Charity gaming – sports funding

In New Zealand, gaming machines have been permitted to operate outside casinos since 1988. During that time, their number and popularity have grown considerably. There are now more than 21,000 such machines operating in this country. Together they account for gaming machine expenditure which is estimated by the Department of Internal Affairs (DIA) to have exceeded $938 million for the year ended 30 June 2008 (a decline of just over one percent from the previous 12 months).

These gaming machines are all owned and operated by trusts that are bound by statute to direct funds to benefit the community. Accordingly, gaming trusts do not derive "profits" in the commercial sense. Instead, funds are used to benefit the community through a system of grants. Gaming trusts currently grant more than $200 million per year to a mix of sporting, educational, health, arts and other charitable purposes. A similar amount is contributed to the Government in GST and duty.

Charity gaming is the life-blood of many sporting organisations. However, a number of recent consolidations within the ranks of the principal funders coupled with more stringent policing of sports funding by the DIA and gaming charities as well as the current economic climate are combining to make the funding equation more stringent.

In addition, the social impacts of gambling are such that the community demands that the benefits, in terms of the funding that it put back into the community by way of grant funding, outweigh the costs. As a result, the compliance regime that surrounds the use of funds from charity gaming to fund sports activities is aimed at maintaining the integrity of the grant funding mechanism and thereby the cost/benefit equation.

Two areas of constant tension in the gaming funding arena are those relating to ensuring that grants are confined to strictly amateur sport and the concept of "guaranteed" funding.

Grants for amateur sport

A recent reminder issued by the DIA about the requirement that gaming machine funds can only be granted to sport that is entirely amateur has caused a number of practical difficulties for competitions which are largely amateur but which may have a professional element. In particular, in the September 2007 edition of the publication Gambits, the DIA noted that an amateur team or an amateur player can be reimbursed for certain (limited) expenses but players training for a professional sport cannot be categorised as "amateur" and therefore cannot be reimbursed for training or living expenses.

This issue arises because the test for "amateur" status under the Gambling Act 2003 differs from that under the income tax legislation. The test under the Gambling Act focuses on the nature of the team and the competition. This requires examination of the payments made to players and the team expenses paid by the club (or other body). The club or team must be affiliated to a national body and the sport must be played as part of a significant competition.

As a result, the DIA noted that, if players are paid to play or reimbursed for lost income while playing, then the team's activities will not be authorised. A similar policy applies to players who are paid to train or compete.

Amateur teams can receive grants for such things as uniforms, team travel and training costs. Grant funding can also be used to reimburse players' travel and accommodation expenses but not lost income.

The DIA also suggests that the fact that one or two professional players join an amateur team for a few games during a competition will not, of itself, make the team professional. However, those professional players can only receive the same limited expenses that are paid to the team's amateur players.

Grant funding can also be used for club expenses including the coaching of amateur teams, and other expenses related to amateur teams such as ground maintenance and administration fees.

Players who are contracted to join representative teams, such as those picked by a national sporting body, may also retain their amateur status provided the payments they receive are confined to the reimbursement of expenses.

Other areas highlighted by the DIA which may be problematic for sporting bodies include:

• the separation required where a sporting body conducts both amateur and professional competitions;
• the requirement that professionals using grant-funded sports facilities (e.g. practice facilities) pay true market rates for that use;
• the restriction on grant funding being used for training programmes to prepare amateur players for a move to the professional side of the sport (e.g. a rugby academy programme).

Guaranteed Funding

For many sporting organisations, the constant cycle of grant funding applications and the uncertainty associated with this method of funding is a constant source of concern. Anecdotally, this has lead to a growing number of managers of sporting organisations describing the principal role of management as becoming less concerned with the business of management of their chosen sport and increasingly characterised by the process of submitting grant applications. Having submitted the application, the manager is then unable to plan until they have been advised that the application has been succeeded and the funding will be made available.

This process has a certain "groundhog day" element to it, because the success of an application for funding of, for example, a particular tournament in one year is no guarantee that the same funder will provide a grant for a team to participate in the tournament in the following year.

The gaming charities themselves are faced with the difficult process of juggling a large number of applications for the funds that are available. Whilst the total pool of available funding has remained relatively static for a couple of years, grant applications are said to be increasing exponentially both in number and amount.

Some of the pressures that are generated by the uncertainty surrounding funding have given rise to a variety of different arrangements that are used by sporting organisations to try to develop greater certainty around the funding equation. These include:

• arrangements between sporting organisations and gaming machine venues designed to guarantee funding from the gaming charity whose gaming machines are hosted in the relevant venue;
• the provision of naming rights and other sponsorship-type benefits on the operator of gaming machines in return for grant funding – with the obvious concern that such sponsorship rights may gravitate towards high profile, well-attended (often televised) events to the exclusion of support for the grass roots development of the particular sport; and
• the establishment of so-called "end-user trusts" that are established as a charity and operate gaming machines but which are closely associated with a particular sport or even a sporting team, with the result that the grant funding provided by that trust is provided almost exclusively to the relevant sport or team.

A number of interested groups have voiced their concerns about the pressures being brought to bear on different participants in the funding equation and the structures that are being devised, largely to try to engender greater certainty into funding discussions. One of the principal concerns voiced by a number of parties is the scope for a breakdown in either the effectiveness of grant funding or the integrity of components of the process.

On one level, some of the schemes (which have been described by some commentators are complying with the letter but not the spirit of the law) do no more than provide the relevant sporting organisation with adequate comfort that, for example, an annual tournament will be funded on a similar basis year in-year out. However, there are also concerns that such structures may crowd out the ability of other sports to gain an equitable share (based on player participation) of the available pool of grant moneys, or that high performance programmes with a high public profile are receiving funding at the expense of grass roots activities. Ultimately, there may also be a risk that elaborate funding structures designed to suit the needs of individual sports may also have the perhaps unintended by-product of favouring a handful of individuals or businesses associated with the establishment or management of those structures.

In light of the interest of a range of parties, including government officials, industry groups, various funding agencies, a number of sporting bodies including national sporting organisations and the media, it seems likely that some aspects of the funding equation are set to change. That change may be accelerated by the confirmation of the economic downturn and the practical reality that the difficult times being experienced by some parts of the economy, particularly the retail sector, mean that a number of avenues of commercial sponsorship are likely to become more difficult to obtain.

Enquiries and information

Bell Gully manages issues such as sponsorships, player contracts, financing, merchandising, disciplinary hearings and constitutional issues. Our clients include the country's leading sporting teams, players and organisations.

For more information on any of articles in Sports Law Update or advice please contact our sports law team:

Stephen Layburn, Senior Associate