Case K8

Judges:
HP Stevens Ch
RE O'Neill M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 21 March 1978.

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H.P. Stevens (Chairman): The question at issue in these references is one of short compass but nevertheless an important one. It concerns the alleged wrongful failure by the Commissioner in terms of sec. 121C(4) to overlook the taxpayer's lack of satisfaction of the requirements of sec. 121C(1).

2. In order to gain the benefit of exemption under sec. 23F a fund must not only satisfy the provisions of that section (not an issue here) but also meet the further requirement that the Commissioner be ``satisfied that, at all times during that year of income'' the assets of the fund included public securities to ``not less than'' specified percentages. A failure to meet that requirement may not necessarily be fatal for, in terms of sec. 121C(4), the Commissioner can disregard that failure if he is satisfied that -

• (a)
  • (i) ``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
  • (ii) ``the failure was by reason of a temporary delay in investment,'' and
• (b) ``in all the circumstances, it would be reasonable to disregard the failure''.

3. It will be seen that it is insufficient for the Commissioner to consider that in all the circumstances it would be reasonable to disregard the failure. He, and the Board standing in his place, only comes to that question if he, or it, is satisfied as to either (a)(i) or (a)(ii) above. This is the real issue in this case for, having regard to the extent by which the assets have failed to meet the required percentages and the fact that the tax at the rate of 37 ½ % of the otherwise exempt income of the fund exceeds any deficiency in public securities, I would accept that it would not be unreasonable to disregard the failure.

4. My colleagues have set out the facts of the case and there is no need for me to repeat them. Suffice to say that there were no steps taken to ensure that on each day of the year or at the end of each month or quarter (apart from June) the required percentages were maintained. The reason for this was that it was considered the requirements for the exercise of the discretion would be met if the percentage was maintained as at each 30 June.

5. The trustee has now recognized the need to change his attitude and this was reflected in his evidence and is summed up in his answer to a question I asked just before the hearing concluded. The question and answer were: -

``Is it correct to say in those earlier years you were thinking an annual adjustment was all that was required? - I think that is a fair statement, yes, particularly in view of the amount of annual income and change.''

Earlier statements in evidence were the basis for this question.

6. I accept that the trustee of the fund believed that all he had to be concerned about was the 30 June position although this seems to have arisen because of the Commissioner's discretion being previously exercised in relation to a differing set of facts. In the past when the income of the fund was small it was the contributions made in June each year that had caused deficiencies in percentages in respect of which the Commissioner had exercised his discretion when additional securities were purchased after the end of June. It was not shown that deficiencies existed in earlier years other than at the end of each year and it would seem that in relation to these years the Commissioner was acting on the basis of a temporary delay in investment rather than the other ground of satisfaction. The position in relation to the years in question was different in that the income of the fund in each year exceeded $3,000 whilst for the 1972 year the required percentage was not met during the whole of the period 1 July 1971 - 15 June 1972 (minimum deficiency $282 maximum $784) and for 1973 there was a failure for 7 August 1972 - 14 June 1973 and 20 June 1973 - 30 June 1973 (minimum $15 maximum $755).

7. A lack of appreciation of the completely different set of circumstances that had arisen in the years in question might explain why the trustee acted as he did but can this be translated into facts which would justify being satisfied he made a genuine and bona fide attempt to ensure a state of affairs that he did not realize was required? I do not think it can.

8. Taking the terms of sec. 121C as a whole I think a proper interpretation is that the requirements of sec. 121C(1) must be construed strictly with sec. 121C(4) giving the Commissioner, in certain circumstances, power to act to correct difficulties caused by

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the strict literal meaning of sec. 121C(1). Nevertheless, for present purposes, the Commissioner can only act where the trustee has made a genuine and bona fide attempt to ensure the strict requirements of sec. 121C(1) have been met.

9. If sec. 121C(1) stood on its own it would be no answer to its non-satisfaction to say one was unaware of its precise requirements and I do not consider that, by virtue of sec. 121C(4), this unawareness of those requirements can be elevated into a reason why the Commissioner, or this Board, should be satisfied a person had attempted to meet the conditions of sec. 121C(1). Section 121C(4) does not refer to a person who, in all the circumstances, has acted according to his beliefs but to one who has attempted to comply with the actual requirements of sec. 121C(1).

10. This view yields a somewhat harsh result in this case but I can see no escape from it. By requiring the Commissioner to be satisfied as to a specific aspect, in addition to being satisfied ``it would be reasonable to disregard the failure'', the legislation cannot, in my view, be regarded as countenancing simply an inquiry into what was each and every relevant trustee's view of the requirements of sec. 121C(1).

11. I should also say that, even if the above view should be overstating the position, I would reach the same overall conclusion by another route. The subsection, in my opinion, is not concerned so much with whether the trustee had a genuine and bona fide belief that what he was doing would comply with the requirements of sec. 121C(1) as with whether, having regard to what he in fact did, one can be satisfied that he made a real attempt to comply with the requirements of the statute. In the circumstances of this reference one could not in my view be so satisfied. Put in yet another way the subsection might be said to require the Commissioner to be satisfied as to whether what in fact has been done represents what a ``reasonable man'' would do in an honest attempt to comply with the provisions of sec. 121C(1). Surely such a man would, in the circumstances of the present case, do more than make annual purchases?

12. For the above reasons I would confirm the Commissioner's decisions on the objections for the years ended 30 June 1972 and 1973.