TACT and Commissioner of Taxation
[2008] AATA 275
•7 April 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 275
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NT 2005/0521
TAXATION APPEALS DIVISION ) Re TACT Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr P W Taylor SC, Senior Member Date7 April 2008
PlaceSydney
Decision 1. The decision under review is set aside.
2. In substitution the Tribunal determines that TACT was entitled to be endorsed as exempt from income tax as at 9 September 2005. TACT is to be endorsed as exempt with effect from 1 July 2000.
.....................[SGD]..........................
Mr P W Taylor SC
Senior Member
CATCHWORDS
INCOME TAX – exemptions – trust seeking endorsement as a charitable institution –whether trust satisfied sole purpose test – proof of application for purpose for which established – debit balances – use of fund in interest offset transaction – overpayment to trustees – uncommercial loans – distribution to individuals – jurisdictional issues – effective date of endorsement – decision under review is set aside.
LEGISLATION
Income Tax Assessment Act 1997 – ss 50-50(a), 50-60(a), 50-75(3), 50-105, 50-110(3), 50-110(5), Division 50-B,
Taxation Administration Act 1953 – 426-30(2), Division 4 – 14ZZK(b)
Income Tax Assessment Act 1936 – s 23(j)(iia)
Taxation Laws Amendment Act (No 3) (47 of 1998)
A New Tax System (Tax Administration) Act 1999 (179 of 1999)
Taxation Laws Amendment Act (No.4) 1997 (174 of 1997)
Income Tax Assessment Act 1915 – s 11(f)
CASE LAW
Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171
Commissioner of Taxation v Word Investments Ltd [2006] FCA 1414
Inland Revenue Commissioners v Helen Slater Charitable Trust Ltd [1982] Ch 49
Inland Revenue Commissioners v Helen Slater Charitable Trust Ltd [1981] Ch 79
CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 187 CLR 384
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Taxation Ruling TR 2000/11
The Trustees, Executors and Agency Company Limited v The Acting Federal Commissioner of Taxation (1917) 23 CLR 576
Driclad Pty Ltd v Federal Commissioner of Taxation (1968) 121 CLR 45
Compton v Federal Commissioner of Taxation (1966) 116 CLR 233
Davies v Perpetual Trustees Executors and Agency Company of Tasmania Ltd (1935) 52 CLR 604
Deputy Commissioner of Taxation v Taubmans (NSW) Pty Ltd (1966) 115 CLR 570
News Ltd v Australian Rugby Football League Ltd (1996) 58 FCR 447
Australian Postal Corporation v Johnston (2007) 239 ALR 788
The National Mutual Life Association of Australasia Limited v The Commissioner Of Taxation (1970) 122 CLR 13
Mikasa (NSW) Pty Limited v Festival Stores (1972) 127 CLR 617s
Secretary, Department of Treasury and Finance v Dalla-Riva [2007] VSCA 11
Hook v Rolfe (1986) 7 NSWLR 40
Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436
Bray v The Commissioner of Taxation (1977) 140 CLR 560
Ngurli Limited v McCann (1953) 90 CLR 425
Case X60 (1990) ATC 438
Keefe v Law Society or NSW (1998) 44 NSWLR 451
Sutherland re; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361
Re Hodgekiss (1962) 62 SR 340
Roman Catholic Archbishop of Melbourne v Lawlor The Pope v National Trustees, Executors and Agency Co. of Australasia Ltd (1934) 51 CLR 1
In Re Mylne: Potter v Dow [1941] Ch 204
Re Burton’s Charity [1938] 3 All ER 90
McCabe and Minister for Foreign Affairs and Trade (2007) 98 ALD 142I
Shi v Migration Agents Registration Authority (2007) 158 FCR 525
REASONS FOR DECISION
7 April 2008 Mr P W Taylor SC, Senior Member 1.The applicant, which I will refer to as TACT (“The Applicant Charitable Trust”) is a trust for public charitable purposes constituted by a trust deed dated 14 October 1997. On 22 November 2004 TACT applied for endorsement, under s 50-105 of the Income Tax Assessment Act 1997 (“ITAA97”), as an income tax exempt entity with effect from 1 July 2000. The Commissioner refused the application in January 2005. On 9 September 2005 the Commissioner disallowed TACT’s 16 May 2005 objection to the Commissioner’s refusal.
2.A fund that was established in Australia after 1 July 1997 for public charitable purposes, and has made the appropriate application, is entitled to be endorsed as exempt from income tax, and must be so endorsed by the Commissioner, if it satisfies the requirements of ITAA97 s 50-110(3) and (5). The relevant requirements are that the fund:
(a)has at all times incurred its expenditure, and pursued its charitable purposes solely in Australia (disregarding any distribution of money it received as a gift): ITAA97 s 50-60(a) and s 50-75(3);
(b)is applied for the purposes for which it was established: ITAA97 s 50-60.
3.In order to be eligible for exemption an applicant fund must also have an ABN. However, where an application for exemption is granted the Commissioner may determine the date from which the exemption endorsement takes effect. That date may predate the grant of the applicant’s ABN: s 426-30(2) Taxation Administration Act 1953. TACT obtained its ABN on 21 June 2003, with effect from 1 July 2002.
Background to TACT’S establishment and administration
4.TACT’s origin and circumstances provide necessary background to the exemption eligibility issues required to be determined. TACT’s trustees are husband and wife. The wife is the trust settlor. Her father, a partially retired chartered accountant, is sympathetic to the trustees’ religious and charitable motivations. He has administered TACT’s accounting affairs and provided advice to the trustees, since TACT’s establishment. In fact, the accountant has been, directly and indirectly, the principal contributor to TACT’s funds.
5.Until 7 January 2002 TACT’s only asset was a $10,150 contribution from the wife trustee. At that time the accountant provided $160,000 as a gift to TACT. In June 2002 TACT entered into an agreement to provide accounting, corporate and secretarial services to a small airline company. The accountant was a director of the airline and a company he controlled held 25% of the issued capital of the airline. The services required by this agreement are provided by the accountant, at no cost to TACT. The payments made by the airline company have been reported as income in TACT’s annual financial statements and represent the major source of the growth in TACT’s assets since 1 July 2002.
6.The trustees say they intended to allow TACT’s income to accumulate until its funds total about $1 million. In the meantime they contemplated distributing 10% of the fund’s annual income. Once the fund assets reach $1 million the trustees conceive the fund will be able to make significant worthwhile distributions from its annual income. The growth of the fund to date is almost exclusively attributable to the personal generosity of the accountant, particularly his involvement in providing the services required by the airline services agreement at no cost to TACT.
EXEMPTION ELIGIBILITY CRITERIA NOT IN ISSUE
7.Clause 2 of the 1997 Deed requires the trustees to hold TACT’s fund “for such public charitable purposes as the trustees shall from time to time determine”. Nevertheless, the operative reason for the Commissioner’s 9 September 2005 disallowance was that TACT was conducting its affairs as “a business concern in their own right” not solely for charitable purposes. The basis for this conclusion was that TACT derived substantial income from the June 2002 airline services agreement.
8.In opening submissions the Commissioner adhered to the contention that TACT was not a trust for public charitable purposes. This contention again relied on the airline services agreement, and on other arguments relating to the way in which TACT had been applied. However in final submissions the Commissioner indicated that the contention would not be pursued and that the point was not in issue. Having regard to the terms of the 1997 Deed, TACT satisfies the requirements of being a fund “for public charitable purposes” established in Australia by a trust instrument. In the light of the evidence about the origin and performance of the airline services agreement the foreshadowed argument would not have been supportable. The Commissioner was correct in not ultimately relying on it as a matter properly in issue.
Exemption eligibility criteria in issue
9.TACT bore the ultimate onus of satisfying the Tribunal that the objection decision “should not have been made or should have been made differently”: Taxation Administration Act 1953 s 14ZZK(b). But the fact that the Commissioner ultimately did not seek to support the actual basis for the disallowance decision resulted in attention being directed to the Commissioner’s other contentions as to why TACT had not made out its exemption entitlement.
10.A principal matter relied on by the Commissioner was a contention that TACT had not pursued its charitable purposes solely in Australia. It has made distributions to an Australian incorporated charitable organisation that pursues its activities in Bangladesh.
11.The Commissioner also contended that TACT was not applied for the purposes for which it was established. The Commissioner contends misapplication was evidenced by:
(a)an excessive accumulation of trust income;
(b)part of the trust funds being held in an accountant’s trust account where it does not accrue interest;
(c)part of the trust funds being used for the benefit of the accountant or his clients – as a result of “debit balances” within the accountant’s trust bank account ledger records;
(d)the deposit of part of the trust funds in a bank account where it “offset” the trustee’s interest obligations to their mortgagee;
(e)the investment of trust funds in allegedly uncommercial loans;
(f)distributions to individuals associated with the charitable organisation that operates in Bangladesh.
TACT’s distributions related to activities in Bangladesh
12.The incorporated Australian entity to which TACT has distributed funds conducts a program for orphaned and underprivileged children in Bangladesh. I will refer to it as AusEntB. Almost all of the funds AusEntB raises in Australia are used in Bangladesh. TACT has made various donations to, and provided gifts to people associated with, AusEntB. The accountant said that all of the payments were made either by a bank cheque that was handed over in Australia or by transfer to an Australian bank account. Most of the donations are recorded in its financial statements. In the 2004 financial statements they were reflected in a net reduction in TACT’s trust fund gift balance. In the later years they were recorded as distributions from TACT’s current income. The evidence revealed some errors in, and omissions from, the financial statements. Ultimately the actual donations TACT claimed to have made relating to AusEntB, and the financial years to which it attributed the payments, are summarised in the following table.
Y/E JUNE DONEE RECORDED ANNUAL DISTRIBUTION CUMULATIVE DISTRIBUTION 2004 claimed donee: AusEntB 12,800 12,800 2005 AusEntB - Australia 10,000 32,800 2005 (named individuals) - AusEntB 1,800 34,600 2006 AusEntB – Australia 20,000 54,600 2006 (named individuals) – AusEntB 2,886 57,486 2007 AusEntB – Australia 3,450 60,936 2007 (named individuals) - AusEntB 4,445 65,381 13.The Commissioner contends that these donations preclude TACT from satisfying the requirement of ITAA97 s50-60(a) that it “pursued its charitable purposes solely in Australia”. The Federal Court of Australia’s decisions in Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171 and [2006] FCA 1414 apparently contradict the contention, but they were concerned with the endorsement entitlement of a religious or charitable institution under ITAA97 s 50-50(a). The Commissioner says the decisions do not apply to the differently worded endorsement entitlement condition in ITAA97 s50-60(a).
