Pincus J

Federal Court

Judgment date: Judgment handed down 9 December 1991

Pincus J

These are taxation appeals from the Administrative Appeals Tribunal, relating to a superannuation fund. The questions before the Tribunal concerned the deductibility of contributions made by employers to the fund and also whether the fund's income qualified for that beneficial treatment which may be available under the Income Tax Assessment Act 1936. The rather complicated facts are the subject of full and careful treatment in the reasons of the Tribunal and the following account of them is based principally on those reasons. The tax years in issue are those ended 30 June 1979, 1980, 1981, 1982 and 1983. The relevant provisions have been altered since 1983, but I shall speak of them in the present tense.

In 1977, there subsisted a partnership between three accountants, Messrs McKinnon, Laverty and Roche. The respondents to the appeals with which I am concerned are Laverty and Roche, together with a party described as ``Trustee for McKinnon, Laverty and Roche Superannuation Fund''. It is not clear to me that the rules permit the respondent to an appeal to be so described (rather than named), but no point was taken about that.

About mid-1979, for reasons which do not seem to be of any present consequence, it was agreed between the three partners that McKinnon would retire as a partner as from 17 June 1979 and become an employed consultant. It was also then agreed that a superannuation fund would be established for McKinnon's benefit. As I understand the Tribunal's findings, it was also agreed that the fund should provide for McKinnon a payment of $42,000 on his retirement on 31 July 1984, with arrangements to assure to him the same sum in the event of premature termination of the employment by reason of death or disability.

A step was taken to establish the fund when, on 29 June 1979, a sum of $7,403 was paid into a savings bank account in the names of Laverty and Roche as trustees of the fund. However, within a fortnight almost all that money was paid out; on 3 July 1979, $5,303 was withdrawn and on 12 July 1979, $2,000 was withdrawn, leaving only $100 in the account. These sums were loaned back to the partnership. For a period of about six months, the balance in the account remained at $100, but then there was a series of payments of $650 each, described by the Tribunal as a ``programme of regular weekly payments... until mid-April 1980''. The passbook shows a slightly more complicated picture. Beginning on 4 January 1980 and ending on 16 May 1980, 17 payments of $650 each were made, a total of $11,050. The payments are not shown in the book to be at regular weekly intervals, but nothing seems to turn on that. Then a few irregular payments were made in May and June, producing a balance at the end of the year of $15,416.

The position in the 1980 year may thus be summarised by saying that for most of the first half of the year there was little in the account, but in the second half the balance was built up in steps to over $15,000. It was common ground that during that year nothing was done by way of investing to comply with the 30/20 rule, discussed below. It should also be noted that during all, or practically all, of the 1980 year, no document existed setting out the rights and obligations of those interested in the fund. A superannuation trust deed dated 21 June 1979 was tendered, but it was not executed then. The Tribunal did not make a finding as to the date of execution other than, implicitly, that it was executed between 27 May 1980 and 2 October 1980.

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In the 1981 year, a sum of $15,000, constituting almost the whole of the money in the account, was withdrawn; on 3 July 1980, it was placed on term deposit with a bank. During the 1981 year, frequent but not entirely regular payments were made at the rate of $142.36 per week until March and after that at the rate of $569.44 per month. In March 1981 $5,000 more - i.e. in addition to the initial $15,000 - was withdrawn and placed on term deposit. On 30 June 1981, a cheque for $7,773 was deposited and a sum of $9,800 was withdrawn and used to purchase Australian Savings Bonds.

On 3 July 1981, the $15,000 which had been placed on term deposit matured and was paid into the savings account, together with $1,500 interest. An additional $1,200 was used to buy Australian Savings Bonds, $8,200 was placed on term deposit with a bank and a sum of $7,000 was loaned to the partnership. No regular contributions were made during the 1982 year, but on the last day of the year (30 June) a partnership cheque for $59,966 was paid in.

In summary, during the 1982 year, apart from the $59,966, the only sums which were added to the fund were payments of interest. Although there was evidence as to the make-up of the $59,966, it is unnecessary to recount it at this stage and enough to note that most of that sum - $54,000 - was withdrawn on the following day (1 July 1982) and lent to the partnership.

