ACC5216 Tax Exemption for Sporting Clubs and Activities

For the past 81 years, the Australian Football League (AFL), the National Rugby League (NRL) and the Australian Sport industry have enjoyed tax-free status. In the recent past, the Australian government has been under immense pressure to abolish the tax free status enjoyed by the AFL and NRL since the two bodies are engaging in income generating activities such as multibillion-dollar TV deals and lucrative gambling and alcohol advertising. With the millions generated from such activities, AFL and NRL still expert the government to use taxpayers’ money develop or upgrade sporting facilities (Bagshaw, 2018). According to critics of the tax-free status is absurd and obscene and it’s high time the tax policy is abolished. The tax-free status in the sporting industry was introduced by the Australian government as a way of providing participating and development of sporting activities in the country. Through the tax-free status policy, the government allowed the community organisations and volunteers to provide sporting facilities locally and encourage sport participation. In return, the stakeholders would not pay tax.

Arguments in favour of providing the tax-free status

Tax exemption for sporting clubs and activities should be supported based on several reasons. First, the sporting clubs operate to fulfill the ultimate purpose to which they were formed. The clubs apply their funds and properties to encourage and advance sports in the community. Any benefits enjoyed by members such as in this case where payments of over 40 percent over the past decade by Executive to the sports administrators should be regarded as incidental in executing the ultimate purpose of the clubs. Second, tax-free status helps in encouraging and advancing sports which is regarded to as a charitable purpose in Australia. Third, Sporting activities help in building social capital and promoting community spirit (Taxpayers Australia Inc, 2014, p. 690).

Reasons why clubs have achieved large incomes from tax-free status

Tax-free status for sporting clubs was meant to increase the funds for facilitating development and support for sport in Australia. The funds are meant to solely help in supporting the cause of sport clubs and the NFL and NRL are not allowed to distribute their surpluses to their members or invest the money in projects that promote the financial status of individual members. Therefore, critics should not focus on the amount of many held by sporting clubs through mutual funds as well as the impact of tax-free policy (Kohler, 2015, p. 43). Rather, questions should be asked whether or not the clubs use the funds for intended cause. Clubs are free to engage in activities that increase their financial position as far as such activities are meant for developing mutual funds and not profit making. Without subjected to taxation and allowed to engage in activities to develop their mutual funds, clubs are more likely to achieve large incomes (Kohler, 2015, p. 56).

A difference between profit-making and mutual funds is based on the fact that the latter cannot be directed towards benefiting individuals. When it comes to tax-free status, critics should not focus on the activities involved in raising the funds. The focus should be on using the funds to serve the ultimate purpose. The purpose of increasing mutual funds is to allow clubs to conveniently fund their sporting activities (Parker, et al., 2011, p. 5). Minimising the cost of funding sporting activities sports the purpose of the sporting clubs. Tax-free status is one way of ensuring that sporting clubs obtains significant amount of funds and resources to meet their objectives every year. In conclusion, tax-free status enjoyed by the NRL and NRL clubs should not be abolished because the funds cannot be used to finance private projects; the funds can only be distributed to funds sporting activities (Di Pietra, et al., 2014, p. 113).

Arguments against providing the tax-free status

There are several reasons why some people oppose tax-free status for sporting clubs. First, critics have has labelled tax exemption policy as “a rort that is open to abuse”. It is absurd and obscene to financial sporting activities for through provision of infrastructure and facilities to the clubs that enjoy tax Exemptions. It is high time for the clubs to give up their Tax-free status just like the National Football League (NFL) did in the US. Second, why should the government assist clubs to develop their sporting infrastructures yet they are not being taxed (Di Pietra, et al., 2014, p. 126).

The funds invested in facilities such as the Etihad stadium should be used to improve the living standard s of the people through improving the health and education facilities in the country. Third. Although the funds realised from tax Exemptions are to be used to finance the development of sporting facilities in Australia, there was no evidence to support such a cause. Instead, sport administrators and executives are known to earn huge remunerations. Fourth, critics hold that sporting clubs are engaging in profitable activities hence there tax-free status should be abolished if the government is to continue financing their sporting activities. Otherwise, the tax exemptions policy should be abolished as in the case of the USA (Bagshaw, 2018).

Theoretical basis of Tax-free status

Theories such as the Public interest theory, Capture Theory and Economic Interest Theory can be used to justify reasons why the clubs retain their tax-free status and what may happen if the tax-free status is removed. The Public interest theory states that the government is allowed to regulate the market to promote the public interest (Kohler, 2015, p. 73). However, market regulation should only be applied when there is imperfect completion in the market that is likely to interfere with public interest. In the case of tax-free status, the policy was meant to advance public interest and promote social welfare. There was the need for supporting talents through sport. By exempting sporting clubs from taxation, the country has witnessed the growth of sporting facilities and talents (Wilson, 2011, p. 98).

