More money for the community as High Court decision upholds Department approach to gambling sector expenses

26/5/2004

The Wellington High Court has made an important decision strongly supporting the Department of Internal Affairs’ current approach on how much pubs should be paid to host gaming machines.

The Department is developing a new gambling venue expenses policy under the Gambling Act. This judgment will help to finalise the policy.

The Department had refused to allow a gaming machine society, Pub Charity, to pay three pubs $250 per machine per week to cover what were said to be the actual, reasonable and necessary expenses of hosting gaming machines owned by Pub Charity.

The Director of the Department’s Gaming and Censorship Regulation Group, Keith Manch, said that, in effect, Pub Charity was claiming that it cost pubs $234,000 a year to operate 18 gaming machines on behalf of a society.

Pub Charity took Court action against the Department’s decision. Yesterday, the High Court dismissed all of Pub Charity’s arguments and awarded costs to the Department.

Pub Charity also sought a Court order stating that it did not have to recover overpayments it made to the three pubs. The Court refused to grant this order and accepted the Department’s position that it wants to discuss with Pub Charity how the overpayments will be dealt with.

The law allows gaming machines in pubs and clubs as a form of community fund-raising only. The societies that own the machines are required to return the profits to the community as grants. Pubs are entitled to have their actual, reasonable and necessary expenses for hosting the machines covered but cannot be paid more than that – it is money intended for community groups.

The Department currently allows societies to pay pubs up to $150 per machine per week (up to $140,400 per year for 18 machines). It had also allowed them to apply for dispensations to pay more if they can show that this is justified.

The case centred on what evidence a society must provide to justify its claim, and how actual, reasonable and necessary costs should be calculated.

Pub Charity used a gambling sector consultant to work out the pubs’ costs for operating gaming machines. He estimated the costs to be $250 per machine per week ($234,000 a year to operate 18 gaming machines).

Justice Miller observed that the professional accountant that the Department employed to look at possible costs estimated, using the information provided by Pub Charity, that the actual, reasonable and necessary costs were less than half the amount claimed by Pub Charity.

Justice Miller noted the argument that Pub Charity appeared to believe that it needed only to state its claim and it was then for the Department to disprove it. He also stated that Pub Charity had chosen not to supply evidence it had, including data on which its report was based.

In looking at how costs were allocated, the Department had advised Pub Charity that it believed Pub Charity had been incorrect in attempting to allocate parts of all of the pubs’ general costs to the gaming machine operation.

The Department’s position was that only the additional costs that arose from having gaming machines on site could be claimed as actual, reasonable and necessary.

For example, if rent paid to the owner of the building in which the pub was located did not increase because gaming machines were operated, then a portion of the rent could not be claimed as an actual, reasonable and necessary expense. To allow such claims would be to allow the pub’s non-gaming machine operations to be subsidised by money intended for community groups.

Justice Miller found that the Department was entitled to insist on evidence being supplied to support the costs claimed and found that the law requires that the Department allows only expenses that are caused by gaming machine operations.

“The onus is on the applicant for a licence to establish that the costs claimed are actual, reasonable and necessary,” Justice Miller stated.

“I add that, to the extent that the expenses sought by Pub Charity exceeded those that were actual, reasonable and necessary, the Department had no power to authorise them.”

Other important points made by Justice Miller include that licences can only be issued where gaming machines are an adjunct to another business and not a profitable stand-alone business for publicans; and the actual, reasonable and necessary test allows the Department to disallow costs if they are inefficiently incurred.

Mr Manch said that while Pub Charity took action under the current law, which is the Gaming and Lotteries Act, the Court’s decision is important for the development of the new venue expenses policy under the Gambling Act. The Gambling Act was passed in September last year with most of its provisions to come into force this year.

“After consultation with the community and the gambling sector, the Department is currently developing the new policy that would limit how much societies could pay pubs for hosting machines,” Mr Manch said. “Having the High Court state so categorically what ‘actual, reasonable and necessary’ means and that societies must provide evidence for their claims provides significant input for the new policy.”

The new expense requirements are likely to be in force from September 1.

Justice Miller’s judgment
Link here to an electronic version of Justice Miller’s judgment(.pdf) 176k.


Media contact:

Keith Manch Cellular 027 445 6420
Director Gaming and Censorship Regulation

Vince Cholewa Phone 04 495 9350
Communications Advisor Cellular 027 272 4270