In the 1983 year, there was a resolution to pay some monies to other beneficiaries, but although there were some oddities about that, discussed by the Tribunal, it seems to be unnecessary to discuss them. Apart from interest received and payments out to the smaller beneficiaries, nothing of consequence was done in the 1983 year, except that a sum of $10,500 was repaid on 27 June into the savings account. Before that money came in, the balance in the account was a mere $279.

It will be necessary to make further reference to the facts found. Counsel for the Commissioner made numerous attacks upon the Tribunal's reasoning and conclusions. As to some of them, it appears to me difficult to determine whether the points raised were truly questions of law or merely complaints that the Tribunal reached factual conclusions adverse to the Commissioner. A second general difficulty, as it seemed to me, was that the Commissioner's notice of appeal did not identify with sufficient precision the questions of law intended to be raised: see Order 53 rule 3(2)(b). An example of a question specified is as follows:

``Whether on the primary facts as found by the Tribunal it was open to the Tribunal to find that the McKinnon Laverty and Roche Superannuation Fund had complied with the provisions of section 23F(2)(a), (e) and (h) of the Income Tax Assessment Act during the relevant year.''

The grounds of appeal stated are similarly uninformative. Notices of appeal drafted in this fashion are not of much practical use to one endeavouring to ascertain in advance of the argument what are the points being taken; those points were, of course, much more specific than the notice of appeal would have suggested.

However, counsel for the respondent made no complaint about the notice of appeal and therefore its vagueness produces no advantage for the respondent. When the notice of appeal is very general, it is particularly important (in a case of this complexity) to submit a full and careful note of argument.

A third general difficulty is the status of the Commissioner's superannuation guidelines, which were referred to and relied on by the Tribunal in arriving at its conclusions. It is, I think, fair to say that the Tribunal treated the contents of the guidelines as having no lesser significance than they would have had if embodied in regulations or other laws distinctly authorised by Parliament. It is difficult to justify that approach; the guidelines were not binding on the Tribunal. But it seems possible to deal with the issues raised by the Commissioner in the appeal, insofar as they have substance, without coming to any conclusion as to the consequences of the Tribunal's having treated the guidelines as binding - a course which neither side distinctly criticised.

1. Section 23F(2)(a)

The appellant argued that at relevant times the fund did not comply with the requirements of s. 23F of the Act. The section sets out a list of conditions with which a fund must comply in order to achieve the exemption from income tax

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which is given by s. 23F(15). The appellant's principal attack was based upon the provisions of s. 23F(2)(a) which reads as follows:

``Subject to the succeeding provisions of this section, this section applies, in relation to a year of income, to a superannuation fund, not being a fund of a kind referred to in paragraph 23(jaa), if -

  • (a) the fund is an indefinitely continuing fund established and maintained solely for either or both of the following purposes: -
    • (i) the provision of superannuation benefits for employees in the event of their retirement or in other circumstances of a kind approved by the Commissioner; and
    • (ii) the provision of superannuation benefits for dependants of employees in the event of the death of the employees;''

I draw attention to the expression ``established and maintained solely''. It does not appear to me that authorities on the meaning of corresponding previous provisions, such as
Driclad Pty. Limited v. F.C. of T. (1968) 15 A.T.D. 179; (1966-1968) 121 C.L.R. 45, are necessarily of much help in construing the provision I have quoted. It is particularly significant that in the tax year with which Driclad was concerned (1958), the law did not require that the fund be ``maintained solely'' for the requisite purpose. To determine the purpose for which a fund is maintained, one must examine the circumstances surrounding the payments into the fund and the way in which the fund is invested.

It is my opinion, however, that a fund may be maintained for a purpose within s. 23F, even if an important reason for its having been established and maintained is the obtaining of tax deductions. It is not conceivable that Parliament intended the exemption from income tax conferred by s. 23F to be available only to taxpayers who have acted as they did without regard to the taxation concessions which are available to those who establish and maintain superannuation funds. The view just expressed gets some support from the remarks of Davies J., with whom Wilcox J. agreed, in
Raymor Contractors Pty. Ltd. v. F.C. of T. 91 ATC 4259 at 4260-4261. In discussing the expression ``for the purpose of making provision for superannuation benefits...'' in s. 82AAC(1) which gave a deduction for contributions to a superannuation fund, his Honour said, in effect, that if the requirements of s. 23F were fulfilled:

``... it was not pertinent that the sum was set apart and paid into the fund not out of beneficence but out of a duty imposed by law or by an industrial award and not of consequence that the employer had taken into account in establishing and maintaining the fund that incidental benefits such as taxation benefits or the borrowing of sums from the fund at a low rate of interest could be obtained.''

