Bray v Commissioner of Taxation

When the trust deed was executed on 12th June 1974 the sum of $100 referred to therein was not paid as it was recited in the deed to have been. It was paid at the time of the first meeting of trustees on 19th June 1974 to which I shall come shortly.

The day following the execution of the trust deed the appellant went to Melbourne and purchased the shares, the value of which is claimed as a gift. They consisted of 22,620 shares of $2 each in M.B.J. Constructions Pty. Ltd. The price was $45,466.20. All except one of these shares were transferred to the taxpayer. The remaining share was transferred to Trumper Finance Pty. Ltd. The latter was one of a number of companies, the shares in which were owned or controlled by the taxpayer. There was Trumper Pty. Ltd. which, together with Trumper Finance Pty. Ltd., carried on the activities of investment and trading in shares. Trumper Nominees Pty. Ltd. was director of some of the other Trumper companies and acted as trustee of a superannuation fund. Trumper Mining Pty. Ltd. had originally carried on the activity of investing in new issues of shares in mining exploration companies but it had ceased to do so by the time of the events in question. After so ceasing it had been used for the borrowing and lending of money on an interest-free basis.

The assets of M.B.J. Constructions Pty. Ltd. consisted of money in the bank amounting to $45,240 and there were no liabilities.

After the transfer of the shares the appellant and Trumper Finance Pty. Ltd. were appointed directors of M.B.J. Constructions Pty. Ltd. and the previous directors then resigned.

At the first meeting of the trustees of the Foundation on 19th June 1974 all the trustees were present and the taxpayer was appointed chairman of the trustees and president of the Foundation. It was resolved that except where specifically permitted by the decision of all trustees any resolution of the trustees should be unanimously adopted by them in order to be binding. Lastly, there was noted the wish of the appellant to make a donation to the foundation of the 22,619 $2 shares in M.B.J. Constructions Pty. Ltd. There was a resolution by the trustees to accept that donation and to execute the transfer of the shares. A valuation of the shares was submitted in which the total value was shown to be $44,107, the amount claimed by the appellant as a deduction and the amount which has been disallowed. The taxpayer informed the meeting of trustees that he would see to the best of his ability that reasonable dividends would be forthcoming from the shares as income to the foundation for distribution to charitable bodies.

The appellant and Trumper Finance Pty. Ltd. remained the only directors of M.B.J. Constructions Pty. Ltd. On 22nd July 1974 M.B.J. Constructions Pty. Ltd. invested $45,000 by subscribing for and having allotted to it at par 45,000 "A" non-cumulative preference shares in Trumper Pty. Ltd. These shares were redeemable at the option of Trumper Pty. Ltd. They carried with them the right to receive a fixed non-cumulative preferential dividend at the rate of five per cent in each financial year out of profits of such year available for dividend or at a rate less than five per cent but not less than one per cent if the directors should so declare or a rate in excess of five per cent if the directors should so declare, but not exceeding the rate payable in the same financial year in respect of any "B" five per cent redeemable preference shares if the articles prescribed a maximum permissible dividend of ten per cent.

Thus Trumper Pty. Ltd. received the $45,000. It used it to repay some of its creditors and to make a loan to Trumper Mining Pty. Ltd. It will be recalled that Trumper Mining Pty. Ltd. was at that time carrying on the activity of borrowing money interest-free and lending it interest-free to or at the direction of the taxpayer. In fact that is what was done with the instant moneys. They were lent to the taxpayer in order to pay income tax, the income tax which he became liable to pay as a result of the disallowance of the deduction by the Commissioner. This was, however, a use of the money that the appellant did not contemplate at the time of the purchase of the shares. It does not appear to me to matter whether the appellant contemplated that he would personally use the money or whether he contemplated that it would be otherwise used in transactions by one or another of the companies which he alone controlled.

Menhennitt J. summarized the effect of these happenings as follows [6] :

The effect of all of the foregoing may be stated as follows. A significant part of the $45,240 in the bank account of M.B.J. Constructions has been indirectly made available to and used by Trumper, a company controlled by the taxpayer, to repay its creditors which facilitated its activities of lending money to Trumper Mining and investing and trading in shares. The money was so made available by subscribing in cash for the 5% redeemable preference shares. Another significant part of the $45,240 in the bank account of M.B.J. Constructions has been indirectly made available to the taxpayer interest free and used by him for personal purposes. This has been done through M.B.J. Constructions subscribing for the redeemable 5% preference shares in Trumper and Trumper lending part of the subscription money interest free to Trumper Mining which lent part at least of that money interest free to the taxpayer who used it to pay personal taxation. Menhennitt J. also found that the appellant did not reveal to the trustees his intention to deal with the funds of the company whose shares were the subject matter of the gift in a manner which would put those funds at the disposal of companies owned by and controlled by the taxpayer, if not of the taxpayer personally. He also found that at the time the shares were given the appellant contemplated that the company's assets would be made available to companies which were controlled by him. 1. [1977] V.R., at p. 375; (1977) 7 A.T.R., at p. 314; 77 A.T.C., at p. 4125.

