Trust Funds for Charitable Purposes – High Court Rules

A recent High Court decision delivers a salutary lesson that trustees of charitable funds must ensure that the trust’s funds are applied for the purposes for which the trust was established, says Not for Profit specialist law firm, Makinson & d'Apice.

Otherwise, the law firm warns, endorsement as a tax concession charity will be at risk.

The High Court handed down its decision in Commissioner of Taxation v Bargwanna
on 29 March 2012 ruling that trust funds in a charitable trust must be applied for the purpose of the charitable trust, and not just “substantially” or “on the whole” and allowing the appeal by the Commissioner of Taxation.

Makinson & d'Apice Partner Bill d'Apice explains the case saying  Mr and Mrs Bargwanna were the trustees of the “Kalos Metron Charitable Trust”.  Between 2003 and 2007, the trustees distributed a total of $293,914.55 to numerous charitable cases.

In 2004, Mr and Mrs Bargwanna applied for tax concession charity endorsement for the trust on the basis that it was a charitable fund.  The Commissioner refused their application and disallowed their subsequent objection and the matter was litigated both in the Federal Court and the High Court.

The Commissioner contended that the fund was not entitled to endorsement as the fund was not applied for charitable purposes but was actually applied for the benefit of the trustees in several respects.  The trust was also applied for the benefit of the trust’s authorised administrator.

Trust monies were paid into the administrator’s trust account where it was mixed with money held by him on behalf of others.  Interest on this account was credited to a separate bank account and used to defray the costs of maintaining the administrator’s trust account.  

Additionally, in 2004, Mr and Mrs Bargwanna transferred trust money into their personal home loan offset account thereby achieving a benefit by way of interest reduction on their personal home loan.

d’Apice says the principal issue on appeal was the meaning of the phrase “the fund is applied for the purposes for which it is established” in section 50-60 of the Income Tax Assessment Act.

The High Court unanimously allowed the appeal.

The Court considered that the relevant provisions of the Act require that the funds be “applied” for those charitable purposes disclosed in the trust deed and do not require that the fund only be applied for those purposes “substantially” or “on the whole”.

The joint judgment of French CJ, Gummow, Hyne and Krennen JJ, concluded:
“The terms of section 50-60 of the Act require that this fund be “applied” for those purposes … not all breaches of trust will deny the conclusion that the fund nevertheless has been applied for the relevant “public charitable purposes”.  But, on the other hand, and contrary to the reasoning of the Full Court, upon which the respondents relied, the term “applied” is not to be understood as if section 50-60 used such an expression as “substantially applied” or “on the whole, applied”.  The tax payer seeks to gain a valuable benefit through establishment of exempt status.”

The High Court noted in the majority judgment that there were acts of maladministration and that “none of these acts of maladministration were referable to the carrying out of the charitable purposes for which the Deed provided”.

Find more on the case at Commissioner of Taxation v Bargwanna

Links: http://www.makdap.com.au/ http://www.charitiesnfplaw.com.au/