Analysis and Conclusion
190 The leading authority in this area, as to whether an entity is a 'scientific institution' within s 23(e) of the ITAA 1936, even though it was decided over 60 years ago, remains the Surgeons' Case 68 CLR.
191 A summary of the facts of that case assists an understanding of what was said by each of the members of the High Court and what can be drawn from those reasons by way of application to the facts of the present case.
192 The Royal Australasian College of Surgeons was registered in Victoria as a limited company. Some of its objects as stated in its memorandum of association were for the promotion of the professional interests of its members and others were for the promotion of the science of surgery. The members of the College were all surgeons. Its principal activities included: the holding of conferences of surgeons for the discussion and study of surgical matters and the dissemination of knowledge of surgery; the provision of a technical surgical library for the use of its members and the publication of a surgical journal; the conduct of examinations for admission to fellowship of the College; and the administration of funds for surgical research and for the award of scholarships to medical students. The Commissioner assessed the College to tax income received by it from investments. A case was stated before the Full Court of the High Court that asked the question whether the income of the College was exempt from income tax as being the income of a scientific, charitable or public educational institution within the meaning of s 23(e) of the ITAA 1936.
193 It was argued before the High Court by counsel for the College that it was a scientific or charitable institution within the meaning of s 23(e) in that its main object was the advancement of surgery and that any benefit that may accrue to its members was secondary. Counsel for the Commissioner argued that a scientific institution is one which has for its sole or dominant object the enlargement of scientific knowledge; that if there are two coordinate objects, one of which is outside the exception, the exception cannot apply. The College had two objects, namely, the advancement of science and the professional advancement of its members and it was impossible to say that one predominated over the other.
194 Each of the members of the High Court held that the College was a 'scientific institution' within the meaning of s 23(e) of the ITAA 1936 because the main, substantial, dominant or primary object of the College was to promote the science of surgery and the existence of another object, namely, the promotion of the professional interests of its members did not, in those circumstances, mitigate against that ultimate conclusion.
195 A more detailed and complete analysis of their Honours' respective reasons is given by Lockhart J presiding on a Full Court of this Court in Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 90 - 93; see too, Beaumont J at 111 - 113 and 117, and Foster J at 123.
196 While the ultimate issue in the present case is the same as it was in the Surgeons' Case, the real or substantive underlying issues are not. In the Surgeons' Case it was, according to Starke J at 447, '… rightly conceded, that the College was an institution'. And in Federal Commissioner of Taxation v Word Investments Ltd (2007) 164 FCR 194, Allsop J noted at [8] and [9] that there was no dispute that 'Word' was an institution; the only question was whether it was a 'charitable institution'. In the present case, there is a real issue as to whether ATTORI and AARI are institutions. As Gibbs CJ observed in Stratton v Simpson (1970) 125 CLR 138 at 158:
'Although its meaning must depend on its context, [an institution] would not ordinarily connote a mere trust.'
197 The mere fact that ATTORI and AARI are companies limited by guarantee does not make them institutions; any more than the fact that they call themselves an 'Institute': see Pamas Foundation (Inc) v Commissioner of Taxation (1992) 35 FCR 117 at 125 per Beaumont and Lee JJ. As their Honours there said in the immediately preceding sentence:
'The context in which the expression "religious institution" appears includes the juxtaposed term "public benevolent institution" which tends to suggest that the word "institution" is to be given a meaning greater than a structure controlled and operated by family members and friends.'
198 As Gibbs CJ further observed in Stratton v Simpson 125 CLR at 158:
'In its ordinary sense "institution" means "an establishment, organization, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc." (The Shorter Oxford English Dictionary).'
This suggests to me that before an entity can be a 'scientific institution', it must be established for an object or objects of public utility.
199 Nevertheless, it is unnecessary to break the task up into component parts: Is it an institution? And if so, is it a scientific institution? Rather, as Allsop J said in Word Investments at [14]:
'The relevant task, as stated in the Surgeons' Case 68 CLR 436, is to assess the true character or nature of the entity by reference to its objects, purposes and activities. It is an integrated, holistic inquiry directed to whether a body of facts and circumstances satisfies a legal category or conception.'
