Link: Case Summary Document
Citation: [2012] HCA 11 (High Court of Australia, French CJ, Gummow, Hayne, Heydon, Crennan JJ, 29 March 2012)
Acknowledgement:The Pemsel Case Foundation thanks The Australian Centre for Philanthropy and Nonprofit Studies for its contribution in the drafting of this Case Note.
Summary:
This case was an appeal from a decision of the Full Court of the Federal Court: Bargwanna v Commissioner of Taxation [2010] FCAFC 126. The case concerned the construction of Division 50 of Part 2-15 of the Income tax Assessment Act 1997 (Cth) (the Act) and the nature of exempt income under those provisions of the Act.
The appellants in this case, Mr and Mrs Bargwanna, are the trustees of the Kalos Metron Charitable Trust (the Trust). The Trust was established on 14 October 1997, with Mrs Bargwanna as settlor. A dispute with the Commissioner of Taxation (the Commissioner) began on 22 November 2004 with the Bargwannas applied for endorsement of the Trust by the Commissioner, with effect from 1 July 2000, as ‘a fund established in Australia for public charitable purposes by … instrument of trust’.
Endorsement would have qualified the Trust as an entity exempt from income tax, within the operation of Division 50 of Part 2-15 of the Act, but the exemption from income tax would only apply if ‘the fund is applied for the purposes for which it was established’ (section 50-60 of the Act). Since income tax is payable in respect of each income year, the existence of an exemption needs to be considered and applied annually.
The endorsement application was refused by the Commissioner, and that decision was notified to the Trust on 13 January 2005. An objection to this refusal was disallowed by the Commissioner on 9 September 2005. The Bargwannas applied to the Administrative Appeals Tribunal (the AAT) for review of that decision; in that hearing the Commissioner contended that between 2002 and 2007 there had been a number of applications of the assets of the Trust (called the Fund) which were not for the purposes for which it was established.
However, the Bargwannas succeeded in the AAT. On 7 April 2008, the AAT gave detailed reasons for setting aside the Commissioner’s disallowance decision and for substituting a determination that, as at 9 September 2005, the Fund was entitled to endorsement as exempt from income tax with effect from 1 July 2000.
An appeal by the Commissioner to the Federal Court succeeded, and the decision of the Commissioner rejecting the endorsement application was reinstated. The only live issue before Edmonds J in the Federal Court had been whether the AAT had erred in concluding that the Fund was applied for the purposes for which it was established, within the meaning of section 50-60 of the Act. His Honour held that the AAT had erred in the test it applied in determining the issue under section 50-60.
However, the Full Court of the Federal Court (the Full Court) allowed an appeal by the respondents (the Bargwannas) and remitted the proceedings to the AAT for determination of such further facts as it deemed necessary. The Commissioner appealed that decision to the High Court, and the Bargwannas sought special leave to cross-appeal against the remitter order and to achieve a ruling that the litigation was at an end by dismissal of the appeal from the AAT.
In Division 50 of Part 2-15 of the Act, a distinction is drawn between the establishment by will or instrument of trust of a fund for charitable purposes, and the actual application of the fund for those purposes. This appeal was concerned with the application aspect of a fund.
The effect of section 50-1 of the Act and Item 1.5B of section 50-1 (which are found in Sub-division 50-A, ‘Various exempt entities’) is that the total ordinary income and statutory income of an ‘exempt entity’, being a ‘fund established in Australia for public charitable purposes by will or instrument of trust’, is exempt from income tax. The exemption conferred by these provisions is subject to two special conditions:
1. The entity is not exempt from income tax unless it is endorsed by the Commissioner (section 50-2).
2. There is no exemption ‘unless the fund is applied for the purposes for which it was established’ (section 50-60).
To be entitled to exemption in this case, the Trust had to be within Item 1.5B of the Act, and the two special conditions had to be satisfied (section 50-110).
When dealing with an application, the Commissioner may request the applicant to give specified information and documents (section 50-120(1)). The Commissioner must endorse an entity as exempt from income tax if it is so entitled and has applied for endorsement (section 50-105). An endorsement has effect from a date specified by the Commissioner. This may be a date preceding the application date (section 50-130), as happened in this case in the decision of the AAT.
The Commissioner may revoke an endorsement if the entity ‘is not entitled to be endorsed as exempt from income tax’, or the entity has failed to provide information or a document which is relevant to its entitlement to endorsement and which has been requested by the Commissioner (section 50-155).
The conclusions reached by the Full Court respecting the contravention of section 50-60 resembled those of the AAT. Their Honours considered that the primary judge in the Federal Court had erred in finding non-compliance with section 50-60 without treating the explanations of the trustees as relevant and without regard to the administration of the Fund as a whole. This was opposed to the view of the Commissioner that there had been various individual transactions which could be impugned in the course of the administration of the Trust.
In this appeal to the High Court, their Honours held that the relevant provisions of the Act directed attention to the terms of the instrument of trust by which a fund is established for public charitable purposes. They found that too little attention was paid to the terms of the Deed of Trust in this case in submissions to the AAT, to the Federal Court at first instance, and then to the Full Federal Court. They said that it is by reference to those terms and to the general provisions of the law of trusts that a determination will be made about whether a charitable trust has been duly administered for charitable purposes. In this context, their Honours held that (at [44]–[46]):
The terms of s 50-60 of the Act require that this fund be ‘applied’ for those purposes. That term is used in the sense of so administered as to give effect to the trusts established by the relevant instrument. Not all breaches of trust will deny the conclusion that the fund nevertheless has been applied for the relevant ‘public charitable purposes’. But, on the other hand, and contrary to the reasoning of the Full Court, upon which the respondents relied, the term ‘applied’ is not to be understood as if s 50-60 used such an expression as ‘substantially applied’ or ‘on the whole, applied’. The taxpayer seeks to gain a valuable benefit through establishment of exempt status. In the present case, as Edmonds J held, there was misapplication of the funds of the Trust by admixture with other funds…coupled with the failure of the respondents to obtain interest upon those moneys, together with, by means of the interest off-set account, the reduction in the interest payable by the respondents in their personal capacity upon their home loan. None of these acts of maladministration were referable to the carrying out of the charitable purposes for which the Deed provided. The acts of maladministration of the Trust occurred over the period between 2002 and 2007. The respondents sought exemption in respect of the period beginning 1 July 2000. It was an error for the AAT to substitute a determination that as at 9 September 2005 there was an entitlement to endorsement. The application was correctly refused by the Commissioner. In doing so, it was appropriate to have regard to the whole of the evidence in refusing to grant under s 50-130 any endorsement from a date, 1 July 2000, which preceded the application date of 22 November 2004.
Therefore, the appeal was allowed and the Commissioner was successful. The respondents’ application for special leave to cross-appeal was dismissed. Costs were borne by the Commissioner by agreement.
The case may be viewed at: http://www.austlii.edu.au/au/cases/cth/HCA/2012/11.html
Implications of this case
In the Full Federal Court appeal, their Honours had held that the words ‘the fund is applied’ to charitable purposes were to be considered having regard to the whole administration of the fund. They had said that whether the applications or misapplications in each individual case are improper will depend on the circumstances. The High Court comprehensively rejected this outcome. The High Court made it clear that ‘applied’ did not mean substantially applied or mostly applied. There had been misapplications of Trust moneys in this case, and regardless of the motivations behind these, they meant that the fund had not been applied for charitable purposes.