Home Health Pty Ltd and Commissioner of Taxation
[2013] AATA 458
[2013] AATA 458
Division TAXATION APPEALS DIVISION File Number(s)
2012/4823
Re
Home Health Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member C R Walsh
Date 1 July 2013 Place Perth Decision Summary
The Tribunal affirms the Commissioner’s objection decision dated 28 August 2012.
...(Sgd) C R Walsh.........................
Senior Member C R Walsh
Catchwords
INCOME TAX - Public benevolent institution – charitable institution – whether applicant “entitled to be endorsed” as a “public benevolent institution” before and after modification of its Constitution (Articles of Association) - income tax exempt entity – meaning of “public benevolent institution” – the “non-profit” requirement – benevolence – meaning of “public” – meaning of “institution” – applicant not an “institution” – Commissioner’s objection decision affirmed
Legislation
Income Tax Assessment Act 1997 (Cth) – s 6-20 - Division 50 - Subdivision 50-A – Subdivision 50-B – s 50-5, item 1.1 – s 50-5 to 50-45 – s 50-50 – s 50-52 - s 50-105 – s 50-110
Taxation Administration Act 1953 (Cth) – s 14ZZK(b)(iii) - Schedule 1, Division 426
Fringe Benefits Tax Assessment Act 1986 (Cth) – s 5B(1E) - s 57A(1) – s 57A(5) – s 65J(1)(b) - s 65J(1)(baa) - s 123C(1) and (2) – s123E(1)
A New Tax System (Goods and Services Tax) Act 1999 (Cth) – s 38-250 - s 176-1(1) and (2)
Australian Charities and Not-for-Profit Commission Act 2012 (Cth)
Australian Charities and Non-for-Profit Commission (Consequential and Transitional) Act 2012 (Cth)
Statute of Charitable Uses 1601 43 Elizabeth Ch 4 – PreambleTax Laws Amendment (2004 Measures No 1) Act 2004 (Cth)
Cases
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139
Re Kirby and Collector of Customs (1989) 20 ALD 369
Re Costello and Secretary, Department of Transport (1979) 2 ALD 934
Commonwealth v Esber (1991) 101 ALR 35
Esber v Commonwealth (1992) 106 ALR 577
Commrs for Special Purposes of Income Tax v Pemsel (1891) 3 TC 53
Bowman v Secular Society (1917) AC 406
Maughan v Federal Commissioner of Taxation [1942] HCA 32; (1942) 66 CLR 388
Union Trustee Co of Australia v Federal Commissioner of Taxation [1962] HCA 52; (1962) 108 CLR 451
Perpetual Trustee Co Ltd v Federal Commissioner of Taxation [1934] HCA 10; (1934) 51 CLR 75
Commissioner of Payroll Tax v Cairmillar Institute [1992] 2 VR 706
Public Trustee (NSW) v Federal Commissioner of Taxation [1934] HCA 10; (1934) 51 CLR 75
Metropolitan Fire Brigades Board v Federal Commissioner of Taxation (1990) 27 FCR 279
Trustees of the Allport Bequest v Federal Commissioner of Taxation (1988) 19 ATR 1335
Repomed Pty Ltd v Lucas [2000] SASR 203; (2000) 76 SASR 575
Illawarra Suburbs Lawn Tennis Association Ltd v Commissioner of Land Tax (NSW) (1985) 16 ATR 664
Crows Nest Club Ltd v Commissioner of Land Tax (NSW) [1978] 1 NSWLR 523
Australian Council of Social Service Inc v Commissioner of Payroll Tax (1985) 1 NSWLR 567
Re Royal Society for the Prevention of Cruelty to Animals Queensland Inc [1993] 1 QD R 571
Mayor of Manchester v McAdam [1896] AC 500
Christian Enterprises Ltd v Commissioner of Land Tax (1968) 72 SR (NSW) 72
Pamas Foundation Inc v Commissioner of Taxation (1992) 35 FCR 117
Sargents Charitable Foundation v Chief Commissioner of State Revenue [2005] NSWSC 659; (2005) 60 ATR 129
Federal Commissioner of Taxation v Word Investments Ltd [2008] HCA 55; (2008) 236 CLR 204
Stratton v Simpson [1970] HCA 45; (1970) 125 CLR 138Minister of National Revenue v Trusts and Guarantee Co [1940] AC 138
Secondary Materials
Taxation Ruling TR 2003/5, titled “Income Tax and fringe benefits tax: public benevolent institutions”
REASONS FOR DECISION
Senior Member C R Walsh
1 July 2013
INTRODUCTION
Central to this application is whether Home Health Pty Ltd (Home Health), a mental health services provider, is an “institution” and, therefore, a “public benevolent institution” (and “charitable institution”) for the purposes of Division 50 (Exempt entities) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
More particularly, Home Health seeks a review of the Commissioner’s objection decision (dated 28 August 2012) which disallowed in full Home Health’s objection (dated 18 July 2012) against the Commissioner’s decision (dated 2 July 2012) to refuse to endorse Home Health as a “public benevolent institution” (and, therefore, a “charitable institution”) under item 1.1 of the table in s 50-5 of the ITAA 1997, on the basis that Home Health is not an “institution”, with the consequence that it is not “entitled to be endorsed” (pursuant to s 50-110 of the ITAA 1997) by the Commissioner (under s 50-105 of the ITAA 1997) as an income tax exempt entity.
For clarity, item 1.1 on the table in s 50-5 of the ITAA 1997 exempts “charitable institutions” from income tax but not “public benevolent institutions”. However, in Taxation Ruling TR 2003/5, titled “Income Tax and fringe benefits tax: public benevolent institutions” (TR 2003/5), the Commissioner accepts (at [2] and [24]) that entities which are “public benevolent institutions” are also “charitable institutions” for the purposes of s 50-5 of the ITAA 1997. Thus, if Home Health is a “public benevolent institution” it will be treated as a “charitable institution” under item 1.1 of the table in s 50-5 of the ITAA 1997.
EVIDENCE
The documentary evidence before the Tribunal in this application comprised:
· Sub-Section 37 (1AB) Statement in Lieu “Statement of Findings on Material Questions of Fact, Evidence, Reasons for Decision and Relevant Documents” (commonly referred to as the “T Documents”), which was received by the Tribunal on 22 February 2013 and tendered at the hearing as “Exhibit R1” (Exhibit R1); and
· Sub-Section 37 (1AB) Statement in Lieu “Supplementary T Documents”, which was received by the Tribunal on 22 February 2013 and tendered at the hearing as “Exhibit R2” (Exhibit R2).
Mr Lloyd Achard, the sole director, company secretary and a shareholder of Home Health, did not provide a witness statement in support of Home Health’s application, but did attend the hearing and give verbal evidence before the Tribunal.