The explicit reference to ``establishing and maintaining the fund'' should be noted. If this line of reasoning is to be applied to the construction of s. 23F(2)(a), then much of the force of the Commissioner's attack in the present case is lost. Section 82AAC(1), as in force at the time which was relevant in Raymor's case, read as follows:

``Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount or the sum of the amounts, as the case may be, so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction.''

What Davies J. has said amounts to this: the fact that the taxpayer did what he did partly for the tax advantage and partly so that there would be a fund available from which he could borrow at low interest is not inconsistent with its having been done for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee. It cannot be a proper objection to the compliance of a fund with the Act's requirements that it consists, in general, of debt rather than cash; that will be so where the fund has all its money lodged in a bank.

The strongest attack made in the appellant's argument was based on a finding of the Tribunal that certain expenditure was incurred

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``with the purpose of constructing a large tax deduction without any immediate monetary outlay by the Partnership'' (para. 43). That expenditure was a sum of $50,611 paid into the fund on 30 June 1982, and being part of the sum of $59,966 referred to above as having been paid in on that date. The finding gains strength from the fact that, as has been explained, no regular contributions were made to the fund during the 1982 year and the only sums which came to the credit of the fund that year were some payments of interest. It is also important to note again that most of the sum of $59,966 paid in was withdrawn on the following day, when $54,000 was advanced to the partnership. It would no doubt have been difficult for the Tribunal to accept that the payments in and out were unconnected with one another or, to be more precise, that the payment in was not made with the intention of immediately drawing out most of the money again, to lend it to the partnership. Counsel for the respondents did not contend that the finding made by the Tribunal as to the reason for the incurring of the expenditure was incorrect or should be disregarded, but pointed out that the finding was made in the course of discussion of a subject other than compliance with para. 23F(2)(a). That is correct; the finding was treated by the Tribunal as relevant to the question of the permissible level of deductions under s. 82AAE, discussed below. That does not justify ignoring it or overlooking its relevance to the ``sole purpose'' test.

It is necessary to mention some further findings made by the Tribunal. After discussing payments made into the fund at the end of the 1982 year, the Tribunal remarked:

``As I have noted in paragraph 14, the sum of $54,000 was lent back to the Partnership on 1 July 1982 at interest at the rate of 17.5% per annum. That loan back appears to be within the Commissioner's guide lines for that year. To that extent, the loan back of itself does not appear to me to imperil the status of the fund as being a fund established and maintained solely for the purpose of provision of superannuation benefits for employees in the event of their retirement. But it is the events that occurred in the administration of the Fund for the year ended 30 June 1983 which raise doubts about whether the fund was in fact at the end of the year ended 30 June 1982 and for the year ended 30 June 1983 being administered solely for the provision of such benefits for employees.''

The Tribunal pointed out that there was an ``enormous increase'' in contribution in the 1982 year; it was more than tripled. The Tribunal regarded the explanation given for the increase as ``cryptic'' and said there were problems with it. These were, in brief, that there was evidence (which the Tribunal accepted) of a discussion about a proposal to increase McKinnon's benefit to a sum of $156,500 for the purpose of providing tax benefits to Laverty and Roche and that there was evidence of a proposal that he pay Laverty and Roche back $100,000, leaving his net benefit at $56,000. In the end, McKinnon was paid $85,957 on 1 July 1983.

The Tribunal, however, reached the conclusion, after reference to the Driclad case (above), that it was not open to it to find:

``by reason only of the loan of investment funds to the Partnership at an acceptable rate of interest, a positive purpose of benefiting the Partnership subsisting in addition to the purpose of benefiting the members of the Fund...''

