ACC5216 Accounting Theory

This assignment is a research based essay where you are required to relate a real world case study to accounting theory. Below you will find a news article relating to the large incomes earned by some of the Australian football leagues, while retaining tax-free status, and while requesting that the state governments fund the building and upgrades of the stadium facilities using taxpayer’s money. Whilst these articles provide the context for this assignment you need to ensure that you also refer to other sources. You need to incorporate both academic and non-academic articles but must have at least 10 academic references. (Please make sure that you know what an academic reference is).

 

The essay should include an abstract, introduction, body, conclusion and bibliography. Maximum word count is 1400 words not including the abstract or bibliography. Using the news articles provided below as a base, and referring to other appropriate literature, discuss and
critically evaluate the following:

 

Determine the basis on which the tax-free status was initially provided in this case.
Identify and discuss the arguments in favour of providing the tax-free status for sporting clubs.
What are some reasons why some clubs have achieved large incomes since the tax-free status was initially provided.

Identify and discuss the arguments against providing the tax-free status for sporting clubs.
Using Public interest theory, Capture Theory and Economic Interest Theory, describe possible reasons why the clubs retain their tax free status and what may happen if the tax-free status is removed. What theory explains why these clubs ask for governments to build and upgrade the facilities in the stadiums?
Explain how the theory would work in this case.
What other accounting theories might explain the reasons both for and against the tax-free status for sporting clubs in Australia?
Explain what possible impacts there may be if tax-free status was withdrawn from small local sporting clubs, and children’s sporting clubs. Should there be a division between the tax rules for small clubs
versus large clubs? How (in your opinion) should this division be decided (back up your opinion with an Accounting Theory)?
YOU MUST relate your answers to the link between theory and practice The essay should include an abstract, introduction, body, conclusion and bibliography.
Maximum word count is 1400 words not including the abstract or bibliography.

Introduction

Those who advocate tax cuts in an economy claim that reducing the rates of taxes can lead to a greater economic prosperity and rapid growth of economy. On the other hand, those who are in favour of imposing high taxes claim that reducing the tax rates will lead to the flow of benefits only to the rich.

One can argue here that the government of a nation must frame such tax policies which provide relief to those who earn less and tax high income groups. There can be various benefits of this that can accrue to an economy. First, the people who earn less can maintain a decent standard of living and second, taxing high income groups will help in removing economic disparities. Also, it is the duty of every person to contribute in the development of the nation and hence, paying taxes is of utmost importance for an overall development of an economy (Moffatt, 2018).

Body 

The rich and famous leagues in Australia are enjoying their tax free status, which means they are not required by the law to pay tax on the revenue generated by them during an accounting year (Bagshaw, 2018). The term tax free status means all those organizations who are not required to pay taxes on the income earned by them and which have been listed under the law. Under the Australian tax laws, all those organizations who have been awarded the status of being a non profit charitable institutions enjoy tax free status (Australian Taxation Office, 2018). This means organizations which have been established for the purpose of not earning profits enjoy a tax free status. This status is given to such organizations so as to provide them extra incentives which will help them to tackle the problems with the help of the money donated by the individuals and institutions (Zagorsky, 2016).

As per the Australian Taxation Law, the tax free status to sporting organizations is provided to provide an "encouragement of a game, sport or animal racing" (Australian Taxation Office, 2018). The law, however, does not provide for the definition of a game and sport and they are taken at their ordinary meaning which extend to athletic games such as football. This is further extended to less direct means including providing sporting facilities and developing referees (Australian Taxation Office, 2018). As per the annual reports of AFL, it is enjoying the tax free status because its activities performed “are solely the promotion, administration and development of Australian Rules Football” (The Roar, 2012). The provision to grant tax free status to these clubs and sport leagues is 81 year old provision. These were formulated so as to encourage participation in sporting activities and local facilities to the people.

It was often argued that the tax free status provided to these clubs and leagues is to promote sports participation. Apart from this, professional sports teams are an obsession for the public in Australia and hence development of state of the art teams can be done by the money saved by giving them a tax free status. In this manner, the sports industry can be provided with a competitive economic advantage and they will be able to offer high quality of performance and encourage participation to a great extent (Bhasin, 2000).

However, since the time these football clubs have been awarded this tax free status, their earnings have increased to a great extent. The earnings of AFL are generated not only from the tickets sold but also from the poker machines which are owned by the club. Other than this the revenues are also generated from selling of media rights for billions of dollars. Since they are not required to pay any taxes their revenues have increased over the period of time (The Roar, 2012).

