HODGES v FC of TJudges:
BJ McMahon DP
Administrative Appeals Tribunal
BJ McMahon (Deputy President)
This is an application to review a private ruling given under Part IVAA of the Taxation Administration Act 1953. In his application dated 25 January 1996 at item 7 the applicant asked the question:
``Is a deduction allowable for donations to the Apex Overseas Relief Fund by volunteers with overseas work parties for whom overseas flight tickets are purchased by that Fund?''
ATC 2159By private ruling dated 7 February 1996, the respondent answered the question with a simple ``no''. However, section 14ZAF of the Taxation Administration Act empowers a person to apply to the Commissioner for a ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to an arrangement. The section deals only with rulings that relate to the applicant's own taxation liabilities. Section 14ZAG authorises an application for a ruling in relation to the application of tax laws to another person, but only with the written consent of that other person. There was no such written consent in the present case. I will therefore treat the applicant's request as dealing only with the application of tax laws to him.
3. The application was made in the form approved by the Commissioner as required by section 14ZAJ. It included as required by item 9 of that form, a ``full description of the facts''. The Commissioner did not seek further information pursuant to section 14ZAM.
4. I will, therefore, set out the facts as described in the request for private binding ruling, as these facts also form the basis for this Tribunal's review. They are as follows:
``Apex has for many years been conducting work parties to developing nations in Asia and the Pacific to carry out projects which have been approved and subsidised by the Australian International Development Assistance Bureau (AIDAB), now AusAID.
These work parties consist of 15 to 25 Apexians, depending on the size of the project, who donate their time and skills to help fulfil the fourth ideal of the Association of Apex Clubs:
- • To promote International Under-standing and Friendship.
I was part of an Apex work party which built a nutrition centre in Batangas City in the Philippines in October 1995. This project met AusAID criteria, and was subsidised by that Department. I paid the value of my airfare into the Apex Overseas Relief Fund, and wish to claim a deduction for that donation in my 1996 Income Tax Return.
One other work party member and myself left a few days before the rest of the Apexians, with the purpose of preparing the site to ensure all materials and equipment were available. My own itinerary for the project was as follows:Day Activity Monday 2 October 1995 Travel Sydney to Manila (5 hour delay) Tuesday 3 October and Rest after long day travelling, and then Wednesday 4 October 1995 travel to Batangas City Thursday 5 October Meet local host Filipino Apexians and inspect site. Arranged for necessary equipment and materials to be available. Friday 6 October 1995 Rest of Work Party arrives; orientation. Saturday 7 October 1995 Work from 5.30am to 3.00pm. Sunday 8 October 1995 Rain all day. Remain indoors. Monday 9 October to Work 8 to 9 hours every day in extremely Thursday 19 October 1995 hot and humid conditions. Cold showers, wearing work clothes in effort to keep them clean. Friday 20 October 1995 Work until lunch time, then clean up ready for the Official Opening by the Australian Consul General. Refer to the enclosed copy of the programme for the blessing and inauguration, and also a copy of a newspaper report in the Manila Bulletin. Some copies of photographs are also provided. Saturday 21 October 1995 Pack then travel to Sabang Beach on Puerto Galera, an island off the coast near Batangas City. Sunday 22 October to Rest after three weeks hard work in hot Tuesday 24 October 1995 and humid conditions. Wednesday 25 October 1995 Return to Batangas City; farewells. Thursday 26 October 1995 Travel to Manila; problem arranging flight home; lunch with the Consul General; depart 7.00pm. Friday 27 October 1995 Arrive in Sydney about 6.00am. Travel home for lunch, then to Martinsville in the evening for NSW Apex State Board Meeting to report on the trip.
The Apex Overseas Relief Fund provided our air tickets, accommodation and food whilst working on the site in Batangas City.
AusAID subsidises Apex by $3 for every $1 that Apex raises for these projects. The altruistic Apexians who participate in these work parties acknowledge that the projects would be much more difficult to fund if Apex had to pay the air fares for each member of the work party. The cost for Apex to provide air tickets would mean that at least $10,000 of AusAID/Apex funds would be diverted from the much needed development project, greatly diminishing its effectiveness. These Apexians agree to contribute the value of their air fares, food and accommodation to the Overseas Relief Fund (which is approved by the Australian Taxation Office), and then claim an Income Tax deduction for that amount.
The money goes through the account for the Apex Overseas Relief Fund which actually purchases the air tickets. This procedure ensures that Apex formally acknowledges the need for such expenditure to be incurred as part of its regular activities. It is important to note here that the purchase of flight tickets for members of work parties is considered by AusAID to be `Recognised Development Expenditure'. This means that AusAID accepts that transporting work party volunteers is part of the cost of assisting our developing neighbours. Apex could therefore deduct this cost from the value of the Government funding, thus reducing the aid given to the beneficiary overseas project. The volunteers would then not need to contribute their airfare by way of donation.''
