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Bray v. Federal Commissioner of Taxation.

Judges: Barwick CJ
Stephen J
Mason J

Jacobs J
Aickin J

Court:
Full High Court

Judgment date: Judgment handed down 19 May 1978.

Jacobs J.: The appellant in respect of the year of income ending 30th June 1974 claimed a deduction under sec. 78(1)(a) of the Income Tax Assessment Act 1936 (Cth.) in the sum of $44,207 of which the sum of $44,107 was the value of certain shares given to a fund claimed to be constituted by a Deed of Trust executed on 12th June 1974. It was claimed that there was a gift of the shares, which were purchased by the appellant within twelve months immediately preceding the making of the gift, to a public fund established and maintained under an instrument of trust exclusively 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 the sub-paragraphs of sec. 78(1)(a) and for the establishment of such funds, authorities and institutions.

The appellant who is a solicitor had income from his share in the partnership of Feez

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Ruthning & Co., Solicitors, of Brisbane, for the income year in question of $49,821 and further income which brought the total to $57,514 before allowable deductions. Allowable deductions, apart from gifts to the fund amounted to $24,831. With the deduction of the gifts to the fund the taxable income was nil. Without the deduction the taxable income was $32,683. The Commissioner disallowed the gifts to the fund as deductions. An objection was lodged in respect of the disallowance of a deduction of $44,107 but was disallowed. The appellant appealed to the Supreme Court of Victoria ( Menhennitt J.) but his appeal was dismissed. He then appealed to the Federal Court of Australia where his appeal was dismissed by majority. He now appeals from that decision to this Court.

The questions which arise on this appeal are whether the fund was a public fund, and, if so, whether it was established and maintained under the instrument of trust exclusively for the purpose set out above in the section and which I have referred to. In order to appreciate how these questions arise it is necessary to refer at some length to the facts. Between Christmas 1973 and Easter 1974 the appellant decided to create a fund to which he would make substantial donations of a kind which could be tax deductible and to carry out a series of transactions in connection therewith. A Trust Deed was prepared and in April 1974 the appellant approached three of his friends in Brisbane - Mr. J.E. Gallagher (a barrister), Mr. W. A. Gorry (an accountant) and Mr. K. P. Prior (a solicitor) - and asked each of them if he would act as trustee, with the appellant, under the Trust Deed the draft of which he showed to them. Each of them agreed to act.

The Trust Deed contained the following recitals and clauses related to the questions raised by the appeal:

``THIS TRUST DEED is made the twelfth day of June 1974 BETWEEN PETER WILLIAM BRAY of 64 Eastment Street, Rainworth, Brisbane in the State of Queensland, Solicitor (hereinafter called `the founder') of the one part AND the said PETER WILLIAM BRAY, JOHN EDWARD GALLAGHER of 85 Windermere Road, Hamilton, Brisbane, Barrister-at-law, WILLIAM ALLAN GORRY of Lot 67, Peverell Street, Brownsleigh, Brisbane, Public Accountant and KERRY PATRICK PRIOR of 6 Langside Road, Hamilton, Brisbane, Solicitor (hereinafter called `the trustees') of the other part.

WHEREAS:

A. The founder wishes to establish a public fund exclusively for the purposes of providing money, property or benefits to or for funds, authorities and institutions referred to and for purposes referred to in any of the sub-paragraphs of Section 78(1)(a) of the Income Tax Assessment Act of the Commonwealth of Australia and for the establishment of any such funds, authorities and institutions.

B. The founder proposes that the fund will solicit and accept donations from any person, company or organisation of monies and real and personal property and other benefits.

C. The trustees have consented to act as trustees hereof.

D. The founder has paid to the trustees the sum of One hundred dollars ($100.00) to be held by the trustees as the first contribution to be held by the trustees upon the trusts hereof.

E. The founder has formed the intention to establish the fund in gratitude to and affection for his parents GEOFFREY WILLIAM BRAY and DULCIE ENID BRAY.

