VT2003/66 and Commissioner of Taxation
[2005] AATA 941
•27 September 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 941
ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2003/66
TAXATION APPEALS DIVISION
Re: VT2003/66
Applicant
And: COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Mr B.H. Pascoe, Senior Member
Date: 27 September 2005
Place: Melbourne
Decision:The Tribunal sets aside the decision under review and, in its stead, decides that the applicant is entitled to be endorsed or exempt from income tax from 1 July 2002 as a charitable institution under item 1.1 of s 50-5 of the Income Tax Assessment Act 1997.
(sgd) B.H. Pascoe
Senior Member
INCOME TAX – Charitable Institution – endorsement as exempt from income tax – objective of raising funds for advancement of religion – carrying on commercial business prior to 1 July 2002 – whether fund established by instrument of trust
Income Tax Assessment Act 1997 Division 50
Glebe Administration Board v Commissioner of Payroll Tax (1987) 10 NSWLR 352
REASONS FOR DECISION
27 September 2005 Mr B.H. Pascoe, Senior Member
This is an application to review a decision of the respondent to disallow the applicant’s objection to the decision of the respondent to refuse to endorse the applicant as an income tax exempt charity.
At the hearing the applicant was represented by Mrs J. Batrouney SC with Mr M. Flynn of counsel. The respondent Commissioner of Taxation was represented by Ms D. Harding of counsel. Evidence was given by two former directors of the applicant, a current director, and the auditor. The hearing was in private pursuant to s 14ZZE of the Taxation Administration Act 1953
On 16 March 2002, the applicant applied to be endorsed as a tax exempt charitable entity under Division 50 of Part 2-15 of the Income Tax Assessment Act 1997 (“the Act”). By letter of 7 May 2002, the respondent notified a refusal of endorsement. An objection to this decision of 18 July 2002 was accepted by the respondent as lodged within time but disallowed by decision dated 24 February 2003.
The applicant was established on 8 August 1975 as a company limited by guarantee. The subscribers to the Memorandum of Associates were all associated with a voluntary Christian organisation Australian Bible Translators (ABT) and subsequent directors have had that association. ABT is described as a Christian Missionary organisation committed to the expansion of the Christian religion by translation of Christian scriptures particularly in areas of the world where written scriptures have not existed previously. It is a member organisation of an international body. It was said the applicant was established as a financial support company for ABT. It is understood that, initially, the applicant generated funds from housing development but this activity ceased in the early 1980s. In the 1980s, ABT raised some of its funds by borrowing money from individuals who wished to contribute to its activities at a nil or low rate of interest and investing the funds at commercial rates of interest. In 1986 or 1987, it was resolved that the applicant would take over this activity. In 1996, the applicant commenced a new venture by establishing a funeral business. A philosophy statement was drawn up prior to the establishment of the new business which, in the words of a director, spelled out the intent and desire to have a religious function of ministering to the grieving families as it served its secondary goal of making funds for [ABT] …and other religious organisations". Initially the business operated out of an office at a Uniting Church, but relocated to its own premises in 2003. It was acknowledged that funerals had been arranged for non‑Christian families.
On 19 June 2002 a resolution of directions of the applicant resolved that:
After consideration of legal advice, RESOLVED THAT [the company] establish a Trust for religious purposes to be known as The [company], the Trustee of which will be [the company].
RESOLVED from the date of establishment of the Trust Deed, all transactions relating to…Funerals to be subject to the terms of the Trust.
By Deed dated 1 July 2002 between an individual, as founder, and the applicant, as trustee, the Foundation Trust ("the Foundation") was established with an initial sum of $100. The Deed provided that all of the trust funds, additional funds and income thereof were to be held upon trust
…to apply the trust funds for the purpose of providing money, property or benefits to or for funds, authorities or institutions referred to, and for the purposes (if any) referred to, in section 50-5 of the Income Tax Assessment Act (Cth) 1997 or any statutory modification or re-enactment thereof for the time being in force and for any of the beneficiaries set out in the Schedule.