5. In discussions with counsel for the applicant at the hearing, it was agreed that there were several inferences that could validly be drawn from this recital of facts. Firstly, the subsidy paid by AusAID of $3 for every $1 applied to the sum of $1,100 paid by the applicant to the fund. The arrangement was structured in this way so that the fund would have the cost of travel, accommodation and food of the applicant recognised as an outgoing in the aid project and as, therefore, qualifying for the 300% subsidy. At the same time, the arrangement was structured in this way so as to enable the applicant to claim a deduction under the Income Tax Assessment Act 1936 for the $1,100 which he paid. The same sum of $1,100 was therefore intended to attract public revenue benefit both from AusAID and the respondent.
6. It was also agreed that a receipt had been issued for the payment (although it was not
ATC 2161produced to me) but that there was no written agreement between the applicant and the fund. Section 78A(1) of the Income Tax Assessment Act 1936 (the Act) defines ``agreement'' in these words:
```agreement' includes any agreement, arrangement or understanding, whether formal or informal or express or implied, and whether or not enforceable by legal proceedings (whether or not the agreement, arrangement or understanding was intended to be so enforceable)''
7. It was agreed that, having regard to this definition, there was an agreement between the applicant and the fund that in consideration of the applicant's payment of $1,100 the fund would provide air tickets, and accommodation and food for the applicant while he worked on the site in Batangas City. It was also conceded that had not the applicant paid the money, he would not have been included as a participant in the project.
8. The issue to be determined, on these facts, is whether the whole or any part of the sum of $1,100 paid by the applicant to the fund, is deductible under subsection 78(4) of the Act and if so whether subsection 78A(2) denies the deduction that otherwise would have been allowable under subsection 78(4).
9. In order to qualify for a deduction under the gift provisions of the Act, a payment must have both negative and positive characteristics. It must positively fall within the terms of subsection 78(4). This provides relevantly that a ``gift'' by a taxpayer to a fund mentioned in the tables forming part of the subsection is an allowable deduction for the year of income in which the gift was made, if certain other conditions (here irrelevant) are met. It was conceded that the donee fell within the terms of item 9.1.1 of the table accompanying that subsection. It was a public fund in respect of which there was in force at the time when the ``gift'' was made, a declaration under subsection (21) that the fund was an eligible fund for the purposes of that item. The positive qualification which the payment must meet, therefore, is that it is a ``gift''. The negative qualification is that the payment is not caught by the terms of subsection 78A(2). To a large extent, these qualifications overlap. Subsection 78A(2) does not appear to alter the law so much as to restate necessary concomitants of payments that are to be characterised as gifts.
10. The relevant parts of subsection 78A(2) are as follows:
``78A(2) Subject to this section, a gift of money, or of property other than money, made by a person (in this section referred to as the `donor' ) after 7 April 1978 to a fund, authority or institution is not an allowable deduction under section 78 where-
- (a) by reason of any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of-
- (i) the making or receipt of the gift; or
- (ii) any agreement or scheme entered into in association with the making or receipt of the gift,
the amount or value of the benefit derived by the fund, authority or institution as a consequence of the gift is, will be, or may reasonably be expected to be, less than the amount or value at the time when the gift was made of the property comprising the gift;
- (c) by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege other than the benefit of any deduction that, but for this section, would be allowable from the assessable income of the donor under section 78; or
11. Subsection 78A(2) was introduced in its present form in 1984. It was intended, no doubt, to deal with what might be called scheme cases, where artificial structures were devised to take advantage of the deductions provided for by section 78 which Parliament considered ought not to be allowed. Prior to its introduction, however, the meaning of the word ``gift'' had been considered by the High Court in
Commissioner of Taxation v McPhail (1968) 117 CLR 111. Owen J confirmed that the word ``gift'' was used in the sense in which it is understood ``in ordinary parlance'' (at 116). He noted that the Shorter Oxford Dictionary defined the act of giving as ``a transfer of property in a thing voluntarily and without any
ATC 2162valuable consideration''. He then went on to say:
``But it is, I think, clear that to constitute a `gift', it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.''
12. This passage from the judgement of Owen J is often quoted. In
Klopper & Anor v FC of T 97 ATC 4179 at 4188, Nicholson J referred to this passage as ``the McPhail Rule''. Although the reference was put in inverted commas, His Honour did not refer to any other case in which the passage from the judgement of Owen J was so described. It would not be necessary to refer to this except that the present applicant appeared to derive considerable comfort from the use of the word ``material'' in the passage to which I have referred.
