Gambling Commission Rules That Clubs are Entitled to a Reduced Authorised Purpose Return and May Retain a Greater Amount of Gaming Proceeds as Working Capital – Covid-19 Relief

17 February 2021

A recent decision from the Gambling Commission has paved the way for clubs to apply to have their minimum authorised purpose percentage for their current financial year waived.  The decision also enables clubs to hold a larger amount of gaming machine proceeds in reserve as working capital.

In order to take advantage of the dispensation, clubs need to apply to the Department of Internal Affairs to have their current authorised purpose licence condition waived and request a new condition allowing a larger amount of working capital to be retained.

By way of background, in response to Covid-19, the Department of Internal Affairs introduced new regulations.  The regulations removed the minimum authorised purpose return, for gaming societies that mainly distribute net proceeds, for the financial years ending 2020 and 2021.  The new regulations also allowed societies that mainly distribute net proceeds to withhold from distribution net proceeds up to a maximum working capital ratio of 1.5 to 1 (calculated as current assets divided by current liabilities).

The above changes were positive.  The changes did not, however, apply to club societies.  Club societies are not subject to the regulations.  The authorised purpose requirements and distribution requirements for clubs are set by licence conditions.  Immediately after the regulations were announced, I asked the Department whether it would provide similar relief to clubs by amending each club’s licence conditions.  The Department advised that it would not.  The Department considered that clubs had other funds at their disposal which they could use to prop up their gaming division, and considered that the letter provided to the club sector suggesting that authorised purpose funds could be used for a wider purpose was sufficient.

I challenged the Department’s decision via an appeal to the Gambling Commission and was successful.  The Gambling Commission was critical of the Department and questioned the purported “relief” that had been offered to the club sector as a result of Covid-19.  The Commission agreed that it would in fact be inappropriate for clubs to use non-gaming money to prop up their gaming account and unlawful for clubs to use their gaming proceeds for items outside that specified in the authorised purpose statement contained within their licence.

The Department reconsidered and accepted that it had acted unfairly and unreasonably in not reducing/waiving the authorised purpose return licence condition.  The Department accepted that there should be no authorised purpose return minimum for the financial years ending 2020 and 2021.  During the submissions and evidence process, the Department also acknowledged that in subsequent years, it may not be appropriate to apply the standard 37.12% licence condition and accepted that the percentage amount should be set on a case-by-case basis having regard to each club’s particular circumstances.  Although it is not common knowledge, the evidence showed that 31 clubs had already been granted an authorised purpose return of less than 37.12% (the condition having been set at between 25% and 36%).

We will continue to see more business interruption as a result of Covid-19.  This interruption is directly impacting the amount of gaming machine profits clubs make, and thus their authorised purpose return percentage.  Clubs that are concerned they may not meet an existing 37.12% requirement should not simply breach the requirement and expect the Department not to take any enforcement action.  Operating gaming in breach of a licence condition gives the Department grounds to cancel the club’s gaming licence and arguably amounts to conducting illegal gambling. 

A club that is unlikely to meet a 37.12% requirement should immediately apply to the Department to have the following additional licence condition included:

Notwithstanding any other licence condition to the contrary, the minimum amount of net proceeds that the licence holder must apply and/or distribute for authorised purposes, namely an amount equivalent to 37.12% of its GST exclusive gross proceeds (as set out in licence condition 1) does not apply for the licence holder’s financial year ending 2021.

If the club would like to retain a larger amount of gaming proceeds to avoid operating with negative working capital, the club should apply to the Department to have the following additional licence condition included:

Licence condition 4 is subject to this licence condition.  The licence holder may withhold from application or distribution to or for authorised purposes an amount of net proceeds not exceeding a maximum working capital ratio of 1.5 to 1 (calculated as current assets divided by current liabilities).  The licence holder may retain that amount of net proceeds solely for the purpose of satisfying the requirement in section 52(1)(c) of the Act.  The net proceeds retained must be held in a bank account established to hold gaming machine profits in accordance with section 104 of the Act.  A licence holder withholding net proceeds must calculate its working capital ratio at least once every quarter.

Jarrod and Clubs New Zealand are available to assist clubs with the process of having their licence conditions amended.

The Gambling Commission decision that created the above valuable precedent is Youthtown Inc decision CG26/20, which can be downloaded at:

http://www.gamblinglaw.co.nz/download/decisionGC2620.pdf

Jarrod True

17 February 2021

Jarrod is New Zealand’s leading expert on gambling law. His firm, True Legal (truelegal.co.nz) acts for a large number of New Zealand’s gambling operators.  Jarrod is the author of the New Zealand Gambling Law Guide (www.gamblinglaw.co.nz), and the author of Gambling Law (a Thomson Reuters publication).

 

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