It is not possible to agree with the suggestion that an adverse finding on the point was not open to the Tribunal; fairly plainly it was.

The Tribunal then went on to discuss events which occurred in the 1983 year. It does not seem necessary to recite the details of this, but it should be mentioned that McKinnon received ``the full benefit of the enhanced contribution made in respect of him in the year ended 30 June 1982...''. It may be thought that the Tribunal placed too much emphasis upon this factor. There may well, as Mr. McGill contended, be a fund which is so administered that the full benefit of the fund flows through to the employee beneficiaries but is nevertheless not maintained for the requisite purpose.

Reading the reasons of the Tribunal as a whole, however, and despite the use of some expressions with which one could not agree, the major theme of this part of the reasons simply is that the Tribunal was persuaded on the facts that s. 23F(2)(a) was complied with. It has to be kept firmly in mind that this Court has no jurisdiction to set aside the Tribunal's decisions on a ground amounting to

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dissatisfaction with its factual conclusions. Although the evidence with respect to the events at the end of the 1982 and beginning of the 1983 year appears to me to be a rather weak foundation for the ultimate conclusion, I have been unable to conclude that it involved any legal error. To revert to the central point relied on by the Commissioner, the finding that the expenditure at the end of the 1982 year was incurred to construct a large tax deduction without any immediate monetary outlay by the partnership is no doubt correct; but the expenditure also augmented the size of the fund. Unless one were to hold that a desire to get a tax deduction or a practice of lending money out of the fund to assist the employer's business must be taken to be inconsistent with the existence of a s.23F(2)(a) fund, no identifiable legal error can be discerned; the most one could say is that the factual result arrived at seems surprising.

It should be added that the reasons of the Tribunal include reference to the discretion vested in the Commissioner under s.23F(7), and hence in the Tribunal, to disregard non-compliance with s.23F(2) requirements.

The Commissioner's counsel also challenged the findings of the Tribunal reached concerning the 1979 and 1980 years, as to compliance with s.23F(2)(a). He criticised the administration of the fund in the 1980 year, pointing out that at the end of the 1979 year, a sum was paid in, almost all of which was promptly paid out again. The finding was that there was ``no evidence of interest ever having been paid on the sum borrowed''. But there was no finding that the loan was always intended to be free of interest. The view taken by the Tribunal appears to have been that the ``obvious impecuniousness'' of the partners at the relevant time, the fact that the borrowing was short-term only and steadily repaid, and the fact that substantial although irregular contributions were made in the relevant year, were enough to justify a favourable conclusion.

In my opinion, again, it does not appear to me right to hold that this necessarily involves a legal error. I think that the ground of attack is, in essence, a factual one and that there is no justification in law for upsetting the Tribunal's conclusion.

It does not appear to be necessary to discuss compliance with s.23F(2)(a) in the 1981 year, of which little was said at the hearing.

2. Section 23F(2)(e) and (h)

That was not the end of the complaints made by the Commissioner about the Tribunal's conclusion concerning s.23F(2). It was also argued that there was non-compliance with each of para. (e) and (h) of that provision.

Paragraph (e) reads as follows:

``the right of each employee and his dependants to receive benefits from the fund is defined by the terms and conditions applicable to the fund and notice in writing of the existence of that right was given to the employee not later than the time when contributions were first paid to the fund in respect of the employee or of his dependants or 31 March 1966, whichever is the later, or before such later date as the Commissioner approves in relation to the employee;''

Paragraph (h) requires in substance that the employee's benefits not be excessive in amount.

During the course of the argument, reliance also seemed to be placed by the Commissioner on para. (d) of s.23F(2):

``the rights of employees and dependants of employees to receive benefits from the fund are fully secured;''

The Tribunal found that the initial payment into the savings bank account (in 1979) established a fund for McKinnon's benefit as agreed between the partners, and that conclusion was not challenged before me. However, it was pointed out that there was no evidence that the notice in writing required by para. (e) was given, nor did the Tribunal expressly say that the failure to give such a notice was excused under sub-s. (7) or that the date of giving the notice was extended under para. (e). It seems to me, however, that it would be excessively pedantic to send the matter back to the Tribunal on this ground. It is true that it was not disputed that the point was taken, nor can anything be found explicitly relating to it, in the Tribunal's reasons. But the whole basis of those reasons was that McKinnon negotiated, with Laverty and Roche, the terms of the deed. Although there was some delay in reducing them to writing, it

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is inconceivable that the Tribunal would regard the absence of written notice to McKinnon as destructive of the exemption from tax which s.23F creates.

