Case U128

Members:
KP Brady SM
JE Stewart SM
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal

Decision date: 10 June 1987.

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K.P. Brady (Senior Member), J.E. Stewart (Senior Member) and D.J. Trowse (Member)

This case concerns the years of income 1976 to 1980 inclusive, and raises for our determination the questions of first, whether the applicant/taxpayer, the B... Ski Club, was, for the purposes of subsec. 23(g)(iii) of the Income Tax Assessment Act 1936, a club not being carried on for the purposes of profit or gain to its individual

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members, and secondly, whether it was a society, association or club established for the encouragement or promotion of an athletic game or athletic sport. If those questions could be answered in the affirmative, the income of the Club could be properly ruled to be exempt. For the purposes of the hearing, the parties were in agreement that the skiing activities of the applicant, because of their nature, involved human beings as the sole participants. Agreement was also reached that the taxable incomes in issue should be reduced to $2,305 for 1976, $3,729 for 1977, $4,948 for 1978, $6,001 for 1979 and $2,599 for 1980 because of allowance of deductions for depreciation and loose tools. It should be noted that those amounts of income comprised net accommodation receipts derived from guests of members, comparable receipts from members being excluded, of course, in acknowledgement of the principle that a club's assessable income can only consist of moneys derived from sources outside itself. The Commissioner's main argument, as expressed by his representative at the hearing, against exempting the above income was that the Club basically comprised a group of people who operated as a business venture a block of flats or lodge which happened to be situated in a snowfield as opposed to being anywhere else. He contended that the main object of the Club was not to promote skiing but to provide accommodation for reward to members of the Club and their guests and friends. For its part, the Club asserted that the provision of accommodation was an integral part of the sport of skiing and the only point of having the lodge was to better provide the Club's members with access to the ski slopes.

2.The Tribunal review of the matter was a somewhat protracted affair. It commenced on 2 June 1986 before Taxation Board of Review No. 2, but after hearing a considerable amount of evidence from the applicant's principal witness, it was adjourned to a date to be fixed in order that the applicant's counsel could obtain fresh instructions in the light of a change made by the Commissioner in the matters that he was prepared to concede. Some few weeks after the grant of the adjournment, the functions of Boards of Review were absorbed into the Administrative Appeals Tribunal (AAT) and the power of that Tribunal to review the respondent's decision on the objection is derived from sec. 189(2) of the Income Tax Assessment Act 1936 as amended by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986, sec. 223(1) of that Act, and sec. 25 of the Administrative Appeals Tribunal Act 1975. The matter as an adjourned hearing came before the AAT on 7 April 1987 and was completed on the following day.

3. The Club was established in 1972 when a group of people with a common love of skiing banded together and purchased a ski lodge at F... for a price of $43,000. F... was chosen as the most suitable location as it offered cross-country skiing as well as skiing on the surrounding mountain slopes. The building was situated on a State Electricity Commission commercial lease which was originally for a period of 45 years, and had 41 years to run at the time of purchase. The terms of the agreement required payment of an initial deposit of $1,500 and full deposit of $15,000 within two weeks of that payment. The balance was financed by way of a bank loan and because of problems associated with lending to a group of people, a co-operative company was formed which we shall call Blue Hills Co-operative Limited, and that company in fact acquired the property, and the lease of the land was shortly after assigned to it.

4. The operation of the Club and of the Co-operative seems to have proceeded in tandem. When a member joined the Club it seems that he would pay over moneys amounting to $500, comprising a fee of $350 which would go direct to the Club and allotment moneys of 10c per share for an allocation of 1,500 shares in Blue Hills. That total outlay of $500 was in the nature of a "once-off" payment and was additional to the annual subscription of $65. A member's financial involvement did not however end there. Self-help was a necessary aspect of the Club's operation, and members were expected to attend work-parties, and sanctions by way of monetary fines were imposed if that involvement, for one reason or another, was not forthcoming. Within that context, it was advised to us that extensive extensions to the Club's premises involving a materials cost of $19,000 was effected in 1979/80 using solely members' own labour. Over the years that we are concerned with, it seems that revenue by way of subscriptions, etc., was received in the first instance by the Club and then passed over to Blue Hills to provide the funds to improve

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and extend the lodge premises, which activities seem to have amounted to a continuing operation.

