Decision Date: June 13, 2014
Link: Case Summary Document
Citation: Federal Court of Australia

Summary:

This was an appeal from a decision of Perram J in The Hunger Project Australia v Commissioner of Taxation [2013] FCA 693. The Hunger Project Australia (HPA) is a not-for-profit company limited by guarantee which is part of a global network of entities that operate under the name ‘The Hunger Project’. The principal objective of The Hunger Project is the relief of global hunger. It is currently registered by the ACNC as a charity. The activities of HPA are mainly directed at raising funds which are then disseminated to Hunger Project members in the developing world. It is those entities that directly perform charitable acts to relieve hunger rather than HPA itself.

The question raised by this appeal was whether HPA was a ‘public benevolent institution’ within the meaning of section 57A(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTA Act. [1] The Commissioner of Taxation (the Commissioner) contended that an entity that merely engaged in fundraising activities and did not materially perform charitable works directly for the benefit of the public was not a public benevolent institution.

At first instance the primary judge rejected the Commissioner’s contention and found that HPA was a public benevolent institution even though it was predominately engaged in fundraising. This finding was upheld on appeal.

The decision at first instance

At first instance there were two principal issues:

(i) to what extent did HPA directly perform charitable activities; and

(ii) could an organisation which carries out charitable activities indirectly as a fund-raiser qualify as a ‘public benevolent institution’ within the meaning of section 57A(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (the FBTA Act).

The characterisation as a ‘public benevolent institution’ was crucial because if HPA was a ‘public benevolent institution’ within the meaning of section 57A(1) of the FBTA Act, then the provision of a benefit to one of its employees would be an exempt benefit for the purposes of the legislation.

The factual background

HPA is a company limited by guarantee originally incorporated as such under the former Companies (New South Wales) Code 1981 (NSW). Clause 2(a) of its Memorandum of Association (the Memorandum) evidences that it is a nonprofit company whose exclusive object is:

‘The relief of poverty, sickness, suffering, distress, destitution and helplessness with a particular emphasis on directly aiding and developing those suffering from chronic and persistent hunger in certified developing countries as approved by the Australian Minister for Foreign Affairs from time to time.’

Subordinate objects include the soliciting of donations (clause 2(p)), the raising of funds (clause 2(d)) for the purpose of making donations for charitable purposes (clause 2(b)), and co-operating with other entities having similar objects (clause 2(c)). Clause 3 of the Memorandum prohibits the distribution of money to members or directors, a necessary object for a nonprofit company.

HPA has a board of directors, a chief executive officer, and three or four employees. These employees work on three broad activities: raising funds in Australia, co-operating with other partner countries to support programs in developing countries and involvement in the implementation of these programs through co-operation with other Hunger Project entities in program countries. The main activity of HPA is fund-raising, which attracts from $1.6-2.5 million per year. There were two kinds of fund-raising conducted in the relevant tax period. The first kind of funds raised was called ‘unrestricted funds’ because the money donated could be used for any purpose within The Hunger Project. The second, which was called ‘restricted,’ was designated by an individual donor either for expenditure in a particular program country or, more proscriptively, on particular activities in a specified program country.

In addition to fund raising activities, there was also evidence of HPA’s ad hoc involvement in various programs run by The Hunger Project in project countries, including Bangladesh, Uganda, and Malawi. Some of the employees travelled to these program countries, but His Honour found that this did not involve direct charitable work, except for a seed program in Malawi (at [35]). The CEO and one of the employees were also members of the Global Coordinating Committee of the Hunger Project.  However, again His Honour did not see this involvement as direct charitable work (at [38]). In addition, the CEO travelled several times per year with existing or potential donors as part of her duties in encouraging new or continuing donations. His Honour held that however much ‘utility’ these trips might have they did not involve direct charitable work (at [41]).

Having found only one instance of direct charitable work on the evidence, His Honour said concluded (at [44] of the first instance decision):

‘I do not find, therefore, that the applicant is substantially engaged in the direct provision of charitable works. The correct characterisation of its activities is that it is predominantly engaged in fund raising and to a lesser extent in providing strategic guidance. Its direct charitable activities are negligible when viewed in the overall scheme of its operations.’

Without direct provision of assistance was HPA a public benevolent institution?

The term public benevolent institution is not defined in the FBTA Act.  However, section 57A(1)of the FBTA Act provides:

(1)   Where the employer of an employee is a public benevolent institution endorsed under subsection 123C(1) or (5), a benefit provided in respect of the employment of the employee is an exempt benefit.

