David 2
ADMITTED TO THE LEGAL PROFESSION
29 Apr 1991
SIGNED VICTORIAN
BAR
ROLL
23 May 1996
ACCREDITED AS MEDIATOR
03 Feb 2005
QUALIFICATIONS
B.Com. (Hons), LLM.
Legalbrief sm
Name 1a

Subhead 1a
Afl 4

Is the AFL obeying our
Corporations and tax laws?


Usually in this blog I write about equity.  But it's my blog and I'll write how I want to - so today I'm writing about the AFL.

The two most misunderstood terms in Australian rules football are  “AFL Commission” and “member”. Almost nobody knows what these terms really mean.  And that’s because so few people understand what, from a legal point of view, “the AFL” really is.  Whether you are an AFL “member”, a club “member” or a journalist seeking to shed light on the many controversies concerning the AFL, understanding precisely what “the AFL” is is the foundation for understanding these other terms.

WHAT IS THE AFL?

So what is the AFL? It is a company, an Australian public company to be precise. Its full name is Australian Football League Limited ACN 004 155 211.  The AFL was registered as a company on 18 June 1929 under a predecessor of the Commonwealth Corporations Act 2001. Its previous name was Victorian Football League Limited but that was changed to the present name on 23 January 1990. 

There are two types of companies under the Corporations Act: “public” companies and “proprietary” companies. Proprietary companies are the ones with “Proprietary Limited” or “Pty Ltd” after their name. Public companies are generally bigger companies that have “Limited” after their name unless, like the AFL, they are allowed to omit it. Omitting the word “limited” is governed by sections 150 and 151 of the Corporations Act. To omit “Limited” under s. 150 a company needs to have a special registration under the Australian Charities and Not-for-profits Commission Act 2012  and have a constitution that prohibits the payment of fees to directors.  S. 150 doesn’t apply to the AFL because it is not eligible for registration under the Australian Charities and Not-for-profits Commission Act 2012.  To omit “Limited” from a company’s name under s. 151 the  company had to have a licence to do so in force before 1 July 1998.  S. 151 says the licence continues to be in force unless ASIC revokes it under ss 150 (3). The AFL has such a licence but it is not publicly available. It would be interesting to know the conditions of the licence. For example, does it prohibit the payment of fees to directors and the payment of dividends to members? Under s. 150(2)(d) any company with such a licence has to notify ASIC as soon as practicable if it does pay a dividend to its members. More about that later. 

WHO CONTROLS THE AFL?

Like any company, the AFL is ultimately controlled by its members. But who are the members of the AFL? Well they are certainly not the poor souls who log on to the “membership” section of the AFL website and “join” or “renew” their “membership”. The AFL website currently says there is a 10 to 12 year waitlist for “full membership” but what the AFL calls “membership” has nothing to do with being a legal member of Australian Football League Limited. All that those hapless hopefuls waiting for 10 to 12 years will ever get is access to multiple games staged by the AFL and sundry other minor benefits. Those people get no say whatsoever in the running of the AFL the way shareholders ultimately control most companies. The people do who ultimately control the AFL are those who are members for the purpose of the Corporations Act, which in this case means the AFL’s guarantors because it is a company limited by guarantee, not  by shares.  The AFL’s 2013 Financial Report lodged with the Australian Securities and Investments Commission discloses that it has 239 members including 221 life members. The other 18 members are appointees of the 18 clubs who field teams in the competition. 

Each of the guarantors has generously guaranteed the AFL’s debts up to a maximum of 10 cents each. So creditors of the AFL can rejoice in the certainty that if the AFL is ever wound up there’s another $23.90 coming into the kitty. Another role of the members is to elect the company’s directors at the Annual General Meeting. Under s. 250N of the Corporations Act the AFL, like all public companies, must hold an annual general meeting of its member guarantors every year within 5 months of the end of its financial year. However under the AFL’s constitution, the life members have no voting rights. Thus it is the 18 club "appointees" that ultimately control the AFL and decide, by voting at the annual general meeting, who its directors will be.

Normally large shareholders in a company have at least one representative on the board of directors. This is no longer the case with the AFL. Until relatively recent times the AFL’s directors included people associated with particular clubs. For example John Elliott (Carlton), Andrew Plympton (St Kilda), Colin Carter (Geelong), Craig Kimberley (Sydney), Peter Gordon (Western Bulldogs) etc. But the present directors include nine individuals not associated with any particular club and almost all of whom are directors of major Australian corporations. So we can take it that the AFL clubs have abandoned having a representative director in the organisation that controls their cashflow and determines their future. 