200 This really echoes what Starke J said in the Surgeons' Case at 448:
'And I rather think that the question we have to determine is one of fact (Inland Revenue Commissioners v. Forrest [(1980) 15 App. Cas. at 341]; Inland Revenue Commissioners v. Yorkshire Agricultural Society [(1928) 1 K.B. 611 at 625, 634]; Usher's Wiltshire Brewery Ltd. v. Bruce [(1915) A.C. 433 at 466]), but all the relevant facts are stated in the case and may perhaps be regarded as raising a mixed question of law and fact proper to be stated for the opinion of this Court pursuant to s. 198 of the Act.'
201 See, also, Cronulla Sutherland Leagues Club 23 FCR at 117 per Beaumont J.
202 In the Surgeons' Case, Starke J at 448 indicated that it was permissible to look outside the objects of the entity to its activities in determining whether the qualification for exemption was met, at least where the memorandum did not make it clear which objects of a mixed character are its main or dominating characteristics.
203 Williams J went further when, at 452, he observed:
'[I]n order to determine what is the main or dominant purpose of the College, it is a mistake to examine the objects contained in the memorandum in … [a] disjunctive fashion. They should be examined in conjunction with one another and in the light of the circumstances in which the College was formed and of the manner in which the College is fulfilling the purposes for which it was incorporated.'
204 In other words, one can look to the circumstances in which the subject entity was formed and the manner in which it is fulfilling the purposes for which it was incorporated, but there remains the issue of whether one can examine the subjective motives and intentions of the promoters of the subject entity and its directors for the purpose of ascertaining if the statutory exemption from income tax operates. In Cronulla Sutherland Leagues Club 23 FCR at 98, Lockhart J referred to this issue by reference to the decision of the High Court in Brookton Co-operative Society Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 441 where the ultimate issue was whether the taxpayer was a co-operative company within the meaning of s 117 of the ITAA 1936. One of the elements of the statutory definition was that the company 'is established for the purpose of carrying on any business having as its primary object or objects one or more of the following … [objects]'.
205 Gibbs CJ did not find it necessary to decide whether, in considering whether a company came within s 117(1), the subjective motives and intentions of the promoters should be taken into account, although he said that it was clear that the court must consider the activities that the company actually carried on (at 445).
206 Mason J said at 450 - 451:
'[I]n ascertaining the purpose for which a company "is established" it is necessary to look, not only to circumstances existing at the time of incorporation, but also to the activities of the company at the time when its status as a co-operative company is to be determined. No doubt it was the presence of the words "is established" and the purpose of the section that led Fullagar J in A & S Ruffy Pty Ltd v Commissioner of Taxation (Cth) (1958) 98 CLR 637 … and Menzies J in Renmark Fruitgrowers Co-operated Ltd v Commissioner of Taxation (1969) 121 CLR 501 … to adopt this approach. To my mind it is evidently correct, allowing, as it does, that the purpose for which a company is established may change in the course of time and that with the change of purpose there may come a change in status as a co-operative company. Moreover, in Ruffy … the Court explicitly rejected the suggestion that the objects of the business were to be gathered solely from the objects clause in the memorandum. In that case the Court, in characterising the object of the business, looked to the business activities of the company after its incorporation as well as to the purpose of its incorporation -- … In Revesby Credit Union Co-op Ltd v Commissioner of Taxation (Cth) 112 CLR 564 … McTiernan J said: "The main test to be adopted in ascertaining the primary object is to ask what the actual activities of the appellant society indicate it to be."'
207 His Honour added at 453:
[I]n determining the purpose for which the taxpayer is established the courts below were entitled to look not merely to the activities of the taxpayer and its directors, but also to the intentions of the promoters. In general a distinction is to be drawn between purpose on the one hand and motives and intentions of the promoters on the other hand, but I do not see why the intentions of the promoters may not be relevant in determining what is the purpose for which a company is established.'