NOW THIS DEED WITNESSETH and it is hereby agreed and declared as follows:

1. In this Deed the following words and expressions shall have the meanings assigned to them respectively unless the context otherwise requires:

(i) `The Fund'

  • (a) The original sum of One Hundred dollars ($100.00) hereinbefore mentioned;
  • (b) all sums of money and all other real or personal property and benefits or any part thereof at any time and from time to time paid or transferred to and accepted by the Trustees for the purposes hereof;
  • (c) all or part of the property and investments for the time being and from time to time representing the monies, property, benefits and income

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    mentioned in sub-paragraphs (a) (b) and (d) of this sub-clause;
  • (d) all or part of the income from the monies, property, investments and benefits mentioned in sub-paragraphs (a) (b) and (c) of this sub-clause.

2. The founder hereby directs and declares and it is hereby agreed that the trustees shall stand possessed of the Fund upon the trusts and with and subject to the powers set forth in this Deed.

3. Any person or company or other organisation (whether corporate or not) may from time to time and at any time donate monies, real and personal property and other benefits to the trustees to be added to and form part of the fund.

4.(a) The trustees shall be bound by the following rules in the application and use of the fund:

  • (i) The fund shall be applied and used exclusively for the purposes mentioned in Recital A of this Deed;
  • (ii) The fund shall only be applied and used for the benefit of funds, authorities and institutions within Queensland;
  • (iii) the fund will be applied and used without discrimination as to colour, race or creed;
  • (iv) No charge will be made in respect of any use or application of the fund; and
  • (v) The trustees will ensure that benefits from the fund do not flow to any one particular person, authority or institution.

(b) No part of the fund as constituted at the date of any variations or alternations lawfully made to this Deed shall become freed from the limitations imposed by clause 4(a) of this Deed without the approval of the Commissioner of Taxation.

5.

  • (i) Any part of the fund available for investment may be invested by the trustees in any investments authorised by law for the investment of trust monies and in no other manner.
  • (ii) The trustees may retain any property or benefit of any kind or nature in the same form in which it was originally received without being obliged to sell the same or convert it into money.
  • (iii) Sub-clauses (i) and (ii) of this clause 5 of this Deed shall not be amended or deleted without the approval of the Commissioner of Taxation.

...

7. In exercising and discharging their rights and obligations and acting generally hereunder or in relation to any matter event or thing touching or concerning the provisions of this Deed:

  • (i) A trustee shall not be liable for any loss except one attributable to his own dishonesty or wilful default;
  • (ii) The trustees may hire engage or employ and avail themselves of the services of professionally qualified persons, specialists, managers, secretaries, clerks and other persons as the trustees deem fit (whether or not the same shall be a trustee or partner or employer or employee of a trustee) and may remunerate them out of the fund;
  • (iii) The trustees will conduct the fund separately from any other fund;
  • (iv) The trustees will open and conduct a separate bank account exclusively for the purposes of the trust into which all monies received by the trustees for the purposes of the trust shall be deposited; and
  • (v) The trustees will cause the books and accounts of the trust to be audited by a registered public accountant at least once in each year.

...

8. The power of declaring further and other trusts and powers of and under this Deed shall vest in the trustees as they from time to think fit but such power shall not permit any variation which would prejudice any concession allowed to the trust or to any donor to the trust or beneficiary of the trust under the provisions of the Income Tax Assessment Act.

9. This trust is established under the laws of the State of Queensland and the rights of

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all parties in and the construction and effect of every provision hereof shall be subject to such laws and the situs of this trust shall be deemed to be in Queensland.