On the other hand, the Capture Theory of regulation states that the government regulations are meant to improve the wellbeing of a special group in the society and not the general public. For instance, the tax-free status is only meant to be enjoyed by stakeholders in the sporting industry to invest in supporting the development of talents (Deegan, 2013, p. 98). Not everyone in the country enjoys the benefit that come with tax exemption for sporting activities. Lastly, the Economic Interest Theory states that government regulations should be governed by the laws of demand and supply. Market regulations will always support the side with the largest number of lobbyist or lobby groups (Wolk, et al., 2017, p. 91).

The Economic Interest Theory can be used to appropriately explain the current debate on whether or not to abolish the tax-free status currently enjoyed by the sporting clubs (Wolk, 2009, p. 67). For instance, if the majority support the existence of tax-free status for sporting clubs, the policy is here to stay. On the other hand, where the majority are for the abolishment of the policy then the government would have to choice but to abolish tax-free status for sporting activities (Dandridge, 2011, p. 130).

Another accounting theory explaining reasons both for and against the tax-free status

Apart from the three theories, another theory that can be used to explain tax-free status for sport clubs is the Artificial Entity Theory. The Artificial Entity Theory also known as the concession theory state that existence of corporations is governed by government policies and that the government is at liberty to grant concession (Wilson, 2011, p. 101). The government grant concession to companies to enable them achieve certain objective that cannot be achieved without the state of concession due to lack of resources, funds and time. In the case tax-free status for sport clubs, development of sporting facilities could not be achieved in Australia without tax exemptions; no one would voluntarily invest in the sporting industry with high taxation.

The government used tax exemption to encourage investments in the industry. Without providing concession, sport clubs cannot raise enough funds to finance their activities. Based on the theory, abolishment of tax-free status for sport club would see many investors withdrawing from sponsoring sporting activities (Dandridge, 2011, p. 123). Others would be forced to engage in profit-making activities to support the cause of their clubs.

Impacts of abolition of tax-free status on small local sporting clubs, and children’s sporting clubs

Income controlled by organizations is one way of categorising them as either small or large. Large clubs can easily finance their sporting activities compared to small clubs and children’s sporting clubs. Moreover, large clubs can easily attract sponsors and investors compared to the small one. Therefore, abolishing tax-free status will largely impact small clubs and children’s sporting clubs because they would lack the required funds and resources to facilitate their cause. There should be a division between the tax rules for small clubs versus large clubs (Winfree, et al., 2016, p. 93). The division should be based on the amount of funds that each club should be allowed to control for the purpose of tax exemption. Likewise, the Capture Theory should be basis of determining tax exemption for each club on a case by case basis. This way small clubs would be spared if the government choose to abolish tax-free status for sport clubs. 

References List

Bagshaw, E., 2018. 'Open to abuse': Experts slam AFL's tax-free 'rort', Sydney: The Age.

Dandridge, N. S., 2011. Choking Out Local Community Service Organizations: Rising Federal Tax Regulation and Its Impact on Small Nonprofit Entities, Sydney: KY. L.J. 695.

Deegan, C., 2013. Financial accounting theory. 4th Edition ed. North Ryde, N.S.W: McGraw-Hill Education.

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Kohler, M. J., 2015. The Tax and Legal Playbook: Game-Changing Solutions to Your Small-Business Questions. New York: Entrepreneur Press.

Parker, L., Guthrie, J. & Linacre, S., 2011. The relationship between academic accounting research and professional practice. Accounting, Auditing & Accountability Journal, 24(1), pp. 5-14.

Taxpayers Australia Inc, 2014. The Taxpayers Guide 2014-2015. New York: John Wiley & Sons.

Tower, G. D. & Adams, M. B., 1994. Theories of Regulation: Some Reflections on the Statutory Supervision of Insurance Companies in Anglo-American Countries. The Geneva Papers on Risk and Insurance, 19(71), pp. 156-177.

Wilson, R., 2011. Managing Sport Finance. London, UK: Taylor & Francis.

Winfree, J. A., Rosentraub, M. S. & Mills, B. M., 2016. Sports Finance and Management: Real Estate, Entertainment, and the Remaking of the Business. New York: CRC Press.

Wolk, H. I., 2009. Accounting Theory. 1 ed. London: SAGE Publications Lt.

Wolk, H. I., Dodd , J. L. & Rozycki, J. J., 2017. Accounting Theory: Conceptual Issues in a Political and Economic Environment. 1 ed. London: SAGE Publications.