In the financial year 1974 and in the financial year 1975 the appellant, to use his own words, "repeated the exercise" by purchasing shares in other companies whose only assets consisted of cash and by making gifts of those shares to the trustees.

On 25th June 1975 and 30th April 1976 Trumper Pty. Ltd. paid cheques for $1400 and $1800 respectively to M.B.J. Constructions Pty. Ltd. These cheques were said to be by way of dividends on the shares held in Trumper Pty. Ltd. by M.B.J. Constructions Pty. Ltd. On 25th June 1975 M.B.J. Constructions Pty. Ltd. paid to the fund $1400 and on 30th April 1976 a further $1800.

On 25th June 1975 the trustees of the Foundation paid $400 to each of four public charities which were among the categories of funds, authorities and institutions specified in s. 78 (1) (a) and on 24th June 1976 the trustees of the foundation paid to eight such charities $200 and to a ninth $300.

On these facts the first question is whether at the time of the gift of the shares in M.B.J. Constructions Pty. Ltd. the fund established under the trust deed was a public fund.

It is first to be noted that it is not sufficient that the fund is one contributions to which are held in trust for funds, authorities or institutions or for purposes which wholly fall within s. 78 (1) (a). Such a fund may be established and maintained by a single contribution or a number of contributions from a private person. That is not a public fund. The reason why the fund must be a public fund emerges from a consideration of s. 78 (1) (a) as a whole. A gift to an authority or institution effectively disposes of the subject matter of the gift to that authority or institution so that it may immediately be enjoyed by it either for its general purposes or for a purpose described in s. 78 (1) (a). That is to be sufficient. However, it is in the nature of a fund that the objects thereof will not, or at least will not necessarily, benefit immediately from the gift of the subject matter to the fund. It was not the legislative intention that a private person could establish a fund by making gifts of money or property to trustees for the prescribed purposes and thereby claim a deduction under s. 78 (1) (a). Such a private person could if he wished make deductible gifts directly to any of the prescribed authorities or institutions. However, in certain cases a provision for deducting gifts made to established authorities or institutions would be inadequate to cover the field sought to be covered by the legislation. There might be need to raise a fund to which contributions could be made for the establishment of a hospital or a university or a war memorial or a school building. Further there need to be funds collected for the welfare of members of the Services or the provision of marriage guidance. And there was recognized to be a need for funds to be collected for the provision of benefits generally to objects falling within s. 78 (1) (a). The need for such funds, contributions to which would not necessarily be immediately available to any of the named authorities or institutions, could be reconciled with the general intention disclosed in s. 78 (1) (a) that no mere setting aside or appropriation of money or property would be sufficient to qualify for a deduction by providing that only a gift made to a public fund should be deductible. The implicit distinction is between a public fund and a private fund. A private fund as much as a public fund may as a result of the trusts created be irrevocably devoted to the required purposes; but that was not to be sufficient.

A consideration of these circumstances leads me to conclude that the principal distinguishing characteristic of a public fund is that contributions thereto are sought from the public or a significant section of the public. If a member of the public contributes to such a fund as a result of an invitation or request so to do, that, it seems to me is positive, and probably irrefutable, evidence that the fund to which he contributes is a public fund and, if the purposes of the fund fall within s. 78 (1) (a), the contribution will be deductible.

But what of the initial establishment of a public fund where the establishment is by an individual or a number of individuals? At that stage there is no contribution by a member of the public and perhaps no invitation to the public to contribute. Is it then necessary to examine the circumstances of the establishment of the fund or is it sufficient simply to examine the terms of the instrument under which the fund is established in order to ensure that contributions may be made to the fund by members of the public? If the latter be the correct view, then this fund qualifies as a public fund. If it is not correct, then it is necessary to determine what are the relevant circumstances.