10. For the reasons recorded in Recital E to this Deed the founder would have liked the fund to be known as `THE G.W. AND D.E. BRAY FOUNDATION' but in conducting the fund as a public fund (and in particular in soliciting donations thereto and making donations therefrom) the founder expresses the firm preference that this name be not used during his own lifetime lest it be confused with his own name. It is accordingly agreed that for the purposes of soliciting and making donations the fund will be called `THE SPORTSMENS AND BUSINESSMENS BENEVOLENT FOUNDATION' because of the common interest of the trustees and of the founder's parents in sporting and business affairs and in benevolence generally, and that name is hereby adopted as between the trustees and the Commissioner of Taxation for administrative convenience. During the lifetime of the founder the fund may be described as `THE G.W. AND D.E. BRAY FOUNDATION' for any purpose other than soliciting or making donations or dealing with the Commissioner of Taxation if the founder approves. The founder hereby expresses the hope that after his death the title referring to his parents will be employed. Regardless of which name is adopted, both refer to the one and same fund being that constituted by this Deed and defined in clause 1 hereof.

11. In the event of the winding-up of the trust for any reason whatsoever then the fund remaining after meeting all obligations of the trust will be transferred to any organisation, institution or authority meeting the requirements of Section 78(1)(a) of the Income Tax Assessment Act of the Commonwealth of Australia.''

When the Trust Deed was executed on 12th June 1974 the sum of $100 referred to therein was not paid as it was recited in the Deed to have been. It was paid at the time of the first meeting of trustees on 19th June 1974 to which I shall come shortly.

The day following the execution of the Trust Deed the appellant went to Melbourne and purchased the shares, the value of which is claimed as a gift. They consisted of 22,620 shares of $2 each in M.B.J. Constructions Pty. Ltd. The price was $45,466.20. All except one of these shares were transferred to the taxpayer. The remaining share was transferred to Trumper Finance Pty. Ltd. The latter was one of a number of companies, the shares in which were owned or controlled by the taxpayer. There was Trumper Pty. Ltd. which, together with Trumper Finance Pty. Ltd., carried on the activities of investment and trading in shares. Trumper Nominees Pty. Ltd. was director of some of the other Trumper companies and acted as trustee of a superannuation fund. Trumper Mining Pty. Ltd. had originally carried on the activity of investing in new issues of shares in mining exploration companies but it had ceased to do so by the time of the events in question. After so ceasing it had been used for the borrowing and lending of money on an interest-free basis.

The assets of M.B.J. Constructions Pty. Ltd. consisted of money in the bank amounting to $45,240 and there were no liabilities.

After the transfer of the shares the appellant and Trumper Finance Pty. Ltd. were appointed directors of M.B.J. Constructions Pty. Ltd. and the previous directors then resigned.

At the first meeting of the trustees of the foundation on 19th June 1974 all the trustees were present and the taxpayer was appointed chairman of the trustees and president of the Foundation. It was resolved that except where specifically permitted by the decision of all trustees any resolution of the trustees should be unanimously adopted by them in order to be binding. Lastly, there was noted the wish of the appellant to make a donation to the foundation of the 22,619 $2 shares in M.B.J. Constructions Pty. Ltd. There was a resolution by the trustees to accept that donation and to execute the transfer of the shares. A valuation of the shares was submitted in which the total value was shown to be $44,107, the amount claimed by the appellant as a deduction and the amount which has been disallowed. The taxpayer informed the meeting of trustees that he would see to the best of his ability that reasonable dividends would be forthcoming from the shares as income to the foundation for distribution to charitable bodies.

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The appellant and Trumper Finance Pty. Ltd. remained the only directors of M.B.J. Constructions Pty. Ltd. On 22nd July 1974 M.B.J. Constructions Pty. Ltd. invested $45,000 by subscribing for and having allotted to it at par 45,000 ``A'' non-cumulative preference shares in Trumper Pty. Ltd. These shares were redeemable at the option of Trumper Pty. Ltd. They carried with them the right to receive a fixed non-cumulative preferential dividend at the rate of 5% in each financial year out of profits of such year available for dividend or at a rate less than 5% but not less than 1% if the directors should so declare or a rate in excess of 5% if the directors should so declare, but not exceeding the rate payable in the same financial year in respect of any ``B'' 5% redeemable preference shares if the articles prescribed a maximum permissible dividend of 10%.