Also before the Tribunal were the following documents:
· the “Applicant’s Statement of Facts, Issues and Contentions” (dated 15 March 2013), which was received by the Tribunal on 15 March 2013 (Home Health’s SOFIC);
· the “Respondent’s Amended Statement of Facts, Issues and Contentions” (dated 15 April 2013), which was received by the Tribunal on 15 April 2013 (Commissioner’s SOFIC); and
· the “Respondent’s Submissions on Review Hearing” (dated 15 April 2013) , which was received by the Tribunal on 15 April 2013 (Commissioner’s Submissions).
BACKGROUND
Procedural Background
On 5 June 2012 Home Health applied for endorsement as a “public benevolent institution” seeking “all available tax concessions” from 1 July 2004: Exhibit R1 at pp 114, 115 and 117 (Endorsement Application). The Endorsement Application replaced Home Health’s earlier application for endorsement of Home Health as a “charitable institution” from 1 July 2005: Exhibit R1 at pp 16 and 18.
On 2 July 2012 the Commissioner refused the Endorsement Application: Exhibit R1 at p 120. In summary, the Commissioner refused the Endorsement Application for the reason that Home Health did not meet the requirement of being an “institution” as it “appears to be controlled by one director, Lloyd Achard”: Exhibit R1 at p 122.
On 13 July 2012 Home Health objected to the Commissioner’s decision to refuse the Endorsement Application (Objection): Exhibit R1 at pp 123 to127. In conclusion, the Objection states, in part:
Te refuse endorsement based solely on the reason that it is controlled by one director, is unfair, arbitrary and discriminatory. The decision and its reasons are completely unsupported by tax rulings, tax law and case law.
………
To summarise, the decision is wrong because:
1.TR 2003/5 stipulates that no structure is prescribed for PBIs [public benevolent institutions] and it follows that a proprietary-limited company may be eligible to be a PBI [public benevolent institution] and such entities can have one director;
2.[Home Health] is not controlled and operated by family members and friends and does not have limited members and undertake limited activities;
3.The decision and its reason[s] are completely unsupported by tax ruling[s], tax law and case law.
[Home Health] meets the requirements of endorsement as a tax concession charity because:
1.There is no dispute that it demonstrates charitable and public-benevolent purposes and activities;
2.It evinces all the relevant factors to indicate a public benevolent institution such as purpose, separate identity, activities, size, permanence and recognition.
The Commissioner disallowed the Objection on 28 August 2012 (Objection Decision): Exhibit R1 at p 135. The main reason given by the Commissioner for his refusal to endorse Home Health as a “public benevolent institution” under item 1.1 of the table in s 50-5 of the ITAA 1997 was that Home Health is not an “institution” and “therefore does not qualify as a public benevolent institution” such that the “ordinary and statutory income of [Home Health] is not exempt” under s 50-110 of the ITAA 1997: Exhibit R1 at 13. According to the Commissioner (at Exhibit R1 at 11):
…..the predominant factor preventing [Home Health] from satisfying the requirement of an ‘institution’ is that [Home Health] is not greater than a structure controlled and operated by family and friends and has a small and exclusive membership.
Further, in his “Reasons for decision”, in applying the Commissioner’s criteria for a “public benevolent institution” as set out in Taxation Ruling TR 2003/5, titled “Income tax and fringe benefits tax: public benevolent institutions”, to Home Health, the Commissioner found that Home Health:
(i)was established for needs that require benevolent relief: see Exhibit R1 at 7 where the Commissioner states: “It is considered that [Home Health] is established for people suffering from mental illnesses, and this is accepted as a need that would arouse pity and compassion in the community”;
(ii)relieves needs by directly providing services to people: see Exhibit R1 at 8 where the Commissioner states: “In this case, [Home Health] provides mental health services through its employees who provide direct support to sufferers of mental illnesses. It is considered that [Home Health] directly provides benevolent relief”;
(iii)has a dominant purpose of providing direct benevolent relief: see Exhibit R1 at 8 where the Commissioner states “ In consideration of the objects and activities undertaken by [Home Health], it is evident that [Home Health’s] predominant purpose is to provide direct benevolent relief to people with mental illness”;
(iv)is not an “institution”: see Exhibit R1 at 11 where the Commissioner states: “…it is accepted that [Home Health] undertakes relatively large scale activities and is a recognised mental health provider in Western Australia. However,….[Home Health] is considered to have a small and exclusive membership, as shareholders comprises of only family members and is not greater than a structure controlled and operated by family”;
(v)is carried on for the public benefit: see Exhibit R1 at 12 where the Commissioner states: “….[Home Health does not engage the public to participate in the company. In addition, the governing documents allow for a sole director to be the only member of the company and to make resolutions. If this was to occur, it would be quite apparent that [Home Health] was trying to limit public participation in [Home Health]. Despite [this] limiting factor, lack of public control will not exclude [Home Health] from satisfying the public benevolent requirement”; and
(vi)is not for profit from 6 January 2011: see Exhibit R1 at 13 where the Commissioner states: “[Home Health] has appropriate non-profit and dissolution clauses which prevent members from receiving benefits (clause 114 and 115). These clauses were included in the governing documents of [home Health] on 6 January 2011…….It is stated in the non-profit clauses added on 6 January 2011, that they are to take precedence over all clauses which may conflict with its non-profit operation. It is from this date that we consider [Home Health] to be non-profit”.
On 25 October 2012 Mr Lloyd Achard applied to the Tribunal, on Home Health’s behalf, for a review of the Objection Decision: Exhibit R1 at pp 1 to 2. Home Health’s stated “Reasons for Application” are as follows:
I strongly feel that the ATO’s reasons to refuse endorsement of Home Health Pty Ltd as a Public Benevolent Institution is wrong as it is fundamentally based on a premise that is essentially a flawed interpretation of the last sentence of paragraph 91 of TR 2003/5. I believe that my Non-Profit Company, of which I am a shareholder, company secretary and sole director, meets all of the major requirements of a PBI [public benevolent institution], as prescribed by the provisions of TR 2003/5 and supported by relevant case law and that these qualifying factors have not been given sufficient weight and precedence in the final decision.
It was revealed to me in a telephone discussion with the ATO officer initially responsible for assessing my application that it was standard operating procedure for the ATO to always refuse endorsement of small proprietary limited companies as tax-concession charities. It was “how things have always been done”, which I feel is a prejudicial or discriminatory was to assess my application.
I would like the AAT to review the ATO’s decision to refuse endorsement to Home Health Pty Ltd as a Public Benevolent Institution and to resolve this application in our favour, i.e. so that [Home Health] may be endorsed as a PBI.
Factual Background
Home Health is a proprietary limited company that was incorporated on 9 June 1997: Exhibit R2 at p 159 and Exhibit R1 at p 26. Home Health trades under the name “Tender Care”.
Mr Lloyd Achard is presently the sole director, and company secretary and a shareholder of Home Health: Exhibit R2 at pp 160 to 161 and Exhibit R1 at p 2.
In the period 1 July 2004 to 28 August 2012, Home Health had two members, being Mr Achard and his wife, Mrs Barbara Achard. In that period, Mr and Mrs Achard each held 100 ordinary shares in the issued capital of Home Health: Exhibit R2 at pp 160 to 161.