5. Membership of the Club was envisaged by the founding committee as amounting to approximately 35, who, by each paying an amount of $500, would cover the Club's own contribution of $17,500 to the purchase cost of the lodge. The Club was seen to be predominantly for members of families who were keen to learn skiing as a family unit. Accordingly the facility was offered for joint membership of husband and wife both of the Club and of Blue Hills.

6. Some knowledge of where the sport of skiing stood in Australia in 1972 is desirable, we consider, to better understand the reasons behind the purchase of the lodge. One of the founding members, who at various times had been the president and at another stage the secretary of the Club, gave evidence for the applicant, and provided that information in the following terms:

"I first became involved with the B... Ski Club in 1972. At that time, I was approached by a group of people who were envisaging forming a ski club to be able to go skiing. If I might point out, at that stage the ski industry was somewhat less developed than it is today and a great proportion of buildings on the ski slopes were in fact clubs rather than the commercial arrangements that are today. So the normal thing was to - if you want to be associated with the ski fields and go skiing, you had to be in a ski club - it was the only, in fact reasonable and economic way to go skiing as the limited commercial facilities were very expensive."

7. Later in his evidence when commenting upon the advantages of being part of a club as opposed to going independently to the ski slopes and booking accommodation, he said:

"As I suggested earlier that at that time there was not a great deal of commercial accommodation. In fact most of the accommodation was on the basis of clubs. Both at [M...] and at [F...]. That is not so today but at that stage it was. Most of the clubs as we saw it in fact had a different-type membership structuring, some clubs had up to 200 to 300 members. And of course the difficulty of access in that sort of situation was very poor if they all wanted to go skiing. And none of them in fact suited our purposes to encourage families to go up as family units. That is what we wanted to do... most of the members at that particular time... had young families, and the cost of taking a family to a commercial accommodation was very high and prohibitive for most of us, as it probably still is. And we saw that forming a club which would have accommodation rates significantly lower than commercial rates, would in fact encourage families and family friends to go skiing."

8. In giving his evidence, the witness denied the suggestion put to him by the Commissioner's representative that the lodge was acquired because it represented an excellent investment prospect for its members. On the contrary, he stressed that it was purchased because it was viewed as having excellent potential to facilitate members' skiing. Consistent with that view, he pointed to the fact that members were required to show a real interest in skiing in order to be admitted, that tuition was given by members to guests and children of members, that the sport of skiing was actively promoted by members by having groups of school children and guests stay at the lodge and receive tuition, and that social activity within the Club was only incidental to participation in skiing. Also the point was made that since in the appropriate States of Australia, skiing could only be indulged in at locations situated substantial distances from main population centres, the need for a club to offer accommodation to its members was nothing less than essential.

9. It seems that accommodation at the lodge was very basic, certainly in the early years. It consisted of four flats within the building each of approximately five squares, two on each of two levels. Each flat had accommodation for eight persons although that accommodation was said to be cramped. At the time of purchase, there were no drying rooms nor facilities for storing skis and other equipment. We were advised that walls in the bunk rooms were not built up to the ceilings, because if they had, the lodge as a building would not have complied with the appropriate regulations. A communal recreation room was added in 1979 which

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housed a billiard table and occasional furniture. The Commissioner's representative sought to show that the accommodation was something better than basic presumably in order to demonstrate that it was not simply an integral part of the sport of skiing. However, we accept the evidence of the various witnesses that the accommodation, particularly in the Club's formative years was rudimentary only, and indeed we have a certain sympathy with one of the witnesses who made the following comments in his examination-in-chief:

"Q. Did you find [skiing] a strenuous sport to begin with?