Thus Trumper Pty. Ltd. received the $45,000. It used it to repay some of its creditors and to make a loan to Trumper Mining Pty. Ltd. It will be recalled that Trumper Mining Pty. Ltd. was at that time carrying on the activity of borrowing money interest-free and lending it interest-free to or at the direction of the taxpayer. In fact that is what was done with the instant moneys. They were lent to the taxpayer in order to pay income tax, the income tax which he became liable to pay as a result of the disallowance of the deduction by the Commissioner. This was, however, a use of the money that the appellant did not contemplate at the time of the purchase of the shares. It does not appear to me to matter whether the appellant contemplated that he would personally use the money or whether he contemplated that it would be otherwise used in transactions by one or another of the companies which he alone controlled.

Menhennitt J. summarised the effect of these happenings as follows:

``The effect of all of the foregoing may be stated as follows. A significant part of the $45,240 in the bank account of M.B.J. Constructions has been indirectly made available to and used by Trumper, a company controlled by the taxpayer, to repay its creditors which facilitated its activities of lending money to Trumper Mining and investing and trading in shares. The money was so made available by subscribing in cash for the 5% redeemable preference shares. Another significant part of the $45,240 in the bank account of M.B.J. Constructions has been indirectly made available to the taxpayer interest free and used by him for personal purposes. This has been done through M.B.J. Constructions subscribing for the redeemable 5% preference shares in Trumper and Trumper lending part of the subscription money interest free to Trumper Mining which lent part at least of that money interest free to the taxpayer who used it to pay personal taxation.''

Menhennitt J. also found that the appellant did not reveal to the trustees his intention to deal with the funds of the company whose shares were the subject matter of the gift in a manner which would put those funds at the disposal of companies owned by and controlled by the taxpayer, if not of the taxpayer personally. He also found that at the time the shares were given the appellant contemplated that the company's assets would be made available to companies which were controlled by him.

In the financial year 1974 and in the financial year 1975 the appellant, to use his own words, ``repeated the exercise'' by purchasing shares in other companies whose only assets consisted of cash and by making gifts of those shares to the trustees.

On 25th June 1975 and 30th April 1976 Trumper Pty. Ltd. paid cheques for $1400 and $1800 respectively to M.B.J. Constructions Pty. Ltd. These cheques were said to be by way of dividends on the shares held in Trumper Pty. Ltd. by M.B.J. Constructions Pty. Ltd. On 25th June 1975 M.B.J. Constructions Pty. Ltd. paid to the fund $1400 and on 30th April 1976 a further $1800.

On 25th June 1975 the trustees of the foundation paid $400 to each of four public charities which were among the categories of funds, authorities and institutions specified in sec. 78(1)(a) and on 24th June 1976 the trustees of the foundation paid to eight such charities $200 and to a ninth $300.

On these facts the first question is whether at the time of the gift of the shares in M.B.J. Constructions Pty. Ltd. the fund established under the Trust Deed was a public fund.

It is first to be noted that it is not sufficient that the fund is one contributions to which are held in trust for funds, authorities or institutions or for purposes which wholly fall

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within sec. 78(1)(a). Such a fund may be established and maintained by a single contribution or a number of contributions from a private person. That is not a public fund. The reason why the fund must be a public fund emerges from a consideration of sec. 78(1)(a) as a whole. A gift to an authority or institution effectively disposes of the subject matter of the gift to that authority or institution so that it may immediately be enjoyed by it either for its general purposes or for a purpose described in sec. 78(1)(a). That is to be sufficient. However, it is in the nature of a fund that the objects thereof will not, or at least will not necessarily, benefit immediately from the gift of the subject matter to the fund. It was not the legislative intention that a private person could establish a fund by making gifts of money or property to trustees for the prescribed purposes and thereby claim a deduction under sec. 78(1)(a). Such a private person could if he wished make deductible gifts directly to any of the prescribed authorities or institutions. However, in certain cases a provision for deducting gifts made to established authorities or institutions would be inadequate to cover the field sought to be covered by the legislation. There might be need to raise a fund to which contributions could be made for the establishment of a hospital or a university or a war memorial or a school building. Further there need to be funds collected for the welfare of members of the Services or the provision of marriage guidance. And there was recognised to be a need for funds to be collected for the provision of benefits generally to objects falling within sec. 78(1)(a). The need for such funds, contributions to which would not necessarily be immediately available to any of the named authorities or institutions, could be reconciled with the general intention disclosed in sec. 78(1)(a) that no mere setting aside or appropriation of money or property would be sufficient to qualify for a deduction by providing that only a gift made to a public fund should be deductible. The implicit distinction is between a public fund and a private fund. A private fund as much as a public fund may as a result of the trusts created be irrevocably devoted to the required purposes; but that was not to be sufficient.