Mrs Achard was a co-director of Home Health with Mr Achard until 18 July 2007. However, Mr Achard has been the sole director of Home Health since 19 July 2007: Exhibit R2 at p 160.
Until 6 January 2011, Home Health had a relatively standard “Constitution” for a proprietary limited company: Exhibit R1 at pp 25 to 44. Among other things:
(i)its “Memorandum of Association” (dated 9 June 1997) did not limit the objects of the company: Exhibit R1 at p 27; and
(ii) its “Articles of Association” (dated 9 June 1997) provided for:
· The declaration of dividends (Articles 90 and 91): Exhibit R1 at p 39;
· Capitalisation of profits (Article 98): Exhibit R1 at p 40;
· Division of property on a winding up (Article 101): Exhibit R1 at p 41; and
· Certain rights of ordinary shareholders, including the right to receive dividends in common with other ordinary shareholders and the right to share pari passu in Home Health’s surplus assets (if any) on a winding up (Article 104): Exhibit R1 at p 41.
On 6 January 2011, Home Health’s “Constitution” was amended by “Special Resolution”: Exhibit R1 at 45. In short, Home Health’s “Articles of Association” were modified (effective 6 January 2011) by the insertion of the following three additional clauses:
114 Non-profit clause
(1)The assets and income of the organisation shall be applied solely for the furtherance of its objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.
(2)Should there be any conflict with other clauses, this clause will have precedence and be paramount.
115 Dissolution clause
(1)In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for profit or gain of its individual members.
(2)Should there be any conflict with other clauses, this clause will have precedence and be paramount.
116 Objects clause
The objects or purpose of this organisation is to alleviate the mental health problems of Australian citizens, particularly the vulnerable and disadvantaged members of our community. Our mission is to enhance the recovery journey to wellbeing and the quality-of-life of persons with mental health problems and to alleviate the burden of care for carers.
The Objection (at Exhibit R1 at pp 125 to 126), contains the following description of Home Health:
1.Activities
……….
The organisation is a service provider of a holistic range of non-clinical, community mental health services. These include psychosocial support, independent living skills support, recreational support and carer respite support. The service is intensely focused on recovery.
The services are provided to adult members of the Western Australian public who have been diagnosed with a serious and persistent mental illness such as schizophrenia, bipolar affective disorder and major depression.
The sole purpose behind the establishment of this organisation was to alleviate the difficulties and distress from mental illness experienced by members of the West Australian public.
2.Size
The organisation has a fulltime director, an administration assistant and 12 recovery assistants. All staff are permanent. The organisation’s service provides one-to-one support to over 160 persons per year. Over at least the last five years, the director has made a purposeful decision not to tender for additional, services on several occasions that may have resulted in the trebling of the organisation’s size. The current size is judged to be optimal for a sole director to manage this type of service.
The organisation provides service in several sectors of Perth metro and in two large regional areas (Wheatbelt and South-West of WA). The geographical size of the service in the Wheatbelt region, for example, has a span of 470km. The organisation has a fleet of 15 motor vehicles to deliver its services.
3. Permanence
Tender Care commenced 20 years ago under an unincorporated structure, initially providing home nursing services for a Hospital-in-the-Home type program that is designed, instituted in Perth’s largest private hospital (St John of God, Subiaco) and managed externally for 5 years.
Tender Care won its first tender in 1995 with the Department of Health for a mental health intensive case management service in Perth north metro.
Two years later, the Department of Health called for tenders again under a new and huge Community Mental Health Program. This time the tender required responses specifically from incorporated entities. Consequently, the organisation incorporated as Home Health Pty Ltd trading as Tender Care and won a major contract to provide another Department of Health contract under the same program for two large regional areas (Wheatbelt and South West of WA).
The organisation has now been providing mental health services in the WA community for 17 years and can therefore be safely considered permanent, in terms of an institution.
3.Recognition
The organisation has won three large tenders and maintained these contracts and funding with the WA state government through its two public agencies of the Department of Health WA and subsequently, the Mental Health Commission.
The recurrent funding for the now single, consolidated contract is currently $889,805 per annum. It requires a high level of accountability in 6 monthly service reports, 6 monthly financial reports, and annual audited financial reports.
Nine public community health clinics provide the bulk of the referrals to the service. Six public mental health hospitals/units also refer their patients to the service for community follow-up.
See also: Home Health’ SOFIC at [1] and the Commissioner’s SOFIC at [6] to [7].
On 11 May 2009, Home Health entered into the “2008 to 2011 Service Agreement (CO4856)” with the State of Western Australia to provide community health services for a 3 year period from 1 July 2008 (Service Agreement): Exhibit R1 at pp 46 to 98. The Service Agreement provided for an option to extend for 2 further periods of 12 months each: Exhibit R1 at p 54.
Schedule 2 to the Service Agreement (at Exhibit R1 at pp 55 to 60) provides that the “services” to be provided by Home Health in the North Metropolitan, Wheatbelt & South West regions of Western Australia for people with serious and persistent mental illnesses included:
·a community based “Independent Living Skills Support” service (item 1.1. Schedule 2 at Exhibit R1 at p 55);
·a community based “Psychological Support” service (item 4.1 Schedule 2 at Exhibit R1 at p 56);
·a community based “Recreation” service (item 7.1 Schedule 2 at Exhibit R1 at p 58); and
·a community based non-admitted “Respite” service (item 10.1 Schedule 2 at Exhibit R1 at p 59).
In the 2012 financial year:
· Home Health’s funding from the State Government under the Service Agreement was $889,805: Exhibit R2 at p 170;
· Home Health made a profit of $27,118 (representing a decrease from its profit in the 2011 year of $46,770): Exhibit R2 at p 171; and
· Home Health had total retained profits of $99,586: Exhibit R2 at p 172.
ISSUES
The relevant issues for consideration by the Tribunal in this application are whether:
(i)prior to 6 January 2011, Home Health satisfied the established “non-profit” criteria to be endorsed by the Commissioner as a “public benevolent institution” (an “charitable institution”) under Division 50 of the ITAA 1997; and
(ii)Home Health is an “institution” and, therefore, a “public benevolent institution” (and “charitable institution”) under item 1.1 of the table in s 50-5 of the ITAA 1997.
BURDEN OF PROOF
Pursuant to s 14ZZK(b)(iii) of the Taxation Administration Act 1953 (Cth), Home Health bears the burden of proving, on the balance of probabilities, that the Objection Decision should have been made differently: Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 and Re Kirby and Collector of Customs (1989) 20 ALD 369.
That is, Home Health must establish, on the balance of probabilities, that the Commissioner should have allowed the Objection and endorsed Home Health as a “public benevolent institution” (and “charitable institution”) under item 1.1 of the table in s 50-5 of the ITAA 1997 and for the purposes of s 50-110 of the ITAA 1997.
