Commissioner of Taxation v Bargwanna

Federal Court of Australia|2009-06-12|Before: Edmonds J, Member P

INTRODUCTION 1 This is an appeal from a decision of the Administrative Appeals Tribunal ('the Tribunal') pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). 2 The Tribunal set aside the decision under review namely, the applicant's ('the Commissioner's) decision to disallow the respondents' objection dated 16 May 2005 and substituted for the decision under review a determination that the respondents, as trustees of the Kalos Metron Charitable Trust ('the Fund'), were entitled to be endorsed as exempt from income tax under Subdiv 50-B of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') as at 9 September 2005, with effect from 1 July 2000. 3 The Commissioner's notice of appeal stated that it raised four questions of law (paras (1) - (4) inclusive) and eight grounds of appeal (paras (5) to (12) inclusive). The Commissioner's written outline of submissions, filed prior to the High Court of Australia handing down its judgment in Commissioner of Taxation v Word Investments Limited (2008) 236 CLR 204 on 3 December 2008, identified three issues raised by the appeal, namely, whether the Tribunal should have concluded that: (1) The Fund was 'established' for public charitable purposes within the meaning of s 50‑5; (2) the Fund was applied for the purposes for which it was established within the meaning of s 50-60; and (3) the trustees of the Fund pursued its charitable purposes solely in Australia within the meaning of s 50-60(a). 4 At the outset of the hearing of the appeal, indeed in the Commissioner's reply submissions filed prior to the hearing, senior counsel for the Commissioner, correctly in my view, abandoned the first issue in [3(1)] above (ground (5) of the notice of appeal) in the face of the reasons of the joint judgment in Word Investments. 5 During the hearing of the appeal, senior counsel for the Commissioner informed me that he had been instructed, again correctly in my view, not to pursue the third issue in [3(3)] above (ground (6) of the notice of appeal). The premises for the Commissioner's new position were fourfold: (1) The Commissioner's acceptance that it was a fact that the amount paid to HELP International Inc was less than the amount of the gift by Mr Craik of $160,000; (2) the fungibility of money; (3) the provisions of s 50-75(1) of the 1997 Act; and (4) the approach taken in the Explanatory Memorandum to the 1997 Act precursor to these provisions: the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 4) 1997 at 5.69 and 5.70. I hasten to add that the Commissioner's new position on this issue had nothing whatsoever to do with anything the High Court said in Word Investments. 6 It follows from the foregoing that the only live issue on the appeal was whether the Tribunal erred in concluding that the Fund was applied for the purposes for which it was established within the meaning of s 50-60 (grounds (7) to (12) inclusive of the notice of appeal). 7 Nevertheless, I was informed by senior counsel for the respondents that ground (12) had been abandoned. Senior counsel for the Commissioner did not expressly confirm this, but there was certainly no dissent and no submissions were advanced in support of the ground. 8 The remaining live grounds are in the following terms: 7. The Tribunal erred in law in deciding that the application of part of the fund to payment into an interest offset account which diminished the personal liability of the trustees to the bank in respect of their home loan was an application of that part of the fund 'for the purposes for which it was established' and should have held that such application caused the Respondent to fail to satisfy the requirement in section 50-60. 8. The Tribunal erred in law in concluding that an application of a fund 'substantially in accordance with its constituent terms' satisfies the requirement of section 50-60 that the fund 'is applied for the purposes for which it was established', and should have held that application of part of the fund otherwise than for the purposes for which it was established caused the Respondent to fail to meet the requirement in section 50-60. 9. The Tribunal erred in law in concluding that for the purposes of section 50-60 the application by the accountant to whom part of the funds had been entrusted should not be taken into account and should have concluded that the criterion in sec 50-60 is to be applied to the objective application of the funds and not to 'the conduct of the trustees themselves'. 10. The Tribunal erred in law in not deciding that payment of part of the fund into an account maintained by a relative of the Respondents on terms that the interest on the account be paid to the relative and not to the fund was an application of the fund otherwise than for the purposes for which it was established and should have decided that the payment caused the fund to fail the condition in sec 50-60. 11. The Tribunal erred in law in deciding that the application of part of the fund to the making of a loan to Rocfish Pty Ltd on the terms found by the Tribunal at paragraph [111] of its reasons was an application of that part of the fund 'for the purposes for which it was established' and should have held that such application caused the Respondent to fail to satisfy the requirement in section 50-60. 