14.ITAA97 s 50-50(a) imposes endorsement entitlement conditions on a religious or charitable institution. It requires such an institution to have a physical presence in Australia and, to the extent of its Australian presence, to incur its expenditure and pursue “its objectives principally in Australia”. ITAA97 s 50-60(a) imposes endorsement entitlement conditions on certain funds established in Australia for public charitable purposes. It requires that such a fund should, at all times since 1 July 1997, have incurred its expenditure “principally in Australia” and have pursued its charitable purposes “solely in Australia”.
15.The endorsement applicant in Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171 and [2006] FCA 1414 was a company incorporated by Wycliffe Bible Translators (International). Wycliffe was itself an endorsed income exempt entity under ITAA97 subdivision 50B. Word Investments Ltd distributed the majority of its income to Wycliffe. Wycliffe conducted its activities, almost exclusively, outside Australia. The Federal Court recognised that the question of whether Word’s payments were made pursuant to its charitable purposes did require some examination of the nature of Wycliffe’s activities outside Australia. But it was not necessary to determine the actual way in which Wycliffe used the money it received from Word. The payments to Wycliffe were made pursuant to Word’s charitable objectives if they were made in the belief that Wycliffe would use the money for relevant charitable purposes: [2006] FCA 1414 at [31]. The Federal Court applied similar reasoning to that which had been accepted by the English Court of Appeal in IRC v Helen Slater Charitable Trust Ltd [1981] Ch 79; [1982] Ch 49 - a case which also involved distributions made by one charitable organisation to another.
16.The Federal Court said the ITAA97 s 50-50(a) condition that required a charitable or religious institution to pursue “its objectives principally in Australia” was concerned with the nature of the institution's own actual conduct, The Court held that Word’s only relevant conduct was the payments it made to Wycliffe. Those payments were made in Australia, and were in pursuit of its objectives. They therefore satisfied the endorsement entitlement condition. This was so irrespective of the place where Wycliffe might itself spend the money Word paid: [2006] FCA 1414 at [31] and [52].
17.This conclusion was affirmed by the Full Federal Court in Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171. In the appeal judgment Allsop J (with whom Stone J agreed) said ITAA97 s 50-50(a) provided no warrant for combining the exemption applicant with the donee to which it provided funds. The section was concerned only with the conduct of the exemption applicant itself. Word satisfied the ITAA97 s 50-50(a) condition because its relevant conduct was merely the donation of funds to Wycliffe and that had occurred only in Australia. Jessup J made the same findings and came to the same conclusion: see [2007] FCAFC 171 at [56] and [99]-[100].
18.The Commissioner contends ITAA97 s 50-60(a) provides a context that distinguishes the Word decision and reasoning. There are differences between the two provisions, but comparison of their wording does not bear out the Commissioner’s contention. The relevant part of the ITAA97 s50-50(a) exemption condition is that the religious or charitable institution “pursues its objectives principally in Australia”. The relevant part of the ITAA97 s 50-60(a) exemption condition is that the fund “pursued its charitable purposes solely in Australia”. The differences in wording between the two provisions involve only the substitution of (i) “charitable purposes” for “objectives” and (ii) “solely” for “principally”. Despite the Commissioner’s contention, these are not significant differences. In relation to the first difference, the words “objectives” and “purposes” both refer to the operative reason for activity and are relevantly synonymous. The two provisions refer to entities with different legal status and form (institutions and funds). The different use of the words “objectives” and “purposes” is more likely to recognise that difference of form than it is to convey a substantive difference in the intended meaning of the two, otherwise similar, expressions. In relation to the second difference, the word “solely” provides no justification for treating a donee’s conduct as the conduct of an exemption applicant
19.The critical words in ITAA97 s50-50(a) and ITAA97 s50-60(a) are “pursues” and “pursued”. The verb “pursue” refers to conduct undertaken to give effect to a particular purpose or realise a particular objective. In its context in both provisions it refers to the place where the exemption applicant’s identified conduct occurs. It does not refer to the place where the ultimate purpose of that conduct is given effect, or its objective realised, by a donee’s actual use of the money it receives: see Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171 at [100] per Jessup J. The wording differences identified by the Commissioner do not justify the view that regard may be had to the place of a donee’s activities to determine whether an exemption applicant “pursued its charitable purposes solely in Australia”.
20.The Commissioner contends that the purposive background to ITAA97 s50-60(a) requires a different conclusion. The Commissioner points out that the provision derives from 1997 amendments to the Income Tax Assessment Act 1936 that inserted a new s 23(j)(iia). The substance of that provision was then taken into ITAA97, and is reflected in s 50-60(a) and (c)(i), by the combined effect of the Taxation Laws Amendment Act (No 3) (47 of 1998) and the A New Tax System (Tax Administration) Act 1999 (179 of 1999). The Commissioner relies on various parts of the Explanatory Memorandum to the Taxation Laws Amendment Act (No 4) 1997 (174 of 1997), particularly paragraphs 5.12 and 5.13. Paragraph 5.12 says the purpose of the legislation is to prohibit, as a condition of exemption entitlement, both distributions by charitable trusts to offshore organisations and also the offshore performance of direct charitable activities. Paragraph 5.13 contains a statement to the effect that a charitable trust, if it is to be entitled to exemption endorsement, must either “undertake any direct charitable activities in Australia or make any distributions to other charities … which undertake their activities in Australia” or are otherwise approved institutions.
21.The Commissioner says that this intention has been reflected in the context of both the former section ITAA36 s 23(j)(iia) and ITAA97 s50-60, and particularly by the contrast between ITAA97 s50-60(a) and (c)(i). Those paragraphs contain alternative criteria – as had the similarly worded provisions in ITAA36 s 23(j)(iia) (A) and (C). It Is useful to set out the wording of these parts of ITAA 50-60.
50‑60 Special conditions for items 1.5A and 1.5B
A fund covered by item 1.5A or 1.5B is not exempt from income tax unless the fund is applied for the purposes for which it was established and:
(a) incurs, and has at all times since 1 July 1997 incurred, its expenditure principally in Australia and pursues, and has at all times since 1 July 1997 pursued, its charitable purposes solely in Australia; or….
(c) distributes solely, and has at all times since 1 July 1997 distributed solely, to either or both of the following:
(i) a charitable fund, foundation or institution which, to the best of the trustee’s knowledge, is located in Australia and incurs its expenditure principally in Australia and pursues its charitable purposes solely in Australia;
(ii) a charitable fund, foundation or institution that, to the best of the trustee’s knowledge, meets the description and requirements in item 1 or 2 of the table in section 30‑15.
22.The Commissioner particularly highlights ITAA97s 50-60(c)(i) and its explicit concern with the place where the donee’s activities occur. The Commissioner says this is a significant contextual difference from ITAA97 s 50-50(a) that explicitly answers the reasoning of Allsop J in the Word case. The Commissioner contends that the purpose of the 1997 amendments is evidenced in the Explanatory Memorandum and should be given effect to in their interpretation: see CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 187 CLR 384 at 408. The Commissioner says that ITAA97 s 50-60(c)(i) would be readily circumvented, and it is evident purpose frustrated, if the Word reasoning was applied to ITAA97 s 50-60(a). The Commissioner says that such a potential result requires an interpretation that adjusts “the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of the those provisions whilst maintaining the unity of all the statutory provisions”: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 382 [70] and [71].
23.The Commissioner's contention (in so far as it relies on the language of paragraph 5.13 of the Explanatory Memorandum) posits a dichotomy between a fund’s “direct charitable activities” and any “conduit distributions” a fund may make to other charities. The language of paragraph 5.13 of the Explanatory Memorandum also tends to suggest that “direct charitable activities” are confined to the provision of goods or services, and necessarily exclude any money payments (because otherwise a fund that gave money to an eligible beneficiary would not “distribute solely” to another fund and would fall outside s 50-60(c)(i)). A difficulty with the Commissioner’s contention is that the posited dichotomy is false. A second difficulty is that, “direct charitable activities” may well include payment of money to a donee who is intended to have the personal benefit of the funds.
24.A third difficulty with the Commissioner’s contention is that neither ITAA97 s 50-60(a) nor s 50-60(c)(i) refers to “direct charitable activities”. Instead, and without appearing to adopt the dichotomy suggested in the Explanatory Memorandum, the two provisions are worded to encourage the view that ITAA s 50-60(a) governs the exemption entitlement of a fund whose activities involve direct payment of money to intended beneficiaries, even if they also partly involve “conduit” distributions to other charitable institutions. This encouragement is provided in two ways.
25.First of all there is the wording of ITAA97 s 50-60(a). It imposes dual requirements relating to incurring expenditure (principally) and the pursuit of purposes (solely) in Australia. Because these are cumulative requirements it might reasonably be assumed, in favour of the Commissioner’s contention, that the reference to “expenditure” in ITAA97 s 50-60(a) is to payments in the nature of “expenses” in the ordinary sense. In that ordinary sense, expenditure involves payments relating to the acquisition of property or services and includes payments made to discharge a liability. It does not include voluntary and discretionary payments, whether of property or money. These are more properly characterised as gifts or “distributions” of trust property.
