Bray, Peter William v The Commissioner of Taxation

Ir~come Tax - deductions - g i f t t o a publ ic fusd

establ.:.shed

arid main tamed mder an ins t rument of t rus t

- mearing

of'

l fglf t t l -

meanmg

ltpubl-ic

fund"

- meamng o f llestabllsh and

maintaln exclusively for the purposes

. .

- d i s t i n c t i m

between p-~rpose

and rnotive

r e l evasce o f i n t en t o f s e t t l o r

and

subseqllent

events.

Income Tax Assessment

Act

1956,

s.SB(I

) ( a ) .

Coram:	Boxen C. J. , C. A . S-:reeney and Deane JJ,
Sydney.

14th

September

1977.

L .

-	. c
,,e,

I11 ?HE FEDFRATJ COUZT C!: AUETP.LLI.4

. VICTORIAN

........ ........ ........

DISTFiCT REGICTRi )

No. VG ..

.26. of 1977

)

.. F&m8!%. ........ .

DI ' I ISTOJ

ON APPEAL FROM THE SUPRE3E

COURT OF VICTORIA

BEElEI3I.i : %%% .l!?%!@!. ?.gy. ...... ....

........ ........ ........ ........

Appellant

........ ........ ........ ........

. THE COMMISSIOIWR OF TAXATION

........ ........ ........ ........ .

OF THE COIWOWEALTH OF AUSTRALIA

........ ........ ........ ........

I	........ ........ ........ ........

Respondent

O R D E R

T!iE: COUXT ORDLXS THAT:

1. Appeal dismissed with costs.

. . . . . . . . .

. . . .

IN THE

F E D E W COURT OF AUSTRALIA

VICTORIAN

DISTRICT

REGISTRY

V.G. 36 of 1977

GENERAL DIVISION

ON APPEAL FROM THE	SUPF"E COURT
OF VICTORIA
BETVEEN:

PETER WILLIAM BRAY	- Appellant
-	AND:

THE COIWISSIONER OF TAXATION OF THE

COMMOITVEALTH OF AUSTWIA

- Respondent

COM'I: BOWEN C.J. , C.A. SlmNEY

and DEANE JJ.

Seutember.

14th

1977

JUDGMENT

BOIEN C. J.

This is an appeal Victoria. Peter William Bray, the appellant, claimed

from the Supreme Court

deductlon amounting to

$44,107 in his tax return

for the

income year ended 30th June

1974 under s.78(l)(a)

of the Income

Tax Assessment

Act, 1936. This deduction was disallo~red by

the Commissioner of Taxation. Mr.	Brayvs appeal to the	I
; -

Supreme Court against the Commissionerts decision was dismissed with costs.

Mr. Bray is a member of a Brisbane firm

of solicitors.

During the income year ended 30th June

1974, he was in receipt

of a substantial professional income which,

in the ordinary

- 2 -

course, would lead to

a substantial liability

for tax. He

was a reluctant taxpayer.

Between Christmas

1973 and Easter

1974, he decided

to take steps to establish

a charitable trust. The establishment

of such

a trust fitted,

in his mud, Into a larger series

transactions. As his intentions crystalllzed, that proposed serles of transactions included, inter alia, the acqulsltlon

of the issued shares

in a private company which had cash

assets and no liabilities,

a gift of all but one

of those

shares to the proposed charitable trust

and he application

of the cash assets

in the subscrlptlon for shares

in a company

or companies over which

he exercised or would exercise practical

control. The anticipated result

was that he would retain

practical control of the ultimate application of the cash assets

of the company whose shares

he had acquired and given to the

trust, while obtaining

a deduction for income tax purposes

of the value

of the shares given. The appellant planned

that the charitable

trust would recelve dividends

on the shares

I-

which he gave it

and that the moneys recelved by the

trust would be applied

in making gifts to funds, authorltles

I-

and instltutlons and to purposes referred to

in s.78(l)(a).

He hoped that, ultimately, the trust would bear the name

of,

and constitute

a "token of respect for", his parents.

To produce the result that gifts to the proposed

trust would

be deductible, it was necessary that the proposed

trust, when established, should be

a public fund which satisfied

- 3 -

the requirements of	s.78(l)(a).	The relevant portions of
s.78(l)(a) provide:

"The following shall

. . . be allowable deductions:

(a)

Gifts (not being testanentary gifts) of the

value of

Two dollars and upwards of money

or of property other than money which was

purchased by the taxpayer within twelve months

immediately preceding the making of the gift,

made by the taxpayer

in the year

of income

to any of the

followmg funds, authorities

or institutions in Australia:

........ ........ ........ ........ ........ ..

(a variety of categories of funds, authorltles

institutions and pur oses are specifled

sub-clauses (i) and

?xliv) inclusive)

or to a public fund established and

maintained

under a will or instrument of

trust exclusively

for the

purpose of providing money, property

or benefits to

or for funds, authorities

institutions referred to, and for the purposes

(if any) referred to, in any of the sub-

paragraphs of this paragraph, or for the

establishment of such funds, authorities

institutions, being

a public fund as to which

the Commissioner

is satisfied that the terms

of the will

or instrument of trust are such that

any moneys (including income derived from

investments and proceeds of the realization of

investments) paid

or accrued to the fund

as a

direct or indirect result of the particular gift

and not applied

for the purposes of the fund may

not be invested by the trustee otherwise than

in a manner in which trustees are permitted

by an Act, a State Act

or a law of

a Territory

of the Commonwealth to invest trust moneys

authorization".	special	without	I
I

At Mr. Brayts request, an employed solicitor with

his firm, one Andrew Commissioner for the purpose of ensuring that the provisions of

Brown, approached the Brisbane Office of the

the deed establishing the proposed trust would be accepted

satisfying the requirements of

s.78(l)(a).

What was described

- 4 -

as a "model deed" was obtained from the Taxation Department. This was used as the basis for the trust deed which was

ultimately executed on 12th June 1974.

By April 1974, the

draft deed had substantlally reached the form of that

ultimate trust deed.

Mr. Bray numbered among his Brisbane friends,

John

Edward Gallagher, William Allan Gorry and Kerry Patrick

Prior.

In April, 1974, he approached each of them

in turn.

He informed each that

he had in mind the establishment of

a charitable fouqdation, showed each the draft deed and

asked each to agree to act as

a trustee. Mr. Bray indicated

to each that he intended to make to the proposed trust and gave an assurance that,

a gift in the form of shares

so far

as he was able, he would ensure that

a re sonable dividend

was paid on the shares. Mr.

Gallagher was a barrister, Mr.

Gorry was

an accountant and Mr.

Prior was

a solicitor. The

deed had been patently drawn to ensure that gifts to

it were

deductible.

It is apparent that each

of his friends would

have been conscious of the fact that

Mr. Bray's plans involved

I .

the recelpt by him of

an anticipated deduction, for income

tax purposes, of the value

of gifts made by him to the trust

once it was establlshed. Each of them agreed to act

an honorary capacity as

a trustee. Mr. Bray did not inform

them of his plans concerning the application of the cash assets

of the company whose shares

h proposed to give to the trust.

In the course of communication between

b'Ir.

Brown and

the Commissionerss Brisbane office, suggestions and requirements

were made, on behalf of the Commissioner, as to alterations

- 5 -

which were desirable to procure the CommissionerPS approval.

The CommissionerPS suggestions and requirements were met.

On 11th June 1974, the Commissioner wrote to

Mr.

BrayPS firm

a letter in vrhlch it was stated that donations

of $2-00 and

upwards to a fund constituted by and

in accordance with

a deed

of trust

in precisely the same form as the draft which had been

prepared would qualify

as income

tax deductions in terms

of the special provisions of s.78(1) (a).

On 12th June 1974, Mr. Bray, Mr. Gallagher, Mr.

Gorry

and Mr.

Prior executed a deed of trust. Its terms

corresponded with the form of deed which had been approved. There has been no suggestion that this deed was executed as

a sham. Each of the partles to the deed gave evidence.

It was

not suggested to

any of them that the deed was intended to

operate othenarise than

in accordance with its terms.

The trust deed reclted that

Mr. Bray wished to

establish a public fund exclusively for the purposes of providing

money, property or benefits to

o r for funds, authorities and

institutions referred to, and for purposes referred to,

any of the sub-paragraphs

of s.78(l)(a)

of the Act and

for

the "establishment of any such funds, authorities and

institutlonsrl (Recital

A).

It also recited that Mr.

Bray

(referred to as "the

founder!!) proposed that the fund would

"solicit and accept donations from

any person, company

organization of moneys

and real and personal property and

other benefits!!.	It recited that he Ithas paid to the trustees	!
I

One hundred dollars ($100-00) to be held by the trustees the first contrlbution to be held by the trustees upon the

trust hereofq1 and that

he had formed Itthe lntention to

- 6 -

establish the fund

in gratitude to and affection

for his

parents". The trustees appointed by the trust deed were

the four persons who executed it.

Clause 1 of the deed provided that, subject to context, the words "the Fund" when used

in the deed meant, inter alia,

the original

sum of $100-00 previously mentioned and all

sums

of money and all other real

o r personal property at any time

and from time to time pald

or transferred to and accepted by

the trustees for the purposes of the deed.

I shall use the

phrase "the Fund" as referring, in compendious fashion, to both the trusts constituted by the deed and the assets subject thereto.

Clauses 2, 3 and 4 of the deed were

in the following

terms

"2. The founder hereby directs and declares and

it is

hereby agreed that the trustees shall stand possessed of the Fund upon the trusts and with and subject to

the powers set forth

in this Deed.

3. Any person or company or other organisation

(whether corporate

or not) may from time to time

and at any time donate monies, real and personal property and other benefits to the trustees to be added to and form part of the fund.

(a) The trustees shall be bound

by the following

in the application and

USP of the fund:

The fund shall be applied and used

exclusively for the purposes mentioned	!
in Recital A of this Deed;

The fund shall only be applied and used

for the benefit of funds, authorities

and institutions within Queensland;

The fund will be applied and used without discrimination as to colour race or creed;

No charge will be made

in respect of

any use

or application of the fund;

and

- 7 -

(V)

The trustees will ensure that benefits

from the fund do not flow to any one

particular person, authority

institution.

(b)

No part of the fund as constituted at the

date of

any variations or alterations

lawfully made to this Deed shall become freed from the limitations imposed by clause

4(a) of this Deed without the approval

the Commissioner of Taxation".

Clause 5 of the deed dealt with the trustees? powers

of investment. It limited investment to trustee investments but

provided that the trustees might retain

any property or benefit

of any kind

o r nature in the same form

In which it was

originally received without being obliged to sell the same

convert it into money.

It provided that the trustees' powers

of investment should not be amended

or deleted without the

approval of the Commissioner and conferred upon the trustees

a power to accumulate.

Clause 6 of the deed provided as follows:

" 6 .

(i)

The number of trustees shall be not less

than three

nor more than the maximum number

permitted by

law for the time being

or,

if there shall be no such maximum

prescribed, seven.

(ii) In the event of the death and/or retirement

from

office

of any trustee

then,

subject

to compllance with sub-clauses (iii) and

(iv) of this clause

6 of this Deed, the

power of appointing new trustees shall

vest In the trustees

for the time being

holding office whether

or not the number

trustees

making

such

appointment

shall

then

be less than

the

perinitted

minimum

provided that

a new trustee may be appointed

only by the unanimous decision of the

trustees for the time being holding office.