Of course, saying “director”  to the AFL is like being a knight who says “ni”. The AFL prefers the term “Commissioner” to “director” and uses the expression “AFL Commission” to describe its board of directors. This pretentious practice (which includes capitalising the “C” in “Commission” ) serves the purpose of making the AFL’s board and its members sound like they have some sort of elevated statutory status like the “Australian Securities and Investments Commission” or the “Chief Commissioner of Police” but the reality is that the AFL Commission is just a board of directors like any other public company board. (This is why, for those who look deeply enough,  the statutory part of the AFL’s 2013 Annual Report contains a “Director’s Report” and why the nine people named as the directors are the same nine named as the AFL’s “Commissioners”). In an article published on the AFL’s website on 20 November 2007, which remained there until at least 2012, the AFL said that at its board meeting of 19 July 2007 the board was replaced by the Commission and effectively abolished itself. That is rubbish - a board of directors cannot legally abolish itself so it’s a good thing that the AFL removed such a ludicrous statement from its website.

IS THE AFL ALLOWED TO DISTRIBUTE MONEY TO THE CLUBS?

Companies limited by guarantee are prohibited by s. 254SA of the Corporations Act from paying dividends to their members. And according to clause 4 of the AFL’s Memorandum of Association (which forms part of its Constitution), any payment of the League’s income and property to the members of the league “by way of dividend, bonus or otherwise” is prohibited. Clause 7 then goes on to say that if any member of the League does receive any “dividend, bonus or other profit in contravention of the terms of the fourth paragraph of this Memorandum, the liability of every member of the governing body of the League who has concurred in or authorised such payment shall be be unlimited and the liability of every member of the League who has received such dividend, bonus or profit as aforesaid shall likewise be unlimited”. The AFL seems to get around this prohibition by having nominees of the Clubs  serve as the members of the Clubs instead of the Clubs being members directly. Article 5 of the AFL's Articles of Association requires that this person be the Club President, Vice-President or Director. Article 10 says the appointees are not to act as trustees or agents of their nominating Club but "but shall act independently for the encouragement and promotion of football in accordance with the objects of the League set out in its
Memorandum of Association". But does anyone really believe that these appointees don't represent the interests of their Clubs? And if the clubs were named as members, they would have to appoint somebody to speak for them at the AFL AGM's anyway.

According to the AFL’s 2013 Annual Report, in that year alone the AFL paid each club a base distribution of $7.2 million and a bonus distribution of $1.2 million from broadcast rights proceeds. On top of those payments in 2013 the AFL paid the clubs another $59.7 million shared between the clubs in different amounts. The grand total paid to clubs in 2013 was $209.1 million. According to the 2013 Annual Report, these “distributions” are not classified as operating expenses and are paid out of the AFL’s operating surplus.  So if the "appointees" in fact do act as agents of the Clubs, these payments are effectively a dividend. If so, this means the AFL should notify ASIC of the fact as required by s. 150 of the Corporations Act mentioned above. The AFL and its directors might be interested to know that under Schedule 3 of the Corporations Act, the maximum penalty for contravening s. 254SA is a fine of $17,000 or 2 years imprisonment or both. Ouch! That could hurt more than a bump from Jack Viney.

WHY DOESN’T THE AFL PAY INCOME TAX?

In Australia corporations are liable to pay income tax. The current corporate income tax rate is a flat rate of 30%. The AFL doesn’t pay income tax. The AFL’s 2012 financial report lodged with ASIC says “The Company and its controlled entities are exempt from income tax under Section 50-45 of the Income Tax Assessment Act 1997 as amended, as the activities are solely the promotion, administration and development of Australian Rules Football.”

Err, that is not quite what s. 50-45 says. In order to qualify as a sporting organisation  under s. 50-45  the organisation must be “a society, association or club” established to encourage a game or sport.  Although on the face of it s. 50-45 does not apply to companies, that fact hasn’t stopped other companies involved in football (well rugby league anyway) from successfully claiming the exemption in the Federal Court. For example, in St Marys Rugby League Club Ltd v Commissioner of Taxation [1997] FCA 581 (08 July 1997) (HILL J),  St Mary’s Rugby League Club was able to sustain the exemption notwithstanding that it derived substantial income from gambling and other revenue. For reasons I can’t work out, the Commissioner for Taxation never seems to have taken the point that companies established under the Corporations Act can’t at the same time be a “society, association or club”.  Even in the leading case in the area, Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation  90 ATC 4249  23 FCR 82 the issue in dispute was the correct characterisation of the company's activities, not whether it was a “society, association or club”. And since that case was decided Jessup J of the Federal Court decided in Navy Health Limited v Commissioner of Taxation [2007] FCA 931 that a single person, whether or not incorporated, cannot constitute an "association".