RELEVANT LAW
Legislative regime
The current regime for the registration and regulation of charities is governed by the Australian Charities and Not-for-Profit Commission Act 2012 (Cth) (ACNCA) and the Australian Charities and Not-for-Profit Commission (Consequential and Transitional) Act 2012 (Cth) (ACNCTA). Importantly, from 3 December 2012, the “Australian Charities and Not-for-profits Commission” is, in accordance with the relevant provisions of the ACNCA and the ACNCTA, responsible for determining whether a particular organisation is a “public benevolent institution”.
However, before 3 December 2012, it was the Commissioner who decided whether an organisation was a “public benevolent institution”.
From 1 July 2005, s 50-105 of the ITAA 1997 provides that the Commissioner must endorse certain entities as exempt from income tax if the entity is “entitled to be endorsed” (under s 50-110 of the ITAA 1997) and it has applied for endorsement under Division 426 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA): s 50-105 (a) and (b) of the ITAA 1997. In contrast, before 1 July 2005, Subdivision 50-B of the ITAA 1997 contained all of the administrative procedures for applications for endorsement as a charity exempt from income tax. However, those procedural provisions (comprising former ss 50-115 to 50-160) were repealed and replaced by Division 426 in Schedule 1 to the TAA. The endorsement procedures in Division 426 of Schedule 1 to the TAA are substantially similar to those which were previously contained in Subdivision 50-B of the ITAA 1997.
As stated above (in the “Relevant Background” at [10]), the Objection Decision was made on 28 August 2012, being before the commencement (on 3 December 2012) of the current regime for the registration and regulation of charities described above.
Since the Tribunal is concerned with the rights of Home Health as at the date of the Objection Decision it is the law in force at that date (i.e. 28 August 2012) that must be considered (the ACNCA and the ACNCTA not being retrospective in effect): see Re Costello and Secretary, Department of Transport (1979) 2 ALD 934 at 939 to 945 per the Tribunal; Commonwealth v Esber (1991) 101 ALR 35 (Full Federal Court) and Esber v Commonwealth (1992) 106 ALR 577 at 590 per Brennan J. Thus, the Tribunal is required to consider the relevant provisions in Division 50 of the ITAA 1997 and the endorsement procedures, so far as they are relevant, in Division 426 of Schedule 1 to the TAA.
Statutory provisions from 1 July 2005 to 3 December 2012
In applying for “all available tax concessions” in the Endorsement Application, the endorsements that Home Health was effectively seeking were:
·endorsement by the Commissioner (under s 50-105 of the ITAA 1997) as an entity which is exempt from ordinary and statutory income (as a “charitable institution”) under item 1.1 of the table in s 50-5 of the ITAA 1997 because the entity: (i) is an entity which is “entitled to be endorsed” as income tax exempt (under s 50‑110 of the ITAA 1997); and (ii) applied for that endorsement in accordance with Division 426 in Schedule 1 to the TAA;
·endorsement as a “public benevolent institution” under s 123C(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA) (or, alternatively, under s 123E(1) of the FBTAA, as a “charitable institution”, covered by s 65J(1)(baa) of the FBTAA); and
·endorsement as a “charitable institution” under s 176‑1(1) of the A New Tax System (Goods and Services Tax) Act1999 (Cth) (GST Act).
The relevant endorsement provisions in the ITAA 1997, the FBTAA and the GST Act use two key expressions - “public benevolent institution” and “charitable institution”. Both of those expressions self-evidently encompass the concept of an “institution”. It logically follows that an entity can be neither a “public benevolent institution” nor a “charitable institution” unless it is first an “institution”. The meaning of the term “institution” is considered later in these reasons.
Endorsement as an income tax exempt entity under Division 50 of the ITAA 1997
Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of certain entities is exempt from income. That is, such income constitutes “exempt income” under s 6-20 of the ITAA 1997. In some cases, the exemption is subject to special conditions.
The relevant entities are those listed in the tables contained in ss 50-5 to 50-45 of the ITAA 1997. Relevant for present purposes is s 50-5 of the ITAA 1997 which provides a tax exemption for the income of certain charitable, religious, scientific, an educational institutions and funds. Provisions containing special conditions for exemption apply for all “items” in the table in s 50-5 of the ITAA 1997.
Item 1 of the table in s 50-5 of the ITAA 1997 provides that a “charitable institution” is an exempt entity and that such entities are subject to the “Special conditions” in ss 50-50 and 50-52 of the ITAA 1997.
Section 50-105 of the ITAA 1997, titled “Endorsement by Commissioner” states:
50-105 The Commissioner must endorse an entity as exempt from income tax if the entity:
(a) is entitled to be endorsed from income tax; an
(b)has applied for that endorsement in accordance with Division 426 in Schedule 1 to the Taxation Administration Act 1953. [Emphasis added]
Section 50-110 of the ITAA 1997, titled “Entitlement to endorsement”, sets out the requirements an entity must satisfy before being entitled to be endorsed by the Commissioner as exempt from income tax under s 50-105 of the ITAA 1997. In summary, a entity is “entitled to be endorsed” under s 50-110 of the ITAA 1997, for the purposes of s 50-105(a) of the ITAA 1997, if it:
· is, among other things, a “charitable institution” for the purposes of item 1.1 of the table in s 50-5 of the ITAA 1997: s 50-110(2) of the ITAA 1997;
· has an Australian Business Number (ABN): s 50-110(3) of the ITAA 1997.
· satisfies any “special conditions” set out in the relevant table: s 50-110(5) and (6) of the ITAA 1997. The “special conditions” relevant to “charitable institutions” covered by item 1.1 of the table in s 50-5 of the ITAA 1997 are ss 50-50 and 50-52 of the ITAA 1997;
In the Objection Decision the Commissioner did not consider whether Home Health is a “charitable institution” for the purposes of item 1.1 of the table in s 50-5 of the ITAA 1997. Rather, in the Objection Decision, which affirmed the Commissioner’s refusal to endorse Home Health as a “public benevolent institution”, the Commissioner states (at Exhibit R1 at 6):
Question raised and our response:
We consider your objection raises the following question. The question and our answer are set out below:
Question:
Is Home Health Pty Ltd entitled to tax concession charity endorsement as a public benevolent institution under item 1.1 of the table in section 50-5 of the ITAA 1997?
Answer:
No
Further, (at Exhibit R1 at 6) the Commissioner states:
[Home Health] applied for endorsement as a charitable institution that also satisfies the further requirements of a ‘public benevolent institution’. Therefore, [Home Health] will be assessed on the requirements of a public benevolent institution.
As stated above (in the “Introduction”), the reason for this (although not expressly stated in the Objection Decision) is that in TR 2003/5 the Commissioner accepts that entities which are “public benevolent institutions” are also “charitable institutions” for the purposes of s 50-5 of the ITAA 1997. That is, at [2] of TR 2003/5 the Commissioner states that TR 2003/5 applies to “organisations seeking to be endorsed as income tax exempt charities under Subdivision 50-B of the ITAA 1997” and at [24] of TR 2003/5 the Commissioner states “For the purposes of Division 50 of the ITAA 1997, a public benevolent institution which is an entity is a charitable institution”.