In my opinion it is not sufficient that the public under the terms of its establishment may contribute to the fund. That being so, it appears to me that it must be the intention of the promoters or of the founder or founders (if any) that the public will contribute so that in the case of a fund established by an initial gift from an individual or a few individuals what is born of the contribution from an individual or from individuals will blossom into a fund to which the public in fact subscribe. A fund is a public fund when the purpose of its establishment is the raising of funds from the public or a significant section of the public so that the objects will benefit to an extent greater than the benefit which a founder (if any) confers by his own contribution. The question is one of fact in each case and the conclusion would not be lightly reached that promoters or founders did not have the requisite intention or purpose. The fact that members of the public unassociated with the promoters or founders did in fact contribute in response to an invitation or request extended to them would no doubt be very strong evidence that the promoters or founders had extended the invitation to the public with the purpose intention and expectation that that result would follow.

The converse, it should be made clear, is not necessarily true; but in my opinion the findings of fact made by Menhennitt J. establish quite clearly that there was no purpose intention or expectation in the appellant as founder that the public or any section of the public would contribute to the fund established under the trust deed. The only invitations extended to the public were the extraordinary advertisements published twice in the Cairns Post, Daily Mercury (Mackay), North West Star (Mt. Isa), and Townsville Daily Bulletin in the following form:

Donations Invited from the General Public to The Sportsmens & Businessmens Benevolent Foundation

(a managed charitable fund devoted to assisting other Queensland charities).

Contributions of $2 and over are allowable deductions under existing income tax laws.

Understandably there was no response from any member of the public offering any contribution. Menhennitt J. stated [7] : "I am compelled to conclude that the advertisements were inserted not really in the hope of evoking donations but with a view to endeavouring to have some evidence from which it might be contended that the fund was a public fund." That conclusion was fully justified. Moreover, the fact that the form of advertisement appears to have been designed to discourage rather than to encourage contribution and the fact that no other invitation was extended to the public, coupled with the fact that the scheme was patently designed to secure the taxation advantage of deductible gifts without the full measure of pecuniary disadvantage which a donor to deserving causes expects as the price of his generosity - a scheme which would be complicated by a measure of public involvement - lead fairly to the inference that the appellant had no purpose or intention or expectation that the fund would be augmented beyond his own contribution by public contribution. That being so, the fund that was established was not in my opinion a public fund within the meaning of those words in s. 78 (1) (a). 1. [1977] V.R., at p. 380; (1977) 7 A.T.R., at p. 319; 77 A.T.C., at p. 4129.

Although my conclusion that the fund was not at the relevant time a public fund is sufficient to dispose of the appeal, I also am of opinion that the value of the shares was not deductible because at the relevant time the fund was not established and maintained exclusively for the purpose of providing money, property or other benefits to or for the prescribed funds, authorities or institutions or for the prescribed purposes or for the establishment of such funds, authorities or institutions. The purpose here referred to must, I think, be one which appears from the terms of the instrument of trust as they operate or take effect in the circumstances of the case. An extrinsic purpose of the founder or of a donor, which may be described as a motive for the foundation or gift, is not material. Nevertheless the distinction is not simply between motive on the one hand and beneficial objects of the trust on the other hand. Although the trust can be described as a "purpose" trust it does not follow that the purpose referred to in s. 78 (1) (a) can be exhaustively found in the declared beneficial objects. It is necessary also to take into account the powers conferred or duties imposed upon the trustees in order to see whether in the circumstances of the case the instrument in its form and its manner of operation as a result of decisions by the trustees discloses that what might ordinarily be an administrative power operates in fact as a purpose of the maintenance of the fund in the manner in which it is in fact maintained. What is apparently and ordinarily a power may be seen to operate as a purpose if it has an operation other than ancillary to the conferring of benefits upon the objects of the trust. One example will suffice. Assume an instrument of trust which gives power to employ a manager irrespective of the size of the fund to be managed. If the affairs of the trust are so conducted by the trustees under the instrument of trust that the income of the fund is absorbed by the salary of the manager the conclusion would be open that the fund maintained under the instrument of trust was not being maintained exclusively for the purpose of providing benefits to the objects. That conclusion would the more easily be drawn if the exercise of the power by the trustees was not wholly motivated by a wish to promote the best interests of the beneficial objects of the trust.

In the circumstances of the present case the particular power which invites attention is the power to retain property in the same form in which it was originally received without being obliged to sell the same or convert it into money. That power, in the manner of its exercise, was the lynchpin of the appellant taxpayer's scheme. For, if the shares were sold, the proceeds would need to be either applied for the benefit of the expressed beneficial objects of the trust or to be invested in trustee securities. That would have been fatal to the scheme of having control of the company and consequently of the liquid funds which were the only assets of that company whose shares were the subject matter of the gift. The question is whether the inclusion of the power to retain property followed by the exercise of that power in the manner in which it was exercised shows that the fund was established or maintained with a purpose that the shares given to the fund by the founder would be retained in the form in which they were received whether or not the trustees were of the opinion that the retention of the shares was the best way of achieving a purpose of providing money, property or benefits to or for the specified beneficial objects.

