Case L50
Members: HP Stevens ChCF Fairleigh QC
JR Harrowell M
Tribunal:
No. 1 Board of Review
J.R. Harrowell (Member): This is a reference under sec. 78(1)(a) of the Act. It concerns a gift of shares to a benevolent society set up by four residents of Norfolk Island. The gift was made in Norfolk Island by the taxpayer, a retired accountant residing in Australia. It was claimed as a deduction in his return of income for the year ended 30 June 1974.
2. By transfers dated 28 December 1973 9,500 shares in a Norfolk Island company, referred to here as N, and which were registered in the name of the taxpayer, were transferred by way of gift to the Benevolent Society of Norfolk Island. In determining the amount of the gift a value of $2 per share was adopted and so arriving at a deduction of $19,000 as claimed by the taxpayer.
3. The Commissioner disallowed the deduction under sec. 78(1)(a) of the Act by notice of assessment dated 23 May 1975. The taxpayer objected and in due course the matter was referred to this Board.
4. Counsel for the taxpayer argued that the Benevolent Society of Norfolk Island was a public benevolent institution within the meaning of sec. 78(1)(a). It was argued that the word ``public'' in ``public benevolent institution'' sec. 78(1)(a)(ii) looks principally at the nature of the objects of the institution not at the source of its funds. As for the word ``benevolent'' counsel gave that its wider meaning to include purposes and objects that were benevolent in nature whether or not they were strictly charitable in the legal sense.
5. On the other hand counsel for the Commissioner argued that for the purposes of sec. 78(1)(a) the word ``benevolent'' had the narrower meaning attributed to it by
Starke
J. as dealing with ``the relief of poverty, sickness, destitution, or helplessness'' (
Perpetual Trustee Co. Ltd.
v.
F.C. of T.
(1931) 45 C.L.R. 224
).
6. The Benevolent Society of Norfolk Island (the Society) was created by a Deed executed on 6 November 1973 by those four residents. All were members of a professional firm on the island, two of them were its partners, X and his son Y, and the other two were members of its staff, L and I.
7. It was the intention of the signatories to the Deed to incorporate the Society under an Act but to date this objective has not been achieved. It was therefore necessary to register the 9,500 shares given to it in the names of L and I to hold in trust for the Society.
8. Under the Deed it was the purpose of the parties to establish and maintain a public fund ``for the purpose of providing money property or benefits to or for funds authorities or institutions for charitable purposes or for the establishment of such funds authorities or institutions on Norfolk Island such public fund to be conducted as a public benevolent institution, etc.''. Without limiting the generality of these objects the deed went on to include the following specific objects:
``(a) The Norfolk Island Public Hospital.
(b) The Sunshine Club of Norfolk Island.
(c) Religious scientific charitable or public educational institutions on Norfolk Island.
(d) The maintenance and development of
ATC 374
the culture traditions language identity and integrity of the people of Norfolk Island.(e) Education in the theory and practice of government legislation and administration and duty loyalty and service to Her Majesty Queen Elizabeth II and her successors according to law.
(f) Public libraries museums and other institutions relating to the history flora and fauna marine life and geology of or associated with Norfolk Island.''
9. Between 6 November 1973 and 31 December 1974 the Society had received $38,337 by way of donations and income comprising:
Donations
Shares in N - at valuation
(including the taxpayer's gift
valued at $19,000) $32,502
Cash 4,200 $36,702
-------
Interest 10
Dividends 1,625
-------
$38,337
-------
10. From these funds it made a donation on 2 September 1974 of $3,950 to the Norfolk Island Public Hospital (Charity Queen Appeal). This left at 31 December 1974 accumulated funds amounting to $34,387.
11. It should be noted that the fund commenced on 6 November 1973 and the first donation made in accordance with its objects was not paid out until 2 September 1974. In this reference we are dealing with the year which ended on 30 June 1974. On the evidence before this Board the fund had donated $7,526 up to 15 June 1979 including the September 1974 donation of $3,950. After that donation the fund later made eleven subsequent donations commencing with a donation of $250 to the Sunshine Club to provide pocket money for an aged member of one of the Island's pioneer families whilst undergoing medical treatment in Australia.