- 8 -

(iii) The appointment of a new trustee in

accordance with sub-clause

(ii) of this

clause 6 of this Deed shall be conditional

upon the consent thereto of

a Justice of

the Supreme Court of Queensland who shall

before granting such consent enquire

into the suitability of the prospectlve

trustee having

regard t o the public

nature of the

fund and to the requirements

of sub-clause (iv) of this clause

(iv) The trustees for the time being shall be persons each of whom at the time of his

first appointment shall

be either -

A Justlce of the Supreme Court or

a Judge of the District Court of

Queensland;

A Member of the Parliament

of the

Commonwealth of Australia

or of the

State of Queensland;

An Alderman of the Brisbane City

Council or

of any Local Authority

in Queensland;

A member of the Senate

or other

governing body

of any recognised

University or other Educational

Establishment;

A Barrister of the Supreme Court of

Queensland;

A Sollcltor of the Supreme Court of

Queensland;

A Registered Public Accountant;

A graduate of any University

the Commonwealth of Australia;

‘I

Clause 7 contained general provisions relatlng

to manner of exercise and discharge by the trustees of their

rights and obligations under the deed and the powers and

liabilities of the trustees

in the performance of their

functions.

In particular, clause 7(i) provided:

- 9 -

11 (i)

A trustee shall not be liable for

any loss except one attributable

to his own dishonesty or wilful

default.

Clause 8 related to the power of declaring further

and other trusts and provided that such power "shall not permit

any variation which would prejudice

any concession allowed to

the trust

or to any donor to the trust

or beneficiary of the

trust urder the provisions of" the Act. Clause

9 provided

that the trust

was established under the

law of Queensland.

Clause 10 provided that !!for the purposes of soliciting

and making donations the fund established by the Trust Deed

would Ifbe called "THE SPORTSMEN

AND BUSINESSMENS BENEVOLENT

FOUNDATION1111 but envisaged that

in certain circumstances

(for the time being) and

for all purposes (ultimately) the

fund established by the Trust Deed would be

k n o ~ m

as !ITHE

G.H.	ANTJ D.F. BRAY FOUNDATION".

Clause 22 provided:

"In the event of the winding-up of the trust for

any reason whatsoever then the fund remaining

after meeting all obligations of the trust

will

be transferred to

any organisation institution

authority meeting the requirements

of Section

78(l)(a)

of the Income Tax Assessment Act of the

Commonwealth of Australiat1.

The first meeting of the trustees was held

Brisbane at Mr.

Bray's office on the 19th June

1974.

Minutes of this meeting are

in evidence. Their accuracy has

not been disputed and the ensuing summary of what occurred

at the meeting

is taken from them. All trustees were

attendance. Mr. Bray Itwas elected Chairman

of the Trustees

and President of the FoundationI1. The Chairman tabled the

- 10 -

stamped executed trust deed, the letter of 11th June

1974

from the Commissioner and hls personal cheque for

$100-00

vhich was described as "the initial

sum settled under the

Trust Deed and the first donation to the fund".

The minutes record

a number of other matters

relating to the establishment, purposes and adainistratlon

of "the fund". Among them are the follourmg items:

WEASONS FOR ESTABLISFNEXT: The Chairman indicated

that he wlshed to record the

fol1oTwing reasons

for

establishing the Foundation	in additlon to those
mentioned in the Deed:

1. The Chairman desired to give financial assistance

to organizations engaged

in public charity, and

He wished to seek the advice

of others in glving

such asslstance and

for that reason asked the

trustees to accept office as

such, aqd

3 .

A general fund rather than

fund for one specific

purpose was thought to be

a useful means of

assisting public charitable appeals which through

their own efforts secured most but not quite

all of the support required for their particular

purposes.

"DECISIONS OF TRUSTEES: It was resolved that

except

where mecificallv uermitted by the decision

of all

trustees, any

resolhon of th& trustees must be

unanimously adopted by them to be binding."

llPUBLIC NATURE OF FUND: It was resolved that the

Fomdatlon be conducted as a public fund and that

the Foundation solicit

as manv and as lame donations

as possible from

a wide raxge-

of persons, companies

and institutions

in Queensland.

The Chairman reported that as

a pre-requisite for

soliciting donatlons from the public the Foundation

must be registered under the State Collections Act

of 1966.

It was accordingly resolved that the

Chairman be authorized to take all such steps as may be necessary to seek approval of the Foundation

as a Sanctioned Fund under Section	12 of the Collections
Act of 1966.

It was further resolved that the Chairman be authorized

- 11 -

to organize a programme of public advertisements to cover as wide a field as possible during the

1974-1 975 financial year".

I1DONATIOIVS BY THE FOUNDATION: It was resolved as

a matter of general policy that all donatlons by

the Foundation would be devoted to publlc charitable

purposes which themselves are approved

for tax

deductible donations under Sectlon	78 of the
Income T a x Assessment Act".

The final item of business at this meeting related

to the gift by

Mr. Bray of shares

in a Victorian company,

M.B.J. Constructions Pty. Llmited (ll"IB.J. ConstructionsT1). That transaction is at the heart of the present appeal.

The shares

in M.B.J. Constructions had been acqulred

by Mr. Bray some days previously,

in circumstances to

which

it will subsequently be necessary to make detailed reference.

As at 19th June

1974, there were

22,620 issued ordinary shares

of vrhlch 22,619 were beneficially held by Mr. Bray. The other

share was held by

a company called Trumper Finance

Pty.

Limited which was controlled by

Mr. Bray. On 19th June 1974,

the only directors of

M.B.J.

Constructions were Mr. Bray and

Trumper Finance Pty. Limited.

Its only asset was

a bank

credit of $45,240-00. It had no liabilities. In other words,

each share had

a net asset backing of

$2-00 represented by money

in the bank. Under the articles

of association of

M.B.J.

Constructions, each of the issued ordinary shares ranked as to

dividend and return of capital, pari passu with the other

issued ordlnary shares. Al of the issued ordlnary shares had

equal voting rights. The minutes of the trustees meeting

record:

"GIFT OF S N S : The Chairman indicated to the

meeting that

he wished to make

a donation to

the Foundation of

22,619 ordinary fully pald

- 12 -

shares of $2-00 each in the capital of M.B.J.

Constructions Pty. Ltd.,

a company incorporated

in Victoria, these shares having been purchased

by the Chairman on Thursday, 13th

June 1974.

The Chairman tabled

a letter from Messrs. Wilson

Bishop Bowes & Craig dated 18th

June 1974 valuing

the shares at

$1.95 each so that the donation

had a total value of

$44,107.

It was resolved that the trustees accept this

donation and execute the transfer

of shares tabled

at the meeting

in order that the same may

registered by the company1'.

In accordance with the resolution, the transfer of shares tabled

at the meeting was executed by the trustees. The

22,619 shares

in M.B.J. Constructions were transferred to the trustees. The trustees were entered in the share register of that company as

the holders of those shares.

In that share register, the

trustees were entered as joint holders

in alphabetical

order subject

to the qualification that

Mr. Brayts name

appeared last instead of first. The result of the order of

entry was that, in

so far as the company was concerned, Mr.

Gallagher was the trustee who	as, prima facie, entltled to
exercise the voting rights.

Mr.	Brayfs right to claim a deduction in the sum

of $44,107 turns upon whether the fund established by the

deed

was on the 19th June

1974 a fund which satisfied the

requirements of s.78(l)(a). The subsequent actions of the

trustees and certain other occurrences

n ed to be mentioned.

The learned trial Judge took these into consideration, at least

to the extent that they threw light

on the nature of the fund

- 13 -

on that day. It is also necessary to determine the relevance

to that question of the overall motivation of

Mr. Bray and his

actions both

in the acquisition of the shares and

in the

administration of M.B.J.

Constructlons and of other companies

over whose affairs

he exercised practical control.

In pursuance of the resolution of the meeting of trustees, appllcatlon was made, either

on or shortly after

the 19th June,

1974, for the Issue of

a sanction, pursuant

to the Collections Act

1966-1973 (Qeld.), in respect of the

raising by the trustees, from the publlc,

of moneys to be

applied for the purpose of the trust deed. On the 2nd July

1974, the Minister for Justice and Attorney General for the

State of Queensland issued such

a sanction for the period

2nd July,

1974 to 30th June,

1975 (both inclusive). On

25th September 1975, the Minister issued

a further such

sanction which was, by its terms, unrestricted

in point of

time and operative until revoked under and

m ccordance

with the provisions of the Collections Act.

In November 1974, Mr.

Bray took steps to procure

the appearance

in each of four Northern Queensland newspapers,

the Cairns Post, the Mackay Dally Mercury, the Mt. Isa

Northwest Star and the Townsville Dally Bulletin, of

I	advertisement in the following form:

I	"DONATIONS INVITED FROM THE GENERAL PUBLIC

THE SPORTSMENS & BUSINFSSMENS BENEVOLENT

FOUNDATION

P.O. Box 306,

NORTH BRISBANE. 4000

- 14 -

(a managed charitable fund devoted

assisting other Queensland charities).

Contributions of

$2 and over are allowable

deductions under existing income tax laws.

Sanctioned under

!!The Collections Act of

1966".

The advertlsement appeared once

in each OT the four

publications m the period between

16th November 1974 and

, -

17th December 1974.

He procured the reappearance of the

advertisement once

in each publication

in the period

between 31 st May 1975 and 18th June did not lead to any donations being received by the

1975. The advertisements

F'und.

The learned trial Judge, after

a conslderation of the

evidence relatlng to the advertisements, reached the

conclusion that "the advertisements were inserted not really

in the hope of evoking donations but with

a v ew to

endeavouring to have some evidence from which

it m g t be

contended that the fund was

a public fund". His HonourPS

conclusion in this regard was,

in my view, fully justified by

the evidence and inferences which

he was

entitled to draw from

the evidence. Once this assessment of the purpose of the

advertisements is accepted, the overall conclusion from the evidence

is that the trustees did not, at

any time, take

any steps,

aimed at soliciting

o r obtaining gifts and did not,

in the event,

obtain any such gifts o r donations, from	any one other than	l
' _

Mr. Bray. The trustees were bound by the provisionsaf the

deed to accept donations from anyone who might wish to contribute. The publication of the advertisements really did

no	more	than	establish	a communication,	on	behalf	of	the	1
I

trustees, to

a not insignificant part of the Queensland publlc

- 15 -

that the fund was,	in fact, prepared to accept such
donations.

On 24th July

1974, Mr. Bray acquired,

in his own

name, all but one

of the issued ordinary shares

in another

company, Butler Furniture (Horsham) Pty. Limlted ("Butler

Furniture"). Butler Furniture was also

a company whlch had no

liabilities and whose assets consisted of cash

in the bank.

Having acquired these shares, he made	a gift of them to the
fund.

During the income year ended 30th June

1976, Mr.

Bray acquired and gave to the fund all but one

of the issued

ordinary shares

in a third company with no liabilities and

assets consisting

of cash.