26.But if the reference to “expenditure” in ITAA97 s 50-60(a) is interpreted in this way, as excluding gifts, it rather tends to highlight the amplitude of the conduct that could satisfy the second requirement - that the applicant fund must have “pursued its charitable purposes solely in Australia”. The pursuit of charitable purposes, other than by incurring expenditure, would include at least (i) receiving funds (ii) deriving income and (iii) administering the trust’s affairs. It is also apt to include the provision of goods or services, or payment of money, to individuals or other eligible entities. Indeed, if the word “expenditure” in ITAA97 s 50-60(a) is restricted to payment of “expenses” in the ordinary sense, then pursuit of “charitable purposes” really must include a fund’s discretionary and voluntary provision of services, transfer of property or payment of money. If this was not so, then an exemption applicant who carried out direct charitable activities of those kinds would either (a) face difficulty in identifying the conduct demonstrating that it “pursued its charitable purposes solely in Australia” for the purpose of ITAA97 s 50-60(a) or (b) be likely to satisfy ITAA97 s50-60(a) (for example, as a result of the place where it incurred its expenditure and administered its affairs) irrespective of where it made any money payments. Neither of these results is likely to reflect the proper interpretation of that provision. It follows that the expression “pursued its charitable purposes” in ITAA97 s50-60(a) is highly likely to include an exemption applicant’s donation of funds in Australia. Moreover, and unlike ITAA97 s 50-60(c)(i), the section does not impose any additional requirement involving either the nature of the donee or the location of the donee’s activities. In the absence of any such requirement, the proper interpretation of ITAA97 s 50-60(a) invites the application of the Federal Court’s reasoning in the Word Investments decision.
27.A second consideration leading to the same conclusion is provided by the wording of ITAA97 s50-60(c)(i) itself. The provision applies only where an exemption applicant has “solely” distributed to a relevant fund, foundation or institution. The provision is not expressed to apply to an exemption applicant whose “distributions” are made to individuals. Nor is it expressed to apply to an exemption applicant that has made payments both “direct” to eligible persons and also partly as “conduit” payments to donees that are a “charitable fund, foundation or institution” of the relevant kind. An exemption applicant of the latter kind could not, therefore, fall within ITAA97 s 50-60(c)(i) itself. But such an applicant would come within the ordinary meaning of ITAA97 s 50-60(a), without any need to enquire about the place of the donee institution’s activities – as the Full Federal Court’s interpretation of the very similar wording in ITAA97 s 50-50(a) suggests.
28.In Word Allsop J said ([2007] FCAFC 171 at 57):
If the Parliament desires the place of expenditure of funds by the donee to be analysed before the donor can fall within the section, it can say so. It has not done so in section 50-50(a).
29.The Parliament certainly has so stipulated in ITAA97 s50-60(c)(i). But it has done so only in relation to an exemption applicant who distributes “solely” to one of the specified kinds of fund or institution. Furthermore, it has done so by using the word “distributes” in a context where there is obvious potential for overlap with the width of the expression “pursued its charitable purposes” contained in ITAA s50-50(a). As Jessup J said in Word ([2007] FCAFC 171 at 100):
By expressing itself through the metaphor of pursuit, the legislature has not simplified our task of construction of the words in question in section 50-50(a) of the 1997 Act. I consider that the expression pursues its objectives” effectively means “does the things by which it attempts to realise its objectives”.
30.Given the terms of ITAA97 s50-60(a) and (c), and the preceding analysis, ITAA97 s 50-60(a) should not be interpreted in the way the Commissioner contends. The basic reasoning of the Full Federal Court in Word, in relation to ITAA97 s50-50(a), is directly applicable to the similarly worded ITAA97 s 50-60(a). There is nothing in the terms of ITAA97 s 50-60(c) that detracts from applying that reasoning. Indeed, ITAA97 s 50-60(c)(i) does not refer to the place of either the fund’s expenditure or the pursuit of its activities. It contemplates a disjunctive criterion that applies to an exemption applicant that distributes “solely” to a relevant fund or institution. Both the disjunctive and singular nature of the ITAA97 s50-60(c)(i) criterion suggest that ITAA97 s 50-60(a) is actually intended to apply to a donee applicant that principally incurs its expenditure, and makes all of its distributions, in Australia.
31.In the present case the evidence reveals a good deal of contention, to which I will later refer, about the actual extent, and timing of TACT’s distributions, including its payments to AusEntB. But there is no dispute that the evidence shows TACT made its first payment to AusEntB in May 2004. Nor is there any dispute that the evidence shows TACT paid some money, by way of distribution, to Australian entities other than AusEntB – both before and after May 2004. In these circumstances, I conclude that TACT’s provision of funds to AusEntB in Australia satisfied ITAA97 s50-60(a).
TACT’s income and distributions other than to AusEntB
32.The timing and extent of TACT’s actual distribution of any funds since 2001 is contested by the Commissioner. It is useful to summarise TACT’s overall financial position, as recorded in its financial statements, and to outline the competing contentions in relation to the amount and timing of its distributions. This is done in the Financial Statements Summary Table attached to these reasons.
33.The information summarised in the Table permits the following observations about TACT’s affairs:
(a)TACT’s financial statements record a total income of approximately $629,000 since 1 July 1999;
(b)the vast majority of TACT’s income (approximately $509,000) has been derived from the airline services agreement since 1 July 2002. The balance of the income has been derived from interest and share dividends;
(c)between 2002 and 2005 TACT’s funds were held in the form of loans or short term deposits;
(d)until at least the year ended June 2005 only a very small proportion of TACT’s reported income was distributed. The substantial accumulation of income is reflected in the growth in the total funds held;
(e)as at 30 June in each of the years ended June 2006 and June 2007 a significant proportion of TACT’s funds (approximately 25% as at June 2007) was held as cash on hand or at bank;
(f)since 2002 the “distributions” the trustees claim to have resolved upon in each financial year exceed, and after 1 July 2004 substantially exceed, TACT’s reported interest income.
34.TACT’s records of distributions were not entirely clear. After several attempts, involving various corrections and explanations, TACT claimed to have declared and paid distributions totalling $296,914.55 up to 21 September 2007. The Commissioner contends, and TACT concedes, that many of the distributions recorded in the financial statements were not reflected by physical payments made in the same year, and were sometimes reflected as current liabilities in the annual financial statements. The Table includes, in the rows at the bottom, the effect of TACT's concession and sets out a total of the distributions which it contends were the subject of both resolution and payment in the same financial year. The Commissioner's analysis of the distributions took a slightly different approach. It purported to quantify the actual physical payments made in any financial year, irrespective of the date of any resolution authorising the payment. These three different explanations account for the variations set out in the Table about the amount of the distributions in each financial year.
When is a fund “applied for the purposes for which it was established”
35.ITAA97 s50-60 states that a fund such as TACT is not exempt from income tax unless it “is applied for the purposes for which it was established”. The Commissioner concedes this requirement does not preclude a charitable fund from accumulating some of its income. But the Commissioner relies on paragraph 21 of Taxation Ruling TR 2000/11 to contend that, whilst distribution of capital is not required, and some accumulation of income is permissible, the “excessive accumulation of investment income” is impermissible. More specifically, the Commissioner says that accumulation other than for an identified particular purpose is excessive and precludes the fund from satisfying the “application” requirement.
36.The application requirement in ITAA97 s50-60(a) is very similar to the “is being applied” criterion that applied under s11(f) of the Income Tax Assessment Act 1915-1916. The meaning of that criterion was considered by Isaacs J in The Trustees, Executors and Agency Company Limited v The Acting Federal Commissioner of Taxation (1917) 23 CLR 576. His Honour thought that the requirement necessarily had “some elasticity” in its application: (at 23 CLR 587). He recognised that the requirement related to the fund itself, rather than its income. He thought that it implicitly permitted accumulation of income. As an example of permissible accumulation he thought that the purpose of acquiring sufficient funds to purchase a particular asset would still evidence the application of the fund. He also appeared to accept that accumulation of income for a more general-purpose, such as establishing a provision for building repairs, would also not detract from a conclusion that the fund was being applied for the purposes for which it was established.
37.The meaning of the “is being applied” requirement was not fundamental to the decision in the Trustees, Executors and Agency Company case referred to in the preceding paragraph. It did, however, provide the basis for the decision at first instance in Mahoney v Commissioner of Taxation (1965) 39 ALJR 62. That case involved a trust fund which was ostensibly an employee benefit fund to which s 23(j) of the Income Tax and Social Services Contribution Assessment Act 1936-1958 applied. Membership of the fund was available to any employees nominated by the employer. But no relevant nomination had ever been made. More significantly, the overwhelming proportion of the trust funds had been lent back to the company without security, and for the purpose of what was described as “a highly speculative venture”: see 39 ALJR at 64.
38.In Mahoney Owen J agreed with Isaacs J’s view that the expression “is being applied” had to be given some elasticity. It did not require the actual distribution of part of the funds during any particular income period. Indeed Owen J seems to have preferred the more general view of permissible accumulation suggested by Isaacs J’s second example in the Trustees, Executors and Agency Company case. Owen J thought that accumulation “in the exercise of a proper discretion” may be permissible. He gave the example of a decision “to build up the fund so that greater benefits would become available at a later stage”. Conversely the mere fact that the fund was held in a manner authorised by its constituent documents was not itself determinative. In order to determine how the fund “is being applied” regard might properly be had not only to the terms of the deed and the powers and discretions they conferred on the trustees, but also to the actual way in which the trust was administered. Moreover, the enquiry was not confined to the particular financial years in contest in the particular case, because “the purposes for which it was used in other years may throw light on the question whether... the fund was in a real sense being applied” for the purposes for which it was established: see 39 ALJR at 63.
39.In the subsequent full court appeal the High Court disposed of the Mahoney case on the basis that the fund's express purposes did not characterise it as an employee benefit fund and did not entitle it to exemption in any event: Mahoney v Commissioner of Taxation (1967-68) 41 ALJR 232. However, two of the judges went on to address the alternative question of whether, if the fund's purposes had been as claimed, it was “being applied” for those purposes. Taylor J said that if a trust fund was being administered in accordance with its constituent provisions that would normally justify the conclusion that it was “being applied” for the purposes for which it was established. The comments Windeyer J made (at 41 ALJR 238G) appear to reflect substantially the same view. Both judges adverted to the fact that the fund had no nominated employee members. Taylor J did not regard that as conclusive of itself. But he was influenced by the nature and extent of the loans that had been made from the trust funds to the employer company. The last of these loans comprised virtually the whole of the trust fund and had been advanced without either proper security or assessment of the company’s worth. Taylor J considered that the loans had not been made in “the bona fide exercise of the powers of investment” conferred by the trust deed. In these circumstances he found that the trust was not at any time being applied for the purposes for which it was established: see 41 ALJR 237A.