A consideration of these circumstances leads me to conclude that the principal distinguishing characteristic of a public fund is that contributions thereto are sought from the public or a significant section of the public. If a member of the public contributes to such a fund as a result of an invitation or request so to do, that, it seems to me is positive, and probably irrefutable, evidence that the fund to which he contributes is a public fund and, if the purposes of the fund fall within sec. 78(1)(a), the contribution will be deductible.

But what of the initial establishment of a public fund where the establishment is by an individual or a number of individuals? At that stage there is no contribution by a member of the public and perhaps no invitation to the public to contribute. Is it then necessary to examine the circumstances of the establishment of the fund or is it sufficient simply to examine the terms of the instrument under which the fund is established in order to ensure that contributions may be made to the fund by members of the public? If the latter be the correct view, then this fund qualifies as a public fund. If it is not correct, then it is necessary to determine what are the relevant circumstances.

In my opinion it is not sufficient that the public under the terms of its establishment may contribute to the fund. That being so, it appears to me that it must be the intention of the promoters or of the founder or founders (if any) that the public will contribute so that in the case of a fund established by an initial gift from an individual or a few individuals what is born of the contribution from an individual or from individuals will blossom into a fund to which the public in fact subscribe. A fund is a public fund when the purpose of its establishment is the raising of funds from the public or a significant section of the public so that the objects will benefit to an extent greater than the benefit which a founder (if any) confers by his own contribution. The question is one of fact in each case and the conclusion would not be lightly reached that promoters or founders did not have the requisite intention or purpose. The fact that members of the public unassociated with the promoters or founders did in fact contribute in response to an invitation or request extended to them would no doubt be very strong evidence that the promoters or founders had extended the invitation to the public with the purpose intention and expectation that that result would follow.

The converse, it should be made clear, is not necessarily true; but in my opinion the findings

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of fact made by Menhennitt J. establish quite clearly that there was no purpose intention or expectation in the appellant as founder that the public or any section of the public would contribute to the fund established under the Trust Deed. The only invitations extended to the public were the extraordinary advertisements published twice in the ``Cairns Post'', ``Daily Mercury'', Mackay, ``North West Star'', Mt. Isa, and ``Townsville Daily Bulletin'' in the following form:

``DONATIONS INVITED FROM THE GENERAL PUBLIC

to

THE SPORTSMENS & BUSINESS MENS BENEVOLENT FOUNDATION

P.O. Box 306,

NORTH BRISBANE, 4000

(a managed charitable fund devoted to assisting other Queensland charities).

Contributions of $2 and over are allowable deductions under existing income tax laws.

Sanctioned under `The Collections Act of 1966'.''

Understandably there was no response from any member of the public offering any contribution. Menhennitt J. stated:

``I am compelled to conclude that the advertisements were inserted not really in the hope of evoking donations but with a view to endeavouring to have some evidence from which it might be contended that the fund was a public fund.''

That conclusion was fully justified. Moreover, the fact that the form of advertisement appears to have been designed to discourage rather than to encourage contribution and the fact that no other invitation was extended to the public, coupled with the fact that the scheme was patently designed to secure the taxation advantage of deductible gifts without the full measure of pecuniary disadvantage which a donor to deserving causes expects as the price of his generosity - a scheme which would be complicated by a measure of public involvement - lead fairly to the inference that the appellant had no purpose or intention or expectation that the fund would be augmented beyond his own contribution by public contribution. That being so, the fund that was established was not in my opinion a public fund within the meaning of those words in sec. 78(1)(a).