On 25th June

1975, M.B.J. Constructions paid to

the

fund by way of dividend

the amount of $1,400-00. On the same

day Butler Furniture paid

to the fund, by way

of dividend,

$2,250-00. On that day, the trustees paid

$400-00 to each of

four public charities,

namely, the Salvation Armyps Red Shield

Appeal, the Brisbane Soclety Dunwich

& St. Helena Mission

(commonly known as the Brlsbane Clty Mission),

The South

Queensland Adventists School buildlng

fund, and the Adult

Deaf Society Incorporated. Each of these charities was among

the categories specified

in s.78(l)(a).

On 30th April dividend, $1,800-00 from M.B.J.

1976, the fund received, by way

Constructions and

$1,755-00

from Butler Furniture. On 24th June

1976, the trustees paid

$300-00 to the Queensland Adult Deaf Society

and $200-00 to

each of The Childrents Hospital Appeal, the Queensland Society

- I6 -

for Crippled Children, The Tufnell Homes for Orphaned

Children, Lifeline Brisbane, The Society of St. Vincent de

Paul, Help Industries Limited and The South Queensland

Adventist School building fund. Each of these nine charities

rvas among the categories specified

in s.78(l)(a).

The discrepancy between the amounts received and the amounts distributed by the trustees

is explained by the fact

that, in the absence

of an indication by the Commissioner that

he accepted that the income of the fund was not liable to

income tax, the trustees took the view that the prudent course

was to retain sufficient funds to meet any assessment.

Apart from the amounts which it was thought necessary to retain

in respect of possible liability

for income tax, all amounts

received by the fund were distributed to the charities.

Each of the trustees participated

in the decision

as to which charities were to receive gifts. Indeed, to some

extent, the identity of the recipients of gifts was determined

by past

or present association between

a particular trustee

and a particular public charity. Mr.

Prior was the Chairman

of the Queensland Adult Deaf Society which

rvas a recipient

of a donation in each year. Mr. Gorry was interested

in the

South Queensland Adventist School whose building fund received

a gift in each year. Mr. Bray had previously been

a donor to

the Brisbane Society Dunvnch

& St. Helena Mission which was

the recipient of

a gift in the flrst year. Mr.

Bray and

Mr. Gallagher had apparently had some past contact with the

Red Shield Appeal which was the other reciplent of

a gift in

- l7 -

the first year. Among the additional charities benefited

in the second year, the

St. Vincent de Paul Society was

charity with which Mr. Gallagher had been associated for

some time and Mr.

Bray had had previous familiarity with the

sheltered workshop

run by Brlsbane Rotary under the name

of "Help Industries".

Apart from W. Bray, none

of the trustees played

any

part in the affairs of

any of the companies whose shares were

given to the fund, nor

in the affairs

of any other company

in which shares were purchased by those companies. The trustees

saw, in due course, the annual accounts of the companies

in which

the fund held shares. Beyond that, the other trustees apparently

made no inquiries. The trustees, as

a body, received the gifts

of shares

whxh Mr. Bray made to the fund and the dividends

which were paid

on those shares. In so far as those dividends

were not retained to meet liability

for income tax, they were,

as has been said, distributed to charities within the

categories specified in s.78(l)(a).

There is no suggestion

that any moneys received by the trustees have been dealt with or applied in other than the strictest conformity with the pro-

visions of the trust deed	or for other than the purposes
specified in the deed.

On one approach

to the matter, the above constitutes

a summary of all the relevant facts.

On the Commissioner's

approach to the matter however, which found favour

with the

learned trial Judge, the above summary of the facts constitutes

but a misleading facade. To appreciate the reality, it is, on

the latter approach, necessary to examine,

some detail, the

motivation of

fib?. Bray leading to the establishment of the

- 18 -

fund, the steps

by which he acquired the shares, which he

subsequently gave

to the fund

and the manner in which cash held

by the companies

in which shares were acquired by

Mr. Bray

was subsequently dealt with both by those companies	and
other companies.

On 13th June

1974, the day after the deed was

executed, Mr. Bray flew to Melbourne. The learned trial Judge found "that one of the prime purposes of that visit was the

transactiont1 involving the acquisition

of the shares in M.B.J.

Constructions. Prior to 13th June

1974, as his Honour found,

the appellant had discussed with one Peter Hutchins

Melbourne the possibility of purchasing from Hutchins

companies associated with Hutchins all the shares

what Mr.

Bray called a I1cleanl1

company, that is

a company which had cash

assets but no liabilities.

On 13th June 1974, Mr.

Bray arranged

for the purchase for

$45,466-20 from Hutchins

and a company

called Levart (Vic.) Pty. Limited

of the 22,620

issued shares of $2-00 each in M.B.J. Constructions.

Of those shares,

22,220 were ordinary shares

and 400 were

I1Al1

class shares. A l l but one of those shares were transferred

to Mr.

Bray. The other share was transferred

to a company

called Trumper Finance Pty. Limited

(llTrumper

Finance") in

which all of the issued shares were beneficially owned	by
Mr. Bray.

The shares in

acquired, Mr. Bray and Trumper Finance were appointed directors

of M.B.J. Constructions and the previous directors resigned.

At an extraordinary general meeting of M.B.J. Constructions

M.B.J. Constructions having been

- 19 -

on 18th June

1974, it was resolved by special resolution

that all the issued and unissued

I1Al1

class shares of the

company be converted into ordinary shares ranking pari passu

with existing ordinary shares and new articles of association

were adopted. As a result all the shares had equal voting

rights. At all relevant times until 22nd

July 1974, M.B.J.

Constructionsfs only asset was	$45,240-00	cash in its bank
account.

I continue the account of the additional facts the words of the learned trial Judge whose findings

I accept:

"The taxpayer and the company Trumper Finance

controlled by him remained the only directors of

M.B.J.

Constructions at all relevant times

thereafter.

Before referring to the next steps taken

it is

convenient to refer to four companies and the

control thereof at all relevant times.

Trumper Pty. Ltd. (to rrhlch

I shall refer as

llTrumperll) was

company in which all the ordinary

shares were held beneficially

for the taxpayer and

of which he and Trumper Nominees

Pty. Ltd. were the

only directors. Its activities were investment

in other companies and trading in shares in other

companies.

Trumper Finance, to which

I ave already

referred, was

a company in which all the shares

were held beneficially

for the taxpayer and of

which the taxpayer and

company controlled by

him were the directors. At all material times

it has been	an investment company and share
trader.

Trumper Mining Pty. Ltd. (to which

I s all refer

as !'Trumper Mining") was a company in which the

shareholders were two companies the capital n

which was beneficially owned by the taxpayer and

of which the taxpayer and

a company controlled

by him were the directors. Its activities

at all

relevant times have been borrowing money interest

free and lending

it interest free to the taxpayer.

- 20 -

Trumper Nominees

Pty. Ltd. vas a company in which

all the capital

was held beneficially for the

taxpayer.

It fulfilled the role of director

some of the other Trumper companies and acted

as a trustee of

a superannuation fund.

On 22 July 1974 M.B.J. Constructions invested

$45,000 of the

$45,240 which still remained

in its

bank account by subscribing for and having allotted

to it at par 45,000 five per cent

IfAIf non-cumulative

preference shares in Trumper, which shares carried

no voting rights and were redeemable, but only at

the option of Trumperfl.

(I would interpolate

that his HonourPS

reference to

the preference shares

in Trumper Pty.

Limited as

"five per centff non-cumulative preference is, perhaps,

an unduly favourable description

in that the articles

of Trumper provided that the directors might declare

a rate Ifof less than five

per cent (596) but not less

than one per cent

( 156)f1. If the shares are to be

categorized by reference to minimum rights,

it would

possibly be more accurate to refer to them as	ff196
non-cumulative preference sharesff).

flTrumper used the

$45,000, the consideration

for the

issue of the shares,

t o repay some of its creditors and

7 ,

it lent some of the money to Trumper Mining. Trumper

fining subsequently lent some at least of that money

to the taxpayer and

he used it to pay income tax

for which he was assessed when the deduction

issue was disallowed

by the Commissioner.

The effect of all of the foregoing may be stated as

follows.

A significant part of the

$45,240 in the

bank account of

M.B.J. Constructions has been indirectly

made available to and used

by Trumper, a company

controlled by the taxpayer, to repay

its creditors

which facilitated its activities of lending money

to Trumper Mining and investing and trading

in shares.

The money was

so made available by subscribing

cash for the 5% redeemable preference shares.

Another significant part of the

$45,240 in the

bank account of M.B.J.

Constructions has been

indirectly made available to the taxpayer interest

free and used by him for personal purposes. This has

been done through

M.B.J. Constructions subscribing

for the redeemable

596 preference shares

in Trumper

and Trumper lending part of the subscription money

interest free to Trumper Mining which lent part at

least of

that money interest

free to the taxpayer

who used

it to pay personal

taxationf1.

- 21 -

The learned trial Judge found

- and the evldence

justified the finding

- that at the time he established the

fund and transferred the shares

in M.B.J. Constructions, Mr.

Bray broadly had

in mind that the cash which comprised that

company's assets would be made available to companies

which were controlled by him but that

Mr. Bray's intentions

in this regard were not communicated

t o either the Commissioner

or any of the other trustees. It should be noted that there was

no suggestion

in the evidence that

Mr.. Bray had, at

any time

prior to May

1975, intended that

any of the cash funds held

by companles whose shares he acquired and gave to the fund

should ultimately be lent to him personally

or applied for

his personal purposes. The need for such

a l o a n arose when

the income tax assessment disallowing the disputed deduction issued in that month. His Honour accepted the evidence

of the

three other trustees that the

first they knew of any

investment by

M.B.J.

Constructions in the 5% redeemable non-

cumulative preference shares

in Trumper was when they saw the

financial statements of M.B.J. Constructions

for the year

ended 30th June

1975 which, as his Honour observed, must

have been

in the latter half of

1975.

The first question which arises

for determination is

whether in the light of these facts there was

a gift within

the meaning of

s.78(l)(a).

It was argued for the Commissioner

that although property

was transferred to the trustees

voluntarily and not as

result of any contractual obligation,

an advantage of

a material character was received by the

- 22 -

transferror by way of return and, therefore there was not

gift.

Reference was

made

Federal

Commissioner

Taxation v. McPhail (1968) 117 C.L.R.

111.

It appears to me

that Mr. Bray did make

a gift to the trustees of the cheque

for $100 and of the shares

in M.B.J. Constructions. Although

it may be said that he was later seen to

b deriving an

advantage because of the use which was made of the funds

that company, it would be wrong

in my view to hold that any

advantage, which e may have gained

in this way, was

in return

for the gift. Any advantage Mr. Bray received was not the

result of any arrangement or understanding with the trustees. His intention to use the funds as

he did was part of his plan,

which he did not disclose to his co-trustees.

Any advantage

which he obtained resulted from the form of the gift

of shares

in M.B.J.

Constructions and the position of control

In which

he stood in relation to that company. It

was not a quid pro quo

for the transfer of the shares.

Turning to the latter part of

s.78(l)(a),

it seems

clear enough that the Commissloner was satisfied that the

terms of the instrument of trust, of which

he ad approved,

were such that

any moneys paid

or accrued to the fund

as a

result of the gift and not applied

for the purposes

of the

fund, might not be invested by the trustees otherwise than

in the manner specified

in the section. The substantial

question arising

for determination is whether the gift was to

a public fund, established and maintained under

an mstrument

of trust exclusively for the specified purposes. The

- 23 -

Commissioner contends

and the learned trial Judge held that

the fund

in the present case was

not a

public fund and,

any event, was not established and maintained exclusively

f o r the specified purposes.