A. Yes, it was extremely strenuous and tiring and brought into play the back of the leg muscles that I was not accustomed to using.

Q. Have you been back since?

A. I have never been back to the B... Lodge since, no.

Q. Why?

A. My wife refuses to go; she felt that the accommodation was not up to the standards that would be available anywhere else and she resented being forced into a situation where she was sharing common facilities with people that she did not know, or necessarily like."

10. We turn now to an examination of the constitution of the Club. There were in fact two constitutions; the original seems to have come into force in 1973 and was tendered in evidence. The name of the Club was set out in cl. 1 and the objects of the Club were stated in cl. 2 to be as follows:

"(a) To encourage and foster interests in skiing amongst the members of the Club.

(b) To provide, furnish and maintain a ski lodge and skiing facilities for members and others.

(c) To encourage persons or bodies with objectives similar to those of this Club and to promote skiing in Australia.

(d) To do all such other things as are incidental or conducive to the attainment of the above objects; or any of them which may be calculated directly or indirectly to enhance the value of any venture on property of the Club."

11. Clauses 3 and 4 were concerned with Membership and Entrance Fees, and subsequent cl. 5, 6, and 7 dealt with Exclusion from Membership, Resignation and Suspension or Forfeiture of Membership.

12. For present purposes, cl. 8 dealing with Reimbursement to Members is of special relevance and was in the following terms:

"(a) Any member who ceases to be a member of the Club pursuant to Clauses 5, 6 or 7 hereof are entitled to:

• (i) Receive payment from the funds of the Club. The amount of the payment should be the current market value of the Club's assets minus any liabilities, excluding current members' deferred loans, divided by the number of members. The current market value of the Club's assets should be negotiated between the member and the Club's Committee. The Committee's valuation is to be based on the Finance Sub-committee's recommendation. If agreement cannot be reached between the member and the Committee, then 8(a)(ii) applies. This payment should be met by a payment from [Blue Hills] Co-operative Limited of the value of the paid-up capital (if any) of the member's shares. The balance of the payment will be paid by the Club.
• (ii) If the Club and [Blue Hills] Co-operative Limited are not able to make payments as set out in 8(a)(i) above within three (3) months of the member notifying the Secretary in writing of his/her intention to sell, the member has the right to sell his/her interest in the Club and [Blue Hills] Co-operative Limited to another person who will be accepted for membership subject to Clause 3.

(b) No financial reimbursement to any member will be made from Club funds before the Club possesses a real and positive bank balance after the payment of all debts unless recommended by the Committee."

13. The original constitution was superseded by one dated June 1977 which was more comprehensive in its terms and, inter alia, included two additional objects. The first such object which permitted guests to use the Club's

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facilities is of no significance to us, but the additional object described as cl. 2(f) is relevant, we consider, and was in the following terms:

"To apply the income and property of the Club solely towards the promotion of its objects and no part shall be paid or transferred directly or indirectly by way of profit to the members of the Club."

14. Clause 8, however, which was detailed earlier, remained unchanged.

15. The Commissioner's representative contended that a number of members had resigned their membership at various times over the years of income in issue and had received sums of money calculated by reference to the value of the Club's premises; those sums, it was submitted, were considerably larger than the amounts which they had paid to the Club by way of fees. Accordingly, so the argument ran, those surpluses in the hands of members, pointed to the fact that the main object of the Club was to increase the market value of the premises (those premises, it will be recalled, being situated on a commercial lease), to the resultant benefit of its members; the involvement of the members in skiing should be seen to be only ancillary to making profits out of the lodge.