The only trustee who had a knowledge of the facts which would enable a decision to be made on the manner in which the power to retain the shares would be exercised was the appellant. There is nothing in the evidence to suggest that the other trustees at any stage applied their independent judgment to the question. Clearly they at all times intended to do, and in fact did, what the appellant thought fit to do. The factors influencing the appellant as a trustee in determining whether or not to exercise the power to accept the transfer of the shares from himself to the trustees (including himself) and thereafter to retain the shares were therefore factors which can properly be attributed to the trustees as a body.

If it be correct that the fund was established upon the gift of the shares, then the decision of the trustees to exercise the power to accept the transfer of shares and to exercise the power to retain them for reasons other than the exclusive benefit of the objects of the trust means that the trustees exercised their powers in such a way as to achieve a result or effect other than that of exclusively providing benefits to the declared objects of the trust. On the other hand, if the fund was established by the gift of $100, then that decision of the trustees to accept the shares and to retain them had the same result, namely, that the trustees exercised their powers in such a way as to achieve a result or effect other than that of exclusively providing benefits to the declared objects of the trust. In either case the result is the same, namely, that the fund at the time of the acceptance of the transfer of the shares was not being maintained exclusively for the purpose required by s. 78 (1) (a).

For these reasons I am of the opinion that the appellant fails and that the appeal should be dismissed with costs.

The facts relating to this appeal are set out in the judgment of my brother Jacobs and I do not need to repeat them here.

I find myself in substantial agreement with the judgment of Deane J. in the Full Court of the Federal Court, both in his discussion of the facts and of the law [8] . I make the minor and in the end irrelevant exception that I do not think it is possible to say one way or the other whether the appellant's cheque had been drawn either on or before 12th June 1974 and held by him as a trustee pending the first meeting and the decision to open a bank account. There does not appear to me to be any evidence one way or the other on that point. I do not think however that it is necessary to advert to that question to conclude that there were two separate and successive gifts, the earlier of money and the later of shares, even though the separation in time was insignificant. Each was complete in the sense that the trustees were put into the position in which they could themselves take such steps as might be necessary to complete the transfer of the property to themselves, though no doubt the legal title to the shares must have been dependent upon the approval of the directors of M.B.J. Constructions Pty. Ltd. The fund may properly be regarded as "established" by the gift of $100, it being clear that the mere execution of a trust deed without there being any trust property could not of itself establish the fund - see Compton v. Federal Commissioner of Taxation [9] .

1. (1977) 17 A.L.R., at pp. 356-366; 7 A.T.R., at pp. 804-812; 77 A.T.C., at pp. 4359-4365. 2. (1966) 116 C.L.R. 233, at p. 246.

The two critical questions are whether this was a "public fund" and whether it was "established and maintained under a will or instrument of trust exclusively for the purpose of providing money etc." for the specified purposes. As to the first of those questions, I am of opinion that the word "public" in the phrase "public fund" is used in the sense of being open to the public to make contributions to it. It is by way of contrast with "private funds" which are open only to subscriptions by specified groups and not by the public generally. An appeal to the congregation of a particular church for subscriptions to a trust fund for the repair of the church, or a pension for a minister of that church, though charitable in the technical sense, would not be an appeal to the public or for a public fund. Similarly an appeal to former pupils of a particular school or to graduates of a particular university for subscriptions to a fund to be used for the benefit of the school or university would not be a public appeal, nor the fund resulting therefrom a "public fund". This adjectival use of the word "public" is analogous to its use in such expressions as "public libraries", "public transport", "public art gallery" or "public park". A "public appeal" or a "public fund" is one which is addressed to or open to members of the public generally to respond or subscribe. Upon such view it is not material whether the public or members of the public do in fact subscribe. It also follows that public involvement in the formation, establishment or launching of the fund is not a requirement. Indeed, such a requirement is necessarily excluded by the provision of the section which shows that "public funds" may be established and maintained under a will or an instrument of trust. A fund established under a will is necessarily one established by the action of an individual person acting wholly on his own. It is important also to notice that the expression "established and maintained" applies equally to funds under a will as to those established by an "instrument of trust", an expression which must mean a deed poll or an instument inter vivos. There is no basis for construing the expression "established under an instrument of trust" in a manner which excludes such establishment by a single individual as donor or both donor and trustee. The word "maintained" in this context must mean maintained in accordance with the terms of the will or the instrument of trust as the case may be.