To some extent these questions overlap. otherwise might be considered to be

A fund Which

a public fund, might be

held to fall outside

that description, if it was seen

to be

established and maintained

for the specified purposes

and also for the purpose	f supplying private profit	or
advantage.

Leaving this consideration is whether the fund created by the trust deed answers the

on one side, the question

description of

a I1public fund". These words are

a compound

description to which

a meaning has to be given. Some assistance

may be derived from

a conslderation of each of the words used.

The word "fund1'

is not

confined to cash

or money in the bank.

It is appropriate to refer to money

r investments set aside

and administered

for any purpose (see Associated Provident Funds

Pty. Limited v. Federal Commissioner of Taxation

(1966) 14

A. T.D. 333 per Windeyer J.

at p. 351 ) .

The word

llpublicll has

been considered by the Courts

in relation to

a variety of

compound descriptions, such as, public hospital, public school,

public benevolent institution, public education purposes and

the like. In Ratcliffe and McGrath

with Hughes on The Law of

Income Tax (1938), there is a discussion of llpublic benevolent

1nstitutionl1. It is stated (at pp.446-447)

- 24 -

?It seems that

a llbenevolent institutiong1 should

be regarded as llpublicll owing to the presence

or absence of

a number of different factors,

none of which alone

is decisive. It appears

that each case must depend upon its

own particular

circumstances. The main factors to be

considered are whether:-

( 1 ) its foundation was of

a public nature;

(2) its foundation was perpetual;

( 3 ) the source of its income

is public;

( 4 ) its management and control are public;

( 5 ) any private person has

any interest in it;

( 6 ) it has any object of profit;

( 7 ) it is the public who benefit,

or who are

entitled to the benefits from

it.f

There follows

a list of relevant cases. Since 1938

there have, of course, been other cases. Those which may usefully be referred to include: Little Company of Mary (S.A.)

Incorporated v. Federal Commissioner of Taxation

(1942) 66 C.L.R.

368; Maughan v. Federal Commissioner of Taxation

(1943) 66 C.L.R.

388;	Remark Hotel Inc. v. Federal Commissioner of Taxation

(1949) 79 C.L.R. Taxation (1955) 93 C.L.R. 645; Thompson v. Federal Commissioner

10;

Lloyd v. Federal Commissioner

of Taxation

(1959) 102 C.L.R. 315.

The statement quoted appears

to me to set forth the correct approach

in determining the

element of llpublicnessll.

It 1 s also clear from the cases that

the most important elements are the conferring of public

benefit and the exclusion of private advantage

or profit.

Profit-making in itself is not foreign to the notion of

public fund, provided the profits are to be devoted	to the
public purposes of the fund.

- 25 -

In the present case, the foundation of the fund was private, not public, the source of its income was property

given by a private citizen were in the hands of trustees, who were private persons. The

and its control and management

trustees were obliged to accept donations from

any person,

corporation or organisation (cl. 3).

They in fact advertised

for donations	in	several provincial newspapers but without	L
i
!

success. The sanctions obtained under the Collections Act

1966-

1973 (Qtld.), subjected the fund to

a degree of public

supervision and control under the terms of that Act, but its

management and control

was not essentially of

a public character.

On the other hand,

it was a perpetual foundation, the trusts

of which could only be valid

if they were charitable

in the

legal sense. By its terms the trust deed laid down trusts

favour of the funds, authorities and institutions and the purposes specified in s.78(l)(a). Some of these are charitable

in the legal sense; some are not. Section

104 of the Trustee

Act, 1973 (Q'ld.) prevents the inclusion of non-charitable purposes from invalidating trusts for charitable purposes.

The non-charitable purposes may be disregarded (Stratton

Simpson (1970) 125 C.L.R.

138).

The trusts established by the

trust deed are, therefore, those

in favour of funds,

authorities, institutions and purposes specified

n s.78(l)(a)

that are charitable. The fact that the trustees have

discretion to determine which shall benefit, does not alter

cut dovm the essentially public nature of the benefits. The

fund may not,

in terms of the deed, be applied

for the

private

advantage or profit of

any individual. Even if it be wound

up,

any part of the fund remaining

has to be applied for like

- 26 -

public purposes (Cl.

11 of the deed).

Of course, at the end of the day what has to be

determined is whether the

fund falls within the compound

description of llpublic fund". In the circumstances, it appears

to me that

it does, subject only to the qualification stated

earlier that on a consideration of the circumstances relevant to its establlshment and maintenance, it is not found to have

been established

or maintained partly for purposes of

private advantage.

I turn now to the question whether the fund was

established and maintained exclusively for the purposes

specified in s.78(l)(a).

On the facts

in the present case, it seems that

one way

in which Mr. Bray's case might have been presented, was

t o submit that the fund was established by the gift of

$100

and was maintained, albelt for

a brief period, exclusively

for

the purposes set forth

in the deed,

so that when the gift

of shares was made, it was to	a fund which answered the
description in s.78(l)(a).

However, the case for this basis either before this Court

Mr. Bray was not

in fact put on

r, so far as the material

presented on this appeal shows, before the learned trial Judge.

There were, no doubt, sound reasons for this.

appears from the minutes of the first meeting of trustees

on 19th June 1974, the deed was incorrect

in referring on the

12th June 1974 to the $100 as having been paid.

What in fact

happened was that

Mr. Bray's personal cheque for

$100 was

- 27 -

tabled at the meeting of trustees on 19th June

1974. The

meeting lasted less than hour. Perhaps it might be suggested,

cheque at the meeting of 19th June

was

tabled

before

the

transfer

of shares

since

the

1974, there was

a brief period

during the meeting, after the cheque was tabled, when the

trust was maintained exclusively

for the purposes specified

S .78(

) (a).

However, the trust was set

up on 12th June

1974 by the deed and was constituted by the transfer of

property to the trustees on the 19th June 1974. Due to the way

in whrhlch the case

for Mr. Bray was put, there was no evidence

as to how the cheque was handled at the

meetmg or as to

when

the cheque was cleared. Perhaps one should infer

at least

that the property

in the cheque itself passed to the trustees

before the property

in the transfer of shares. Is this

sufficient to lead one to the conclusion that,

w en the

transfer of shares

was handed over there

was already a

fully constltuted trust? I think not.

It does not appear

to me to be correct to draw

a distinction between the

handing over at the one meeting of the cheque and the

transfer of shares. In my opinion, the correct conclusion

is that at the meeting of

19th June 1974, the trust was

constituted by the handing over of both the cheque and the transfer of shares. The arguments put for Mr. Bray appeared to me to accept that this was the position.

In considering whether

a particular gift falls

within s.78(l)(a),

the relevant date must be the date of the

gift. In the case of

a gift to a public fund, the fund must

- 28 -

answer the statutory description at that date.

If the

gift 1s to a fund which is constituted by the very gift itself,

while the question whether the fund is established exclusively

for the specified purposes

i a reasonably straightforward

one, the question whether the fund

is maintained exclusively

for those purposes presents some difficulty. Presumably

in using the -hvo words llestablishedll and l1maintainedf1 the legislature intended to convey two separate meanings

(Maward

v. Williams (1955) 1 W.L.R. 54 at p.60).

But the fund has

no history against which one may

judge whether it is maintained

as required in the section. The notion that the corresponding

words in s.8(5)

of the Estate Duty Assessment Act

1914-1940

did not apply where the gift established the fund, was rejected

in -

Lemm v. Federal Commissioner of Taxation

(1942) 66 C.L.R.

399. Williams J. in his judgment with which Rich

J. and

McTiernan J. agreed, said (at

p.410):-

¶It is the character

and not the pre-existence

of the institution or fund, just as it is the

quality of the purpose, which

is important.

The trusts in the will are intended to establish

an institution and a fund the beneficial interests

in which are not o be vested in any private

person but are to belong inalienablv to the ~ ~ ~~~~

public (Dilworth v. Co&issioner of- Stamps

(1899)

A.C. at p.109;

Girls9 Public Day School Trust

Ltd. v. Ereaut (1931) A.C. 12, at p.35).

In my opinion it

is no objection that the public

hospital, public benevolent institution or fund

is established by the will itself, or that the

trustees of the will are authorized to apply the

fund to assist unnamed institutions,

o long as

their discretion does not allow them to apply it

otherwise than for one

or more of the purposes

mentioned in the sub-section.¶

- 29 -

The position under the Estate

Du y Assessment Act

was clarified

by Act No. 18 of 1942 s.4(d) by inserting

the words

IIas or1! before the words "to

a fund" (see Union

Trustee Company of Australia Limlted

v. Federal Commissioner

of Taxation (1962) 108 C.L.R. 451 at p.456).

The words llas ort1

have not been inserted before the words "to

a public fund"

in s.78(l)(a)

of the Income

Tax Assessment Act notwithstanding

it has frequently been amended

in recent years. Nevertheless,

I believe it is correct to adopt

in relation to

s.78(l)(a)

the same approach as was adopted

in Lemm v. Federal Commissioner

of Taxation before those words were added to	s.8(5) of the
Estate Duty Assessment Act.

Accepting this position, the question

is whether the

Court should pay regard only to the terms of the deed and the

transfer of the property to the fund

in determining whether

was establlshed and maintained exclusively

for the specified

purposes. If so, In the present case, the fund met the requirements of

I would be of opinion

s.78(l)(a).

But Counsel for

the Commissioner argues that the Court may pay regard to all

the circumstances including the intention of the settlor, the

facts leading up to the constitution

of the fund and the

subsequent facts relatlng to its management and the adminis-

tration of its

assets.

I agree that the Court is not confined to

consideration of the deed and the transfer of the property.

am of opinion that the circumstances leading up to the

constitution of the fund are proper matters to be considered.

- 30 -

The intention

of the settlor

and the subsequent management

and administration present more difficulty.

So far as

Intention is concerned,

it appears to me the question before

the Court has to be determined

in accordance with objective

considerations and that the subjective intention

or the motives

of the taxpayer are,

in general, irrelevant. Again, what

occurs after the date of gift

w ll, In general, be irrelevant.

It would be strange

if an innocent donor to

a public fund might

lose the deduction to which he was entitled under

s.78( 1 ) (a)

because the fund was subsequently misapplied.

However, the facts of the present case raise these

questions in a special form.

At the risk of seemlng repetitious,

I refer to the facts

which appear to me to be material. The deed was executed

12th June

1974.

On 19th June 1974 a cheque for $100 and a

transfer of

22,619 ordinary shares of

$2-00 each in M.B.J.

Constructions executed by Mr.

Bray were handed over to the

trustees. The fund was then constituted. Fr. Bray was one

trustee, the other three trustees were friends of his whom he

had selected. Prior to the co&itution of the fund and at the

first meeting of trustees held

on 19th June

1974, he informed

them that he would see to the best of

his ability that

reasonable dividends would be forthcoming from the shares as

income to the foundation

for distribution to charitable bodies.

At the same meeting

on 19th June

1974, a resolution was

passed that except where specifically permitted by the decision

of all trustees,

any resolution of the trustees must be

unanlmously adopted by them to be binding.

It was apparently

- 31 -

sought by this means to overcome the ordinary rule that trustees of a public or charitable trust may act by majority

(In re Vlhiteley (1910) 1 Ch. 600).