His Honour reviewed the authorities on the meaning of public benevolent institution but held that he was not bound by any that existed (at [90]). However, he was persuaded by HPA’s argument that its situation was analogous to that of the charity in Commissioner of Taxation v Word Investments [2008] HCA 55 (Word Investments). Word Investments was founded by persons closely associated with a charitable organisation which conducted missionary and bible translation activities overseas. There was no dispute that those activities were charitable. Word Investments accepted deposits from the public paying little or no interest upon them and used those inexpensive funds to earn profits which were then given to the charitable organisation.

The Commissioner’s contention was that whilst it was an object of Word Investments to proclaim the Christian religion it did not, in fact, do so. All it did was to ‘raise money from commercial activities and hand it over to other bodies so that they could proclaim the Christian religion’ (at [36] of Word Investments). The High Court did not accept that this prevented Word Investments from being classified as a charitable institution. Insofar as the law of charities was concerned, it found nothing which would prevent such a fund raising entity from being characterised as being for charitable purposes.

More importantly for HPA’s position, the High Court had observed that a consequence of the Commissioner’s argument was that if a charitable institution had arranged its affairs in such a way that it had two divisions, one engaged in charitable activities and the other in fundraising, then the organisation would be exempt, but if it were to be split into two organisations then the fundraising entity would lose its exempt status (at [37] of Word Investments).

In this case at first instance, His Honour said that (at [119], [122]):

‘I do not find compelling, therefore, any of the reasons put forward by the Commissioner for why the suggested limitation to direct activities should be discerned in the expression public benevolent institution. On the other hand there is at least one good reason not to do so and that is the High Court’s decision in Word Investments. That case was concerned with ‘charitable institutions’ rather than public benevolent institutions…[but] [t]he applicant submits that this powerfully supports its position for precisely the same argument can be made not only in the case of public benevolent institutions in general but in the case of the applicant in particular.’

The Commissioner submitted that Word Investments provided no guidance in this case. It was concerned with the law of charities rather than with tax law. The use of the expression ‘public benevolent institution’ in earlier relevant tax law was an effort to move away from the technical complexities of the concept of charitable purposes in laws relating to tax. Further, the statutory history of the two concepts was quite different making any analogy between them difficult.

In this last respect, the Commissioner argued strongly that there was a legislative history that prevented HPA from being regarded as a public benevolent institution owing to its not providing direct charitable relief. There were two reasons advanced by the Commissioner:

1.      Previous legislation and case law supported the notion that directness of assistance was a necessary characteristic of a public benevolent institution; and

2.      The explanatory memorandum to the FBTA Act referred to a public benevolent institution as one which was involved in dispensing direct aid to those in need.

His Honour did not agree with these contentions, but rather agreed with HPA’s overall argument on this point (at [124]-[126]):

‘I do not accept that either of these matters provides a good reason to distinguish Word Investments from the present situation. It is true that it was concerned with charitable institutions rather than with public benevolent institutions but the High Court’s reasoning…did not turn on any of those technical matters. It was instead simply the observation that it was difficult to discern the redeeming features of an approach which focussed entirely on the form an organisation took rather than its substance. If the law is affronted by the proposition that a charitable institution might lose its exempt status for its fund raising activities if they be devolved into a separate entity (and Word Investments holds that it is) I cannot see why it would be any less affronted if a public benevolent institution lost exempt status for its fund raising activities by doing the same thing. There is no relevant difference. Nor does the difference in statutory history provide any reason to depart from that conclusion. If it were correct to say that the history and text of the…[previous legislation]…showed that the concept of a public benevolent institution included a requirement of direct provision I might be disposed to see some force in the Commissioner’s contention…Whilst I accept that the statutory histories are different, without more, I do not discern any reason not to conclude that the reasoning in Word Investments is equally applicable to public benevolent institutions. For those reasons, I do not accept that it is a requirement that a public benevolent institution engage directly in the activities making up the object of its benevolence.’

Therefore, HPA was held to be a public benevolent institution even if did not engage in the direct alleviation of hunger, but only in fundraising for that purpose to be undertaken by others.

The appeal decision

The Commissioner appealed the matter to the Full Court of the Federal Court of Australia and advanced four arguments on appeal for his contention that HPA was not a public benevolent institution:

1.      The ordinary meaning of the composite expression ‘public benevolent institution’ is an institution that gives or provides relief directly to those in need;

2.      Contextual considerations support a construction of the expression which requires the direct provision of relief;

3.      A number of case authorities support this contention in relation to the requirement of the direct provision of aid; and, most importantly,

4.      The primary judge erred in relying on Word Investments in rejecting the Commissioner’s construction and upholding HPA’s case. The Commissioner maintained the position that Word Investments is distinguishable because it concerns a different statutory expression in different legislation. The Commissioner pointed in particular to the fact that the expression ‘charitable institution’ has a technical legal meaning which is not directed or controlled by the scope or purpose of the statute in which it is contained. However, the expression ‘public benevolent institution’ has no technical legal meaning and must be given its ordinary meaning.