The second question is: what is the significance in the present case of the requirement that the fund be maintained exclusively for the purpose of providing money etc. for the specified purposes, i.e. the funds, authorities and institutions listed in sub-pars. (i) to (xliv)? It appears to me to be clear that for the fund to be "established" for those purposes the trusts of the relevant instrument must provide only for the provision of money, property or benefits to or for such specified funds, authorities or institutions, and for no other purpose or institution. For such a public fund to be "maintained" under a will or instrument of trust it must, in my opinion, continue to be subject to the trust for those purposes. If "maintained" means "in fact administered", there is a practical problem in this section because it is obvious that, in the case of a fund which is open to subscriptions from the public generally, members of the public will have neither actual knowledge nor any means of obtaining knowledge that such a fund is in fact being so administered or that there have been no breaches of trust by the trustees either in the past or current at the time of the donation. Nor would there be any means of ascertaining whether such breaches are deliberate or accidental, in the sense that part of the fund or its income may have been used to provide money for that which was believed by the trustees to be a fund, authority or institution specified in the sub-section, but which, in fact and in law, was not such a fund or institution. It does not seem a likely intention to attribute to the legislature that, in its evident policy of encouraging donations to the institutions and for the purposes specified, those taxpayers who are so encouraged or induced should gain or lose the tax benefit held out to them by reference to facts not ascertainable by them. The requirement of the legislature is that the fund should be of that character and to have that character at the time of the donation. It is at least clear that subsequent breaches of trust by application of the funds in an unauthorized manner, or failure properly to keep the investments under review, could not affect the deductibility of the donation. However it is not in the present case necessary to decide what would be the effect of breaches of trust prior to or current at the date of the gift, for there were none at the relevant time.

The purposes for which such a fund is established and maintained are in my opinion to be derived from the terms of the will or instrument of trust and not from the subjective intentions or motives of the founder or of other donors, nor of the trustees. There is clear authority for this proposition in relation to charitable trusts (see e.g. Hoare v. Osborne [10] and Keren Kayemeth Le Jisroel Ltd. v. Commissioners of Inland Revenue [11] ) and that view is in my opinion equally applicable to the determination of whether a fund is a "public fund" and is "established and maintained" for the prescribed purposes.

1. (1866) L.R. 1 Eq. 585. 2. [1932] A.C. 650, at pp. 657, 661.

In the present case we are concerned only with the donation of property in the year of income ended 30th June 1974. I am satisfied that, at the time of the handing over of the instrument of transfer of these shares and, presumably the necessary share certificate, there was an established fund which was of the necessary character. At that time, and indeed for the balance of that financial year, there was no suggestion of any breach of trust by the trustees, either active or passive. I say "passive" because there could be a breach of trust if the trustees did not review from time to time the manner in which the trust funds were invested, so as to ensure that the fund is so far as possible preserved from loss through failure of companies in which the trustees hold shares, whether by unwise investment by the directors of such companies, or otherwise. However nothing occurred in the relevant financial year which would have called for action and there was no reason for the trustees as such to fear that any unusual risks attached to the nature of the property which had been the subject of the donation. It is true it was a proprietary company which had liquid funds and no other assets and of which one of the number was in effect the controlling director. It would have been clear to them that M.B.J. Constructions Pty. Ltd. would have to put the funds to use by an investment of some kind in order to earn income. At that moment there was no reason why they should question the taxpayer's undertaking that he would do his best to see that there was a proper return in the form of dividends and that of course would depend upon the success or wisdom of the investment or use to which the M.B.J. Constructions put the funds at its disposal. They were not a party to the taxpayer's plan that the funds should be used in other companies controlled by him, rather than used in some business conducted by M.B.J. Constructions itself. The findings make it clear that they were unaware of those plans of the taxpayer and also make it clear that at the time of the donation the taxpayer had no plan or intention to divert the funds for his personal benefit.

No doubt there are cases in which subsequent events may cast light on earlier events and intentions, but it is a mode of reasoning to be used with some caution and in the present case it cannot be used to suggest that the trustees were, whether at the time of the foundation of the fund or during the balance of that financial year, actuated by improper intentions or by an intention that the fund should be applied in the manner likely to involve losses by reason of substantial reduction in the value of the shares which were the subject of the donation, or an intention to put the actual use of funds out of the reach of the company in which the trustees held shares.

For those reasons I am of opinion that this appeal should be allowed.