Consequently, for the purposes of this application, the Tribunal need not consider whether Home Health is a “charitable institution”, as that expression is understood to mean: see Commrs for Special Purposes of Income Tax v Pemsel (1891) 3 TC 53, Bowman v Secular Society (1917) AC 406, and the Preamble to the Statute of Charitable Uses 1601 43 Elizabeth Ch 4 (which creates four “heads” of charity, comprising relief of poverty, advancement of education, advancement of religion and other purposes that are beneficial to community).
It is not in dispute that Home Health has an ABN for the purposes of s 50-110(3) of the ITAA 1997: see the Objection Decision at Exhibit R1 at p 6 and Exhibit R1 at p 115.
As stated above, being tax exempt as a “charitable institution” under item 1.1 of the table in s 50-5 of the ITAA 1997 is subject to the “special conditions” in ss 50-50 and 50-52 of the ITAA 1997.
An entity will satisfy the “special condition” in s 50-50 of the ITAA 1997 if, among other things, it “has a physical presence in Australia and, to the extent that it incurs its expenditure and pursues its objectives principally in Australia” s 50-50(a) of the ITAA 1997. As stated above, the Commissioner accepts that Home Health satisfies this special condition: see the Objection Decision at Exhibit R1 at p 13.
An entity will satisfy the “special condition” in s 50-52 of the ITAA 1997 provided it is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997 (i.e. the entity is endorsed by the Commissioner (under s 50-105 of the ITAA 1997) as income tax exempt because the entity is “entitled to be endorsed” (under s 50-110 of the ITAA) and it has applied for endorsement in accordance with Division 426 in Schedule 1 of the TAA.
Endorsement as a “public benevolent institution” under s 123C(1) of the FBTAA
Broadly, endorsement of an entity as a “public benevolent institution” under s 123C(1) of the FBTAA, requires that the entity concerned:
· has an ABN: s 123C(2)(b) FBT Act. As stated above, it is accepted that Home Health has an ABN: see the Objection Decision at Exhibit R1 at p 6 and Exhibit R1 at p 115; and
· must not be an employer in relation to which step 2 of the method statement in s 5B(1E) of the FBTAA applies: 123C(2)(c) FBT Act. That is not at issue here.
Endorsement as a “charitable institution” under s176-1(1) of the GST Act
Endorsement of an entity as a “charitable institution” under s 176‑1(1) of the GST Act if it is a “charitable institution” and it has an ABN: s 176-1(2) GST Act. As already stated, it is accepted that Home Health has an ABN: see the Objection Decision at Exhibit R1 at p 6 and Exhibit R1 at p 115; and
Statutory provisions from 1 July 2004 to 30 June 2005
As stated above, in the Endorsement Application Home Health sought endorsement as a “public benevolent institution” from 1 July 2004. In other words, it also sought endorsement for the period 1 July 2004 to 30 June 2005. The legislative provisions dealing with endorsement were in a different form in that period. Amendments were later effected by the Tax Laws Amendment (2004 Measures No 1) Act 2004 (Cth).
In that period, there was an endorsement requirement as to the relevant exemption from income tax under Division 50 of the ITAA97 as a “charitable institution”: Subdiv. 50-B ITAA97 (as then in force). However, there were no endorsement provisions in existence with respect to fringe benefits tax (FBT) and goods and services tax (GST).
Instead, as regards FBT, the legislation provided that where an employer was a “public benevolent institution”, a benefit provided in respect of the employment of an employee was an exempt benefit: s 57A(1) of the FBTAA (as then in force): see also ss 57A(5) and 65J(1)(b) of the FBTAA (as then in force). In relation to GST, the legislation provided that certain supplies were GST-free where the supplier was a “charitable institution”: see for example s 38-250 of the GST Act (as then in force). (There were other such provisions in the GST Act at that time.)
Accordingly, so far as Home Health seeks a review of the Commissioner’s refusal of the Endorsement Application, pre-1 July 2005 the only possible endorsement was as being exempt from income tax under s 50‑105 of the ITAA 1997. In any event, it is only that refusal to endorse that is before the Tribunal in this review application. Consequently, it is unnecessary for the specifics of the statutory provisions relevant to the period 1 July 2004 to 30 June 2005 to be further developed by the Tribunal in these reasons.
Meaning of “public benevolent institution”
According to the High Court of Australia, the term “public benevolent institution” is not a term of art. Its meaning is governed by the context in which it is found: Maughan v Federal Commissioner of Taxation [1942] HCA 32; (1942) 66 CLR 388 at 395 per McTiernan J. See also the decision of the High Court in Union Trustee Co of Australia Ltd v Federal Commissioner of Taxation [1962] HCA 52; (1962) 108 CLR 451 at 454 per Taylor J, and the cases cited therein.
In the context of taxation legislation, and taxation exemptions specifically, the term has been considered by the High Court of Australia in a number of cases: see, for example, Perpetual Trustee Co Ltd v Federal Commissioner of Taxation [1931] HCA 20; (1931) 45 CLR 224, Public Trustee (NSW) v Federal Commissioner of Taxation [1934] HCA 10; (1934) 51 CLR 75 and Maughan. Decisions of the High Court are binding on the Tribunal.
In Perpetual Trustee Co Ltd v Federal Commissioner of Taxation, the High Court describe “public benevolent institution” as follows:
· …..a ‘public benevolent institution’ means, in my opinion, an institution organized for the relief of poverty, sickness, destitution, or helplessness”: (1931) 45 CLR 224 at 232 per Starke J.
· I am unable to place upon the expression ‘public benevolent institution’ in the exemption a meaning wide enough to include organizations which do not promote the relief of poverty, suffering, distress or misfortune”: (1931) 45 CLR 224 at 233-234 per Dixon J.
· Such bodies vary greatly in scope and character. But they have one thing in common: they give relief freely to those who are in need of it and who are unable to care for themselves.
Those who receive aid or comfort in this way are the poor, the sick, the aged, and the young. Their disability or distress arouses pity, and the institutions are designed to give them protection.”: (1931) 45 CLR 224 at 235-236 per Evatt J.
According to the High Court in Union Trustee Co of Australia Ltd v Federal Commissioner of Taxation (1962) 108 CLR 451 at 454 per Taylor J, the above definitions (in Perpetual Trustee) are not rigid or inflexible but they do convey the general notion of what constitutes the essential attributes of a public benevolent institution.
A public institution whose services were predominantly the treatment of mental conditions or disability by psychotherapy has been held to be a “public benevolent institution”: Commissioner of Payroll Tax v Cairmillar Institute [1992] 2 VR 706. These “conditions were such as to arouse community compassion and so engender the provision of relief”: [1992] 2 VR 706 at 711 per Gobbo J.