208 Aickin J said at 461:
'[T]he expression "is established" indicates that the company and its activities must be looked at year by year, and not merely at the time of its incorporation. That expression therefore has the significance of "maintained" or "kept in operation". This Court has held that the objects as set out in the company's memorandum of association or other constituent documents cannot be decisive and perhaps may be of only remote relevance.'
209 His Honour added at 463:
'[T]he subjective intentions of the promoters, the original subscribers or shareholders and the original directors, whether formed prior to or at the time of incorporation are of no assistance in determining whether the taxpayer company is … a co-operative company within the meaning of s 117 … what matters is what the company did. The purpose of its incorporation must be ascertained from what it did.'
210 Murphy and Wilson JJ agreed with Mason J.
211 The diversity of opinion in Brookton had previously been commented on by Ormiston J of the Supreme Court of Victoria in SSAU Nominees Pty Ltd v Federal Commissioner of Taxation (1985) 16 ATR 992 at 1011:
'Here it is clear that all members of the court on each occasion [Brookton and Ruffy] held the view that the primary object or objects of the appellant's business could not be determined solely, or even initially, by reference to its memorandum of association, and that evidence of its history, setting up and activities, had to be examined. In this instance Mason J (at 453), with the concurrence of Wilson J, thought that the intentions, if not the motives, of the promoters could be looked at, although Aickin J strongly disagreed: at 463.'
212 A little later his Honour said at 1011, 1012:
'Upon a careful consideration of all these cases, both in England and Australia, I have reached the conclusion that there is neither binding nor persuasive authority which requires me to resolve this case solely on a construction of the plaintiff's constituent documents. In the first place, it is obvious that a variety of opinions have been expressed from time to time in the highest appellate courts on this issue and they are by no means consistent. …
I therefore conclude that there is no authority which binds me to exclude evidence of the activities of the plaintiff company, or of the surrounding circumstances which led to the setting up of the scheme. What I am concerned with in the present case is an alternative test based on either exclusive or principal purpose and that entitles the court to have regard to a wide range of relevant factual circumstance, although I would not think that motive was one of the relevant circumstances. Of course it is necessary to look at the constituent documents, but in the present case, as with many of the cases which I have cited, those documents are of relatively little assistance, certainly in determining what is the principal purpose of the plaintiff company. This is not a matter to be resolved merely by the construction of a deed of trust, for it requires a realistic appraisal of whether the chief or major purpose of the scheme is the advancement of "the interests of a university or a school" of the relevant kind. For this purpose I would adopt the passage set out above (at 40) from Williams J's judgment in the Royal Australasian College of Surgeon's case, supra, at 452.'
213 This last-mentioned reference is to the passage reproduced at [203] above.
214 SSAU Nominees involved a claim for a sales tax exemption for 'goods for use … by a society, institution or organisation established and carried on exclusively or principally for the promotion of the interests of a university or school conducted by an organisation not carried on for the profit of an individual'. Some 17 years later, Mandie J of the Supreme Court of Victoria said in Capital Club Pty Ltd v Commissioner of State Revenue (2007) 66 ATR 606 at [41]:
'Ormiston J referred to Ruffy and Brookton noting that the High Court held the view that the primary object or objects of the company's business could not be determined solely or even initially by reference to its Memorandum of Association and that evidence of its history, setting up and activities had to be examined. The case otherwise turned on its own facts and the particular legislation.'
215 The balance of authority seems to favour the view that one can have regard to the motives and intentions, if they be different, of the promoters, in addition to the activities of the company and its directors, in determining the purpose for which a company is established. On the other hand, in the present case, I do not know that it is necessary to go that far; indeed, I do not know that there is any direct evidence of such motives and intentions; I was certainly not taken to any. As the Commissioner's submissions make clear, there is evidence of the circumstances in which ATTORI and AARI were formed and of the manner in which each has carried out its activities and both of those are relevant to the determination of what is the main or dominant purpose of ATTORI and AARI: see Williams J in the Surgeons' Case at [203] above. From that evidence, which is not disputed, certain conclusions can be drawn.