40.If trustees administer a trust without good faith regard to their powers and discretions their conduct may justify a conclusion that the fund is not “applied” for the purposes for which it was established. But the propriety of drawing a conclusion that the trustees have not acted in good faith, or that its absence sufficiently indicates the application of the trust funds for an extraneous purpose, will depend on the nature, and perhaps the extent, of the trustees’ allegedly irregular conduct. Neither lack of good faith, nor extraneous purpose, is necessarily established by the fact of loans being made to entities associated with the trustee, or by the fact that substantial third party loans have been made without security. In Driclad Pty Ltd v Federal Commissioner of Taxation (1966-1968) 121 CLR 45, for example, the trustees had made very substantial loans, without security and over a period of years, to companies that had established an employees’ benefit fund. The loans were within the investment powers in the trust deed and there was nothing to suggest the trustees were neglecting the interests of the trust beneficiaries. Nor was there anything to suggest they had exercised their investment powers other than in good faith and for the expressed purposes of the trust: 121 CLR at 61-62.
41.In Compton v The Commissioner of Taxation (1965) 116 CLR 233 membership of a superannuation fund was available to nominated employees. But the only nominees were four persons who were also the substantial shareholders in the employer company. The trust funds were used to purchase shares in companies related to the employer. Income derived from those shares was accumulated by the trustee over a three-year period. Taylor J held that the fund was not “being applied” for the purpose for which it was established, namely a fund for the benefit of nominated employees. This was because it appeared “clearly enough that at all relevant times it was the intention of the four directors and for that matter, of the trustees, that no … attempt should be made” to include any non-shareholder employees as members of the fund or to provide benefits to them. Taylor J said that this conclusion was particularly open when “the bulk of the income of the fund was being accumulated”: see 116 CLR at 239.
42.The Commissioner contends the combined effect of the observations of Isaacs J in The Trustees, Executors and Agency Company Limited v The Acting Federal Commissioner of Taxation (1917) 23 CLR 576 and Taylor J in Compton v The Commissioner of Taxation (1965) 116 CLR 233 is to require the conclusion that a fund is not “applied for the purposes for which it was established” if the trustees merely accumulate its income. The accumulation must occur for some specific and objectively justifiable good reason. In particular, the Commissioner contends that a mere desire to accumulate income until the trust fund reaches a specified amount, is essentially an arbitrary decision. The Commissioner says that in the present case the trustees’ general intention to accumulate TACT’s income, until it has net assets of $1 million, is inadequate and that the accumulation of income has been excessive. The trustees’ intention is not directed to any particular purpose and is not supported by any analysis of either the appropriateness of the $1 million target or the period of time that may be required for it to be achieved. The Commissioner contends that the lack of any definite timeframe, purpose or management plan, together with the extent of accumulation that has occurred, requires the conclusion that the fund does not satisfy the requirement that it “is applied for the purposes for which it was established”.
43.The Commissioner supplements this contention with specific criticisms of the trustees’ claimed distributions. The Commissioner says that there was no distribution of TACT’s income, and consequently no relevant application of the fund, until December 2003. The Commissioner contends that donations the accountant claims TACT made to the Baptist Church in the financial years 2001-2003 were actually made from the accountant’s own funds. They were never paid to TACT, never banked and not contemporaneously recorded in the accountant’s trust bank account ledgers. The Commissioner says that the donations never formed part of TACT’s assets. The amended trust ledgers that do record TACT having made the donations were rewritten years later by the accountant for the purpose of supporting the exemption application. For his part the accountant does not dispute that the payments made before 8 December 2003 were made from his personal funds and never physically received by TACT. But he says that he made the payments on TACT’s behalf. They were not recorded in TACT’s trust ledger and annual financial statements merely because of his oversight.
44.The Commissioner also complains about the timing of the payment distributions TACT claims to have made. The accountant claimed that all payments TACT resolved to make were discussed with the trustees and were the subject of a confirming annual resolution that was made around 15 June in each financial year. In relation to the resolution claimed to have been made on 15 June 2003, the Commissioner noted that the actual payment was not made until 8 December 2003. The Commissioner contended that this cast such doubt over the reality of the claimed distribution resolutions that the Tribunal could not be satisfied about the extent to which TACT had made any distribution resolutions in any particular financial year.
45.The Commissioner’s basic argument, that an accumulation of income for the general purpose of the trust, especially where distributions are few and comparatively small in amount, does not evidence the required application of the fund, contains an inherent difficulty. On the one hand it implicitly concedes that some accumulation of income is permissible. On the other it relies on either the concept of accumulation for a specific purpose, or an impressionistic characterisation of the accumulation as “excessive”, as marking the limits of permissible accumulation. Neither of these concepts is found within the wording of ITAA97 s50-60 and each involves an essentially arbitrary distinction. The contention that accumulation for general purposes does not evidence the required application of the fund is essentially the proposition that was rejected by the English Court of Appeal in IRC v Helen Slater Charitable Trust Ltd [1981] Ch 79; [1982] Ch 49. In that case one charity had made a payment to another and the donee charity simply accumulated the payment as part of its general trust funds. It was contended that the donor’s payment did not involve its income having been “applied to charitable purposes”. The argument was considered against a legislative background, similar to ITAA97 s50-60, that required the fund both to be a charity and to apply its funds for charitable purposes. As Oliver LJ noted, this dual requirement is intended to convey an eligibility criterion “beyond that of merely being applicable for charitable purposes”: [1982] Ch 49 at 59D. His Lordship thought that the limitation involved more than a mere prohibition against the actual misapplication of the fund. But he thought it was likely to have little application if there was affirmative evidence that the fund was being held in accordance with the terms of the trust. He specifically rejected any distinction between specific and general accumulation. His Lordship said ([1982] Ch 49 at 59F):
Charitable trustees who simply leave surplus income uninvested cannot, I think, be said to have “applied” it at all and, indeed, would be in breach of trust. But if the income is reinvested by them and held, as invested, as part of the funds of the charity, I would be disposed to say that it is no less being applied to charitable purposes than it is if it is paid out in wages to the secretary. I share (the first instance judge's) difficulty in seeing why an accumulation for a specific charitable purpose resolved on by the trustees as being a desirable way of carrying out their charitable objects should be, as is conceded it is, an “application”, whereas an accumulation for the general purposes of the charity is not”
46.Although the issue in the Helen Slater Charitable Trust Ltd case was the application of income, Oliver LJ’s reasoning has equal force in answering the question whether the fund itself was applied for the required purpose. Indeed Oliver LJ’s view is essentially the same as that expressed by Owen J in Mahoney v Commissioner of Taxation of the Commonwealth (1965) 39 ALJR 62 at 63. The reasoning of both judges supports the view that a fund may still be regarded as being applied for its nominated purposes even if, during particular accounting periods, the fund accumulated its income for the general purpose of augmenting the value of the fund.
47.The preceding discussion shows that two generalities compete for application in determining whether a fund “is applied” for the purpose for which it was established. The first generality is that administration of the fund consistently with its constituent provisions ordinarily justifies the conclusion that it is being applied for the required purpose. The second generality is that the “is applied” criterion requires more than, and is not necessarily satisfied by, compliant administration of the fund in accordance with its constituent provisions. In resolving the competition between these generalities it is appropriate to recognise that the ITAA97 s 50-60 criterion that a fund “is applied for the purposes for which it was established” expresses a concept where the qualities of application and purpose are related. Inherent in the idea of “application” is a relationship between conduct and purpose. Conduct or property is relevantly “applied” when it is directed towards a particular purpose or use: Davies v Perpetual Trustees Executors and Agency Company of Tasmania Ltd (1935) 52 CLR 604 at 607; Deputy Commissioner of Taxation v Taubmans (NSW) Pty Ltd [1966] 115 CLR 570 at 573. What will constitute conduct evidencing the “application” of property for a particular purpose will necessarily depend on the nature of the purpose and the extent to which the conduct is apt to lead to its direct or indirect achievement.
48.The “is applied” criterion in the opening lines of ITAA s 97 s50-60, unlike those in the immediately following paragraphs, does not include any adverbial qualification requiring exclusivity of purpose. Purpose is itself a frequently used criterion in many different legal contexts. Concerted trade conduct is proscribed where it is engaged in for “real” or “dominant” purpose of causing loss to another: News Ltd v Australian Rugby Football League Ltd (1996) 135 ALR 33. Legislative provisions commonly render documents immune from disclosure under Freedom of Information legislation where they were brought into existence for the purpose of commercial activities: Australian Postal Corporation v Johnston (2007) 94 ALD 586 at Greenwood J (FCA). Expenses incurred in relation to the use of property “for the purpose of producing assessable income” may be deductible for income tax purposes: National Mutual Life Association v Commissioner of Taxation (1970) 122 CLR 13 at 22 per Gibbs J. In all these contexts exclusivity of purpose is not required. Often it is sufficient if the relevant purpose was an operative and substantial reason for the conduct in question: Mikasa (NSW) Ltd v Festival Stores (1972) 127 CLR 617 per Barwick CJ at 634; Secretary, Department of Treasury and Finance v Dalla-Riva [2007] VSCA 11 FOI Act Buchanan JA at [13]; Hook v Rolfe (1986) 7 NSWLR 40 at 44, 45. Sometimes the purpose criterion will be interpreted to refer to the dominant or main purpose of the hypothesised conduct. In that context it is particularly apt to note that in determining whether an entity was “established” for a purpose that gave rise to an income tax exemption, it has been held that the enquiry is to determine the main object or purpose of the entity’s activities in the relevant income year: Royal Australian College of Surgeons v Commissioner of Taxation (1943) 68 CLR 436.
49.It is also important to take into account that the conduct potentially involved in the application of a fund is not restricted to distributions of income or capital – so much is apparent from the decisions in Mahoney and Driclad. It includes not only episodic events of that kind but also the more mundane and recurrent conduct involved in the ordinary administration of the fund’s affairs. This suggests that the characterisation required by the “is applied” criterion is not directed towards minute examination of the conduct of the fund at any or every particular time. What it is directed to is an enquiry as to whether the fund is “in a real sense” (per Owen J in Mahoney 39 ALJR at 63) being applied for the purposes for which it was established.