13. As I read this passage, it seems to me that His Honour is doing no more than restating the ``ordinary parlance'' to which he had previously referred. The use of the word ``material'' does not alter the sense of the preceding words. It is probably no more than a reference to the absence of ``de minimis'' considerations. As a canon of statutory construction, these considerations were discussed by Hill J in
Farnell Electronic Components Pty Ltd v Collector of Customs (1996) 24 AAR 72 at 74-76. Possibly Owen J was simply eliminating as a disqualifying factor, any advantage received by the donor of a de minimis nature.
14. The concept of a ``gift'' under section 78 was more fully explored by a Full Court consisting of Bowen CJ, Brennan J and Deane J in
Leary v FC of T 80 ATC 4438.
15. Following McPhail, Bowen CJ agreed that ``the context and obvious intention of the suggestion suggests that [gift] is used in its ordinary non-technical sense''. The essential idea of a gift he said (at 4441) is the transfer of property by way of benefaction. Brennan J referred to a case decided in the United States Supreme Court (
Bogardus v Commissioner 302 US 34) in which Frankfurter J referred to the idea of a gift as a ``notion of a benefaction unentangled with any aspect of worldly requital''.
16. Dealing with the disqualifying effects of any such ``worldly requital'' Brennan J said at 4450 and 4451:
``The ordinary notion of gift and `gift' in its technical meaning have common features: a transfer of a beneficial interest in property by way of benefaction, and an absence of a pecuniary or proprietary benefit passing to the transferor by way of return. But the relevant circumstances in which these indicia may be found are more narrowly confined when the enquiry is as to a gift in the technical sense than when the enquiry is as to a gift according to ordinary notions. The former enquiry is narrower in scope, for it is more confined in its purpose. Its purpose is to ascertain whether a beneficial interest in property has been transferred by a mode which falls within the classification of gift. The intention of the transferor and transferee as to the ownership of the beneficial interest and the form of its transfer exhaust the matters for investigation as to the divesting and investing of the interest, and the absence of consideration passing from the transferee to the transferor serves to distinguish a gift from other modes of transferring property.
But an enquiry into the making of a gift according to ordinary notions requires reference to wider circumstances. In the first place, it is relevant to enquire as to the return (if any) which a disponor seeks and receives by disposing of the relevant property. The ordinary notions of a gift do not pay much regard to the difference between a return to a disponor which he receives as consideration under a contract and a return which is furnished under some other arrangement or understanding; nor is it of great importance that the return does not come directly from a disponee, but indirectly. It will always be of significance that a disponor has received from a disponee, either directly or indirectly, the return sought for making the disposition.
Secondly, it is relevant to enquire whether the disponee is, to the knowledge of the disponor, free to enjoy without burden the property disposed of; or whether, to the knowledge of the disponor, the taking of that property under the disposition is the occasion and reason for incurring a liability. If the disponor is aware that the receipt of
ATC 2163the property by the disponee will impose a liability upon the latter, the disposition may be seen not to be by way of benefaction. And as Dixon J. said in Cuming Campbell Investments ((1940) 63 CLR 619, at p. 642), a transfer by way of benefaction is the `essential idea' of a gift. No doubt much depends upon a comparison between the property taken and the liability incurred. It is of lesser significance that the liability is incurred under an arrangement or understanding with someone other than the disponor, or that it is to be discharged out of assets other than the property received.
Thirdly, and most importantly, if the disponor is moved to dispose of his property, not to confer a benefaction on the disponee, but to acquire a pecuniary or proprietary benefit for himself, his disposition of that property with the object of effecting that result denies an essential characteristic of a gift according to ordinary notions; and this will be so notwithstanding that the disposition is made for the immediate purpose, and has the immediate effect, of vesting that property in the disponee. Of course, if the purposes of the disposition are to confer pecuniary and proprietary benefits upon both the disponor and disponee, it would have to appear that the purpose of conferring such a benefit upon the disponee is dominant before a gift according to ordinary notions is established. It is in this enquiry that the first two considerations are useful, for in truth a return sought by the disponor and his knowledge of a liability incurred by the disponee speak to the purpose of disposition: the return sought by a disponor, and his knowledge of the measure of benefit to be taken by the disponee, are relevant in ascertaining whether benefaction is the purpose of the disposition.''
17. Deane J (at 4453-4454) considered that the concept of a gift:
``... involves, in my view, the concept that the relevant transfer is by way of well doing in that the recipient will be advantaged, in a material sense and without any countervailing material detriment arising from the circumstances of the transfer, to the extent of the property transferred to him.''
18. In other words, the concept involves a net increase in the worth of the donee, corresponding with a net decrease in the worth of the donor without any detriment arising to the donee from the transfer of property. This was an anticipation of the terms of subsection 78A(2). His Honour added (at 4455) that the usual attributes of a gift were that it would be ``by way of benefaction, that a gift will usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be without any advantage of a material character being received in return''. He referred to a number of phrases in cases collected and summarised at page 4455 such as ``detached and disinterested generosity'' and ``out of affection, respect, admiration, charity or like impulses''. The presence or otherwise of these usual attributes of a gift, His Honour said, would provide the reference point for answering the essential question, namely whether the transfer in question can, as a matter of ordinary language, properly be described as a gift.