The last point requiring mention, taken under s.23F, was that there was non-compliance with s.23F(2)(h). The Commissioner's counsel argued that the fund could not be tax exempt throughout the whole of the period, because of the provisions of that paragraph. The contention was that the paragraph was incapable of the application which the Tribunal gave to it.

The operation of para. 23F(2)(h) is simply that it is one of the conditions with which a fund must comply in order that there should be a right to the exemption from income tax mentioned in s.23F(15). It is true that s.23F(7) gives the Commissioner a discretion to treat the requirement of para. (2)(h) as satisfied even if it is not, but unless that discretion is exercised favourably, the income tax exemption for the year in question is simply lost. The Tribunal held that there was an increase in the amount of benefit in the 1982 and 1983 years which was not explained and exercised a discretion under s.82AAE(b) so as to cut down the deduction for contributions made to the fund in each year.

It appears to me that the point raised under para. 23F(2)(h) has not been dealt with in respect of each of the 1982 and 1983 years. The question would seem to me to be whether the discretion given by s.23F(7) should be exercised in favour of the respondents. That aspect of the matter must be reconsidered by the Tribunal.

3. Sections 82AAC and 82AAE

It was argued for the Commissioner that in respect of one year, s.82AAE was not complied with. That provision reads in part as follows:

``The deduction, or the sum of the deductions, allowable under this Sub-division in an assessment or assessments of a taxpayer or taxpayers in respect of income of the year of income in respect of amounts set apart or paid by the taxpayer or taxpayers as or to a fund or funds for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee -''

There are then set out limits which may not be exceeded unless the Commissioner exercises his discretion.

The point taken for the Commissioner was simply that in respect of the 1982 year the finding was of a purpose other than that set out in s.82AAE, namely the purpose of getting a big tax deduction without any immediate outlay. It should be noted that s.82AAC requires the existence of the same purpose as does s.82AAE.

The then counterpart of s.82AAC, namely sub-s. (1) of that provision, was considered by the Full Court in Raymor's case. Hill J. said that there is ``much to be said for the view that the section is concerned with sole purpose'' (4271). That view has the support of a dictum of the Full High Court in Driclad Pty. Limited v. F.C. of T. (referred to above) (1968) 15 A.T.D. 179 at 183; (1966-1968) 121 C.L.R. 45 at 67. The provision which then corresponded to s.82AAC was s.66, set out at p.46 of the report; it does not appear to me to be different in any material way. Barwick C.J. and Kitto J., with whose reasons the other Judges agreed, remarked:

``Turning to s.66 we find in that section a very precise requirement that the payments allowed as deductions must be for the purpose of making provision for individual personal benefits of employees and for that purpose only. If, therefore, it were the case that the payments were simply made to the trustees of a fund, and, that the fund had been established from which such benefits are to be provided and for another purpose as well, e.g., to return to the company as loans payments made by the company to trustees, we ourselves would think that the income of the fund would not be within s.23(j) nor would payments to the fund be allowable deductions under s.66.''

As I have pointed out above, s.23(j) mentioned in this passage used language significantly different from its present counterpart. However, what the High Court said about s.66 appears to me relevant to the construction of the references to purpose in the sections with which I am concerned, namely s.82AAC and s.82AAE.

Raymor's case, which dealt specifically with purpose in s.82AAC, contains authority for the view that employers having taken into account

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in establishing and maintaining the fund ``incidental benefits such as taxation benefits or the borrowing of sums from the fund at a low rate of interest'' does not destroy the tax benefits; some may not find this easy to reconcile with what was said in the Driclad case about s.66.

