In a decision handed down on Thur 29.3.2012, the High Court has allowed the Commissioner’s appeal and held that the taxpayer trustees’ administration of the Kalos Metron Charitable Trust had not complied with the requirement for tax exemption under s 50-60 of the ITAA 1997, because the fund was not “applied for the purposes for which it was established”.
The Fund was established for public charitable purposes pursuant to its deed. The trustees of the Fund were a married couple. In addition, the wife’s father (the accountant) managed the Fund’s accounting affairs and had provided advice to the trustees since the establishment of the Fund. The Fund’s monies were held in 2 bank accounts, a cash management account and the accountant’s trust account.
In March 2004, the trustees obtained a housing loan, which included an interest offset account. The trustees applied the Fund’s monies by payment into the offset account, under which no interest accrued to the Fund and the interest on their personal housing was reduced. Subsequent payments and withdrawals from the offset account resulted in the trustees exceeding the amount they had paid into the account and hence effectively withdrew the Fund’s monies for their own purposes. In 2007, the Fund’s accountant credited an amount representing a “shortfall” to the trust account and an amount as “compensation” into the cash management account.
The Commissioner rejected the Fund’s application for endorsement as a tax exempt entity. On appeal, the AAT concluded that the Fund was entitled to be endorsed, but the Federal Court (Edmonds J) disagreed. The Court ordered that the matter be remitted to the AAT. The taxpayers appealed to the Full Federal Court which held that the primary judge had erred in finding non-compliance with s 50-60 without treating the explanations of the trustees as relevant and “without regard to the administration of the fund as a whole”, and remitted the proceedings to the AAT for determination of such further facts as it deemed necessary.
The Commissioner was granted special leave to appeal to the High Court.
The High Court unanimously allowed the Commissioner’s appeal. It considered that the relevant provisions directed attention to the terms of the instrument of trust by which the fund was established in Australia for public charitable purposes. Section 50-60 requires that the fund be “applied” for those purposes, and the Court said this was not to be understood as requiring only that the fund be “substantially” or “on the whole” applied for those purposes. The Court said the acts of maladministration relied upon by the Commissioner “were not referable to the carrying out of the charitable purposes for which the Deed provided”, and the Commissioner was correct to reject the Fund’s application for endorsement as a tax exempt entity.
(FCT v Bargwanna [2012] HCA 11, High Court, French CJ, Gummow, Hayne, Heydon and Crennan JJ, 29 March 2012.)
[LTN 27, 10/2]