19. Klopper is the most recent Federal Court authority on section 78. The applicant sought to reply upon parts of it. The judgement does not expound any new principles or lay down any new rules. It applies the law as expounded in McPhail and Leary to the facts before the Court. The present applicant distinguished the facts in the present case from those in Leary. For example, on the facts of that case His Honour was satisfied that the provision of the applicant's airfare by the donee was not an advantage of a material character. The present applicant seeks to rely upon this. Klopper, of course, depends very much upon its own facts. The amount involved greatly exceeds the amount involved in the present case. The cost of an airfare to England was a very small proportion of the amount in question. In the present case, the cost of an airfare provided by the donee accounted for almost all of the amount paid by the applicant.
20. In its reasons for decision the Tribunal, whose decision was the subject of the appeal in Klopper, found that there was no ``measurable utility value'' to Mr Klopper in having participated personally in the overall circumstances there under consideration. I am not sure where the phrase ``measurable utility value'' comes from. I was not referred to any authority which introduced this concept as a relevant consideration in determining whether or not a gift has taken place. However, as I have said, the circumstances of Klopper and of the
ATC 2164present case are quite different. The whole point of the present applicant paying the sum of $1,100 was to ensure that he was allowed to take part in the project. The money was paid in the knowledge that it would be applied, by the donee, to offset his expenses. If there is such a valid consideration as ``measurable utility value'', then I consider that the present applicant put such value upon his participation that he was prepared to pay for it. The ``measurable utility value'' was $1,100 - the price of being permitted to take part in the project.
21. I find that the payment of this money was not a gift in ordinary parlance. If I am wrong in this respect, however, it seems to me that the provisions of section 78A(2) disqualify the payment from deductibility under subsection 78(4).
22. Paragraph (c) focuses on any ``benefit, advantage, right or privilege'' which the donor may reasonably be expected to obtain as identifying a relevant disqualification. It was submitted by counsel for the applicant that in Klopper, Nicholson J saw no relevant difference between the meaning of conferring a material benefit on a donor, which would preclude the donation from being a ``gift'' on the one hand and the meaning of the words ``benefit, advantage, right or privilege'' as used in subsection 78A(2)(c). As I read the judgement in Klopper His Honour, however, does not appear to have addressed the question. The words ``benefit, advantage, right or privilege'' appear in a statute and must be given a meaning. They must add something to the meaning of the word ``benefit''. The phrase consists of words of enlargement, rather than restriction. The phrase, it seems to me, is intended to catch any benefit properly described in terms of any of the four words. In this case, the applicant received his airfare, food and accommodation. This in itself must be regarded as a benefit even when that word is narrowly construed. He received what Brennan J referred to as ``pecuniary and proprietary benefits''. However other words in the statutory phrase are apt to describe the applicant's residual quid pro quo. Privilege is defined (relevantly) by the Macquarie Dictionary as ``a prerogative, advantage or opportunity enjoyed by anyone in a favoured position (as distinct from a right)''. In the present case, the applicant had the privilege of taking part in the Philippines project. It was not an opportunity to be enjoyed by anyone. It was an advantage or prerogative extended only to those chosen who had also agreed to pay the stipulated money. To the extent that payment of this money secured the relevant privilege for the applicant, the payment is disqualified by paragraph 78A(2)(c) from deductibility as a gift.
23. This very consideration renders it unnecessary to consider a final submission made by counsel for the applicant. Different types of benefits are variously defined in the Fringe Benefits Tax Assessment Act 1986 as assessable. It has never been suggested, he submitted, that if an employer pays the airfare of an employee sent overseas to take part in the employer's business, that such a payment would be taxable under that Act. This was because, he said, the provision of an airfare (and accommodation and food) in the course of an employee's duties could not be regarded as a benefit. It is not necessary to consider this submission, although I consider the facts in the present case to be quite different from the facts postulated by counsel. In this case, the applicant has received an ``advantage'' and a ``privilege'' as consideration for the payment of $1,100.
24. Although the organisation intended ultimately to benefit by the payment may be of a charitable nature, it cannot be said that the payment was an act of ``detached and disinterested generosity''. It could not be said, again to use Brennan J's words, that benefaction was the purpose of the disposition. It was a payment made in the expectation of being allowed to participate in a desired project. It was a payment made by agreement to support a financial structure that would benefit both the donee and the donor. It was, to use a figurative expression, a payment with strings attached.
25. Accordingly, I am of the view that the Commissioner was correct in the answer he gave to the request by the applicant for a ruling. The decision under review is affirmed.