Each will be dealt with below in turn.

1.      The ordinary meaning of the composite expression ‘public benevolent institution’ is an institution that gives or provides relief directly to those in need

Case law from past years supports the notion that in ordinary English usage a public benevolent institution means an institution organised for the relief of poverty, sickness, destitution or helplessness: see Perpetual Trustee Co Ltd v Federal Commissioner of Taxation [1931] HCA 20; (1931) 45 CLR 224 at 232 per Starke J (Perpetual).  Moreover, this relief is to be given freely: per Evatt J at 235 of Perpetual. The Commissioner relied on the word ‘given’ to indicate the aid must be direct. The Federal Court of Appeal was not persuaded by this reliance on Perpetual (at [37]-[39]):

There is a further difficulty with the Commissioner’s reliance on what was said in the various judgments in Perpetual. Even if there could be divined from the various judgments a single expression of the common understanding of public benevolent institution, the Commissioner’s approach suggests that the common understanding in 1931, when Perpetual was decided, must forever fix the common understanding or meaning of the expression. We doubt that is the correct approach.  Whilst past judicial statements concerning the ordinary meaning of a word or expression can often assist in divining the meaning of the word or expression, the common understanding of the meaning of an expression may change over time depending on the particular expression in question. When the question is whether a particular institution is a public benevolent institution, the answer depends on the common or ordinary understanding of the expression at the relevant time. The question is not to be approached as a legal question to be dealt with by the mechanical application of past authority, irrespective of the present current understanding of the expression in the currently spoken English language…There is much to be said for the proposition that the common understanding or usage of the expression in question here has expanded or changed since Perpetual was decided…It is unlikely that global aid networks comprising separate fundraising entities such as the Hunger Project were prevalent when Perpetual was decided. Even if it was the case that the common understanding of a public benevolent institution in 1931 involved the institution directly dispensing relief, we can see no reason why that common understanding may not have changed over time to encompass organisations that may be structured in ways that separate fund raising entities from entities that dispense relief or aid using those funds.

2.      Contextual considerations support a construction of the expression which requires the direct provision of relief

The appeal court described the Commissioner’s contentions in this regard as ‘at best unpersuasive and at worst misconceived’ (at [40]). The point being made by the Commissioner here was related to the one above on ordinary meaning, and relied on words used in the Estate Duty Assessment Act 1914-1928 (Cth) (the EDA Act). The appeal court was underwhelmed (at [41]):

As for the reliance on s 8(5) of the EDA Act, it is difficult to see how the terms of a different Act dealing with a different taxation regime can assist in divining the common or ordinary meaning of the expression public benevolent institution in the FBTA Act. The fact that in 1928 the legislature chose to separately exempt from estate duty, inter alia, a “public benevolent institution” and a “fund established and maintained for providing money for the use of such institutions” does not mean that the common understanding of a public benevolent institution over eighty years later cannot include an institution that is primarily involved in fund raising. In our opinion the terms of s 8(5) of the EDA Act do not provide a relevant contextual consideration in working out the contemporary understanding of the meaning of a public benevolent institution as that expression is used in the FBTA Act.

The wording and surrounding circumstances of the FBTA Act also did not offer any assistance to the Commissioner (at [43], [45]):

The terms of s 57A(3)(b) of the FBTA Act also provide no assistance in determining whether an institution which primarily raises funds for benevolent purposes can be a public benevolent institution…We should add that we do not consider that it is correct to approach the issue of the ordinary meaning or common understanding of an expression used in a statute as if the answer can necessarily be gleaned from the apparent intention of Parliament in the statute, or other statutes that may use the expression.

3.      A number of case authorities support this contention in relation to the requirement of the direct provision of aid

The Commissioner relied primarily on the decisions of Rath J at first instance and Street CJ on appeal in Australian Council of Social Service Inc v Commissioner of Pay-roll Tax (1985) 1 NSWLR 567 (ACOSS). The Federal Court of Appeal was not persuaded that this decision, or any other that the Commissioner relied on, was of any assistance to the Commissioner’s case.

In ACOSS, the relevant institution, the Australian Council of Social Service, was an umbrella organisation the primary objective of which was to promote the social welfare of all Australians, with particular reference to poor and disadvantaged persons. It did so by providing services to its member organisations, conducting research into areas of concern and publishing materials on topics related to social welfare. Rath J held that ACOSS was not a public benevolent institution for the main reason that it was a body which was merely organised to promote, as opposed to administer, aid and comfort, and so could not fall within the ordinary English meaning of the expression public benevolent institution. This reasoning was based on that in Perpetual. Since the Federal Court of Appeal had already rejected the basis of Perpetual, this had no persuasive effect on the court’s decision. The part of the appeal decision of Street CJ in ACOSS relied on by the Commissioner was obiter (not part of the decision itself, but observations aside from it). Again this was not persuasive (at [59]-[60]):

We do not consider that the judgment of Rath J at first instance and Street CJ on appeal provide a persuasive basis for upholding the Commissioner’s contention that an institution cannot be a public benevolent institution if it does not dispense aid directly. Nor are we persuaded that the other authorities relied on by the Commissioner support his contention.