16. Tabled in evidence by the applicant was a list of members who had resigned from the Club over the years of income in issue. The total amounted to seven including three husband/wife members and was evenly spread over those years 1975 to 1980 inclusive, and it seems that they were duly replaced by new members. Special attention was directed by the Commissioner's representative to members M, P, and V who had each received sums in excess of $6,000. M gave evidence as a witness for the Commissioner and advised that he had received an offer from the Club to pay him an amount of $2,500 under cl. 8(a) of its constitution upon notifying the Club of his resignation. He had considered that offer inadequate based upon his assessment of the value of the Club's premises and he himself had interviewed, as he was perfectly entitled to do by operation of cl. 8(a)(ii), a prospective member, H, who had agreed to pay an amount of $6,300 to take over his membership. That figure seems to have been based upon the insurable value of the Club's premises as divided by the number of members. It seems that the Club in order to screen H as a suitable member took over the transaction and received the funds from him and subsequently paid them over to M and at the same time took the opportunity to repay to M a small loan which he had at some time past made to the Club. The same sort of arrangement was subsequently entered into by V with an incoming member, T. The payment made to P was somewhat different in that it involved a payment directly from the Club and again it was of much the same amount as received by M and V, basically because the level of pay-out had become common knowledge amongst Club members. It was conceded by the principal witness for the Club that cl. 2(f) of the constitution detailed earlier did not prevent the payment being made to P. It was the submission of the Commissioner's representative that because the pay-out figure to retiring members was calculated by reference to the value of the Club's premises, the conclusion was inescapable that members viewed their involvement in the Club as an investment rather than as a means of participating in the sport of skiing. However, the Commissioner's own witness rejected that line of argument and advised that his departure from the Club was a decision based upon personal grounds; it had nothing to do with realising an investment.

17. The criteria for determining whether the Club can come within the sec. 23(g)(iii) description are set out in the decision of the Supreme Court of New South Wales in the case of
"The Waratahs" Rugby Union Football Club v. F.C. of T. 79 ATC 4337. There Waddell J., after referring to the judgments in
Royal Australasian College of Surgeons v. F.C. of T. (1943) 68 C.L.R. 436, stated at p. 4341:

"... 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"

(emphasis added).

18. It would seem that the most material evidence for determining the main purpose for establishing the Club would comprise its

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objects and the activities of its members (see dicta of Rich J. in the Royal Australasian College of Surgeons case (supra) at p. 446). It was stated by Board of Review No. 1 in Case G53
(1956) 7 T.B.R.D. 301 at p. 309 that a Tribunal in determining such an issue should be free to consider not only the objects of the Club as expressed in its memorandum of association but also the motives of the founders and the manner in which the Club's objects were being fulfilled.

19. In our view the evidence is clear that the main or real purpose for which the B... Ski Club was established was to provide, furnish, and maintain a ski lodge with attendant facilities such as drying rooms, etc., so as to enable its members to participate in the sport of skiing. The objects set out as cl. 2(a) and 2(b) of the Club's constitution demonstrate that to be so and the evidence of two long-standing members and of one erstwhile member was not seriously challenged, we believe, in demonstrating that individuals joined the Club in order to ski, also that the more proficient skiers gave tuition to new members, that adult members provided on-going tuition to their children, and that groups of students from various secondary and tertiary schools and colleges lived in the lodge at various times in the snow season and were encouraged to further their interest in skiing. We heard from another witness, a one-time guest at the lodge, that the same sort of encouragement was extended to invitees such as himself and his family. Also, taking up the latter point made in the excerpt from Mr Justice Waddell's judgment, we obtained the firm impression that whatever social activity existed in the Club was very much subsidiary to the main interest of the members of actively engaging in skiing.