Beneficiaries set out in the Schedule to the Deed were:
All religious:
(i)funds;
(ii)authorities;
(iii) institutions;
(iv)organisations; and
(v)purposes
exempt under Item 1.2 of the Table in section 50-5 of the Income Tax Assessment Act 1997.
The financial statements in relation to the business, in operation since 1 July 2002, have been prepared on the basis of the applicant as trustee of the Foundation. On 15 March 2005, the Foundation applied for endorsement as a tax exempt charitable fund. This application was refused on 30 May 2005 and an Objection against that decision was made by letter of 31 May 2005. At the date of the hearing no decision on this objection had been made and is not before the Tribunal.
In early 2005, the directors of the applicant to close the investment arm and, in or about April 2005, wrote to all investors requesting them to redeem the investment and place the funds elsewhere. It was said that, at one point of time, the applicant had $2.7million in deposits from investors and, at the date of hearing, some deposits remained.
The relevant provisions of Division 50 are:
50-1 The total *ordinary income and *statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.
...
SECTION 50-5 Charity, education, science and religion
___________________________________________________________________
Charity, education, science and religion
___________________________________________________________________
ItemExempt entitySpecial conditions
___________________________________________________________________
1.1 charitable institution see sections 50-50 and 50-52
………………………………………………………………………………………………….
1.2 religious institution see section 50-50………………………………………………………………………………………………….
…
1.5B fund established in Australia for see sections 50-52 and 50-60
public charitable purposes by
will or instrument of trust (and
not covered by item 1.5 or 1.5A)
…
50‑50 An entity covered by item 1.1 or 1.2 is not exempt from income tax unless the entity:
(a)has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or
(b)is an institution that meets the description and requirements in item 1 of the table in section 30-15; or
(c)is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or
(d)is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia.
…
50‑52(1) An entity covered by item 1.1, 1.5, 1.5A, 1.5B or 4.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.
50‑52(2) However, an entity that is a charitable institution prescribed for the purposes of paragraph 50‑50(c) or (d) may be exempt from income tax even if the entity is not endorsed as exempt from income tax under Subdivision 50‑B (as long as the entity meets the other requirements of this Division).
50‑52(3) This section has effect despite all the other sections of this Subdivision.
…
50‑60 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
(b)is a fund which is referred to in a table in Subdivision 30-B or in item 2 of the table in section 30-15; 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.
For the applicant, there were four options submitted as bases for a tax exempt status. The first was that it was exempt under Item 1.1 of s 50-5 being a charitable institution as an organisation established and maintained for the advancement of religion having a physical presence in Australia and incurring its expenditure and pursuing its objectives principally in Australia. There was no dispute that the applicant is an institution for the purposes of this provision nor that the advancement of religion is a charitable purpose.
From the evidence, I am satisfied that the founders of the applicant had a clear intention that its function was to raise funds for the benefit of ABT and/or similar religious organisations. While the respondent expressed concerns at the wide powers contained in the Memorandum of Associates of the applicant, I am satisfied that the primary objects related to the advancement of religion and the non-religious objects were ancillary and included as a result of the not unusual abundance of caution of those legal advisers responsible for the drafting of the document.
Between 1986 or 1987 and 1996, the sole activity of the applicant was the generation of income from interest earned on deposits from individuals seeking to support those fund raising activities. Its constituent documents prohibited distribution to members of the company and the income generated was applied solely for the benefits of ABT as the primary recipient with small contributions to other similar religious organisations. It pursued those objectives solely in Australia and, as such, satisfied the requirements of Item 1.1 of s 50-5 and s 50-50(a) of the Act and was entitled to be endorsed as exempt from income tax for that period as an institution for the advancement of religion.