Although my conclusion that the fund was not at the relevant time a public fund is sufficient to dispose of the appeal, I also am of opinion that the value of the shares was not deductible because at the relevant time the fund was not established and maintained exclusively for the purpose of providing money, property or other benefits to or for the prescribed funds, authorities or institutions or for the prescribed purposes or for the establishment of such funds, authorities or institutions. The purpose here referred to must, I think, be one which appears from the terms of the instrument of trust as they operate or take effect in the circumstances of the case. An extrinsic purpose of the founder or of a donor, which may be described as a motive for the foundation or gift, is not material. Nevertheless the distinction is not simply between motive on the one hand and beneficial objects of the trust on the other hand. Although the trust can be described as a ``purpose'' trust it does not follow that the purpose referred to in sec. 78(1)(a) can be exhaustively found in the declared beneficial objects. It is necessary also to take into account the powers conferred or duties imposed upon the trustees in order to see whether in the circumstances of the case the instrument in its form and its manner of operation as a result of decisions by the trustees discloses that what might ordinarily be an administrative power operates in fact as a purpose of the maintenance of the fund in the manner in which it is in fact maintained. What is apparently and ordinarily a power may be seen to operate as a purpose if it has an operation other than ancillary to the conferring of benefits upon the objects of the trust. One example will suffice. Assume an instrument of trust which gives power to employ a manager irrespective of the size of the fund to be managed. If the affairs of the trust are so conducted by the trustees under the instrument of trust that the income of the fund is absorbed by the salary of the manager the conclusion would be open that the fund maintained under the instrument of trust was not being maintained exclusively for the purpose of providing benefits to the objects. That conclusion would the more easily be drawn if the exercise of the power by the trustees was not wholly motivated by a wish to promote the best interests of the beneficial objects of the trust.

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In the circumstances of the present case the particular power which invites attention is the power to retain property in the same form in which it was originally received without being obliged to sell the same or convert it into money. That power, in the manner of its exercise, was the lynchpin of the appellant taxpayer's scheme. For, if the shares were sold, the proceeds would need to be either applied for the benefit of the expressed beneficial objects of the trust or to be invested in trustee securities. That would have been fatal to the scheme of having control of the company and consequently of the liquid funds which were the only assets of that company whose shares were the subject matter of the gift. The question is whether the inclusion of the power to retain property followed by the exercise of that power in the manner in which it was exercised shows that the fund was established or maintained with a purpose that the shares given to the fund by the founder would be retained in the form in which they were received whether or not the trustees were of the opinion that the retention of the shares was the best way of achieving a purpose of providing money, property or benefits to or for the specified beneficial objects.

The only trustee who had a knowledge of the facts which would enable a decision to be made on the manner in which the power to retain the shares would be exercised was the appellant. There is nothing in the evidence to suggest that the other trustees at any stage applied their independent judgment to the question. Clearly they at all times intended to do, and in fact did, what the appellant thought fit to do. The factors influencing the appellant as a trustee in determining whether or not to exercise the power to accept the transfer of the shares from himself to the trustees (including himself) and thereafter to retain the shares were therefore factors which can properly be attributed to the trustees as a body.

If it be correct that the fund was established upon the gift of the shares, then the decision of the trustees to exercise the power to accept the transfer of shares and to exercise the power to retain them for reasons other than the exclusive benefit of the objects of the trust means that the trustees exercised their powers in such a way as to achieve a result or effect other than that of exclusively providing benefits to the declared objects of the trust. On the other hand, if the fund was established by the gift of $100, then that decision of the trustees to accept the shares and to retain them had the same result, namely, that the trustees exercised their powers in such a way as to achieve a result or effect other than that of exclusively providing benefits to the declared objects of the trust. In either case the result is the same, namely, that the fund at the time of the acceptance of the transfer of the shares was not being maintained exclusively for the purpose required by sec. 78(1)(a).

For these reasons I am of the opinion that the appellant fails and that the appeal should be dismissed with costs.


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