50.I do not intend to suggest that the absence of any express restriction to “dominant” or “sole” purpose in the opening lines of ITAA97 s50-60 would result in a fund satisfying the application criterion merely if 51% of its distributions were made to charitable purposes. (Although the question does not arise in the present case, it is highly unlikely a fund that made substantial distributions for extraneous purposes would satisfy the requirement that it is applied for the purposes for which it was established.) But I do consider that at least in its application to conduct involving the management and administration of the fund the “is applied” criterion is directed towards an overall characterisation of the conduct of the fund and does not require satisfaction about the appropriateness of every action of the trustees and those administering the trust on their behalf. Where the conduct under consideration is of this kind (that is the administration, as distinct from the distribution, of the fund) an examination of the purpose for which it has been undertaken is necessarily of a general kind, and must properly take into account the totality of the fund’s activities. This does not give priority to the trustee’s merely subjective intentions, motives and beliefs but, contrary to the Commissioner’s contention, neither are they wholly irrelevant. The permissible breadth of relevant considerations recognises that ultimate purposes may be pursued in different ways and with different degrees of immediacy. It also recognises that particular shortcomings in the administration of a fund, including some kinds of failure to comply with the terms of the trust, will not necessarily require, and may not even justify, a conclusion that the fund is applied for purposes other than those for which it was established.
51.Returning to what I have described as the competing generalities, it is appropriate to apply the “is applied” criterion by enquiring whether the fund is administered substantially in accordance with its constituent terms. Substantial compliance will ordinarily provide some evidence that the fund is being held for its intended purpose and, at least in the absence of contrary indications, justify an inference that the fund “is applied” for its established purposes. The strength of the inference in any particular case will depend on the degree of compliance and the nature, extent and reason for any non-compliance. This approach to the “is applied” criterion is essentially that adopted by Oliver J in IRC v Helen Slater Charitable Trust Ltd [1981] Ch 79; [1982] Ch 49. It is also accords with the view that where a transaction or conduct is within the powers of trustees or directors, it will not result in a relevant misapplication of property under their control unless the court is satisfied that it has an intended operation “other than ancillary to the conferring of benefits upon the objects of the trust” or the purposes of the company: Bray v The Commissioner of Taxation (1977-1978) 140 CLR 560 at 577 per Jacobs J; see also Ngurli Ltd v McCann (1953) 90 CLR 425 at 440; and the circumstances tend to indicate a clear purpose of achieving some other extraneous benefit: see Case X60 (1990) ATC 438 at 446. The difficulty of arriving at such a conclusion, and the extent to which its appropriateness is likely to be influenced by impressionistic assessment of the overall good faith of the trustee, is illustrated by comparison of the comments made by Taylor J in Driclad Pty Ltd v Federal Commissioner of Taxation (1966-1968) 121 CLR 45 at 61 with the same judge’s comments in the context of the different circumstances in Compton v The Commissioner of Taxation (1965) 116 CLR 233 at 239. The difficulty is not avoided, even where the legislative criterion requires exclusivity of purpose, merely by demonstrating that parts of the fund has been invested in breach of the terms of the constituent trust: Case X60 (1990) ATC 438 at 447. A breach of trust is a relevant, but not necessarily decisive, consideration in determining whether the fund “is applied” for the required purposes: per Owen J in Mahoney v Commissioner of Taxation (1965) 39 ALJR at 64.
52.In the present case the Commissioner’s submissions explicitly disavowed any intention to suggest that either the trustees or the accountant knowingly set out to misapply TACT’s funds. That disavowal strengthens my own view that the trustees are genuine in their desire to have TACT increase its assets to a total of $1 million. I also accept that they regard the $1 million amount as a trust capital amount that would permit worthwhile distributions from TACT’s investment income. I do not regard these views as significantly impugned by the Commissioner’s complaint that the trustees have no formal plan nor appear to have given specific detailed consideration to the desirability of their $1 million objective. There was no doubt a time when $1 million was a very large sum. But it is far from an extraordinary, and may not even be a remarkable, amount in contemporary Australia. The less is it so when one considers the width of the charitable purposes for which the fund was established, and the limited contribution that small income distributions would make to them. TACT provided a table of representative available interest rates for the period from 2001 to 2007. These were between about 5% and 7% per annum. Using those rates the yearly interest income on a $1 million fund would not exceed $70,000. In reality TACT’s historical interest income has been much less. Indeed TACT’s reported investment income was less than $25,000 in the year ended June 2004 and has approximated only $30,000 in the years since. These are not excessively large sums, indeed they are considerably less than the current Australian Bureau of Statistics estimates of annual average full time earnings. Of course it is true than every potential donee is likely to welcome assistance in whatever amount is available, but it hardly contradicts the purpose of a charitable trust to desire to achieve sufficient capital to be able to make distributions the trustees regard as significant. In these circumstances an intention to accumulate the fund to a point where its annual income would allow it to make significant regular distributions is consistent with the general charitable purpose for which TACT was established. Nothing in ITAAs97 s 50-60 compels the distribution of income, and the cases have interpreted similar provisions as permitting accumulation, at least in principle. A desire to achieve an ultimate fund balance of $1 million is far from being objectively unreasonable or excessive.
53.It is also relevant to note that the preponderance of TACT’s reported income derives from the airline services agreement. That arrangement is wholly dependent on the personal generosity of the accountant. The amounts TACT receives in relation to that agreement have more similarity to a gift to TACT than to “investment income” of the kind whose “excessive accumulation” Taxation Rule TR2000/11 impugns. If the particular nature of TACT’s total reported income is understood in this way, distinguishing between its investment income and the payments it receives under the airline services agreement, then it becomes apparent that TACT’s total distributions have very substantially exceeded its actual investment and interest income. In my opinion the trustees’ policy of accumulating part of TACT’s reported income, for the purpose of reaching a fund total of $1 million before adopting a practice of implementing full distribution of annual income, does apply the fund for the purpose for which it was established.
54.In coming to the view stated in the preceding paragraph I have not ignored the Commissioner’s criticisms of TACT’s claims about distributions to the Baptist Church in 2001, 2002 and 2003, and about the annual distribution resolutions TACT claims to have made around 15 June each financial year. I am not satisfied that the $1,000 donations claimed for the 2001 – 2003 financial years were in fact made on behalf of TACT. The fact that they appear to have been omitted from the financial statements, and only very belatedly reflected in the MYOB accounting records, inclines me to the conclusion that TACT’s claims are later rationalisations, perhaps prompted by the Commissioner’s stated reasons for the initial refusal of the exemption application, rather than an accurate reflection of the circumstances and intentions when the donations were made. But lack of satisfaction about these particular distributions is immaterial. TACT was not required to make distributions in any particular year, its interest income was not significant before the 2003 financial year and in that calendar year it made a substantial distribution in any event.
55.I am also not satisfied that the trustee made the distribution resolutions the accountant says occurred around 15 June each year. There are no contemporaneous records of the resolutions (only copies of resolutions written on 9 April 2007 and purporting to record past events) and many of the payments allegedly authorised by the claimed resolutions were not made until many months later. In these circumstances I do not accept that the relevant distribution resolutions were actually made in the manner and circumstances claimed by the accountant. However I do accept that TACT made the total amount of the distributions claimed. I also accept that those distributions were the subject of discussion with the trustees, albeit the discussion was typically brief and often informal, around the time they were made. In these circumstances absence of satisfaction about the reality of the resolutions TACT asserts were made in June each financial year has no material impact on my opinion that TACT’s fund was applied for the purposes for which it was established.
the trust funds being held in a non interest bearing account
56.The accountant has been responsible for the administration of TACT’s funds and maintaining its accounting records. Typically the funds have been paid into his practice trust account. The accountant maintains ledger accounts for the various clients, including TACT, on whose behalf he holds funds. They record both balances held in the trust bank account and some other investments, such as term deposits, made on behalf of clients. The accountant’s trust bank account itself is interest bearing. But the accountant said he has a standard arrangement with all clients whereby they agree to forego interest on their funds. The accountant says that interest is credited to his practice account, as a means of defraying the costs of maintaining the trust bank account and its related accounting requirements.
57.The accountant explained that apportioning the trust bank account interest between individual clients, according to their trust ledger account balances would be a substantial exercise, and one beyond the capacity of his accounting software. He regarded such an exercise as essentially impractical and that was why he had always used a standard disclosure and acknowledgement under which his practice clients agreed to the trust bank account interest being used to defray the accountant’s trust account administration and general practice costs.
58.The Commissioner accepts that the interest waiver arrangement was a standard feature of the accountant’s dealings with his clients, and was conceived as a practical means of defraying the cost of administering the trust bank account and its related client ledger accounts. But the Commissioner contends that the arrangement resulted in interest waiver unrelated in amount to the actual cost of administering the particular client’s account. The Commissioner contends that this foreseeable result of the arrangement between the trustees and the accountant means that allowing the finds to remain in the accountant’s trust account was an application for the purpose of the accountant and his practice, rather than for the purpose of the fund.
59.The Commissioner emphasises that the amount of interest foregone cannot be insubstantial. The Commissioner says that the total trust account interest foregone approximates $175,000 for the financial years from July 2000 to date. For his part the accountant said that, up until 2003 half of the time of his personal assistant was spent administering the practice bank account. He conceded he had not established the actual cost involved but he thought that it would be more than the total interest that had accrued on the trust bank account. For their part the trustees gave no specific evidence of the interest waiver arrangement that the accountant described as his standard practice. The accountant himself was unable to recall whether or not he had ever specifically discussed the arrangement with them.
60.The Commissioner estimated the total trust bank account interest foregone by the accountant’s clients was approximately $175,000. This provides no real information relevant to TACT’s funds. The Table summarising TACT’s financial statements (which accompanies these reasons) shows that until the year ended 30 June 2004 TACT had virtually no “cash on hand or at bank”. Instead almost the entirety of its funds was represented by shares, loans or term deposits and generated an investment income of approximately $25,000. As at 30 June 2005, the figure for “cash at bank” was about $42,000. In contrast to these small cash balances, the interest derived from the accountant’s trust bank account for the period up to 30 June 2005 was $142,082 (i.e. approximately 81% of the $175,000 total interest foregone as estimated by the Commissioner). The combination of these considerations requires the conclusion that, at least until the 2004 financial year, and most likely also the end of the 2005 financial year, the supposed “interest foregone” by TACT as a result of the accountant’s standard practice, must have been very small.