Both before and after the

constitution of the trust,

Mr. Bray had the additional

intention, not communicated to the other trustees, that the

sum of $45,240-00 held by

M.B.J.

Constructions in its bank

account, would, after the shares

in the capital of that

company were given to the fund, be available for use by

other companies under his control.

In the light of this

intention, and

in the light of the way

in which the funds were

later in fact used, the significance of the structure of the trust and the nature of the gift of shares becomes apparent.

The structure was o arranged that Mr.

Bray, having

transferred the shares

in M.B.J. Constructions to the fund,

retained the power to extract some

or all of the value of

those shares

in order to benefit other companies which

controlled.

This is, in fact, what occurred. He was one

trustee who at all times had

a full knowledge of the facts.

As a trustee, his duty was to administer the assets of the fund to the best advantage.

As a director of M.B.J.

Constructions, his duty was to act

for the benefit of the

company, or, in real terms, to act for the benefit of its

corporators, which virtually meant the trustees of the fund.

Trumper received

$45,000 from M.B.J. Constructions for the

issue of

45,000 five per cent

"A" non-cumulative redeemable

preference shares. This was a lower form

of security than an

unsecured loan at

576 interest would have been.

If either a

- 32 -

dividend or interest at the rate of

5% was sure to be paid,

there would be some advantage

in M.B.J.

Constructions

receiving rebatable dividends rather than taxable interest.

But M.B.J. Constructions had little assurance regarding the payment of dividends beyond reliance upon

Mr.

BrayPS goodwill.

The articles of Trumper were such that the dividend might be

reduced to 1%;

that the company might pay dividends only

out of profits (at the 30th June

1975, Trumper had

a nett

deficiency of assets apparently representing accumulated

losses amounting to

$10,000)

; that the dividend was non-

cumulative; that the shares might be redeemed only at the

option of Trumper; and, that the shares carried no voting

rights. On a winding up of Trumper, any payment to shareholders

would, of course, be postponed until unsecured creditors

were paid.

As a director of Trumper, Mr.

Bray owed a duty to

that company,

or in real terms, to its corporators, which

vlrtually meant himself, since

he beneficially owned all the

ordinary shares. A conflict of duty situation and

a conflict

of duty and interest situation arose

in r lation to the

transaction betvreen M.B.J. Constructions and Trumper.

But thls

was beyond the reach of the trustees, unless they took steps to

assert their powers as shareholders of

M.B.J. Constructions, by

winding up o r otherwise, with

a view t o ensuring the proper

management of its assets. Under the deed they had power to

retain the share investment.

A power to retain

an investment

involves trustees

In considering from time to time whether

- 33 -

is prudent to exercise the power. Under the deed, the

trustees were not to be liable	for any loss due to lack
of prudence or even negligence	on their part; they were

to be liable only for

l ss attributable to dishonesty or

wilful default.

It was not conceded by Counsel

for the

Commissioner that there had been no breach of trust but

neither was it contended there had been

a breach. In the

circumstances it appears unlikely that the trustees, other

than Mr. Bray, would seek to act against hlm or against the

companies he controlled. Indeed,

it was argued by Counsel

for the taxpayer, in effect, that the trustees' attitude of

standing by was

a proper one for them to adopt, since they

expected further gifts from

l@.

Bray and would

be wise not to

I	take steps which might defeat those expectations.

At one stage,

it was suggested

in argument that one

way of regarding the matter was to treat the trustees as having

received the shares

in M.B.J. Constructions subject to

stipulation that they would not interfere with

Mr. Brayls

direction of that

company.

If this view were accepted, it would

presumably lead to the result that the valuation of the gift

should be made upon the basis it was a gift of shares shorn of

the right to interfere. However, although that may have been

the expectation of Mr.

Bray, it appears to me that there was

no definite stipulation of this character. Mr.

Bray kept this

part of his intentions to himself.

In the circumstances, I

consider the gift was

gift of the shares without any such

restriction as would be given effect to by

a Court.

!	- 34 -
i

The special feature of this case, as

it ppears

to me, is that a structure was established by the terms of

the deed and the nature of the gift of shares, which provlded

a potential for the value of the fund to be applied virtually

without effective remedy to purposes other than those

specified in s.78(l)(a).

In some cases this potential

may

be regarded as of no significance.

In the present case, the

proved intentions of Mr.

Bray and the subsequent events show

it to be of such

aracter that the Court is precluded from

regarding it as of no signlficance.

Treating it as slgnlficant, is inevitable that the fund is not

I think the conclusion

shovrn to have

been established

and maintained under the instrument

of rust exclusively for the

purposes specified in s.78(l)(a).

It is unnecessary to express

a view whether the fund,

in all the circumstances, should be

regarded as

a publlc fund.

I do not consider this general approach to be

inconsistent with that adopted by the High Court

in dealing

with the different but somewhat related problem arising under

the former

s.23(j) of the Act (See Mahoney v. Federal Commissioner

of Taxation (1965) 39 A.L.J.R.

62 affirmed 41 A.L.J.R.

232;

Compton v. Federal Commissioner of Taxation

(1966) 116 C.L.R. 233;

and, Scott

v. Federal Commissioner of Taxation

(No. 2 ) (1966)

40 A.L.J.R. 265).

I propose that the appeal be dismissed with costs.

IN THE FEDERAL'COURT OF AUSTRALIA

V,G.36 of 1977

VICTORIAN DISTRICT REGISTRY

GENERAL DIVISION

ON APPEAL

FROMTHE SUPREME COURT

OF VICTORIA

BETWEEN :

PETER WILLIAM BRAY

- Appellant

- and -

THE COMMISSIONER

OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA -

Respondent.

CORAM:

BOWEN, C.J., C.A.SWEENEY, J., AND DEANE J.

REASONS FOR JUDGMENT

C. A. SNEENEY, J.

This appeal

is brought from a judgment of the

Supreme Court of Victoria, dismlssing an appeal by Peter Willlam Bray (whom I shall call 'the taxpayer') against an assessment of

income tax in respect

of the year ended

30 June 1974.

The appeal relates to the disallowance by the

Commissloner of the taxpayer's claim for a deduction amountlng to

$44,107, pursuant to s.78(1)(a)

of the Income Tax Assessment Act

1936-1976, the relevant provislons of whlch are

as follows:

'The following shall be allowable deductions:

(a) Glfts (not being testamentary gifts) of the

value of Two Dollars and upwards of money or

of property other than money which was purchased

by the taxpayer within twelve months immediately

preceding the making of the gift, made by the

taxpayer in the year of income to any of the

following funds, authorities	or institutions in
Australia:-'

(i) to xliv) (in which there

are specified

various

public funds, authorities or

institutions in Australia)

./2

'or to a public fund established and maintained

under a will

or instrument of trust exclusively

for the purpose

of providinq money, property

or benefits to or for funds, authorities

institutions referred

to, and for the purposes

(if any) referred

to, in any of the sub-pragraphs

of this paragraph, or for the establishment of

such funds, authorities or institutions, being

a public fund as to which the Commlssioner is

satisfied that the terms

of the will or instrument

of trust are such that any moneys (includlng income

derived from investments and proceeds

of the

realization of investments) paid or accrued to the

fund as a direct or indirect result of the particular

gift and not applied

for the purposes of the

fund

may not be invested by the trustee otherwise

than

in a manner

In whlch trustees are permitted by an

Act, a State Act or a law of a Territory of the Commonwealth to invest trust moneys without special authorization.'

The first ground on which the learned trial judge held

that the deduction was properly disallowed by the Commissloner

was that the fund, to the trustees of which the taxpayer had

transferred certain shares, the subject of the

clahddeduction,

was not a fund established and maintained exclusively (his

Honour's emphasis) for the purpose of providing money, property

or benefits to or for funds, authorities or institutions referred

to and for the purposes referred to in sub-paragraphs (i) to

(xliv) of s.78

(l)

(a).

The taxpayer gave evidence that, between Christmas 1973 and Easter 1974 he became interested

In establishing some type of

charitable fund or foundation. He was then 33 years old and had

been a solicltor for ten years. He was engaged in the company law

and estate planning section of the

firm, In

which he was one

ten partners. After he conceived the idea of establishing a

trust or foundation, he had one of the

flrm's employee sollcitors,

named Brown, enquire

at the Commonwealth Taxation Office in

Brisbane whether

it was likely that the Commlssioner would approve

such a deed and if

so, what his requlrements for

it would be.

Brown began these enqulries early in April 1974 and

they continued until some tlme between 7 and

11 June 1974 when

he was told by the Taxatlon Department that a deed in the form

which was ultlmately executed would be acceptable.

. / 3

3 .

The taxpayer stated that by

the time of Brown's

first enquiry

in April, the idea of setting up the fund had been

formulated fairly clearly in his mind. On April 22, 1974, he become trustees, together with himself, of the proposed fund. He said that none of them was really familiar with the idea of such

approached three friends of his, John Edward Gallagher, a Brisbane

barrister, William Allan Gorry, a Brisbane public accountant and

a foundation or how

it worked, except in the most general terms.

Each of them accepted his invitation.

In April 1974 the taxpayer had formed the broad

intention to purchase the shares in a company or companies which

had no liabilities but had money in the bank,

to transfer these

shares, or practically all of them, to the trustees

of h fund

and to take the necessary steps

o achieve the object that the

money in the bank would,

as counsel for the Commissioner phrased

it, be 'percolated through'

to the other companies owned and

controlled by him, and would be available	to be used by those
companies.

The taxpayer did not tell Brovm or his fellow

trustees of this object, but he told the trustees that he would,

to the best of his ability, make sure that a dividend upon these

shares was paid year by year to the trustees.

Prior, one of the trustees, gave evidence that

he was asked by the taxpayer in April 1974 to be a trustee of

charitable foundation which he proposed to set up. The taxpayer

told him that he intended to make a gift to the foundation in

the form of shares and that he would maintain

as far as

he was

able a reasonable dividend flow. Prior agreed that it was

implicit in that first conversation that the trustees would not

be giving away the capital, but would be making distributions

from the dividends. The taxpayer stated that he did not discuss

with the trustees the way

in which the company, in which they

were to receive shares, would invest its funds.

. /4

t r u s t d e e d d a t e d

12 June

1 9 7 4 was

made

between the

t a x p a y e r , r e f e r r e d

t o

the founder , o f

the one

part

and the

taxpayer

and Gallagher, Gorry and

Prior

( t h e r e i n n f t e r

called

' t h e

t r u s t e e s ' )

t h e o t h e r

part.

The r e l e v a n t terms

t h e

deed a re

s e t o u t i n t h e r e a s o n s

for

judgment of

the

Chief

Judge.

or about 11 June, 1974,

the

taxpayer

had

te lephoned

t h e o f f i c e o f

Melbourne c l ien t

h l s f i r m ,

named

Hutchins,

s t a t i n g t h a t h e

was

i n t e r e s t e d i n a c q u i r i n g

a l l t h e l s s u e d c a p i t a l

a company w i t h c a s h

assets and no

h a b l l i t i e s , and was

t o l d

t h a t t h e o f f i c e

had severa l such companies for

sale.

H e

had

known

beforehand that Hutchins would have	a t least	one such	company	f o r
sale.

f o l l o w t h e s t e p s t a k e n b y t h e t a x p a y e r ,

n e c e s s a r y t o

set

o u t

some

p a r t i c u l a r s o f

number

o f p r o p r i e t a r y

companies ,

incorpora ted

in Queens land ,

the

in which

were

owned

c o n t r o l l e d

him

and the boards of which

were

u n d e r h i s

c o n t r o l .

