Case: Commissioner of Taxation v Word Investments Limited (2008) 236 CLR 204
Outcome: considered
Commissioner's notice of appeal stated that it raised four questions of law (paras (1) (4) inclusive) and eight grounds of appeal (paras (5) to (12) inclusive). The Commissioner's written outline of submissions, filed prior to the High Court of Australia handing down its judgment in Commissioner of Taxation v Word Investments Limited (2008) 236 CLR 204 on 3 December 2008, identified three issues raised by the appeal, namely, whether the Tribunal should have concluded that: (1) The Fund was 'established' for public charitable purposes within the meaning of s 50-5; (2) the Fund was applied for the purposes for which it was established within the meaning of s 50-60; and (3) the trustees of the Fund pursued its charitable purposes solely in Australia within the meaning of s 50-60(a). At the outset of the hearing of the appeal, indeed in the Commissioner's reply submissions filed prior to the hearing, senior counsel for the Commissioner, correctly in my view, abandoned the first issue in [3(1)] above (ground (5) of the notice of appeal) in the face of the reasons of the joint judgment in Word Investments . During the hearing of the appeal, senior counsel for the Commissioner informed me that he had been instructed, again correctly in my view, not to pursue the third issue in [3(3)] above (ground (6) of the notice of appeal). The premises for the Commissioner's new position were fourfold: (1) The Commissioner's acceptance that it was a fact that the amount paid to HELP International Inc was less than the amount of the gift by Mr Craik of $160,000; (2) the fungibility of money; (3) the provisions of s 50-75(1) of the 1997 Act; and (4) the approach taken in the Explanatory Memorandum to the 1997 Act precursor to these provisions: the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 4) 1997 at 5.69 and 5.70. I hasten to add that the Commissioner's new position on this issue had nothing whatsoever to do with anything the High Court said in Word Investments. It follows from the foregoing that the only live issue on the appeal was whether the Tribunal erred in concluding that the Fund was applied for the purposes for which it was established within the meaning of s 50-60 (grounds (7) to (12) inclusive of the notice of appeal). Nevertheless, I was informed by senior counsel for the respondents that ground (12) had been abandoned. Senior counsel for the Commissioner did not expressly confirm this, but there was certainly no dissent and no submissions were advanced in support of the ground. The text of s 50-60 is quite clear. It requires that 'the fund is applied for the purposes for which it was established'. Subject to what is said at [31] below, the intention of the trustees of a fund, where the purpose for which an application of the whole or part of the fund is in question, is not relevant although the intention of the settlor and other promoters of the fund is undoubtedly relevant to the s 50-5 requirement that the fund be established for public charitable purposes (Item 1.5B). So much is implicit in what was said in the joint judgment in Word Investments at [70]: In s 50-50 it was thus not necessary to provide in terms that the assets of a charitable institution be 'applied for the purposes for which it was established'. On the other hand, s 50-60 applies to item 1.5A in the table in s 50-5 (a 'trust covered by para 50-80(1)(c)') and to item 1.5B (a 'fund established in Australia for public charitable purposes by will or instrument of trust (and not covered by item 1.5 or 1.5A)'). And s 50-57 applies to item 1.5 (a 'fund established for public charitable purposes by will before 1 July 1997'). Further, s 50-65 applies to item 1.6 (a 'fund established to enable scientific research to be conducted by or in conjunction with a public university or public hospital'). In context the expression 'fund' means a fund held by a trustee for charitable purposes. The trust covered by s 50-60, and the funds covered by ss 50-57, 50-60 and 50-65, continue to have their status as a trust or a fund even if the trustees are acting in breach of trust and not applying the assets to the relevant trust or fund purposes. Hence it was necessary to do in relation to ss 50-57, 50-60 and 50-65 what it was not necessary to do in relation to s 50-50, namely make express provision for loss of tax exemption where the trust or fund was not applied for the purposes for which it was established. As Word submitted, the difference in drafting flows from the fact that ss 50-57, 50-60 and 50-65 (unlike s 50-50) speak of funds or trusts which were 'established' for certain purposes, and the legislation requires not merely that they be established at the outset for those purposes, but also that their assets be applied for those purposes from time to time thereafter. Moreover, the text of s 50-60 requires that 'the fund is applied for the purposes for which it was established', not that it is 'substantially' or 'principally' applied for those purposes: cf., s 50-50(a), 'pursues its objectives principally in Australia' (emphasis added). If the legislature had intended that substantially applied for those purposes was sufficient, it would have been easy enough to say so. Where the purpose of an application of moneys of a fund is in question, the intention of the trustees or manager/administrator in applying the moneys may be relevant where there is an incidental or inadvertent misapplication of part of those moneys, but that is not this case. The assailed applications in this case were intentional applications; in at least two of the cases for significant sums of money representing substantial proportions of the Fund; and carried significant benefits for persons who were clearly not objects within the ambit of the purposes for which the Fund was established. With respect, such misapplications are not cured or exculpated by: (1) Oversight; (2) a lack of intention to benefit a person who was not an object within the ambit of the purposes for which the fund was established, but who was in fact benefited by an intentional act; (3) making good the detriment to the fund, particularly where there is no corresponding detriment to the person who benefited; or (4) any holistic characterisation of the conduct of the fund by, or the benevolence of, those administering it. Turning to the specific transactions that are assailed in the remaining live grounds of appeal: (1) The interest off-set account It is not in dispute that the substantive economic effect of this account, by reason that it was non-interest bearing, was to reduce the interest payable by the respondents to the National Bank on their home loan by an amount referrable to the balance of the interest off-set account for the time being and from time to time. The respondents, who were the trustees of the Fund, did not pay interest to the Fund, either concurrently with the effective reduction of their interest liability to the Bank or, it seems, at any time afterwards. Compensation to the Fund for the interest foregone was effected by and through the instrumentality of Mr Craik. But this does not, in my view, cure the misapplication of the Fund's funds to purposes other than purposes for which the Fund was established. (2) Mr Craik's trust account The same observation can be made of the fact, again not disputed, that no interest was paid to the Fund on the amounts Mr Craik held in his trust account for the Fund. Putting to one side the 'irregularities' in his recording of his trust account which made it impossible to ascertain what amount of money was available to answer the Fund's claims, such failure to pay interest and Mr Craik's application of trust account funds to payment of debit balances recorded in such accounts, even if small as found by the Tribunal '...over the whole 4 year period was less than $1000' ([82]) and, albeit late in the peace, compensated by Mr Craik, does not, in my view, cure or exculpate the intentional misapplication of the Fund's funds, even if Mr Craik did not intend to benefit himself. The Rocfish loan