61.The summary Table does show that in each of the financial years ended June 2005, 2006 and 2007 TACT’s funds included an increased level of “cash on hand and at bank”. These were amounts in addition to its term deposit investments and included both the calculated balance of the amounts actually held in the accountant’s trust bank account and some accrued interest (especially, after April 2004, outstanding interest on the interest offset deposit referred to elsewhere in these reasons). They represented approximately 10%, 20% and 25% of TACT’s total funds as at the end of each of those financial years.
62.TACT’s reported cash on hand and at bank in each of these financial years obviously represents a more significant proportion of its total assets than in previous years. But the relevance of these increased proportions to an assessment of the significance of the trust account interest derived by the accountant requires an assessment of TACT’s funds in relation to the actual periodic balances of the trust bank account. In that regard it is significant to note that the total credits to the accountant’s trust bank account in the three years from June 2005 to June 2007 were approximately $7.7m, $5.9m and $7.8m (as summarised in the Table of trust account balances set out later in these reasons.) TACT’s reported balances represented less than 2% of the total trust account transaction volume during each of those years.
63.The miniscule proportion that TACT’s funds bore to the total transaction volume of the accountant’s trust bank account has particular relevance in light of the accountant’s explanation for the increase in the reported level of TACT’s “cash on hand”. He said it was principally attributable to the lack of secretarial and administrative support that was available to him after 2003. He had found it increasingly difficulty to cope with the client demands, and this had affected not only his handling of TACT’s funds but other clients as well. In addition he had felt the need to keep funds on hand for distributions. In that regard it is also relevant to take into account the level of distributions that TACT declared and paid in each of the years 2005, 2006 and 2007. These are summarised in the Financial Statements summary Table accompanying these reasons. In each year of those years the resolutions resolved exceeded those paid. The fact that declared distributions remained unpaid at year end arguably lends a degree of credibility to the accountant’s explanation.
64.I do not accept the Commissioner’s contention that the fact the trustees allowed the accountant to administer TACT’s accounting records through his practice trust bank account relevantly informs an assessment of the purpose for which TACT’s funds were applied. Neither do I consider that the level of TACT’s reported “cash on hand and at bank” is significant in characterising the purpose for which TACT’s funds were applied. The characteristic practice of the trustees and the accountant, throughout the period after 1999 was to invest TACT’s funds in shares, term deposits and loans. The trustees’ purpose in allowing the accountant to be responsible for maintaining TACT’s accounting records was to facilitate the investment and growth of the trust fund. The irregularities that have occurred in the accountant’s management of TACT’s funds do demonstrate deficiencies in the extent to which he diligently and properly carried out that purpose. But the basic, and dominant purpose of his administration remained those for which TACT was established. His deficiencies, which the Commissioner contends includes the fact that the funds held in his practice trust bank account did not accrue interest for the benefit of the fund, do not significantly detract from that purpose. Earlier in these reasons I expressed the view that the characterisation required by the “is applied” criterion is essentially directed towards an assessment whether the fund was “in a real sense” being applied for the required purpose (per Owen J in Mahoney v Commissioner of Taxation (1965) 39 ALJR at 63). I also said that the assessment required by the criterion is not determined by finding particular instances of deficiency, by the trustees or those acting on their behalf, in the diligent pursuit of the trust’s best interests. In my opinion, the evidence of the totality of TACT’s funds, and the general manner of their administration, does show that TACT was “in a real sense” applied for the purposes for which it was established. This is so notwithstanding the increase in the reported levels of “cash on hand and at bank” at the end of each of the 2005, 2006 and 2007 years. As the Summary Table shows, over that three year period much more than half of TACT’s total reported income was applied to the payment of distributions.
The occurrence of “debit balances” within the accountant’s trust bank account ledgers
65.Throughout the period between from 1 July 2000 and 30 June 2007 some of the client trust bank account ledgers, which the accountant maintained in his MYOB accounting software application, periodically recorded debit balances. The Commissioner contends that these debit balances reflect the use of the general trust account balance for the advantage of those individual clients. In particular, the Commissioner contends that the occurrence of debit balances inevitably means that at least some part of TACT’s funds was applied for purposes other than those for which TACT was established under the 1997 Deed.
66.The Commissioner’s argument derives from the general position that where a trust fund is insufficient to meet the entitlements of all the beneficiaries, they are entitled to participate rateably in the division of the available funds: Keefe v Law Society of NSW (1998) 44 NSWLR 451 at 461A; Sutherland re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361. However there is also a principle that if the fund contains moneys to which a defaulting trustee has an entitlement, then the defaulter will be assumed to have withdrawn first from the trustee’s own portion of the mixed fund: Re Hodgekiss (1962) 62 SR 340 at 356. The accountant contended that any trust account withdrawals he made were always covered by available credit funds, including money of his own, or which he had authority to apply for his own benefit.
67.The Commissioner’s argument was developed in two different ways. First of all, an examination of the trust ledger accounts showed debit balances occurred in various trust ledger accounts throughout the whole period from June 2000 until July 2007. The accountant’s exculpatory contention, that these were always covered by credit funds to which he had access, was not demonstrable from the face of the trust account ledgers themselves. In the absence of such a demonstration, the Commissioner contended that the opacity of the ledger account balances and transactions precluded satisfaction that TACT’s funds had been applied for the required purpose. Secondly, the Commissioner correctly pointed out that there were occasions when TACT’s trust account ledger balance exceeded the actual trust account bank balance. The Commissioner contended this necessarily demonstrated that TACT’s funds were applied for the benefit of other clients and not for the purposes for which TACT was established.
68.In order to evaluate the significance of the first of the Commissioner’s arguments it is necessary to understand the context and the extent of debit balances recorded in the accountant’s trust bank account ledgers. This requires knowledge of (i) the volume of the accountant’s trust account dealings, (ii) the extent of TACT’s trust bank account balance, and (iii) the nature and duration of the trust account debit balances.
69.The accountant’s trust bank account handled a large volume of funds. The accountant also administered term deposit accounts on behalf of clients. The accountant’s MYOB trust account ledgers included both the trust bank account and the term deposit accounts. There was some duplication of these account balances in the ledger accounts, specifically in relation to TACT (in a manner to which I will refer). The thrust of the accountant’s evidence was that it was necessary to have regard to both the trust bank account ledger, and the term deposit account ledgers, to obtain a proper understanding of the total client funds that he held. The following Table summarises those ledgers. (I have excluded from the deposit account totals TACT’s funds relating to the interest offset account, which is referred to later in these reasons.)
SUMMARY OF ACCOUNTANT’S TRUST BANK ACCOUNT LEDGERS AND STATEMENTS
Y/E TRUST LEDGER ACCOUNT TRUST BANK A/C DEPOSIT A/C Year start Year-end Total Debits Credits 30.6.01 986,109 1,211,753 4,917,713 4,692,068 1,214,260 not stated 30.6.02 1,211,753 1,189,069 4,473,559 4,496,244 1,144,938 not stated 30.6.03 1,189,069 1,324,485 7,406,522 7,271,106 1,357,266 not stated 30.6.04 1,324,485 1,136,498 7,865,178 8,053,165 1,151,387 2,805,000 30.6.05 1,136,498 580,592 7,156,705 7,712,611 590,341 2,435,407 30.6.06 580,592 614,773 5,956,619 5,922,437 not available 2,322,925 30.7.07 614,773 596,923 7,780,889 7,798,739 not available 1,523,967 70.The Table summarising TACT’s annual financial statements (attached to these reasons) shows that TACT had no significant assets until it received the accountant’s $160,000 gift on 7 January 2002. Before that, and for some time afterwards, the fund balance held in the accountant’s trust bank account was small. This is apparent from the following summary of TACT’s trust bank account ledger.
TACT BALANCES - PER TRUST BANK ACCOUNT LEDGER
Fin Year 1 July 1 October 1 January 1 April Trust funds End July F Y end 2001 298 298 538 309 12,371 2002 309 309 463 463 174,678 2003 617 10,167 13,664 41,164 275,049 2004 20,187 27,628 48,924 166,082 389,199 2005 181,259 210,747 226,192 251,879 447,555 2006 236,023 256,895 231,388 274,232 534,926 2007 276,024 248,627 256,917 271,421 549,926 2008 282,959 392,852 71.TACT’s trust bank account ledger balances, as summarised in the preceding Table, actually overstate the real balance of TACT’s funds in the accountant’s trust bank account after about April or May 2004. This is because, from that time onwards, the accountant included in the trust bank account ledger the $210,000 that had actually been deposited in, and most of which was retained in, the interest offset bank account. That account related to the trustees’ home mortgage loan and is discussed elsewhere in these reasons.
72.TACT’s recorded ledger account balances, before the May 2004 alteration in the accountant’s ledger treatment, reflected a practice where the overwhelming preponderance of its funds was invested outside the accountant’s trust bank account, typically in term, or cash management account, deposits. TACT’s periodic balance in the trust bank account itself made up only a small proportion of the total funds held by the accountant – as an informed comparison of the two preceding Tables suggests.
73.The Table comparison invited in the preceding paragraph, when carried out with knowledge of the individual entries in the trust ledger accounts, shows that, at any particular point in time prior to 20 May 2004, TACT’s funds were also but a small proportion of the trust bank account balance. Furthermore the recorded transactions tend to show a pattern of incremental deposits to the ledger balance (from investment income and the payments made under the airline services agreement) followed by withdrawals comprising transfers to loans, distributions or payment of expenses (including tax).