Trumper

Pty.

Ltd.

was

i n c o r p o r a t e d i n

1967

and

i t s

ac t iv i t ies

were

inves tmen t and t r ad ing in the sha res o f o the r

companies.

Trumper

Finance

Pty.

Ltd.

carried

the

same

act ivi t ies

from

1 9 7 1 onvards.

Trumper

Nominees

P t y .

L t d .

f u l f i l l e d

t h e

role

d i r e c t o r o f

some

t h e o t h e r

Trumper companies and acted

t r u s t e e o f

superannuation

fund.

Trumper

Mining

Pty.

Ltd.

was

incorporated about 1970,

originally

f o r t h e p u r p o s e

i n v e s t i n g

i n

new

i s sues o f sha res in min lng exp lo ra t ion compan ies , bu t

c e a s e d t o

some

yea r s be fo re the pe r iod wi th wh ich

a r e

conce rned . Af t e r

t ha t

time

its o n l y a c t i v l t y

was

the

borrowing

and

lendlng

of money o n a n

i n t e r e s t

f ree

b a s i s .

The

taxpayer

g a v e e v i d e n c e t h a t

' f o r

some

years nov ,

t h i n k ,

Trumper

Mlnlng

has cont inua l ly bor rowed

money,

i n t e r e s t

free,

a n d l e n t

t o m e

and

a t b o t h e n d s

th ink the loans have been

i n t h e n a t u r e o f

running account . '

H e

said

t h a t i n a l l c a s e s t h e l o a n s

were

f r e e

l n t e r e s t and repayable

on demand.

On June 13,

1974, t h e t a x p a y e r

f l e w t o tklhurne and arranged

the pu rchase

t h e w h o l e o f t h e i s s u e d s h a r e s i n

one

t h e c a p n i e s

which Hutchins

had

for

sale, M.B.J.

Constructions

Pty. Ltd. There were

22,000

o rd ina ry

sha res and

400

' A '

class

s h a r e s .

All

o f

t h e s h a r e s ,

save one,

were

t r a n s f e r r e d t o t h e t a x p a y e r , t h e o t h e r s h a r e b e i n g

. .

transferred

Trumper

Finance

Pty.

Ltd.

At the

time

the

I	transfer of the shares, the assets	of M.B.J.	Constructions Pty.
I

Ltd. consisted of

a bank credit of $45,240 and

it had no

liabilities. The shares having been so transferred, the taxpayer

and Trumper Finance Pty. Ltd. were appointed directors of

M.B.J.

Constructions Pty. Ltd. and the previous directors then resigned.

At an extraordinary general meeting of

M. B. J.

Constructions Pty. Ltd. held

on 18 June 1974

it was resolved by

special resolution that all the issued and unissued

' A '

class

shares of the company be converted into ordinary shares ranking

pari passu with the existing shares and new articles of association

were adopted. As a result all the shares had equal voting rights.

On 19 June 1974, the first meeting of the trustees

the foundation was held, all trustees being present. The taxpayer

was appointed Chairman of

the Trustees and President of the

Foundation. He tabled his personal cheque for $100, the original sum settled under the trust deed. He personally recorded certain reasons for establishing the foundation in addition to those

mentioned in the deed. One

of them was his desire to give financial

assistance to organisations engaged in public charity. Another was that a general fund rather than fund for one specific purpose was thought to be a useful means of assisting public charitable appeals. .

It was resolved that except where specifically permitted by the

decision of all trustees, any resolution of the trustees must be

unanimously adopted by them to be binding. The last item of

business of the meeting was the expression of

a wish by the taxpayer

to make

a donation to the foundation

of the 22,619 ordinary $2

shares in

M. B. J. Constructions Pty. Ltd. held by him and

resolution by the trustees to accept that donation and

to execute

the transfer of those shares tabled

at the meeting. At the meeting

a valuation of the shares by

a firm of accountants

at $1.95 each

was tabled, the total value being $44,107. This

is the amount of

the claimed deduction which has been disallowed. The trustees

became registered as the shareholders of the 22,619 shares

M. B. J. Constructions Pty. Ltd., being registered in the alphabetical

order of their names,save that the name of the taxpayer appeared

last.

. ./6

. .

At the first meeting the taxpayer again said that he would see to the best of his ability that reasonable dividends would be forthcoming from the shares as income to the foundatlon

for distribution

to charitable bodies.

The taxpayer and Trumper Finance Pty. Ltd. remained the

only directors of M. B. J. Constructions Pty. Ltd. at all relevant times thereafter. The taxpayer did not invite any of his co- trustees to become a director nor did any of them express any wish

to become a director.

The learned trial judge found that on

22 July 1974 M.B.J.

Constructions Pty. Ltd. invested

$45,000 of the $45,240 which

still remained in its bank account by subscribing for and having

allotted to it at

par 45,000 'A' non cumulative preference shares

in Trumper Pty. Ltd.

The preference shares, which

M. B. J. Constructions Pty.

Ltd. obtained in Trumper Pty. Ltd., were redeemable, but only at

the option of Trumper Pty. Ltd. The articles of associatlon

the latter company attached

to what were referred

to in them

'the "A"

5 per cent

( 5 % ) redeemable preference shares' the right

to receive a fixed non cumulative preferential dividend

at the

rate of 5% in each financial year out of the profits of such year

available for dividend, or a rate less than

5% but not less than

l%, if the directors

o declare, or a rate in excess of

5% I the

directors so declare, but not, in any event,

to exceed the rate

payable in the same financial year

In espect of any "B" five

per cent (5%) redeemable preference shares, for which the articles

prescribed a maximum permissible dividend of

10%. It will be

remembered that the directors

who had these powers, and the power

to redeem the preference shares, were the taxpayer and Trumper

Nominees Pty. Ltd.

Trumper Pty. Ltd. used part of the

sum of $45,000 which

it received from M. B. J. Constructions Pty. Ltd. to repay some

of its creditors. It lent some of the money to Trumper Mining

Pty. Ltd.

./7

I	Part of the money which Trumper Mining Pty. Ltd. lent

I	to the taxpayer	on the running account was used by him to pay
I

income tax, when the deduction in issue in the present case was

disallowed by the Commissioner. The taxpayer said that the

necessity to make these payments of tax had not been in his

contemplation at the time

of the purchase of the shares and that

they distorted the picture of the running account in a way which

he did not originally intend. This change

in circumstances did

not alter the fact that the money whlch Trumper Pty. Ltd. received

from M. B. J. Constructions Pty. Ltd. and lent to Trumper Mining

Pty. Ltd. was available for the use

of the taxpayer and was used

by him. It simply altered the use he made of the money and took

it out of circulation between him and his companies.

Having reviewed the evidence, some of which has been

set out above, the learned trial judge found that a significant

part of the $45,240 in the bank account

of M. B. J. Constructions

Pty. Ltd. had been indirectly made available to and used by

Trumper Pty. Ltd. to repay its creditors, which facilitated its

activities of lending money

to Trumper Mining Pty. Ltd. and

investing and trading in shares.

He also found that another

significant part of the

$45,240 had been indirectly made available

to the taxpayer interest free and used by him for personal purposes.''

His Honour found

on the evidence

of the taxpayer and

of the trustees that the taxpayer did not reveal

to the trustees

that his money to be used to purchase the shares

to be given to

the foundation would be ultimately indirectly used

in the way the

taxpayer contemplated

it would be used and

it was in fact used.

The taxpayer could not recall any enquiry by his

fellow trustees

as to the use to which the funds held by

M. B. J.

Constructions Pty. Ltd. were being put. They received a copy

appe l l an t t he bene f i t

of any deduction

i n respec t

o f

the

t r ans fe r o f t he sha res

and issued

assessment on

that

basis.

appeal by the appel lan t

t o the Supreme Court o f Vic tor ia

against

that

assessment

was dismissed.

The appel lant

appeals

from that

d e c i s i o n t o t h i s

Court.

The pr imary facts

and circumstances i n the context

o f

which

th i s Appeal

falls t o be decided are set out

i n t h e

judgment of

Bowen C.J.

which I have had the benefi t of read-

ing.

I agree with the Chief

Judge's

statement

those

f a c t s and circumstances and his acceptance, subject

t o one

qua l i f ica t ion , of the f ind ings

o f

the learned

trial

Judge

i n those l imi t ed a reas in

which

any

r e a l d i s p u t e

t o primary

f a c t e x i s t e d

between

the pa r t i e s .

The

q u a l i f i c a t i o n i s

that

I am of the view

that there was no r e a l basis i n the evidence

f o r any

f ind ing

that,

a t

the t ime

o f

t h e t r a n s f e r o f t h e

shares , the appel lan t in tended

that

any part of the cash

a s s e t s of

iqi.B.J.

Constructions Pty. Limited

would be

made

a v a i l a b l e t o

him personally.

a l s o agree,

f o r the

reasons

. .

which he has given, with the conclusion of Bowen

C.J.

that

the transfer by the appellant

of the shares constituted

'"a

gift" of them for the purposes

f .78(l)(a).

It is common ground that the shares were purchased

by the appellant within twelve months immediately preceding

the making of the gift.

It is clear that the respondent

Commissioner was satisfied that the terms of the trust

deed,

of which he had approved, were such that any money paid

accrued to the trust as

a direct or indirect result of the

gift of the shares and not applied for the purposes of the

trust, might not

be invested by the trustees otherwise than

in the manner specified in s.78(l)(a). It follows that the

appellant is entitled

to the benefit of

a deduction of the

appropriate amount representing the value of the

sbres if

the gift of the shares was,

in the words used in s.78(l)(a),

to 'la public fund establislzed

and maintained under ... (an)

instrument of trust exclusively for the purpose of providing

money, property

or benefits to or for funds, authorities

institutions referred

to, and for the purposes (if any)

referred to, in any

of the sub-paragraphs

of (s.78(1) (a)) or

for the establishment

of such funds authorities

or institut-

ions'l.

I shall, on occasion, refer to these purposes for

which any relevant fund must, if the appellant is

to be

entitled to a deduction, be exclusively established and

maintained under an instrument

of trust as "the requisite

purposesr1.

The trust deed of 12th June,

1974 recited that the

appellant (described as 'Ithe founder") had already paid

the trustees

to be held upon the trusts thereof the

sum of

$100.00.

The appellant's personal cheque for that amount

. .

vas tabled by the appellant at an early stage of the first

meeting of trustees which was held on 19th

June, 1974.

It would seem probable that the cheque had

been drawn by

the appellant either

on o r before the 12th June,

1974 and

had been held by him, as

a trustee, pending the first meet-

ing of trustees

and the decision

to open a bank account for

the trust which was

made at that meeting. In any event,

it is clear that the gift of the cheque for

$100.00 was

made prior to the gift of the shares which was effected,

by delivery and acceptance of transfer, as the last item

of business of that first meeting of trusteeg.

The question of the appellant's entitlement to the

benefit of a deduction in respect

02 the initial gift of

the cheque for

46100.00 is not involved

in this appeal. It

is therefore unnecessary to consider whether, for the

purposes of s.78(l)(a),

a fund can be said to be establish-

ed at the time

of execution of

an instrument of trust making

provision for the establishment, raising and administrat-

ion o f the fund,

or can only

be said to be established when

property is first held upon the trusts

set out in the

instrument (see ComDton v. Federal Commissioner of Taxation,

(1967) 116 C.L.R.