9 Significantly, there was no ground that directly raised what seemed to be, if the Commissioner's written and oral submissions can be taken as a guide, at the forefront of the Commissioner's challenge to the Tribunal's decision: the criteria or test applied by the Tribunal in determining whether the primary facts satisfy the conclusion required to be drawn for exemption from income tax under s 50-60, namely, that the fund 'is applied' for the purposes for which it was established, although arguably it underlies all remaining live grounds. The Commissioner submitted that whether or not one can draw that conclusion is a matter of objective fact untrammelled by the subjective intentions of the trustees or others having the carriage of the administration of the Fund. He challenged the approach of the Tribunal which is perhaps best summarised at [50] and [51] of its reasons: 50 … But I do consider that at least in its application to conduct involving the management and administration of the fund the 'is applied' criterion is directed towards an overall characterisation of the conduct of the fund and does not require satisfaction about the appropriateness of every action of the trustees and those administering the trust on their behalf. Where the conduct under consideration is of this kind (that is the administration, as distinct from the distribution, of the fund) an examination of the purpose for which it has been undertaken is necessarily of a general kind, and must properly take into account the totality of the fund's activities. This does not give priority to the trustee's merely subjective intentions, motives and beliefs but, contrary to the Commissioner's contention, neither are they wholly irrelevant. The permissible breadth of relevant considerations recognises that ultimate purposes may be pursued in different ways and with different degrees of immediacy. It also recognises that particular shortcomings in the administration of a fund, including some kinds of failure to comply with the terms of the trust, will not necessarily require, and may not even justify, a conclusion that the fund is applied for purposes other than those for which it was established. 51 Returning to what I have described as the competing generalities, it is appropriate to apply the 'is applied' criterion by enquiring whether the fund is administered substantially in accordance with its constituent terms. Substantial compliance will ordinarily provide some evidence that the fund is being held for its intended purpose and, at least in the absence of contrary indications, justify an inference that the fund 'is applied' for its established purposes. The strength of the inference in any particular case will depend on the degree of compliance and the nature, extent and reason for any non-compliance. This approach to the 'is applied' criterion is essentially that adopted by Oliver J in IRC v Helen Slater Charitable Trust Ltd [1981] Ch 79; [1982] Ch 49. It is also accords with the view that where a transaction or conduct is within the powers of trustees or directors, it will not result in a relevant misapplication of property under their control unless the court is satisfied that it has an intended operation 'other than ancillary to the conferring of benefits upon the objects of the trust' or the purposes of the company: Bray v The Commissioner of Taxation (1977-1978) 140 CLR 560 at 577 per Jacobs J; see also Ngurli Ltd v McCann (1953) 90 CLR 425 at 440; and the circumstances tend to indicate a clear purpose of achieving some other extraneous benefit: see Case X60 (1990) ATC 438 at 446. The difficulty of arriving at such a conclusion, and the extent to which its appropriateness is likely to be influenced by impressionistic assessment of the overall good faith of the trustee, is illustrated by comparison of the comments made by Taylor J in Driclad Pty Ltd v Federal Commissioner of Taxation (1966-1968) 121 CLR 45 at 61 with the same judge's comments in the context of the different circumstances in Compton v The Commissioner of Taxation (1965) 116 CLR 233 at 239. The difficulty is not avoided, even where the legislative criterion requires exclusivity of purpose, merely by demonstrating that parts of the fund has been invested in breach of the terms of the constituent trust: Case X60 (1990) ATC 438 at 447. A breach of trust is a relevant, but not necessarily decisive, consideration in determining whether the fund 'is applied' for the required purposes: per Owen J in Mahoney v Commissioner of Taxation (1965) 39 ALJR at 64. 10 As noted in [9] above, the process of reasoning at [50] of the Tribunal's reasons is not expressly raised as a ground of appeal, although the reasoning at [51] is undoubtedly raised by ground (8). No point was taken by the respondents as to any deficiency in the Commissioner's entitlement to advance the argument he did and, in the circumstances, it would be inappropriate to now hold that there was any impediment to his doing so. In any event, as I have already observed at [9] above, what is at the forefront of the Commissioner's challenge to the Tribunal's decision arguably underlies all remaining live grounds. 11 Finally, during the hearing of the appeal I was informed by senior counsel for the Commissioner that, contrary to the prayer for relief at para (3) of the notice of appeal namely, that the respondents pay the Commissioner's costs of the appeal, the Commissioner would be paying all costs of the appeal and I accordingly granted the Commissioner leave to amend his notice of appeal by striking out the relevant paragraph.