12. Events subsequent to the year under review cannot be ignored but the weight given to them depends on the facts of the case. In this instance the taxpayer was informed on 23 May 1975 that the deduction he claimed in respect of his gift to the fund had been disallowed. I would therefore give little weight to the evidence detailing the gifts made by the fund after that date. Further under our tax law it is necessary to consider what a fund of this kind has the power to do as well as what it has done.
13. Section 78(1)(a) allows as a deduction gifts of $2 and upwards to the funds, authorities or institutions in Australia as listed in that subsection. It deals first with unnamed public bodies including a public benevolent institution. It then goes on in subsequent paragraphs to deal with named bodies which may not technically comply with the opening general provisions but to put the matter beyond dispute are specifically referred to by name. For example following the decision of the High Court in Perpetual Trustee Co. Ltd. case (supra) Parliament amended sec. 78 to include a public institution which provided for the comfort, etc., of those serving in the armed forces.
14. Subsection (a) concludes with a general provision which includes a public fund established under an instrument of trust or a will exclusively for the purpose of providing money, property or benefits to funds, authorities or institutions in Australia of the character as listed in the preceding paragraphs to which I have generally referred. If such a fund gives the trustees power to invest donations to it pending the decision to distribute to these other funds, authorities, etc., the Act requires the Commissioner to first satisfy himself that the instrument of trust confines the trustees to invest only in trustee type securities as defined by law.
15. In my opinion this final provision of subsec. (a) has no application to the Benevolent Society of Norfolk Island as its objects extend beyond the support of the particular funds, authorities or institutions as detailed in the paragraphs of sec. 78(1)(a).
ATC 375
Also cl. 14(n) of its constituting deed gives the Society authority ``To exercise widest powers of management and investment as may be determined by the Society either in general meeting or by its duly authorised officers''.16. No evidence was tendered to show that the Commissioner had been satisfied that the terms of the Deed had conformed with the requirements of sec. 78(1)(a). For the reasons set out in para. 15 I consider that the Society is not a public fund in terms of the provisions of this section. This leaves the matter to be considered under sec. 78(1)(a)(ii)
-
whether or not the Society in this reference was at the relevant time a public benevolent institution. For this reason I consider that the decision in
Bray
v.
F.C. of T.
78 ATC 4179
does not apply in this reference.
17. Counsel for the taxpayer dealt at length with the three important words ``public'', ``benevolent'' and ``institution''. His arguments have been summarized by Mr. H.P. Stevens, Chairman, and so I will not repeat them. My colleagues have referred to the cases which have dealt with this matter. It is by no means an easy task to select and apply to this particular case a principle emerging from the many decisions given. That of course is the ever present difficulty to be met by all those who deal with the law. But in this particular case it is accentuated by the construction of sec. 78(1)(a).
18. The section deals in some detail with a public fund established under a trust or a will, its purpose and its manner of investing and the need to obtain the prior approval of the Commissioner. On the other hand a public benevolent institution is referred to by those words only among five subparagraphs which deal with other public bodies. Under tax law, arm's length transactions are viewed in a different light from transactions between associated persons. It would therefore appear that in drafting that section the draftsman set out to distinguish and separate public funds established by individuals acting in a private capacity from public funds or bodies established and administered in a clearly impersonal public manner.
19. In viewing the section in this manner I find it difficult to accept that what to me, is a fund comprising a bank account and investments administered by four people in a private capacity can fail under the section as a public fund but be considered under the same section as a public benevolent institution. To me it would appear that under this section the words a ``public benevolent institution'' were intended to mean a body more substantial than a private fund (at the relevant time) with a public purpose. In dealing with the word ``institution'' the Privy Council in
M.N.R.
v.
Trusts and Guarantee Co. Ltd.
(1940) A.C. 138
at p. 149
said:
``It is by no means easy to give a definition of the word `institution' that will cover every use of it. Its meaning must always depend upon the context in which it is found. It seems plain, for instance, from the context in which it is found in the subsection in question, that the word is intended to connote something more than a mere trust.''
20. Lord
MacNaghten
in
Mayor etc. of Manchester
v.
McAdam
3 T.C. 491
at p. 497
also dealt with the word and gave it a wide meaning.
21. However these authorities are not sufficient to allow me to say that a fund or a ``mere trust'' cannot become a ``public benevolent institution'' (or ``society'') just by the simple process of giving it that title. I must therefore consider these three words and their application to the Society in this reference.