233 at p. 246).

It is also unnecessary

to determine whether, in the event that

a fund cannot be

said to be established until property is first held upon the trusts set out in the relevant instrument of trust

o r

to be maintained while no property is actually held upon

those trusts, the first gift to the trustees of property

to be held upon such trusts

can properly be regarded as

a gift to a fund llestablished and maintained" under the

instrument of trust

(see Union Trustee

CO. of kust-ralia

Limited v. Federal Commissioner of Taxation (1962)

108

C.L.R.

451 at pp.456-7). Whether the relevant property

is regarded as being the

8100.00

referred to in the recitals

in the trust

deed which vas the amount of the appellant's

cheque which was duly

met o r , more accurately, is regarded

as being the physical property in the cheque itself

and

the mandate

to the bank which

it contained and which was

duly obeyed, the trustees, prior

to the delivery

and

acceptance of the trvlsfer

of the shares, already held

property under and subject to the trusts

of the trust

deed.

That property constituted the l1fund1l which had been

established under the trust

deed.

That fund would include,

in accordance with the provisions

of Clause 2 o f the trust

deed, Itany personal property

... from time to time paid or

transferred to and accepted by the Trusteest1 for the pur-

pose of the trust deed.

Senior Counsel who appeared

for

the respondent Commissioner expressly disclaimed any suggest-

ion that the trust

deed was a sham in the sense that it vas

not intended

to operate in accordance with its terms

o r

that property vested in the trustees was not held by them

upon the trusts

of the trust deed.

The gift of the shares

was, f o r the purposes

of s.78(l)(a),

a gift to a fund

established under an instrument

of trust.

The question whether the fund was, for

the purposes

of s.78(l)(a),

a public fund established

and maintained

under an instrument of trust exclusively

for the requisite

purposes falls, in my view, to be answered as at the time

of the gift. If a fund answers the necessary description

as at the time of the gift, the fact that it subsequently ceases t o answer it will not alter the character of the

gift as

a gift to a fund of the requisite type. The

policy underlying the relevant provisions

of .78(l)(a)

. .

obviously includes the encouragement

of gifts of the

designated character. The relevant provisions of the sub-

section are concerned with the entitlement

to a deduction

of the donor to the fund: they are not concerned with the liability to tax of the fund itself. If, at the time of

the gift, the fund is

a fund of the prescribed type, the

donor's entitlement to a deduction will not

be dependent

upon his ability to identify, in the hands of the trustees

of the fund, the precise proceeds of his gift

o as o

show that it vas in fact applied for the requisite purposes

(see Cobb &. Co. Ltd. v. Commissioner of Taxation

(1959)

101 C.L.R. 333 at

336).

Mor will the benefit

or" the

deduction in respect of the gift

be lost by reason of the

fact that, at some subsequent date, the fund

no lo ger

satisfies the necessary description or, for that matter, has gone out of existence as a consequence of fulfilment

of its purposes

o r for any other reason.

As has been said, the gift of the shares was

the fund established under the trust

deed of 12th June,

1974. Clause 4(a)(i) of that

deed provided that the fund

must be applied and used exclusively for the purposes

mentioned in Recital

A of the deed, namely, Itthe

purposes

of providing money, property

or benefits to

o r for funds,

authorities and institutions referred to

in any of the

sub-paragraphs of Section 78(l)(a) of the Income

T a x

Assessment Act of the Commonwealth

of Australia and for the

establishment of any such funds, authorities and institut-

ionstt. These purposes must

be restricted, in accordance

with the provisions of

s.104 of the Queensland Trustee

Act

1973, by disregarding any purposes which are not charitable

in the legal sense. With

or without such restriction,

they are clearly and exclusively, as was conceded on

behalf of the respondent Commissioner, purposes

of the

requisite character. The trust deed was Intended to

operate in accordance with its terms. The property held by

the trustees at

and immediately after the gift

the

shares was held by them upon the trusts

of the trust

deed.

The fund to which the shares were given was a fund establish-

ed under an instrument of trust which was vested in the

trustees appointed under the instrument and held by them

upon trust

for the requisite, and

no other, purposes.

The purposes for which

a fund is established

under an instrument of trust are the

direct and immediate

purposes for which the property comprising the fund is

be devoted.

Vkre the trust is established

under an instru-

ment of trust which is not

a sham, those purposes are the

direct and immediate purposes contained

the instrument

of trust itself (14ahone.y v. Federal Commissioner

of Taxation

(1965)

39 A.L.J.R.

62 at p. 63; Compton v. Federal

Commissioner of Taxation (supra) at

pp. 238-9, p. 250;

Kayemeth V. Inland Revenue Commissioners

L.R.

1932 A.C.

650 at pp. 657,

661;

Roman Catholic Archbishop of Melbourne

v. Lawlor (1934) 5 1 C.L.R.

1 at p. 32). In such a case,

neither the source of the property

nor the person of the

trustee is relevant to the determination of the purposes

for which the fund is established under the instrument

trust (Robinson

v. Stuart (1891) L.R. (N.S.W.) Eq. 47

at pp.49-50 and re The Trusts

of the Arthur HcDougall

Fund,

Thompson v. Pitzgerald (1957) 1 W.L.R.

81 at p. 90).

The

motivation of the founder

of the trust in establishing the

trust for those purposes is likewise irrelevant (Hoare

Osborne (1866) L.R. 1 Eq. 585 at p. 587).

It is the legal

consequences of what is done, not the motives of those

doing it, which ardignificant (Scott

Commissioner o f

Taxation (No. 2) (1966) 40 A.L.J.R.

265 at p. 278).

The founder

o r a trustee of a trust or fund

established under

an instrument of trust for particular

defined purposes may

be motivated by altruistic humanitar-

ia.n or religious sentiments

or by a less altruistic desire

for spiritual reward, social recognition

or material advance-

ment o r by any number of other objectives

or considerations.

Such motivation of founder

o r trustee is irrelevant

to the

definition of the purpose or purposes for which the trust

or fund is established under the instrument of trust.

Thus, for example, in the present case, the fact that the

appellant was,

to some extent, motivated by

a desire to

pay tribute

to his parents does

no% mean that,

in the

relevant sense, that

vas a purpose for which the fund was

established under the instrument

of trust (see Home v.

Osborne, supra; In re Kerr, Kerr

v. Bradley L.B. (1923)

1 Ch. 243). Again, for example, a fund constituted under

a trust deed for the single purpose of improving

a particular

public bridge as

a bridge will

be a fund established under

the instrument of trust exclusively for that purpose not- withstanding the fact that the founder was motivated by

the selfish desire

to have an improved bridge over which he,

with other members of the public, might lawfully pass

from which he might unlal.rfully fish. It is only when the

instrument of trust under which

a fund is established is,

at least in part,

a sham that it can

be said that the fund

is established under the instrument for purposes other

than or additional to the purposes	to which the instrument
itself restricts it.

As has been said, any suggestion that the trust

deed was executed as

a sham was expressly disclaimed

behalf of the respondent Commissioner. The fund t o which the appellant gave the shares was a fund which had been

established under the trust

deed for the purposes specified

in that deed.

It vas, at the time

of the gift of shares,

a fund established under an instrument of trust exclusively

for the requisite purposes. It is therefore necessary

consider whether, at the time

of the gift, the fund was,

for the purposes of

s.78(1) (a), %mintainedtt under that

instrument of trust exclusively for those purposes.

The words used in s.78(l)(a) in relation to the

purposes for which

a fund is maintained,

o not, as

matter of ordinary language, invite or warrant

a general

investigation, by reference

to undefined and subjective

criteria, of the direct

or indirect motivation, object-

ives, purposes

or intentions of those associated with the

fund.

A need for any such general investigation would

tend to frustrate the policy underlying s.78(1) (a)

encouraging gifts

of the designated character

for the reason

that a prospective donor

to a fund would ordinarily

be in

no position to ascertain or

to assess the material relevant

to it. The relevant questions, under

78(1) (a) , are

whether the fund is maintained, as well as established,

under an instrument

of trust and, if so, whether it is

maintained under that instrument	of trust exclusively for
the requisite purposes.

At the time of the gift

o the shares, the only

asset of the fund

to which the gift

was made vas the cheque

for $100.00. That cheque, and, subsequently, the proceeds

thereof, were held by the trustees exclusively upon the

trusts and for the purposes set

out in the trust

deed

subject to any modification resulting from the provisions

of s.104

of the Trustee Act (Qld.)

1973.

The shares were

received by the trustees and held by them as part of the

fund upon the trusts

of the trust deed.

The fund was

maintained by the trustees llunderll the trust

deed at the

time of the gift in that it vas held by them, in their capacity as trustees, as the fund established

under the

trust deed, exclusively for purposes specified

in the trust

deed.

Since the modified purposes

for which the trustees

held the fund

were charitable in the legal sense, the

obligation to maintain the

fund under the trust

deed

exclusively for those purposes was subject to both the

general jurisdiction

of the Queensland Supreme

Court and

to the special supervisory control

of the Queensland

Attorney-General representing the

Crown.

There is

no suggestion that, at the time

of the

gift of shares, the trustees had been guilty of any breach

of trust or, indeed, of even the slightest irregularity in

the administration

of the fund. In accepting the gift of

the cheque and the gift

o the shares

to be held upon the

trusts of the trust

deed, they had acted strictly

accordance with their duties as trustees. There is no

suggestion that, at

any time, the trustees themselves

ever paid or distributed any money

or other property which

came to their hands as trustees otherwise than in accord-

ance with the provisions

of the trust

deed. Even if

be assumed that the trustees accepted the gift of shares

on the understanding that the appellant alone of their

number would concern himself with the internal management

of M.B.J.

Constructions Pty. Limited, it has never been

10.

. .

suggested by the Commlssloner

o put in cross eXaminatlOn,

on his behalf, that there was any arrangement

or understand-

lng between the trustees

or any of them that the appellant

would act or would be permltted to act wlth the slightest impropriety in the administration of the company in whlch the

shares were given

or that he would conduct himself In relatlon

to the affairs of that company otherwise than In strict con-

formity with his fiduciary duty as a director of it. Even If

it be assumed that the trustees were guilty of breach of

trust in falling, after the cash funds of M.B.J. Constructions ,

I .

Pty. Limited had been invested in

the manner in which the

appellant procured their lnvestment, to take steps

to have

the appellant and Trumper Finance Pty. Limited removed as

dlrectors and the investment

set aside, that investment did

not even occur until after the time of gift and, indeed,

until after the end of the tax year.

In my view, the fund was,

at the time of the gift

of shares, a fund maintalned under the trust deed. What

then were the purposes for which,	at that time, the fund
was so maintalned?