4.      The effect of the Word Investments case

His Honour at first instance said that an approach to determining whether a particular institution is a public benevolent institution which focused on the form or structure of the organisation, as opposed to the substance of its objectives and activities, would be erroneous. The Federal Court of Appeal said that there was no error involved in that reasoning (at [63]-[65]):

We do not consider that the primary judge erred in any way in relying on aspects of the reasoning of the High Court in Word Investments. There is no doubt that his Honour was conscious that Word Investments was concerned with the technical concept of charitable purposes or a charitable institution. His Honour accepted (at [123]) that the expression “public benevolent institution” was introduced in s 8(5) of the EDA Act to “move away from the technical complexities of the concept of charitable purposes”. His Honour found, however, that the High Court’s reasoning concerning the unredeeming nature of an approach which focused on the structure of an organisation rather than its substance “did not turn on any of these technical matters”. We agree. The point his Honour was making was that, by parity of reasoning, an approach to determining whether a particular institution is a public benevolent institution which focused on the structure of the organisation, as opposed to the substance of its objectives and activities, would be erroneous. His Honour’s reasoning was directed to determining the ordinary meaning of the relevant expression and whether HPA fell within that ordinary meaning. We see no error involved in that reasoning. Contrary to the Commissioner’s submissions, the primary judge was not in any respects equating the different meanings or concepts of a charitable institution and a public benevolent institution. Nor was he doing anything other than construing the expression public benevolent institution as used in the FBA Act in accordance with its ordinary meaning. The Commissioner’s submission that in adopting this reasoning his Honour somehow exceeded the Court’s proper judicial function has no merit and is rejected.

What is a ‘public benevolent institution’ in 2014?

Has the ordinary meaning of a public benevolent institution changed over time? The court said that it had (at [66]-[67]):

In our opinion, whilst there is no single or irrefutable test or definition, the ordinary meaning or common understanding of a public benevolent institution includes…an institution which is organised, or conducted for, or promotes the relief of poverty or distress. To adapt the words of Priestley JA in ACOSS, such an institution conducts itself in a public way towards those in need of benevolence, however that exercise of benevolence may be manifested. The ordinary contemporary meaning or understanding of a public benevolent institution is broad enough to encompass an institution, like HPA, which raises funds for provision to associated entities for use in programs for the relief of hunger in the developing world. The fact that such an institution does not itself directly give or provide that relief, but does so via related or associated entities, is no bar to it being a public benevolent institution. Such an institution is capable of being considered to be an institution organised or conducted for the relief of poverty, sickness, destitution and helplessness.

Therefore, The Hunger Project Inc was a public benevolent institution for taxation purposes and the Commissioner’s appeal was dismissed.

The case at first instance may be viewed at:

http://www.austlii.edu.au/au/cases/cth/FCA/2013/693.html

This appeal decision may be viewed at:

http://www.austlii.edu.au/au/cases/cth/FCAFC/2014/69.html

The ACNC Commissioner has issued an interpretation statement of the case at first instance and is available at:

https://www.acnc.gov.au/ACNC/Pblctns/Interp/ACNC/Publications/InterpStmt.aspx?hkey=56e40a9d-66d2-46e0-986f-a7fa62bc0f05

Implications of this case

This case has important implications for the meaning of ‘public benevolent institution’ in taxation law. Despite the strong judicial opinions in both cases, the importance of the matter may encourage a further appeal to the High Court of Australia.

The case if it stands and there is no amending legislation should see more charities register as Public Benevolent Institutions for various exemptions such as fringe benefits and gift deductibility. Many charities have been prevented from obtaining  the particular concessional status because of the ATO’s view of the necessity of ‘direct relief’ and has been a consistent complaint raised to government inquiries over the past twenty years and will no doubt wish to take advantage of this correction of the ATO’s interpretation of the law.

The current statement of the law would go a long way to meeting the recommendations of the 1995 Industry Commission, 2001 Charity Definition Inquiry and 2010 Productivity Commission research Report recommendations for the reform of Public Benevolent Institutions and access to gift deductibility status.

[1] A Public Benevolent Institution can gain an exemption from Fringe Benefits Tax which is currently capped at $30,000 of the grossed up taxable value of fringe benefits per employee. Further gifts of cash and property (subject to certain conditions) of a value of $2 or more to a registered PBI which is a Deductible Gift Recipient (DGR) can be claimed as a deduction by donors.