It appears to be implicit in the Commissioner's argument that the test of purpose posed in s.82AAC is more rigid or stringent than that purpose mentioned in s.23F(2). Section 23F(2)(a) does not require that one focus on the separate purpose of each payment in and payment out; it requires a wider scrutiny, of the maintenance of the fund over a whole year. It may well be that a particular payment into a fund complying with s.23F is not deductible under s.82AAC. Each separate payment does not have to be, in itself, one for the purpose of provision of superannuation benefits; a payment might be made to repay a loan to the fund, without taking the fund outside s.23F. Further, as Mr. McGill pointed out, if the s.82AAC purpose test, as to a payment, is not complied with, no part of the payment is deductible; there is no provision for apportioning a payment which has not the requisite purpose.

It is my opinion that the Tribunal has either misunderstood or overlooked this point. Although counsel for the respondents contended otherwise, the Tribunal was, I think, obliged to disallow in full deduction of any payment made in the 1982 year which did not comply with the purpose test imposed by s.82AAC and s.82AAE. Although no doubt the Commissioner would assert that, on the primary findings, a conclusion adverse to the respondents on this point is inevitable, in my opinion the matter should be remitted to the Tribunal for reconsideration on this point also, with leave to both parties to adduce further evidence.

4. 30/20 Rule

It was argued that the income of the fund was not exempt in 1980 or 1981 because s.121C(1) of the Act was not complied with. It is admitted and indeed clear that the 30/20 rule was not complied with throughout almost the whole of the relevant years, and the question is whether the situation is saved by an exempting provision.

Section 121C has a definition of ``superannuation fund'', covering the fund here in question, in sub-s. (1A). The relevant requirement is in sub-s. (1) and reads as follows:

``The investment income of a superannuation fund derived during the year of income, being a superannuation fund that was established after 1 March 1961, is not exempt from income tax by virtue of paragraph 23(ja), or section 23F, unless the Commissioner is satisfied that, at all times during that year of income -

  • (a) the assets of the fund included public securities the cost of which was not less than 30% of the cost of all the assets of the fund; and
  • (b) the assets of the fund consisting of public securities included Commonwealth securities the cost of which was not less than 20% of the cost of all the assets of the fund.''

Note that the question posed relates to ``all times during that year of income''. The exempting provision is sub-s. (4):

``For the purposes of this section, the Commissioner shall disregard any failure of the assets of a superannuation fund to include, at all times during a particular year of income, assets as provided by any provision of this section if he is satisfied -

  • (a) that the trustee of the fund made a genuine and bona fide attempt to ensure that the assets of that fund included, at all times during that year of income, assets as so provided; or
  • (b) that the failure was by reason of a temporary delay in investment,

and that, in all the circumstances, it would be reasonable to disregard the failure.''

The point taken by Mr. McGill, for the Commissioner, was that the Commissioner was not obliged to disregard any failure, nor did the Tribunal, on appeal, have any right to do so, because there was nothing to suggest that either condition (a) or condition (b) applied or could reasonably be thought to apply. I accept this submission.

It is not clear what view, if any, the Tribunal formed on this point. It is conceded that the

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Commissioner raised the question and, indeed, reference was made in the Tribunal's reasons to the 30/20 ratio. However, I can find no discussion of the question whether the failure to comply with sub-s. (1) of s.121C could, in the circumstances of this case, be overlooked under sub-s. (4).

The argument advanced by Mr. Logan for the respondent was that the failure was by reason of a ``temporary delay in investment''. There was also some discussion of what ``temporary delay'' might mean; it seems to make the length of the delay the test, but may also, in this context, imply that the delay is either accidental or else occasioned by some passing circumstance. Whatever the expression means, it can hardly cover the circumstances of the present case. Of the 731 days in the two years, there was compliance on one day only. There is nothing to suggest that compliance was impossible or even difficult during the rest of the period. The simple fact is that nothing was done to comply with the 30/20 rule until the last day of the two-year period and I therefore hold that the fund was not exempt in either of the 1980 or 1981 years.


The consequence is that the income of the fund was not exempt in either of the 1980 or 1981 years. As to the 1982 year, reconsideration by the Tribunal is necessary from the point of view of s.82AAC, s.82AAE and s.23F(2)(h). As to the 1983 year, reconsideration is necessary with respect to s.23F(2)(h). I shall invite submission of a draft order and submissions on costs.

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