However, the commencement of the funeral business in 1996 was a significant change in its operations and objectives. While it may be said that an underlying purpose of that business was the generation of profits for the ultimate benefit of a religious institution, it is difficult to consider a commercial funeral business as having an objective of the advancement of religion. The views of Priestly JA in Glebe Administration Board v Commissioner of Payroll Tax (1987) 10 NSWLR 352 (at p365) are apt to this case where he said:
In my opinion the Board was not at any relevant time a religious institution. It was a statutory corporation doing commercial work within limitations fixed by reference to religious principles. It was staffed by persons who wished to observe the religious principles giving rise to the limitations on the Board’s commercial activities. The property in its ownership both increased in value and gave rise to revenue. Capital was held for the benefit of a religious institution and large amounts of revenue were handed over to that institution. To my mind all these matters result in it being accurate to describe the Board as a legal entity working in a commercial area, guiding its commercial conduct by the principles of a religious institution and, in ordinary language, working for that religious institution. I do not think that this legal entity can either by an ordinary or a technical use of language be accurately called a religious institution.
It is likely that the advisers to the applicant came to a similar view after seeking endorsement thus leading to the transfer of the business to a trust from 1 July 2002. While it is accepted that management and staff of the funeral business were all committed Christians, the business was a commercial operation for the purpose of making a commercial profit. As such, I do not accept that the applicant was itself a charitable institution whilst operating that business. The result is that the applicant was not entitled to endorsement as a charitable institution from the commencement of the funeral business in 1996 to 30 June 2002 when it was transferred to the trust.
Whilst it is not without doubt, I am of the view that it is appropriate to consider the activities of the applicant in its own right as separate from its activities as a trustee of the applicant's trust. As a consequence it would be seen that the activities after 1 July 2002, being the same as those prior to 1996, entitle the applicant to endorsement as a charitable institution from that date. As indicated previously, as much as I am sure that the applicant is seeking a view on the activities of the trust, there is no reviewable decision before the Tribunal in relation to that question.
The second option submitted as a basis for exemption was that the applicant is a fund established in Australia for public charitable purposes by instrument of trust. The agreement relies on the constitution of the applicant as being an instrument of trust. I am unable to accept that the Memorandum and Articles of Association of the applicant, being the constituent documents which establish it as a company, can, in any sense, be described as an instrument of trust. The essential characteristics of an instrument of trust under which a trustee is appointed to hold assets in trust for specified beneficiaries with a separation of legal and beneficial ownerships of those assets is not present in such documents which establish the corporation as an entity in its own right. If it could be said to be an instrument of trust it is clearly arguable that it is not exempt under Item 1.5B of s 50-5 of the Act because it does not satisfy s 50-60. The distributions to ABT are to a foundation or institution which incurs its expenditure and pursues its charitable purposes outside Australia.
The third option submitted was that, from 1 July 2002, the Foundation was exempt under Item 1.5B of s 50-5 of the Act. As stated previously, this is not a question which is properly before the Tribunal.
The final option submitted was that the applicant is and always has been a part of ABT which is an exempt institution. While not in evidence before me, it would appear that any exemption of ABT is under item 1.1 or 1.2 of s 50-5 of the Act and satisfies s 50-50(2), being a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia. I am unable to accept that the applicant, being an incorporated company, and entity in its own right and pursuing objectives which may be for the principal benefit of ABT but not solely, can be considered as part of and encompassed by ABT as an institution. It is separated from ABT both legally and in practice.
It is with no disrespect to counsel for each party that I have not referred specifically in these reasons to the many decisions of the Courts referred to in respective submissions. Whilst having taken many of these into consideration in arriving at a decision in this case, the ultimate question is one of fact in the particular circumstances, relating to the objects and activities of ABT.
It follows from the foregoing that the objection decision under review should be set aside and, in its stead, a decision that the applicant is entitled to be endorsed as exempt from tax as a charitable institution under Item 1.1 of s 50-5 of the Act from 1 July 2002.
I certify that the seventeen [17] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member
(sgd) Catherine Thomas
Clerk
Date of Hearing: 6 June 2005
Date of Decision: 27 September 2005
Counsel for the applicant: Mrs J. Batrouney SC with Mr M. FlynnSolicitors for the applicant: Moores Legal
Counsel for the respondent: Ms D. Harding
Solicitor for the respondent: Australian Taxation Office, Legal Services Branch
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