216 Put another way, in undertaking the task of deciding whether ATTORI and AARI are 'scientific institutions' for the purposes of s 23(e) of the ITAA 1936 or s 50-5 (item 1.3) of the ITAA 1997 in each of the relevant years of income, I do not think I am confined to a consideration of the objects in their respective memoranda of associations and their respective activities in vacuo. I am entitled to consider, in so far as there is evidence of such matters, the following:
(1) The circumstances in which ATTORI and AARI were formed.
(2) The framework, if any, other than one imposed by reference to its objects, within which it carries on its activities in pursuit of these objects.
(3) The imperatives, if any, which drove the activities, other than those imposed by reference to its objects, and an assessment of the purpose of such activities, in the light of any such imperatives.
(4) The public accessibility to the results of research, both within the scientific community and the community at large; the public utility aspect.
217 As noted earlier at [199], the inquiry is an integrated holistic one directed to whether a body of facts and circumstances satisfied a legal category or conception; and that is the way each of the members of the High Court approached the task in the Surgeons' Case 68 CLR.
218 I have come to the conclusion that neither ATTORI nor AARI was a 'scientific institution' for the purpose of the applicable statutory provision in the relevant years of income. My reasons for coming to this conclusion are set out below, but it would be fair to say that these reasons in large part reflect my acceptance of the Commissioner's submissions at [41] - [112] and [140] - [189] above.
219 While the objects for which ATTORI and AARI were established (see [14] and [114] above) are consistent with those of a scientific research institute, and the prohibitions contained in the memoranda of associations against the distribution of income and property to their members either by way of dividend, bonus or otherwise or upon a winding up or dissolution are consistent with what one would expect to find in the constitution of such an institute (see, for example, the Surgeons' Case at 448), and both bodies carried out scientific research activities consistent with those objects; such matters or considerations only tell half the story. They do not tell you, by reference to objective indicia rather than the motives or intention of the promoters, why ATTORI and AARI were brought into existence; they do not tell you anything about the commercial/contractual framework within which ATTORI and AARI were to pursue their objects; they do not tell you anything about the commercial/contractual imperatives which drove those activities so as to enable an informed conclusion to be drawn as to their real purpose; and they do not tell you anything about the public utility of such activities. These are all matters or considerations that fall under the umbrella of why ATTORI and AARI were brought into existence and why and how they carried on their activities in pursuit of their objects. It is to those matters that I now turn.
220 In summary, the Commissioner submitted that the Court should make the following findings:
(a) The main, substantial or predominant purpose of ATTORI and AARI was the discharge of contractual obligations undertaken pursuant to agreements entered into in respect of the various Budplan prospectuses. Each was a service provider, performing a function which was essential to the commercial success of the investment projects described in the prospectuses;
(b) the research activities were not aimed at altruistically improving or benefiting the state of scientific knowledge, but rather were aimed at providing the Participants in the Budplan arrangements with intellectual property rights that they would be able to commercially exploit. The research results were to be the property of the Participants;
(c) the proceeds of the commercial exploitation of the scientific research were to flow to the Budplan Participants and the manager, for their individual benefit, rather than to the researcher;
(d) in six of the Budplans, apart from administration fees and commissions paid to BARM, the Main Camp Group of companies also stood to benefit from commercial exploitation of the scientific research through their interests in the supply and sale of tea tree oil and celery seed extract (such products having been the sole products used in the 'scientific research');
(e) rather than generally disseminating the results of the scientific research, steps were taken to ensure that the results would be kept confidential - which was no doubt important for their commercial exploitation;
(f) much of the scientific research that each of ATTORI and AARI was obliged to carry out for the Budplan syndicates was in any event not carried out by them, but was carried out by other persons pursuant to contracts entered into for that purpose (e.g. Southern Cross University, Centre for Molecular Biology & Medicine at the Austin & Repatriation Medical Centre). In such instances, each of ATTORI and AARI acted as, in effect, a middleman, by undertaking a contractual obligation and then engaging a sub-contractor to perform work so that its primary obligation would be discharged;
(g) Some sponsorship and fellowship arrangements were entered into, but in circumstances where the recipients had to enter into confidentiality agreements, any resultant intellectual property would be vested in ATTORI and AARI;
(h) examination of the circumstances of publication of scientific papers and conference poster presentations, provides no support for the contended 'scientific institution' status. Employees of ATTORI and AARI were not permitted to publish material of any commercial value. In relation to academic institutions that were third-party contractors for ATTORI, their 'scientific findings' could only be published with the written approval of ATTORI and such approval could be withheld to the extent that disclosure of the findings might 'adversely affect ATTORI's commercial or scientific interests'. With isolated exceptions, the material pointed to in AARI's evidence was published from the year 2000 onward (i.e. after the period to which the present proceedings relate), and at a time when it was known to be unlikely that the research results could be commercially exploited.
