Decision impact statement

Commissioner of Taxation v Bargwanna

Venue: High Court
Venue Reference No: S284/2011
Judge Name: French CJ, Gummow, Heydon, Hayne and Crennan JJ
Judgment date: 29 March 2012
Appeals on foot: N/A
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• Not applicable

Subject References:
charitable trust
charitable fund
exempt entities

Précis

Outlines the ATO's response to this case concerning whether a public charitable trust should be exempt from income tax where part of the fund is applied for another purpose and not for public charitable purposes.

Brief summary of facts

By deed executed on 14 October 1997, a husband and wife, Mr and Mrs Bargwanna, were appointed trustees of a trust fund established "for such charitable purposes as [the trustees] shall determine from time to time".

In 2004, the trustees applied to the Commissioner for endorsement under Item 1.5B of the Table in s.50-5 as an entity exempt from income tax. Item 1.5B applies to a fund established in Australia by will or trust for public charitable purposes. The years for which exemption was sought were the income tax years ended 30 June 2001 to 30 June 2004

Importantly, in order to qualify for endorsement as an exempt entity, the "special conditions" set out in s.50-60 of the Income Tax Assessment Act 1997 (ITAA 1997) required, amongst other things, that "...the fund [be] applied for the purposes for which it was established...".

In 2002, the accountant father of one of the trustees provided money as funds subject to the trust. However, that and other amounts were placed by the trustees in the accountant's client trust fund; in other words, trust funds were mixed with the accountant's trust account and therefore mixed with an account in which others had an interest.

Interest income of the trust fund and interest derived by others in the mixed account by the accountant were therefore not readily identifiable.

Further, the trustees used trust fund amounts to satisfy obligations in their personal capacities to reduce a home loan obligation.

At one point, this misuse of the trust fund moneys amounted to a "shortfall" of the trust claiming to be a trust fund exempt from tax. It appears to have been the evidence that the trustees undertook this use of the trust fund without an appreciation that the misuse of the trust money may have amounted to maladministration or a breach of trust.

Accordingly, in the circumstances, the Commissioner refused to endorse the trustees' application for endorsement as an exempt under entity Item 1.5B, s.50-60 of the ITAA 1997.

That refusal was made on the basis that the special condition set out in s.50-60 of the ITAA 1997, That is, that "...the fund [had not been] applied for the purposes for which it was established...".

The trustees sought a review of that refusal at the AAT, and the matter was eventually dealt with by the High Court after certain appeals in the Federal Court.

Issues decided by the court

The trustees requested the AAT to review the Commissioner's decision to refuse endorsement as a charitable trust fund under s.50-5 of the ITAA 1997.

The High Court decided that the trust fund was not entitled to endorsement as an exempt entity. The Court was of the view that the trustees had not applied the trust fund for the purposes for which it was established: s.50-60 ITAA 1997.

In a joint judgment (French CJ, Hayne, Gummow, Crennan JJ) allowing the Commissioner's appeal from a decision of the Full Federal Court, their Honours held that the terms of s.50-60 of the ITAA 1997 require that a fund be applied for the purposes set out in the trust deed, that is, that the fund be properly administered so as to give effect to those purposes.

In disagreeing with the principles set out by the Full Federal Court, the High Court said it was not sufficient to satisfy the requirements of s.50-60 of the ITAA 1997 that the trust fund be "substantially" or largely applied for the purposes set out in the deed of trust.

Heydon J delivered separate reasons, in effect agreeing with the majority judgment of the High Court.

ATO view of Decision

The High Court decision is consistent with the ATO view that any application of a fund for purposes other than those for which it is established means that the fund is not applied for the purpose for which it is established. The particular misapplications of the fund by the trustees meant that the fund was not applied for the purposes for which it was established. The Commissioner was entitled to refuse the trustees' application for endorsement to be treated as an exempt entity under s.50-5 (Item 1.5B) of the ITAA 1997.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

Not applicable

Implications on Law Administration Practice Statements

Not applicable

Court citation:
[2012] HCA 11
2012 ATC 20-312
82 ATR 273

Legislative References:
Income Tax Assessment Act 1997 (Cth)
s 50-5
s 50-60
s 50-75(1)

Case References:
Latimer v Commissioner of Inland Revenue
[2004] 3 NZLR 157
[2004] 1 WLR 1466
[2004] 4 All ER 558

Fouche v The Superannuation Fund Board
[1952] HCA 1
(1952) 88 CLR 609

Youyang Pty Ltd v Minter Ellison Morris Fletcher
[2003] HCA 15
(2003) 212 CLR 484

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (In liq)
[2000] HCA 25
(2000) 202 CLR 588
46 ATR 91

Scott v National Trust for Places of Historic Interest or Natural Beauty
[1998] 2 All ER 705

Attorney-General (NSW) v Perpetual Trustee Co (Ltd)
[1940] HCA 12
(1940) 63 CLR 209

Mahoney v Commissioner of Taxation
(1965) 39 ALJR 62
[1966] ALR 888

Compton v Federal Commissioner of Taxation
[1966] HCA 1
(1966) 116 CLR 233

Federal Commissioner of Taxation v Word Investments Ltd
[2008] HCA 55
(2008) 236 CLR 204
70 ATR 225
2008 ATC 20-072

Driclad Pty Ltd v Federal Commissioner of Taxation
[1968] HCA 91
(1968) 121 CLR 45

Ryland v Federal Commissioner of Taxation
[1973] HCA 33
(1973) 128 CLR 404
4 ATR 40
73 ATC 4107

Commissioner of Taxation v Bargwanna as Trustee of the Kalos Metron Charitable Trust
[2009] FCA 620
(2009) 72 ATR 963
2009 ATC 20-107

Bargwanna v Federal Commissioner of Taxation
[2010] FCAFC 126
(2010) 191 FCR 184
2011 ATC 20-244
80 ATR 594