Since, apart from having revenue sources from tickets there are various areas from where the revenues are being generated and such sources cannot be counted as promotion of sporting participation. Instead these clubs are setting up poker machines which is making the people more involved into gambling. This cannot be classified as charity and therefore, these clubs must be revoked off from their status of being non profitable. Instead they must be taxed as other business organizations are being taxed because poker machines cannot be used solely for the promotion and development of Australian Football (The Roar, 2012). Furthermore, these are not even contributing for the development of the society at large. Major part of their tax free revenues goes for the fat pay packages to its top management and players and the reported revenue declines. This leaves no amount for the development of the stadiums which in turn makes them call the public for development of sports infrastructure.

Various theories such as public interest theory, capture theory and economic interest theory can be used to explain this situation. The capture theory suggests that the regulations so framed are manipulated in a manner that fulfils the interests of the groups being affected by such a regulation (Greg Accounting, 2012). In other words, the politicians as well as groups interested in such a formulate regulations. In this case, the regulation so framed affects the revenue of the leagues and hence, they have been awarded a tax free status under the name of promoting games and sports. On the other hand, public interest theory is directly linked with welfare economics. The regulators are driven by societal objectives and intervene to protect interests of the society at large (Porter et al., 2014). The current tax law granting tax free status to leagues is certainly against the public interest theory because this law gives importance to economic interests of the private parties rather than society. The economic interest theory suggests that the policies so framed are driven by the forces of demand as well as supply. The theory suggests that the regulations are framed keeping in mind the benefits to that particular industry (Greg Accounting, 2013). Government only enforces the policies framed by the industry. However, this theory cannot be applied because the tax regulations are drafted by the government. The public interest theory explains the reason why these clubs ask government to upgrade facilities in stadiums because these are concerned with developmental objectives of sports infrastructure (Maloney, 2001). The other theories such as the public good theory, capital formation theory and donatives theory can be used to explain the tax exemptions for non profit organizations (Fricke, 2016).

Conclusion

The tax free status to large sports clubs are being abused in the manner that they are using the revenues to pay high amounts to the top management rather than spending the amount on the development of stadiums. However, if the tax free status is removed then the small local sporting clubs shall suffer the most as these clubs do not have much sources of incomes. The government should frame such tax policies which brings the large clubs into tax brackets and are made to pay taxes on the income earned. The theory that supports this is the public interests theory as this regulation seeks to protect the interest of the public at large (Hertog, 1999). Under this theory, it has been suggested that the resources are distributed to their best use. If the large clubs are brought under tax bracket it will generate a huge amount of revenues for the government which can then be used for the purpose of overall development of the economy.

References

Australian Taxation Office, 2018. Sporting organisations. [Online] Available at: https://www.ato.gov.au/Non-profit/your-organisation/do-you-have-to-pay-income-tax-/types-of-income-tax-exempt-organisations/sporting-organisations/ [Accessed 03 May 2018].

Bagshaw, E., 2018. 'Open to abuse': Experts slam AFL's tax-free 'rort'. The Age, 4 March.

Bhasin, A.K., 2000. Tax-Exempt Bond Financing of Sports Stadiums: Is the Price Right. Villanova Sports & Ent. Law Journal, 7(2), pp.181-208.

Fricke, M., 2016. The Case Against Income Tax Exemption for Nonprofits. St. John's Law Review, 89(4), pp.1129-83.

Greg Accounting, 2012. Capture Theory and regulation. [Online] Available at: http://greg-accounting.blogspot.in/2012/12/capture-theory-and-regulation.html [Accessed 03 May 2018].

Greg Accounting, 2013. Economic Interest Theory and Regulation. [Online] Available at: http://greg-accounting.blogspot.in/2013/01/economic-interest-theory-and-regulation.html.

Hertog, J.d., 1999. General Theories Of Regulation. Economic Institute/ CLAV, Utrecht University.

Maloney, 2001. The Public Interest Theory of Government. [Online] Available at: http://maloney.people.clemson.edu/827/19.pdf [Accessed 03 May 2018].

Moffatt, M., 2018. The Effect of Income Taxes on Economic Growth. [Online] Available at: https://www.thoughtco.com/effect-of-income-taxes-on-economic-growth-1146370 [Accessed 03 May 2018].

Porter, M., Olejarski, A.M. & Pfister, S., 2014. Capture Theory and the Public Interest: Balancing Competing Values to Ensure Regulatory Effectiveness. International Journal of Public Administration, 10(37), pp.638-45.

The Roar, 2012. AFL’s massive tax break won’t stop them crying poor. [Online] Available at: https://www.theroar.com.au/2012/01/12/afls-massive-tax-break-wont-stop-them-crying-poor/ [Accessed 03 May 2018].

Zagorsky, J.L., 2016. Why the NFL and other professional sports don’t deserve nonprofit status. The Conversation, 4 May.

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