sport to sport, but so long as it is not merely incidental or is insubstantial, it will be sufficient if it is associated in a significant degree with the carrying on of the sport. Skill, experience, cunning, concentration and other mental attributes can be seen in participators in unquestionably athletic sports, such as tennis. These non-corporeal skills, however, will not suffice to support the player through a number of sets. On the other hand, non-physical skills alone will not be sufficient to categorise a sport or pastime as an athletic game or sport. Until the recent amendment, for example, chess was not regarded as falling within the terms of the paragraph. On the evidence before me, athleticism is so material in competitive motor cycling as to give the sport that quality.

30. It is true (as counsel for the respondent pointed out) that the degree of athleticism is greater amongst the few champions than amongst the many junior club members. This is so, however, in all sports. The fact that some sportsmen are better performers than others does not detract from the nature of the sport itself. I also agree with counsel for the respondent that there is nothing inherently athletic in riding a motor cycle. However in the circumstances in which these events are carried on, as it was described to me in largely unchallenged evidence, athleticism is a significant element. The fact that one is riding a man-made object does not detract from the degree of vigour needed. A rower may be in control of sculls, developed with a high degree of technology. Nonetheless, physical effort will be required to control and direct them. It is not to the point to say that fitness is only an element in improving one's performance. On the evidence before me, it is an essential element in providing any performance at all. I therefore find that the sport of competitive motor cycling is an athletic sport.

31. The last issue to be determined is whether it is one in which human beings are the

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sole participants. Counsel for the respondent pointed to the general competition rules, Exhibit C, and to the fact that machines were entered for the events, not riders. He suggested that the machines should be viewed, much as horses are viewed, as participants in a horse race. In my view, this submission can succeed only if an unreal meaning is given to the word participant.

32. It means, in my view, one who actively and effectively shares in the pastime. As used here, it could not be said that spectators are participants. Much less could it be said, as counsel for the respondent suggested, that the manufacturers of the machines were participants as their name was exposed by way of advertisement. The word implies an independent animate will. The horse in a race, the pony in a polo match, both actively contribute to their sports and can be said to participate in them together with their riders. In my view, it is fanciful to argue that a piece of machinery is a participant, just as it would be fanciful to argue that spiked shoes participated with the runner or that sophisticated golf clubs participated with the golfer. In some ways, the irrelevance of the machine was illustrated by the evidence that in one event, known as the Yamaha Cup, the machines are supplied by the manufacturer and riders are drawn by lot. This is to ensure that the result of the race will depend upon the riders and not the cycles. These machines are in my view simply the means through which competition is conducted and may be compared, in logic, with javelins, racing bicycles or toboggans. Like computers, they will do only what their programmers and operators require of them. They cannot be said to be participants in competitive motor cycling. In my view, only human beings are involved in that sport.

33. It follows that the income of the applicant during the relevant years was exempt from income tax. The objection decisions under review are therefore set aside and the matter is remitted to the respondent with a direction to that effect.