221 Generally, I accept the Commissioner's submissions and find that:
(1) ATTORI and AARI were formed to undertake the contractual obligations set out in the prospectus documents.
(2) They were incorporated to meet the objectives of a broader commercial endeavour.
(3) Their activities after incorporation were directed predominantly, if not solely, to that commercial endeavour.
(4) Their activities were not concerned with benefiting the public or advancing science as ends in themselves; no one was intended to benefit from the research but BARM and the Participants.
222 More specifically, I accept the Commissioner's submissions that the contractual framework constituted by the Prospectus, Management Agreements and Research Agreements for the Budplans allow me to find that ATTORI and AARI were brought into existence:
(1) To undertake research for reward pursuant to contractual obligations arising under the Personal Syndicate Deed for Budplan Personal Syndicate or the Research Agreements for the remainder of the Budplans entered into with the Participants and others.
(2) To provide the Budplan Participants and BARM, as Manager, with the'Research Results' so that those results could be commercially exploited for the benefit of Participants and BARM.
(3) In the case of ATTORI, to further the commercial interests of the Mainstar Group of companies, particularly in relation to sales of the product, Main Camp Premium Pharmaceutical Grade Tea Tree Oil.
(4) To perform the research function in a large commercial venture with a view to making profits and securing tax advantages for the various players.
223 The findings in [221] and [222] manifest themselves in a number of different ways that are referred to in the Commissioner's submissions above. It serves no purpose to repeat them; they are all antithetical to a conclusion of status as a 'scientific institution'.
224 Viewed holistically, ATTORI and AARI were components of a larger commercial venture which had as its objective the commercialisation of the 'research results' for the financial benefit of the Participants and BARM. They did not manifest an independence and freedom, subject of course to financial constraints, in the activities each undertook in pursuit of the advancement of science. This is not to say that an entity claiming status as a 'scientific institution' cannot enter into contractual obligations to undertake scientific research for reward for a particular third party, but its entitlement to such status will be impaired if that is all it does or if such activities comprise the great bulk of its overall activities. Rather than being a scientific institution, it will be seen for what it is: a 'captive' scientific researcher undertaking research work for the benefit of a third party and its associates. In his oral submissions, senior counsel for the Commissioner referred to such a body as a 'service provider' and the description is apt; he suggested as an analogue, a company that undertook scientific research exclusively, or nearly exclusively, for a research-based pharmaceutical group; such a company, he submitted, would not be a scientific institution even though all its activities were devoted to the advancement of science. In my view, the analogue is also apt.
225 Finally, there is the absence of public benefit, except to the extent it can be said that the public benefits from scientific development for private commercial gain. The research results were kept strictly confidential by all concerned and the results were not to be published if ATTORI or AARI considered them to be of any commercial value. The material that did reach the public domain was minimal and was more in the nature of a mere by-product of ATTORI's or AARI's activities than the sole or even predominant or significant purpose for which each company was established. For an entity to claim status as a 'scientific institution', the results, albeit not necessarily the ownership, of the subject entity's activities should be freely available to the community at large; the public community as well as the scientific community. Neither ATTORI nor AARI qualified on this score.
226 My findings that ATTORI and AARI were not 'scientific institutions' within the applicable statutory provision in the relevant years of income necessitates that I address issue 2.