74.Debit balances do appear in other trust ledger accounts during the period prior to May 2004. But they are of no real significance. Between August 2002 and July 2003 the debit balances are typically for small amounts (often less than $1,000) and for short periods (often only days). There are occasional instances of much larger debit balances but in those instances either (i) TACT’s own ledger balance was minimal at the time or (ii) the debit was eliminated by a transfer between ledger accounts. Between July 2003 and 20 May 2004 there were few debit balances in other account ledgers. Those that did occur were, with one exception, either for trivial amounts or for short periods. The exception was a five month debit balance of $10,925 between December and 30 June 2004 in one account. But throughout the whole of that period the accountant's own trust ledger account had a minimum credit balance of $141,657 and $10,925 was posted from that account on 30 June 2004 to eliminate the debit balance. In any event, when the $210,000 overstatement in TACT’s trust bank account ledger (as explained above) is taken into account, that trust ledger account was itself actually in debit for a very substantial period after 20 May 2004.
75.In the 2005 financial year there were few debit balances in the accountant’s trust bank account ledgers. (I interpolate that, in summarising the trust ledger accounts I have ignored any debits that were either demonstrably explicable because withdrawal and matching deposit entries were posted out of sequence. I have also ignored any debits that lasted only one or two days, on the assumption that they most likely reflect timing differences in the receipt and withdrawal of funds.) Those that did appear were again either for short periods or inconsequential amounts. There were larger debits in December 2004 ($8,748), January 2005 ($17,950) and April 2005 (up to $7,500). But at each of those times there were credit balances, exceeding $750,000 in total, in accounts in the name of the DB company and the accountant’s wife. (The accountant said that he wholly owned and controlled the DB company. Its ledger account balance represented borrowed funds the company held effectively as his nominee. The accountant impliedly asserted he had his wife’s general authority to deal with her funds.) In contrast, as the summary Table of TACT’s financial statements shows, the preponderance of its funds were invested in term deposits or loans. In these circumstances the debit balances that appeared in the accountant’s trust bank account ledgers during the 2005 financial year have no real bearing on proper assessment of whether TACT’s funds were applied for the purposes for which it was established.
76.In the financial year ended June 2006 the debit balances in the ledger accounts were again typically few, of short duration and for comparatively small amounts. To this generality there were significant exceptions. They occurred in relation to an account in the name of the accountant’s wife and in another account. The ledger account in the name of the accountant’s wife showed an incrementally increasing debit balance over a period of eight months. In June 2006 the debit balance of $493,285 was eliminated by a transfer of $525,000 from the DB company trust ledger account. The credit balance in that account had, throughout the period, exceeded the accumulating debit balance in the accountant’s wife’s account. The other exceptional account had a debit balance that increased from late October 2005 until June 2006 when it was $578,194. But the debit balance in this account was substantially eliminated by a transfer from an apparently related account, which itself had a credit balance sufficient to cover the debit balance.
77.In the 2007 financial year it is difficult to summarise the nature and effect of the debit balances. There are comparatively minor debit balances in several accounts that appear to relate to the trustees. But these debit balances are less than the amount of substantial credit balances in another trust ledger account in the trustees name. The trust ledger account in the name of the accountant’s wife was in debit for the whole 12 months – except for the opening and closing balances – and the debit incrementally increased to about $721,787. But for almost the whole of this time there was a credit balance in the DB company account of at least about $350,000. The debit balance in the accountant’s wife’s ledger account was eliminated at the end of June 2007 by a series of entries. One of these is a transfer of $586,000 from another account that had a credit balance of not less than about $621,000 at all times since February 2007.
102.The evidence of the trustees and the accountant revealed some confusion about the proper characterisation of the $210,000 deposit account. The accountant and the wife trustee did not regard the substance of the interest offset arrangement, and the interest offset account in particular, as disclosing a loan by TACT to the trustees personally. The wife trustee’s understanding was that the purpose of the arrangement was simply to provide TACT with the interest that would otherwise accrue to the trustees’ bank mortgagee. She said she did not believe the trustees had any entitlement to withdraw funds from the interest offset account for their personal benefit. She claimed not to have known either that the interest offset account balance was less than the amount of the trust deposit, or that the accountant was to compensate TACT for the shortfall in the interest offset account balance.
103.The husband trustee, on the other hand, said that his own salary was credited to the interest offset account and that he withdrew funds from the account for the personal use of the trustees. He had some understanding that the interest offset account was effectively a loan to the trustees personally. He did not keep his own record differentiating between TACT’s deposit balance and the amount of his own deposits and withdrawals. He claimed that he checked the balance of the interest offset account and satisfied himself, before making any withdrawals, that the account balance was more than the outstanding balance of the NAB mortgage advance. Comparison of the mortgage loan and interest offset bank statements shows that the balance of the former did exceed the balance in the latter at the time the male trustee made all his withdrawals. Throughout most of the 2005 calendar year the excess was substantial.
104.The interest offset transaction was clearly conceived as a benefit to TACT and provided it with the opportunity to achieve an increased rate of interest over that which it might otherwise obtain. The arrangement as proposed, which need not have involved the trustees having direct personal access to TACT’s deposit account, would have had substantially the same effect, save for the increased interest rate, as a term deposit with the bank. In these circumstances the transaction as proposed was an ordinary investment transaction for the benefit of the trust and was a proper application of its funds consistent with the trust purposes.
105.The question whether the irregularities involved in the operation of the Interest offset account warrant the conclusion that the fund was applied for extraneous purposes has to be answered in the light of the whole of the circumstances. Those circumstances include the fact that from the outset the trustees accepted an interest obligation in relation to the whole of TACT’s deposit amount, and that this was intended to advantage TACT by earning interest at a higher rate. They also include both the subsequent accrual of interest, and its payment by the accountant. In addition, the evidence establishes that although the male trustee’s withdrawals from the interest offset account contributed to a temporary shortfall in the balance of TACT’s deposit, that shortfall was unintended and later remedied by the accountant. These circumstances justify the conclusion that the interest offset transaction was in the nature of an ordinary commercial investment for the benefit of the trust fund itself. It is, in my opinion, in a similar category to the loan transactions commented upon approvingly by Taylor J in Driclad Pty Ltd v Federal Commissioner of Taxation (1966-1968) 121 CLR 45 at 61-62.
Overpayment to the trustees
106.Between October 2002 and September 2002 the husband and wife trustee lent more than $110,000 to TACT. The loan was repaid partly in December 2002 and, as to the balance, on 9 September 2003. However the accountant says that in making the repayment he mistakenly paid an additional $3,056.30. He discovered this mistake on 1 December 2003 and immediately compensated TACT, by transferring money from the trustees’ ledger account within his trust account. In August 2007 the trustees paid $59.98 to TACT, representing interest on the overpayment amount.
107.The Commissioner contends that this overpayment, and the delay in providing compensation to TACT, is further evidence of the application of the trust funds for an unauthorised purpose. There is no substance in this contention. The overpayment was a mere administrative error. It cannot reasonably be regarded as evidencing an application of the fund for an extraneous purpose. The payment was made for the purpose of discharging a fund liability. That purpose provides the proper basis for determining the application of the fund. The mistaken, and subsequently remedied, overpayment was not itself an application of the fund for the purpose of ITAA97 s50-60.
The use of the trust funds in uncommercial loans to r and d
108.Between 19 September 2002 and 30 September 2005 made five unsecured advances to D Pty Ltd. The 5 loan advances were of various amounts between $2,000 and $12,000, the total amount advanced was $29,000, but because of intervening repayments the maximum outstanding loan balance during the period was only $24,346. The loan bore interest at 11%, payable 6 monthly in arrears. TACT provided evidence demonstrating that this interest rate was higher than the rates generally commercially available. Interest was in fact paid, apparently timeously. The loan was repaid in full on 19 January 2006.
109.D Pty Ltd was a client of an accounting practice to which the accountant was a consultant. The trustees approved the loan on the advice and recommendation of the accountant. They say, however, that the accountant neither informed them that the loan was unsecured, nor of the risks of making unsecured loans.
110.The Commissioner contends that the D loan was not made on commercial terms and evidences the application of the fund for purposes other than that for which TACT was established. The circumstances do not justify that conclusion. Clause 5(e) of the trust deed expressly authorised investments being made without security. The loan was made at a commercial interest rate. So far as the evidence reveals, the purpose of the loan was purely as a favourable commercial investment on TACT’s behalf. The decision to advance funds on an unsecured basis may not reflect the best practice of prudent trustees, but it does not detract from the evidence that the loan was made for the purpose of providing TACT with a genuine investment at a favourable rate of interest. Such a transaction involved an application of TACT’s funds for the purpose for which the fund was established.
111.TACT made a further loan the Commissioner contends was uncommercial. This was a loan of $120,000 to R Pty Ltd. The loan was provided on the basis of a loan agreement document dated 7 May 2004 (T79 - 1306). The agreement provided for security for the advance, but none was ever provided. The loan agreement with R Pty Ltd provided for 7% interest that was payable annually in arrears. But clause 2 of the Deed contemplated interest default and permitted capitalisation. No interest was in fact paid throughout the currency of the loan. By 9 August 2007 the total outstanding amount was the original principal of $120,000 and capitalised interest of approximately $35,000. At that time the accountant provided R Pty Ltd with a replacement loan from his own funds and the loan was fully repaid to TACT.
112.R Pty Ltd was a small company that operated as a musical group providing entertainment with a Christian message. Its 2003 financial statements indicated that the company had traded at a loss in the preceding year and had only marginal net assets. The accountant had provided accounting advice to the company and was its tax agent. The accountant believed in what the company did. He had encouraged the company in its activities because he regarded them as consistent with his religious beliefs and those of the trustees. The trustees authorised this loan on the advice and recommendation of the accountant. The wife trustee said she had a general understanding of the loan proposal and would have been aware of the loan amount, but really relied on her father’s advice. The husband trustee was aware of the nature of R Pty Ltd’s business and that it had no significant assets. He had seen R Pty Ltd perform and was very impressed. He regarded the company as having a Christian ministry that deserved support. He considered that supporting the company with the loan transaction was within the concept of the charitable causes supported by TACT’s trust deed.
113.TACT’s accountant adviser says he regarded the loan as a fully commercial loan transaction. Although the company’s 2003 financial statements showed only a small net asset value, it also showed a gross income of about $315,000. His assessment was based on discussions with the directors and examination of their business plan. That plan included a US concert tour, which the accountant regarded as a very sound commercial decision. He was also impressed by the personal assurances of the company’s principals. He says he had absolute trust and confidence that the loan would be repaid. He denies that his own actions in later arranging the early repayment of TACT’s loan was a response to the Commissioner’s rejection of TACT’s endorsement application. He says he simply took the view that he should transfer the risk to himself personally and remove it from TACT.