When a fund is established and maintained under

instrument of trust, the purposes for which the fund is

maintained

under

tha t

i n s t rumen t

of t r u s t will, at least

where no breach of trust or fiduciary duty has occurred in

the administration of the fund, be the direct and immediate

purposes for whlch the fund is held and

mamtained under

the provlslons of that Instrument. The subjective motives

of founder or trustee are

not purposes for which the

fund is maintained under

t he in s t rumen t

t r u s t unless

and to the extent to which such motives find expression in the lnstrument of trust as purposes of the trust. The

fact that the fund

is established and

mamtained under an

instrument of trust as part

of a wider plan

or scheme of

the founder

or a trustee does not, at least

in the absence

of breach of trust or fiduciary duty, mean that the purposes

of the wider plan

or scheme become purposes for which the

fund is established and maintained under the instrument

trust which governs its application

and administration

(note, in this regard, the comments

of Gibbs J. in Xco Pty.

Limited v. Federal Commissioner

of Taxation (1971) 124

C.L.R.

343 at pp. 350-51).

As has been said, it was not suggested, on behalf

of the respondent Commissioner, that, at the time

o f

the

gift of shares, there had been any breach

of trust or of

fiduciary duty in the administration of the trusts under

the trust deed.

It is common ground that the

de d of trust

was not a sham and that property constituting the fund

established under it was impressed with the trusts of the

trust deed which required that such property

b held upon

trust exclusively for the requisite purposes. It is not

suggested that, either at the time

of the gift

or at any

time thereafter, one

cent of such money

or any part of

such property was paid or distributed by the trustees other than exclusively for the requisite purposes.

The submission made on behalf

of the respondent

Commissioner was, in

effect, that, at the time

of the gift,

the fund could

not be said to be established and maintained

exclusively for the requisite purposes for the reason that

it was established

and maintained, in accordance with the

overall designs of the appellant, for the purpose of

enabling the appellant o make gifts to it of shares in

private companies with cash assets in

a co text where the

12.

appellant would obtain

a deduction for income tax purposes

, 1

of the value of the shares at the time of gift and would,

subsequent to the gift,

be permitted by the trustees

t o

remain in effective control

of the management of the

com-

panies and, by use

or abuse of such powers of management,

cause the cash assets

of the companies to be made available

to other companies controlled by him by way

of subscription

for non-voting non-cumulative preference shares in such

companies. Even if it were permissible

to construct a

purpose for which the fund was maintained under the instru-

ment of trust by reference

to the overall plans and object-

ives of the appellant, it would, in my view,

be artiflclal

in the extreme

to attribute as

a purpose for which the fund

was maintained under the instrument of trust

a p rpose

derived from overall objectives

of the appellant of which,

at the time of the relevant gift, the other trustees as the learned trial Judge found, unaware

were,

and to ignore

the one essential ingredient of those objectives of which

the other trustees were aware.

It was an essential element

of the appellant's overall plans and objectives that the

fund be, at the time of the gift,

a fund established and

maintained under an instrument of trust exclusively for

the requisite purposes if the appellant were

to obtain the

benefit of the deductions which, as the other trustees

must have &own,

constituted a vital element of the

appellant's expectations in the establishment of, and the

appellant's gifts to, the fund. In so far as the overall

plans and objectives

of the appellant

were known to the

other three trustees, they constituted

a collateral reason

for the proper performance

of their duty, as trustees,

ensure that the fund

be and remain

a fund established

and

maintained under the trust

deed exclusively for the purposes

13.

for which they held

it.

More important, however, the submission made behalf of the respondent Commissioner confuses the motivat-

ion of the appellant

in establishing and procuring the

maintenance of the fund

and the purposes for which the fund

was established and maintained under the instrument of trust which established it. Even if one were to reach

the conclusion that, at the time

of the gift, the appellant

had, in selecting the trustees

and procuring the passage

of the resolution that the trustees should

act unanimously,

already taken the first steps

on the path of a planned

course of subverting the administration

of the trust, the

plain fact remains that,

at the time of the gift, the

trustees had done nothing at all in the administration of

the trust which was inconsistent with the provisions of

the trust deed that the fund must

be held and administered,

under the deed, for the purposes set out therein. The

, -

only effect of the appellantts plans was that they perhaps

raised a doubt as to whether the fund would,

in the future,

continue to

be maintained under the trust

deed for the

purposes therein specified. In my view, at the time of the

gift of the shares, the fund was established

and maintained

under the trust

deed for the purposes specified

in the

trust deed. It was, at that time,

maintained under an instrument of trust for the requisite

purposes. It remains to consider rvhether the fund was

a fund established and

a tlpublic

fund1' for the purposes

of s.78(l)(a).

The adjective lrpubliclt is

one which is used in

m a n y collocations with

a meaning which varies according

to the noun with which

and the context within which it

140

used (The Little

Company of Mary (S.A.) Incorporated v.

The Commonwealth (1942) 66 C.L.R. 368 at p.378; In re

Income Tax

Acts (No. 1) (1930) V.L.R.

211 at p. 221). In

some phrases, such as 18public charity", used in

a context

similar to the provisions of s.78(1) (a), the word will

little to qualify the meaning of the noun with which it

appears (Joyce

v. Ashfield Municipal Council

(1959) 4

L.G.R.A.

195 at pp. 212-3 and, on appeal, (1976) 3 ?T.L.R.

617 at p.

629). In other phrases, such as llpublic

institutiont1, used

in a similar context, the

rrord will

direct attention primarily

to the purpose

for which the

institution is established and maintained rather than the

source of the funds

to sustain it

or the manner in which

it is controlled (see Dilworth

v. Commissioner of Stamps

(1899) A.C.

99 at pp. 108-9; Lemm v. Federal Commissioner

of Taxation (1942) 66 C.L.R. 399 at

p. 410).

There is much

to be said for the view that any

fund which is charitable in the legal sense and, therefore,

inalienably dedicated

to purposes which the law regards

as public

and subject to the supervision of the Attorney-

General must

be a public fund for the purposes

of s.78(l)(a).

On balance however,

I have come to the conclusion that,

in determining whether

a fund is

a public fund for the

purposes of s.78(l)(a)

in the context where permissible

purposes are specifically designated, it is necessary

pay regard

to a number of factors none

of which will, in

the ordinary case,

be decisive. These factors include the

source, management and control, the duration, and the

purposes, objects or beneficiaries of the fund. When the

fund is established under

an instrument of trust, the

relevant factors will

be determined both by reference

the terms

of the instrument

and surrounding facts

and

circumstances.

In the present case the appellant was the source of the only assets constituting the fund

and the overall

evidence indicates that there never was any real intention,

among the trustees who

ere actually appointed,

t o solicit

funds from the public

even though the Recitals

of the deed

establishing the fund expressly contemplated such solicit-

ation. IJIore important, the primary responsibility

for the

management and control of the

fund was vested in

four

trustees, of ?-!horn one was the private founder (the appellant)

and the other three, whatever their public standing might be, were appointed as trustees primarily because of	then
personal friendship with the appellant.

On the other hand, the fund was expressly stated,

by the deed which established it,

to be a public fund. It

was established and inalienably dedicated

for purposes

which, when modified in pursuance

of the provisions

of s.104

o f the Trustee

Act (Qld.) 1973, were charitable in the

legal sense. The fund was subject

to the special super-

visory control of the Queensland AttorneyGGeneral who,

as representative of the Grovm vhich is the protector of

all property subject

t o charitable trusts, might at

any

time approach the Supreme Court#>for injunctive relief

restrain a threatened breach of trust,

for remedial orders

in respect

of a breach vfhich had occurred

or for general

orders for the enforcement of the trusts subject to which

it was held. It was of unlimited duration. By its terms,

it was a fund to which any member of the public was entitled

to contribute. Even accepting to the full the learned

trial Judge’s findings as to the motivation underlying the

insertion of the advertisements in four Queensland news-

papers, the advertisements unquestionably constituted

public notification

of the fact that donations

to the fund

would be accepted from the public in the event that they

were forthcoming. The terms

of the trust deed had been

finally settled in consultation with officers

of the

Australian Taxation Department to ensure that the fund was

a public fund

for the purposes of s.78(l)(a) and its

contents had been approved by that Department as approp-

riate to a deed providing for the establishment

a d main-

tenance of such

a public fund.

AS a result 0.t such con-

sultation, the terms

of the trust

deed had been

altered to

provide that the appointment

of any new trustees should

conditional upon the consent thereto

of a Justice of the

Queensland Supreme Court. At the time of the gift of

shares, the trustees had resolved

to seek sanction under

the provisions

of the Collections

Act 1966-1973 (Qld.)

which subjected the fund

to a degree of public supervision

and control over and above that applicable	to charitable
trusts generally.

In all the circumstances,

I have reached the

con-

clusion that the fund was, at the time of the gift,

a llpublic

fund”. It follows that the fund was at the

tim of the

gift a public fund established and maintained under

instrument of trust exclusively for the requisite purposes

and that the appellant was entitled

to a deduction pursuant

to s.78(l)(a)

of the Act in respect of the gift

of the

shares. There remains for consideration the amount of the

deduction to which the appellant was

so entitled.

Section 78(2) of the Act provides that, for the

purposes of s.78(1),

the value of a gift of property other

than money shall

be deemed to be the value of the property

at the time

of the making of the gift

o r the amount paid

by the taxpayer

f o r the property whichever is the less.

At the time of gift of the shares, the shares represented

22,619 shares of a total of 22,620 ordinary issued shares

in the capital of M.B.J. Constructions Pty. Limited. There

were no other shares issued

in the capital

of that company

and all of the issued shares, at the time

of the gift,

carried identical rights. At the time o f the transfer of

the shares the assets

of M.B.J.

Constructions Pty. Limited

consisted of a bank credit of $45,240.00

and it had

liabilities. This represented a cash asset backing of

$2.00

per share. The total purchase price paid

by the taxpayer

in respect of the 22,620 issued shares was

$45,466.20. This

represented a purchase price of $2.01 per share. The

premium of one cent is explained by the fact that the

purchaser of the shares acquired the benefit	of the moneys
expended in the establishment of the company.

It seems to me that,

in these circumstances, the

best guide to the value of the shares

at the time of the

gift is to be found either in the purchase price which the

appellant paid for them

o r , since the shares were shares

in the capital of a "clean companyt1 whose only asset was

cash, the net cash asset backing per share. Neither approach

was, however, adopted

on behalf of the appellant. The

appellant limited his claim

to a deduction to an amount o f

$1.95 per share being the value attributed to each share

by an experienced valuer who was called to give

evidence

on his behalf. This value, which represents the value

18.

the shares to someone who regarded the corporate structure as a disadvantage and is, therefore,

a minimum value, was

not really disputed by Senior Counsel who appeared for

the respondent Commissioner. In

all the circumstances it

should be accepted as the appropriate value

of the shares

at the time of the gift.

I therefore conclude that the

appellant was entitled to	a deduction in the amount	of
$44,107.00.

My conclusion that the appellant is entitled

to a

deduction in respect

of the relevant gift

o f shares does

not necessarily mean that the appellant

is entitled to a

deduction in relation

to any subsequent transfers

of shares

to which reference was made in the evidence

or that the

value to be attributed to any subsequent gift is the full

value of the shares transferred. Any entitlement

of the

appellant to a deduction in respect

of any such subsequent

transfer will fall

to be determined by reference to the

circumstances existing at the time of such transfer.

The appeal should

be upheld. The assessment should

be remitted to the respondent Commissioner

to be amended

by allaxing

a deduction in the amount of

$44,107.00. The

respondent Commissioner should

be ordered to pay the

appellantfs costs both	of this appeal	and in the Supreme
Court of Victoria.

19 D

[1977] FCA 61

14 Sep 1977