20. The Commissioner's representative sought to show that the Club's promotion of the sport of skiing was extremely limited and amounted almost to a disavowal of the object detailed in the Club's constitution as cl. 2(c), viz.: "To encourage persons or bodies with objectives similar to those of this Club and to promote skiing in Australia." He alluded to the fact that the Club did not make donations to other clubs to assist them financially, nor did it disseminate information about skiing except by way of a newsletter to its members. Furthermore, it did not buy skis for people who could not afford them but instead used funds to buy equipment, etc., for the use of its members at the lodge, and it did not appoint a member as an education officer to better promote the sport. All those omissions were conceded by the principal witness for the Club. However they do not necessarily lead to the conclusion that the Club was not actively engaged in promotion. The Club may not have been as evangelistic in that area as it might have been, but equally it could well have believed that promotion, like charity, should begin at home. Also we agree with the statement made by Board of Review No. 1 in Case G53 (supra) that as provision is made in the subsection for both encouragement and promotion, it must be taken that encouragement is not to be read in the sense of actual promotion, and that a club's activities in that area may fall short of actual promotion of the particular sport, and yet attract the exemption. With only limited funds at its disposal, the Club had to allot priorities and the priorities which it did establish were, in our view, consistent with establishing a sound foundation for the Club in its formative years, and seeking to inculcate a measure of solidarity and camaraderie within the Club; the introduction of the concept of self-help was doubtless another manifestation of the same aim.

21. Paraphrasing dicta of Lord Watson as stated in
I.R. Commrs v. Forrest (1890) 15 App. Cas. 334 and approved by the High Court in the Royal Australasian College of Surgeons case (supra), we believe that if anyone was asked to say what would be a more efficient method of promoting skiing than that adopted by the B... Ski Club, he would have difficulty in making a satisfactory reply.

22. On the authority of
Boating Industries Association of New South Wales v. F.C. of T. 85 ATC 4224, the Commissioner's representative pointed to the distinction between a club whose activities had the effect of promoting skiing, and a club which is established for that purpose. Under the terms of sec. 23(g) (iii), the club must be:

"established for the encouragement or promotion of an athletic game or athletic sport in which human beings are the sole participants"

(emphasis added).

23. As the representative properly submitted, it is not sufficient in order to gain the exemption that a club do such things as provide

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skiing tuition for the children of members, which might be said to encourage the sport of skiing, if in fact it be established for objects other than that very purpose, for instance, to provide accommodation for a group of people who wished to ski. However, on the view that we take of the evidence, the use to which the lodge was put supports our belief that the Club was established for the encouragement of an athletic sport in which human beings are the sole participants. That use, we consider, was not of a general kind; it was only relevant in the context of encouraging skiing. Just as change rooms might be considered to be essential to a football team so was the lodge vital for members of the B... Ski Club. If that analogy is correct, as we believe it to be, it is not true to assert that the Club was established merely to provide accommodation for people who wished to ski. The Club was not merely involved in promoting skiing. It was truly established to carry out that objective as demonstrated both by the terms of its constitution and the conduct of its members which, on the evidence, was consistent with those terms.

24. It is pertinent to add at this juncture that we consider that skiing as practised by those people attending the resort at F... was an athletic sport and, as mentioned earlier it was not disputed by the Commissioner's representative that skiing is an activity "in which human beings are the sole participants".

25. The Commissioner's representative submitted that even if the Club met the criteria as to its establishment, it still failed to attract the exemption because it was not one where it could be said that it was not carried on for the purposes of profit or gain to its individual members. He asserted that it was carried on for profit and pointed in particular to the payment made ex the Club's own funds to P, calculated by reference to the insured value of the Club's premises. However the evidence was that P received a pay-out figure based on amounts which other retiring members had obtained from individuals seeking to join the Club. There was no evidence to support the claim that the Club was conducted to make profits for its members by way of recurrent operational surpluses, nor was there evidence to demonstrate that the Club was spending money on the premises in order to enhance its value and ultimately provide a capital gain to the members. What money was so expended was done for the purpose of inducing members and guests to use the premises as a take-off point for their participation in skiing, and in our view the outlays were made for no other purpose. Accordingly, we consider that the B... Ski Club complies with all the criteria set out in sec. 23(g)(iii) and therefore its income is exempt.

26. For the reasons detailed above we would set aside the objection decisions in relation to the years of income 1976 to 1980 inclusive and allow the objections in full.