114.The Commissioner contends that this advance was uncommercial because of the combined circumstances that (i) it was unsecured (ii) it provided for capitalised interest, (iii) R Pty Ltd had no significant assets and (iv) in the circumstances the interest rate did not properly reflect the level of risk. The Commissioner stresses that, despite the apparently religious nature or association of R Pty Ltd’s business, the accountant said he regarded the loan as a purely commercial transaction.
115.The Commissioner’s criticisms of the loan to R Pty Ltd are forceful. But it is necessary to take into account the nature of R Pty Ltd’s business and the fact that its religious connotations apparently favourably influenced both the accountant and the trustees. To recognise the relevance of this consideration to their decision is not to contradict the accountant’s evidence that he regarded the loan as a proper commercial investment. What it does is provide an insight into some of the reasoning that was likely to have influenced his assessment of the loan as a sound commercial transaction, but one that might not permit the consistent timely payment of interest during the whole of the loan term. The accountant’s evidence that he regarded the loan as a sound and proper investment for TACT to make should, in my opinion, be accepted. As the principal adviser to TACT’s trustees, and in practical reality, TACT’s principal benefactor, he is hardly likely to have knowingly hazarded a significant part of the fund’s assets in a doubtful transaction. Moreover there is no suggestion that either the accountant or the trustees benefited in any way, directly or indirectly, from the loan advance to R Pty Ltd. In these circumstances, whilst objective assessment of the R Pty Ltd advance suggests that its commerciality was questionable and its favourable resolution perhaps fortuitous, the evidence does not warrant rejection of the accountant’s evidence that he regarded it a proper investment in conformity with the trust purposes. The circumstances of the loan do not evidence that the TACT fund was applied other than for the purposes for which it was established.
Distribution to individuals
116.Some of TACT’s distributions have been made to individuals associated with either the Uniting Church or AusEntB. TACT contended that all these payments should be characterised as payments to missionaries or clergy and as being payments made for the advancement of religion. TACT relied on Roman Catholic Archbishop of Melbourne v Lawlor (1934) 51 CLR 1 at 32, In Re Mylne: Potter v Dow [1941] Ch 204 at 206-7; and Re Burton’s Charity [1938] 3 All ER 90 at 92.
117.The Commissioner accepted TACT’s general contention. But the Commissioner complained about payments made in 2007 to or for the benefit on an AusEntB missionary. One of the payments was made for repairs to a motor vehicle used by the missionary’s sons in Australia. The Commissioner contends these were not an application of the fund for its established purposes. I do not accept this contention. A gift may be relevantly one for charitable purposes if it is “for the support, aid or relief of clergy and ministers or teachers of religion, the performance of whose duties will tend to the spiritual advantage of others by instruction and edification”: Roman Catholic Archbishop of Melbourne v Lawlor (1934) 51 CLR 1 at 32. As TACT pointed out in its submissions, that concept extends to permit gifts to retired missionaries, on the basis that it “may encourage people to take up missionary work”: In Re Mylne: Potter v Dow [1941] Ch 204 at 206-7. The evidence showed that these principles applied to the gifts made for the benefit of the AusEntB missionary. They were made because of his participation in missionary work and to alleviate the financial sacrifices that work required of him, and the difficulty to which it gave rise in supporting his family in Australia.
The jurisdictional issues
118.TACT’s application was made in November 2004 and sought endorsement with effect from 1 July 2000. The Commissioner’s reviewable decision, disallowing TACT’s objection to the refusal of the application, was made on 9 September 2005. The Commissioner contends that the reviewable decision was as to TACT’s entitlement exemption as at 9 September 2005 and it is only that question that is able to be determined by the Tribunal in the review proceedings. The Commissioner relies on the Full Federal Court’s decision in Shi v Migration Agent’s Registration Authority (2007) 158 FCR 525. The Commissioner submits that the decision in Shi, which concerned the cancellation of registration under the Migration Act 1958, should be preferred to the contrary decision in Commissioner of Taxation v Word Investments Ltd (2006) 64 ATR 483; [2007]FCAFC 171 at [63].
119.In Re McCabe and Minister for Foreign Affairs and Trade (2007) 98 ALD 142I I examined the effect of the decision in Shi v Migration Agent’s Registration Authority (2007) 158 FCR 525. I said that application of the reasoning in Shi depended on the nature of the decision under review and the statutory provisions that determined the scope of the matters relevant to a particular decision. Specifically, if the statutory provisions confined the statutory decision (both of the primary decision maker and also the Tribunal) to matters that existed at a particular time, then evidence that went only to subsequent events could not form a proper basis for the review of the original decision. The reasoning in Shi would only be relevant in the present case if I had decided that TACT had not demonstrated its endorsement eligibility prior to 9 September 2005 or, conversely, had become ineligible thereafter. I have not come to either of those conclusions. In my opinion, TACT was eligible for endorsement as at 9 September 2005 and the evidence of the conduct of its affairs since that time has not demonstrated any disentitlement.
120.The Commissioner’s contention appeared to proceed on the basis that TACT’s endorsement application, and thus both the Commissioner and the Tribunal’s powers related only to the closed period between the effective date of the application and the refusal decision. However, as all the judges in the two Word decisions pointed out, the Commissioner’s statutory power was to grant the application with effect from a date the Commissioner determined: [2006] FCA 1414 at [64]-[66] per Sundberg J; [2007] FCAFC 171 at [62]-[63] per Allsop J and [105] per Jessup J. Furthermore, once an endorsement decision was made, it continued to operate until the Commissioner withdrew the endorsement under ITAA97. In these circumstances it was open to the Commissioner, in the circumstances of the present case, to have granted the application on 9 September 2005 and if granted on that date, it would have continued to operate thereafter. The Tribunal’s power is no more restricted.
The effective date of endorsement
121.Neither of the parties submissions canvassed the date from which TACT’s endorsement should take effect if I decided that TACT established its entitlement. It is consistent with the Commissioner’s challenge to the distributions that TACT claimed to have made in the 2001 and 2002 financial years, that the endorsement should not, in any event, take effect before 1 July 2002. I have not accepted TACT’s claim to have made any distribution in those years. However, I have accepted TACT’s argument that the application requirement in ITAA97 s50-60 did not mandate distribution in any particular year. The evidence also discloses that TACT had immaterial income before the year ended 30 June 2003. In those circumstances, I consider it is preferable to determine that TACT’s exemption endorsement should take effect from the date it sought namely, 1 July 2000.
Decision
122.The decision under review is set aside. In substitution for the decision under review the Tribunal determines that TACT was entitled to be endorsed as exempt from income tax as at 9 September 2005 and is to be endorsed as so exempt, with effect from 1 July 2000.
I certify that the 122 preceding paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member.
Signed: ................[SGD]............................................................
AssociateDates of Hearing 29 – 31 October 2007 and 19 – 20 November 2007
Date of Decision 7 April 2008
Counsel for the Applicant Mr J Horowitz
Counsel for the Respondent Ms E Collins and Ms K DeardsSolicitor for the Respondent Mr M Donohoe
ATTACHED TABLE: TACT – SUMMARY OF FINANCIAL STATEMENTS
2000 2001 2002 2003 2004 2005 2006 2007 Trust funds Contributions by settlor 10 10 10 10 10 10 10 10 gifts to trust 10,150 10,150 170,150 170,150 163,350 163,350 163,350 188,350 Capital profits reserve -222 -222 -222 -222 -222 14,446 19,914 19,914 Reserves 2,030 2,433 4,740 105,111 226,061 269,749 351,651 341,651 Total trust funds 11,968 12,371 174,678 275,049 389,199 447,555 534,925 549,925 Current assets Cash 308 319 627 20,197 10 42,857 108,825 135,818 Receivables 12,000 138,300 169,913 172,896 176,017 Investments 9,550 10,839 10,839 10,839 186,230 154,946 Other 2,111 1,314 163,312 302,957 188,050 200,266 Total current assets 11,968 12,471 174,778 345,993 326,360 413,036 467,951 466,780 Non-current assets Investments 0 60,000 60,000 60,000 65,950 125,950 Shares 0 10,839 24,519 23,600 23,600 Total non-current assets 0 0 60,000 70,839 84,519 89,550 149,550 Total assets 11,968 12,471 174,778 405,993 397,199 497,555 557,501 616,330 Current liabilities Accounts payable 10,000 0 2,575 2,513 Undistributed income 100 100 120,944 8,000 50,000 442 HELP 20,000 3,450 Borrowings 100 100 120,944 8,000 50,000 0 60,000 Total current liabilities 100 100 130,944 8,000 50,000 22,575 66,404 Total liabilities 0 100 100 130,944 8,000 50,000 22,575 66,404 Net assets 11,968 12,371 174,678 275,049 389,199 447,555 534,926 549,926 Income Consultancy fees earned 0 100,000 100,000 103,000 103,000 103,000 Dividends-franked 480 312 308 266 1,188 852 1,020 1,192 Distributions from trusts - MLC 283 91 1,998 8,695 11,823 5,233 4,457 Interest Loan R 9,460 10,122 Interest Loan D 1,247 0 Interest received 937 11,939 22,303 10,787 10,709 Total income 763 403 2,306 109,898 124,949 131,388 129,972 129,551 Expenses Bank fees and charges 0 0 0 0 Total expenses 0 0 0 0 0 0 5,106 2,657 Net profit 763 403 2,306 109,898 124,949 131,388 124,866 126,894 Distributions TACT's contention Financial statement distribut'n 0 0 0 10,000 14,000 87,700 42,963 126,452 Financial statements - undistrib'd 2,306 99,898 110,949 43,688 81,903 442 % annual income distributed 0% 9% 11% 67% 34% 100% Distributions claimed/declared 1,000 1,000 11,000 26,800 77,700 42,963 136,452 Distibutions paid in year 1,000 8,800 23,700 14,577 71,952 Commissioner's contention All distributions paid in year 12,800 33,900 27,886 102,235 % annual profit distributed 10% 26% 22% 81%
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