22. The word ``public'' does not infer that the control of the institution must rest with some government body
-
``... public control is not essential (the main criterion is the extensiveness of the class it is the object of the institution to benefit) and, in order to be of a public nature, the control need not be, in my opinion, that of some government body'' (
Williams
J. in
Maughan
v.
F.C. of T.
(1943) 66 C.L.R. 388
at p. 397
). That case dealt with estate duty and not income tax. On the facts set out by the Chairman, which I accept, the Society received no contribution from the public nor did it seek public money. The four founding members of the Society became its first officers (Cl. 6 of the Deed). Future appointments depended on the terms of suitable rules to be formulated by the founders (Cl. 7). To date such rules have not been made. In
Maughan's case (supra) Williams
J. summed up as follows (at p. 398):
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``To sum up, the sources of the Association's finances are public benevolence, it is controlled by an executive elected upon a quasi -public basis, and its activities, which accord with and fulfil the main objects in the memorandum of association, are of a public benevolent nature.''
23. Notwithstanding that this judgment was not in relation to income tax I would apply its principles to this case. I accept that the Society had a public purpose, subject to the limitations imposed because of a small island population, but in my opinion it fails in all other respects to meet the criteria set down by Williams J. to qualify as a public body.
24. With regard to the word ``benevolent'' I would agree with counsel for the taxpayer that it has a wider meaning than ``the relief of poverty, sickness, destitution or helplessness'' (
Starke
J. in
Perpetual Trustee Co. Ltd. case (supra)
). Any organization or person with a desire to do good and acts accordingly may be described as benevolent. But I do not concede that such a wide meaning could be applied to that word when used in sec. 78(1)(a). Sir Wilfrid
Green
M.R. in
In
re Diplock
(1941) Ch. 253
said:
``It must not be supposed for one moment from anything I have said that in a proper context the word `benevolent' may not be given a meaning much more limited than the one which it normally bears.''
25. I adopt Mr. Justice Starke's concept of the words in the Perpetual Trustee Co. Ltd. case (supra) and say that for the purpose of sec. 78(1)(a)(ii) the word ``benevolent'' covers the relief of poverty, sickness, destitution or helplessness. In doing so I quite realize that in a relatively small community, as on Norfolk Island, a benevolent institution may need to extend the meaning of that word to fulfil a real need. If that be so sec. 78(1)(a) is constructed to accommodate it if the government so wished. The institution could be removed from the confinement of subpara. (ii) of the section and become a named body, through amendment, in a subsequent subparagraph of its own as has been done in regard to many other special organizations. As it stands, the objects of the Society, in my opinion, are too wide to fall within sec. 78(1)(a)(ii).
26. I now return to the specific objects of the Society to which I have referred in para. 8 of my reasons. Included in those specific objects is the Sunshine Club of Norfolk Island. No evidence was tendered in regard to its constitution or its activities. No evidence was tendered to show that a donation of two dollars or more to that club would be an allowable deduction for income tax purposes. It was argued by counsel for the taxpayer that ``the purposes and objects of this Society, whether or not they are strictly charitable in the legal sense, when one considers them they would all be within what would be properly described as benevolent within the ordinary general meaning of that expression''. In my view this is yet another reason for giving the word ``benevolent'' a more narrow meaning within the terms of sec. 78(1)(a). If a donation of the appropriate amount made to the Sunshine Club of Norfolk Island was not an allowable deduction for taxation purposes it would not, in my opinion, be allowed if paid first through the Society in this reference.
27. Finally I refer to the quantum of the donation. The taxpayer's donation comprised 9,500 shares in company N valued at $2 per share amounting to $19,000. I agree with the Chairman that the taxpayer discharged the onus of proving that the total value of $19,000 was an acceptable figure. I was not satisfied that proper consideration had been given to the real value of the improvements made to the restoration of a ruin leased by N from the Crown. However in the absence of evidence disproving the cost of $63,880 I am not prepared to second-guess. In my opinion the onus of proof had shifted to the Commissioner and was not discharged by him. However in view of my findings this particular aspect is not material to my decision.
28. I would hold that the gift of shares in N valued at $19,000 made by the taxpayer to the Benevolent Society of Norfolk Island is not an allowable deduction in terms of sec. 78(1)(a) of the Act.
29. I would uphold the Commissioner's decision on the objection and confirm the taxpayer's assessment for the year ended 30 June 1974.
Claim disallowed
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