It is important to note that the High Court has held that the term “public benevolent institution” is a composite or compound expression: Perpetual Trustee (1931) 45 CLR 224 at 232 and 240 per McTiernan J and Public Trustee (NSW) v Federal Commissioner of Taxation [1934] HCA 10; (1934) 51 CLR 75 at 103 per Dixon J. That is, it is not to be interpreted by fragmenting its component parts: Metropolitan Fire Brigades Board v Federal Commissioner of Taxation (1990) 27 FCR 279 at 281 per Wilcox, Spender and Pincus JJ. See also Trustees of the Allport Bequest v Federal Commissioner of Taxation (1988) 19 ATR 1335 at 1338 per Northrop J.
In other words, to constitute a “public benevolent institution” an organisation must be: (i) public; (ii) benevolent; and (iii) an “institution”. The meaning of each of these terms is considered further below.
Meaning of “public”
Whether an institution is “public” is concerned with the character and objects of its benevolence: Australian Council of Social Service Inc v Commissioner of Payroll Tax (1985) 1 NSWLR 567 at 568 per Street CJ. See also Re Royal Society for the Prevention of Cruelty to Animals Queensland Inc [1993] 1 QD R 571 at 578 per Fitzgerald P. According to Williams J in Maughan (1942) 66 CLR 388 at 397, “the main criterion is the extensiveness of the class it is the object of the organisation to benefit”. In other words, the relevant question for consideration is whether the benevolence is directed to the public at large or a substantial sector of it.
Further, it has been held that, in some circumstances, a connection of an organisation with government may assist towards a conclusion that it is a “public benevolent institution”: Metropolitan Fire Brigades Board (1990) 27 FCR 279 at 282 per Wilcox, Spender and Pincus JJ.
In Trustees of the Allport Bequest v Federal Commissioner of Taxation (1988) 19 ATR 1335, Northrop J held (at 1338 to 1339) where an organisation is subject to some form of “public” control (for example, through government funding) is a relevant factor to be taken into account in determining whether an institution is “public”. However, ultimately is not the ‘source’ of the funds, but the “use to which the funds are put” which is determinative of whether an institution is “public” in nature.
The “non-profit” requirement – meaning of “benevolent”
It has been held that for an organisation to be a “public benevolent institution” it is a fundamental requirement that the institution not be conducted for the individual profit or gain of its members: Repromed Pty Ltd v Lucas [2000] SASR 203; (2000) 76 SASR 575 at [42]. The term “benevolent” is defined in the Macquarie Dictionary Fifth Edition (2005) as: “”1. desiring to do good for others. 2. intended for benefits rather than profit: a benevolent institution”.
That is, to be a “public benevolent institution” an organisation must be “non-profit”. Its operations must be carried on for the community, or an appreciably important class of the community, and not for private gain but for the public good. Logically, if an organisation is carried on for the profit of its members, it is for the benefit of those members and not for the benefit of the public. This distinction is illustrated by the following example given by Gobbo J in Cairnmillar Institute [1992] 2 VR 706 at 711 to 712:
The hypothetical case was raised in argument of a medical clinic which charged fees for medical treatment which found their way to the doctors who owned the clinic, seeking to come within the exemption because they were relieving the suffering of their patients. Such a claimed exemption would, however, probably fail at the threshold because the clinic would have great difficulty in proving it was a public institution. Assuming however, that this could be overcome, it could not be said that such a service was a benevolent one for the predominant purpose of the institution was not to relieve distress but to make a profit for its owner. Moreover, the institution could not have the necessary character of benevolence because it was not ‘desiring to do good for others’. Rather, its predominant aim was to make a profit or enrich those who directly or indirectly controlled it.
In Repromed Pty Ltd v Lucas (2000) 76 SASR 575 at [42] to [43] and [35] to [36], Debelle J held that it is insufficient that in fact there has been no distribution of profits or assets among members. There must be a constraint on the distribution of profits and assets to members in the organisation’s constitution.
What is to be determined is whether the organisation has in law, and in fact, created the circumstance that its members cannot and do not receive any pecuniary benefit: Illawarra Suburbs Lawn Tennis Association Ltd v Commissioner of Land Tax (NSW) (1985) 16 ATR 664 at 670 per Lee J.
To ascertain whether an organisation is not carried on for profit it is necessary to consider the purposes for which it is carried on. This inevitably directs the inquiry to the “objects” of the organisation as disclosed by its constitution: Crows Nest Club Ltd v Commissioner of Land Tax (NSW) [1978] 1 NSWLR 523 at 526 and 527 per Hutley JA.
Meaning of “institution”
The term “institution” is not defined for the purposes of Division 50 of the ITAA 1997 (or for the purposes of the endorsement provisions in the FBTAA and the GST Act, as discussed earlier).
The meaning of the term “institution” has been the subject of substantial judicial comment. In considering the meaning of the term “institution”, the starting point in many cases is the following excerpt from the reasons for judgment of Lord Macnaghton in Mayor of Manchester v McAdam [1896] AC 500 at 511 to 512:
It is a little difficult to define the meaning of the term ‘institution’ in the modern acceptation of the word. It means, I suppose, an undertaking formed to promote some defined purpose … It is the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle. Sometimes the word is used to denote merely the local habitation or the headquarters of the institution. Sometimes it comprehends everything that goes to make up the institution – everything belonging to the undertaking in connection with the purpose which informs and animates the whole. A public library may, I think, be properly called an ‘institution’ in that sense.
The fact that an organisation is a body corporate by virtue of incorporation does not mean that as a corporation it is also an “institution”: Christian Enterprises Ltd v Commissioner of Land Tax (1968) 72 SR (NSW) 72 at 98 to 99; Pamas Foundation Inc v Commissioner of Taxation (1992) 35 FCR 117 at 125; Sargents Charitable Foundation v Chief Commissioner of State Revenue [2005] NSWSC 659; (2005) 60 ATR 129 at [23].
More recently, in Federal Commissioner of Taxation v Word Investments Ltd [2008] HCA 55; (2008) 236 CLR 204 at 223 [33], four members of the High Court (comprising Gummow, Hayne, Heydon and Crennan J) endorsed the definition of “institution” “in the senses” said to have been “approved” by Gibbs J in Stratton v Simpson [1970] HCA 45; (1970) 125 CLR 138 at 158, as follows:
….an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc’ ... ‘an undertaking formed to promote some defined purpose ...’ or ‘the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle’.
However, as stated by the Privy Council in Minister of National Revenue v Trusts and Guarantee Co [1940] AC 138 at 149 in the context of whether a charitable trust was a “chartable institution” under the legislation concerned:
It is by no means easy to give a definition of the word “institution” that will cover every use of it. Its meaning must always depend upon the context in which it is found.
In Christian Enterprises Ltd v Commissioner of Land Tax (1968) 72 SR (NSW) 72 a question arose whether land held by a company was exempt from land tax under the Land Tax Management Act 1956 (NSW) (LTMA). In short, in order to be exempt under the LTMA, the company had to be a “charitable institution”. Membership of the company was confined to natural persons who accepted certain articles of faith. There were seven members. The company's primary object was to raise funds to promote specified religious purposes. The income and property of the company were to be applied solely towards this object. It was held by majority of the New South Wales Court of Appeal that the company was not a “charitable institution” but was a “religious society” for the purposes of the LTMA. In reaching this conclusion, Walsh JA, with whom Asprey JA agreed, expressly rejected (at (1968) 72 SR (NSW) 72 at 99) a submission that every company with charitable objects is a “charitable institution”:
At the relevant time the appellant had only seven members. But I do not think that the question before the court [i.e. whether it was a ‘religious society’] turns in any way on that fact. One cannot say that if it had had a hundred members or some selected number of members it would be a religious society but that, with only seven members, it is not.