But even if a company can be a “society, association or club” I doubt very much whether the AFL is. The reason is that the very essence of such an organisation is that it has individual people as its members whom its activities serve. For example in Douglas Hector Douglas v Commissioner of Taxation of the Commonwealth of Australia [1997] FCA 724 (6 August 1997) Justice Olney of the Federal Court held that a society, organisation or club refers to a voluntary organisation having [individual] members associated together for a common or shared purpose.

The AFL could have a big tax problem if the Tax Commissioner took the view that the Appointee members really are just representataives of their individual Clubs.  The 18 clubs are also registered companies. And the clubs’ own true membership suffers in many cases from the same misleading use of the term “member” that the AFL’s does. For example Collingwood Football Club Limited ACN 006 211 196 claims its membership exceeds 74,000 people. Collingwood’s annual financial report  lodged with ASIC for 2013 disclosed that its “statutory members” indeed guarantee the clubs debts to the extend of $10 each. S. 300B of the Corporations Act states that the directors’ report of companies limited by guarantee must disclose the total amount that the members of the company are liable to contribute if the company is wound up. Unfortunately Collingwood ignored this requirement in its 2013 report (maximum fine $850) but had it complied we would be able to work out just how many “statutory” members it really has. When I signed up as a Collingwood member years ago I was not presented with any paperwork about any guarantee and I've never been invited to an Annual General Meeting so I'm wagering Collingwood does not have many true members at all. Essendon's Football Club Limited ACN 004 286 373 has done only slightly better. It also is a company limited by guarantee and its 2013 Financial Report lodged with ASIC states each member's guarantee is $20 and there are 56,402 members. But the real question is whether each of those "members" actually agreed to be a guarantor and are listed on the register of members required by the Corporations Act. The terms and conditions part of the membership section of Essendon's website is curiously silent on these subjects.  It's a different story again with the West Australian and South Australian Clubs. The West Coast Eagles' company name is Indian Pacific Limited ACN 009 178 984. It is not a company limited by guarantee but an unlisted public company with 5 shareholders. These shares are held on behalf of West Australian Football Commission Inc, Organisation No. 109 236 633, an organisation which has not lodged a document with the Western Australian Department of Commerce since 20 September 2010 so the membership of that organisation is something of a mystery. But according to it's 2013 Annual Report, Western Australian Football Commission Inc also owns 100% of the shares in Fremantle Football Club Limited. (So when you go to the Western Derby, barrack for WAFL, you can't lose!). The situation in South Australia is the same: the 2012 annual report of South Australian National Football League Inc reveals that neither Adelaide Football Club Ltd or Port Adelaide Football Club Ltd are member based organisations, they are both wholly owned subsidiares of SANFL Inc.

The AFL’s 2013 Annual Report  discloses that over the 10 years from 2004 to 2013 it paid the Clubs $1,381 million.That means over $1.3 billion has been distributed to 18 other companies who also don’t pay income tax and who in many cases are likewise controlled by a small inner cabal. To my mind, that’s not what the income tax exemption in s. 50-45 is directed to. This is particularly so when you consider that to claim the exemption for encouraging a "game or sport" unders s. 50-45, (which is item 9.1 in s. 50-45) you have to comply with the special conditions imposed by s. 50-70. S. 50-70 says if you are covered by item 9.1 you are not exempt from income tax unless you are a society, association or club not carried on for the purpose of profit or gain of your individual members. Is this meant to mean that a club etc. is exempt if it is carried on for the purpose of profit of its incorporated members? I don't think so - the whole Scheme of Division 50 of the ITAA 1997 which deals with exempt income is directed towards community organisations with individuals as members, not large corporations like the AFL which has total annual revenue of over $400 million. S. 50-70 (2) also says that to be exempt from tax under Item 9.1 you have to comply with all the substantive requirements in your governing rules. The AFL presently pays over $200 million a year to the Clubs. If the 18 Appointees are really just agents of the Clubs then the AFL is not complying with this condition for income tax exemption.

If I was the Commissioner for Taxation (he’s a real Commissioner) I’d be taking a close look at the AFL and its member clubs. After all, when you include interest and penalties the tax bill over the last decade could be well over half a billion dollars. And even though the AFL’s net assets as at 30 June 2013 were a mere $111 million, Chris Jordan could always call up that $23.90 in guarantees!

P.S. 14 May 2015: this article has now been linked at footyalmanac.com.au where comments may be left.