Importantly, Walsh JA explained (at 99 to 100) how as the membership of an organisation grew it may move from a “society” to an “institution”, membership numbers being unimportant to the existence of a “society” but relevant to the existence of an “institution”:
For example, I think that the Franciscan Order of Friars Minor, which has a large membership, would undoubtedly be properly described as a religious society: cf Perpetual Trustee Co (Ltd) v Wittscheibe (1940) 576 WN 166. But I think also that it was already a religious society at the time when St. Francis of Assisi and his then quite small group of followers had joined together in a community, with the common purpose of devoting themselves to preaching, as well as to poverty and prayer. It may well be that, in the ordinary use of the language, one would speak of the Franciscans as being now, but not being in those early days, an “institution”. But, in the term “religious society” I find no notion that size or numbers are of importance. [Emphasis added]
In summary, Walsh JA concluded in Christian Enterprises that in the circumstances of that case that the appellant company’s membership, of seven natural persons, was insufficient for it to be tax exempt as a “charitable institution” under the LTMA.
Although, in Christian Enterprises, Walsh JA discussed examples of what was and what was not an “institution”, as did the Privy Council in the main case relied on in Christian Enterprises (i.e. Minister of National Revenue v Trusts and Guarantee Co Ltd [1940] AC 138), neither Walsh JA nor the Privy Council explicitly offered any test for the meaning of “institution”: Federal Commissioner of Taxation v Word Investments Ltd [2008] HCA 55; (2008) 236 CLR 204 [28].
In Pamas Foundation Inc v Commissioner of Taxation (1992) 35 FCR 117, the Full Federal Court of Australia was required to consider whether the Pamas Foundation was a “religious institution” within the meaning of s 3 of the Debits Tax Administration Act 1982 (Cth) (DBTAA), in which case the foundation was entitled to an exemption certificate under the DBTAA.
In summary, the facts in Pamas Foundation were that a medical practitioner (Dr Staer) and his wife established a foundation which was incorporated under the provisions of the Associations Incorporation Act1895 (WA). The membership of the foundation consisted of the medical practitioner and his wife, their four adult children and two other people. Its objects were to use funds collected for trading purposes and to then distribute the profits for Christian and charitable works. The Full Federal Court held that the foundation was not a “religious institution” for the purposes of the DBTAA.
In reaching this conclusion, Beaumont and Lee JJ, having referred with approval to the reasons for judgment of Walsh JA in Christian Enterprises (at (1968) 88 WN (Pt2) 112 at 119 to 120; (1968) 72 SR (NSW) 90 at 99- to 100) and Gibbs J in Stratton v Simpson (at (1970) 125 CLR 138 at 158) with respect to the meaning of “institution”, stated (at (1992) 35 FCR 117 at 125 to 126):
……..The context in which the expression “religious institution” appears [i.e. in the DBTAA] includes the juxtaposed term “public benevolent institution” which tends to suggest that the term “institution” is to be given a meaning greater than a structure controlled and operated by family members and friends.
The fact that the Foundation is a body corporate by virtue of its incorporation under the provisions of the Associations Incorporation Act does not mean that as a corporation it is an institution. The Foundation has a small and exclusive membership which is limited to Dr Staer, his family and some close friends. The scale of its activities is relatively small. Looking at the whole of the circumstances, in our opinion, the Foundation is not a religious institution to which s 3 of the [DTAA] applies. [Emphasis added]
In Pamas Foundation, Davies J reached the same conclusion as Beaumont and Lee JJ, but for slightly narrower reasons. Davies J stated (at (1992) 35 FCR 117 at 118 to 119 and 120):
The [DTAA] uses the term “religious institution” in the sense in which, for a very long time, that term has been used in tax and rating statutes, that is, as referring to those significant religious institutions which are a recognised part of society, the establishment and maintenance of which is seen to provide a public benefit justifying exemption from fiscal charges and tax.
………
The word “institution” can be used in ordinary parlance in a much wider sense than it is used in the expression “religious institution” in tax and rating statues.
……….I agree with Beaumont and Lee JJ that the appellant has the potential to become a “religious institution”, for the value of the medical work done by Dr P A Staer, particularly in Africa, and Dr Staer’s commitment to the Christian ethic are well known and recognised and therefore the organisation may develop. Yet, for the moment, the appellant has a character analogous to that of the private charitable trust considered in the Allport Bequest case….rather than that of a “religious institution” as that term is used in the [DTAA].
The Tribunal notes that the Full Federal Court’s decision in Pamas Foundation was not referred to by the High Court in its more recent decision in Federal Commissioner of Taxation v Word Investments Ltd [2008] HCA 55; (2008) 236 CLR 204.
ANALYSIS
Home Health’s status before 6 January 2011
The Commissioner’s contention is that Home Health was not a “public benevolent institution” (and “charitable institution”) before 6 January 2011 for the purposes of Division 50 of the ITAA 1997.
The Tribunal agrees with the Commissioner’s contention. The primary reason for this is that, as asserted by the Commissioner, prior to 6 January 2011, when Home Health’s Constitution (Articles of Association) was amended by the insertion of Article 114 (“Non-profit clause”) and Article 115 (“Dissolution clause”) (see [18] above), Home Health’s Constitution permitted the declaration of dividends to members and the distribution of profits and assets to its members on a winding-up. That is, before 6 January 2011, Home Health was a proprietary limited company that could, even if it in fact did not, carry on its activities for the purpose of profit or gain. As such, it was not a “public benevolent institution” as that term has been consistently interpreted by the courts to mean: see the authorities referred to in [52] to [66] above.
In addition, and importantly, prior to 6 January 2011, Home Health’s Constitution (Articles of Association) contained no “benevolent” object. This was rectified when, on 6 January 2011, Home Health’s Constitution was being amended by the insertion of Article 116 (“Objects clause”): see [18] above and the authorities referred to in [52] to [58] and [62] to [66] above.
Further, based on the authorities discussed above (in [67] to [80]) and for the reasons set out in further below (in relation to the position “Home Health’s status from 6 January 2011”), the Tribunal considers that at no time prior to 6 January 2011 cannot be said that Health was an “institution” within the meaning of the composite expression “public benevolent institution” (and “charitable institution”) for the purposes of Division 50 of the ITAA 1997.
Consequently, the Tribunal considers that the Commissioner was correct to refuse to endorse Home Health as a “public benevolent institution”, for the purposes of Division 50 of the ITAA 199, in relation to the period prior to 6 January 2011.
Home Health’s status from 6 January 2011
Based on the “Reasons for decision” to the Objection Decision and the Commissioner’s Submissions, the Commissioner accepts that from 6 January 2011:
(i)Home Health satisfies the “non-profit” requirement of a “public benevolent institution” as a consequence of its Constitution (Articles of Association) being amended by “Special Resolution” on 6 January 2011 by the insertion of Articles 114 to 116 (being a “Non-profit clause”, “Dissolution clause” and “Objects clause”, respectively);
(ii)Home Health is “benevolent” within the meaning of the expression “public benevolent institution” (and for the purposes of Division 50 of the ITAA 1997), broadly because Home Health gives relief to persons in the community who suffer from serious and persistent mental illness; and
(iii)Home Health’s benevolence is “public” within the meaning of the expression “public benevolent institution” (and for the purposes of Division 50 of the ITAA 1997), as the relief provided by Home Health to those suffering mental illness is directed to a sufficiently large sector of the community: see the Objection Decision at Exhibit R1 at pp 7, 8, 12 and 13 and the Commissioner’s Submissions at p 13 at [73] to [75].
However, according to the Commissioner, in the period from 1 July 2004 (being the effective date from which Home Health sought endorsement as a “public benevolent institution”) until the Objection Decision (dated 28 August 2012), Home Health was not an “institution” within the meaning of the expression “public benevolent institution” (and, it follows, for the purposes Division 50 of the ITAA). That is, the Commissioner’s contention is that from 6 January 2011 Home Health is not a “public benevolent institution” because it is not an “institution”. This is the case, it is submitted, despite the fact that is both “benevolent” and “public” within the meaning of the expression “public benevolent institution”.
In this regard, the Commissioner’s Submissions state:
81.Critical to the question of whether the applicant ought to be characterised as an institution is its control and small & exclusive membership.
82.Mr Achard, as sole director of the applicant, has unilateral control over the activities of the applicant. He is the applicant’s directing mind and will.
83.The applicant has a small & exclusive membership – Mr Achard and his wife. It is a smaller and more exclusive membership than the 7 members in Christian Enterprises Ltd and the 8 members in Pamas Foundation Inc. The membership has no public character.
84.Accordingly, the applicant is not even an entity controlled and operated by family members and friends. It is something more removed from being an institution than the body corporate in Pamas Foundation Inc. The applicant is a structure controlled and operated by a single man, Mr Achard. It is no more than his alter ego. The applicant was only acquired to comply with the State of Western Australia’s tender requirement: [T-6] (page 126). Before then Mr Achard as sole proprietor operated the business of Tender Care.
85.It could not seriously be suggested that Mr Achard, as a natural person, was an “institution” within the phrase “public benevolent institution”. The incorporated status of the applicant ought not make any difference to whether the organisation is an institution.
86.Applying by analogy the authority of Pamas Foundation Inc v Commissioner of Taxation (1992) 35 FCR 117 – a unanimous decision of the Full Court of the Federal Court of Australia – the applicant is not an “institution” within the meaning of “public benevolent institution” (or charitable institution). The word bears a meaning greater than a structure controlled and operated by a single man.
In the Tribunal’s view, there can be no doubt on the facts and evidence before it (and as accepted by the Commissioner) that since 6 January 2011, following the amendment of Home Health’s Constitution by the insertion of an appropriate “Non-profit clause”, “Dissolution clause” and “Objects clause”, Home Health has been both a “public” and a “benevolent” organisation within the meaning of the expression “public benevolent institution”, as those terms have consistently been interpreted by the courts to mean: see the authorities referred to in [52] to [66] above.
However, based upon the court authorities which the Tribunal is bound to apply, Home Health is not, on the facts and evidence before the Tribunal, an “institution”. It was not an “institution” before 6 January 2011, nor did it become an “institution” following the amendment to its Constitution on 6 January 2011. One reason for this is that the only members of Home Health are Mr Achard and his wife. To adopt the parlance of Beaumont and Lee JJ in Pamas Foundation ((1992) 35 FCR 117 at 125), this cannot be described as anything other than a “small and exclusive membership”. Indeed, Home Health’s membership is even a smaller and more exclusive membership than that which existed in the Full Federal Court case of Pamas Foundation (where the membership comprised the founding Doctor, his wife and four children and two additional members – i.e. eight members in total) and the membership of the company in the earlier New South Wales Court of Appeals case of Christian Enterprises (where the membership comprised seven natural persons). In this case, there are only two members.
Another reason is that, again to use the language of Beaumont and Lee JJ in Pamas Foundation ((1992) 35 FCR 117 at 125), Home Health cannot be described as an organisation “greater than a structure controlled and operated by family members”. That is, despite the fact that, based on the facts and evidence, Mr Achard has approximately thirteen staff working for him (see [19] above) and the scale of Home Health’s activities cannot, based on the facts and evidence before the Tribunal (see [19] above), be described as “small” (i.e. in contrast to the activities of the foundation in Pamas Foundation), it remains that Mr Achard is nevertheless the sole director (and company secretary) of Home Health. As such, the Tribunal agrees with the Commissioner’s contention that Mr Achard is Home Health’s controlling mind and will and that Mr Achard has unilateral control over Home Health.
In other words, due to its “small and exclusive membership” and the fact that it is “controlled” by one man, Mr Achard, who is also one of only two members, Home Health cannot, in the Tribunal’s view, be described as an “institution” for the purposes of the expression “public benevolent institution”: Christian Enterprises and Pamas Foundation.
That is, whilst the Tribunal considers, based on the facts and evidence before it, that Home Health is both “public” and “benevolent”, it is not an “institution”. Consequently, Home Health fails to satisfy the meaning of all three terms within the composite phrase “public benevolent institution”. Accordingly, Home Health is not “entitled to endorsement” (under s 105-110 of the ITAA 1997) such that the Commissioner is not required to endorse it (under s 105-105 of the ITAA 1997) as an income tax exempt entity (and “charitable institution”) under item 1.1 of the table in s 50-5 of the ITAA 1997.
Further, although not at issue in this application, the Tribunal makes the observation that, since, for the reasons provided above, Home Health is not an “institution”, it follows that it would also not qualify for endorsement as a “public benevolent institution” or a “charitable institution” under the relevant provisions of the FBTAA or as a “charitable institution” under the relevant provisions of the GST Act: see [31], [32], [46], [47], [49] and [50] above.
DECISION
For the above reasons, the Tribunal considers that Home Health is not a “public benevolent institution” (and “charitable institution”) for the purposes of endorsement as an income tax exempt entity under Division 50 of the ITAA 1997.
Consequently, the Tribunal affirms the Objection Decision.
I certify that the preceding 96 (ninety six) paragraphs are a true copy of the reasons for the decision herein of Senior Member C R Walsh.
…(Sgd) T Freeman.…………
Associate
Dated 1 July 2013
Date of hearing 18 April 2013
Representative for the Applicant Mr L Achard
Counsel for the Respondent Mr J C Vaughan
Solicitor for the Respondent Mr M Vincent
ATO – Legal Services Branch
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