FACTUAL CONTEXT 12 The respondents ('the trustees') are the trustees of a trust fund ('the Fund') established for public charitable purposes pursuant to a deed made 14 October 1997. 13 The trustees are husband and wife. Mrs Bargwanna's father, Mr Craik, is a partially retired chartered accountant who has administered the Fund's accounting affairs and provided advice to the trustees since the Fund's establishment.

Source of funds 14 Apart from an initial contribution of $10,150 from Mrs Bargwanna in 1997, the growth of the Fund to date is almost exclusively attributable to the personal generosity of Mr Craik. Mr Craik made a gift of $160,000 to the trustees of the Fund in January 2002. From June 2002, Mr Craik has provided various accounting services to Pacific Air Express Australia Pty Ltd ('PAEA'), an airline company, on behalf of the Fund, at no cost to the Fund, to enable the Fund to derive substantial income from a contract it had with PAEA for the provision of such services. In each of the years ended 30 June 2003 to 2007, accounting fees in an annual amount of some $100,000 were paid by PAEA for the services performed by Mr Craik and treated as income of the Fund.

Application of funds 15 Moneys of the Fund were held in two bank accounts, the MLC cash management account and the David Craik & Co Trust Account.

The MLC account 16 Moneys paid into the MLC account in respect of the Fund included: (a) The $160,000 contribution of January 2002, (b) a payment in October 2002 of $135,000 by way of 'loan' from the respondents in their personal capacities; and (c) $59,000 on account of PAEA fees in the period to April 2003. 17 Moneys were paid out of the MLC account as or for: (a) Acquisition of listed shares in 1997-8 at a cost of $6,350; (b) an interest free loan of $12,000 to Deodoriser Pty Ltd in September 2002; (c) the acquisition of a $50,000 investment in 'Westpac Firsts' in December 2002; (d) repayment of the 'loan' from the respondents to the extent of $114,000 in September 2003, and (e) payment of $190,000 into the 'Offset account' of the respondents in March 2004. The offset account was a non-interest bearing bank account maintained by the respondents personally with the National Bank, the balance of which was deducted from the outstanding balance of their home loan account in calculating the interest payable by them on their home loan (see [21] and [22] below).

Mr Craik's trust account 18 The payments by PAEA were deposited into the trust account, as were moneys transferred from the MLC account. From that account, in addition to GST and the payments in [17], payments were made as or of: (a) Subscription of $10,000 for units in the Moorebank Property Trust in May 2003; (b) a further advance to Deodoriser Pty Ltd of $10,000 in August 2003; (c) a further $20,000 into the trustees' personal interest offset account in April 2004; (d) loans to Rocfish Pty Ltd of $120,000 in May 2005, on which the borrower paid no interest, and which the borrower failed to repay; and (e) $176,821 to HELP International and various churches in the 2003 - 2004 and later years. 19 The income arising from the trust account was appropriated by Mr Craik for his own benefit or that of his accounting practice, pursuant to what was accepted by the Tribunal as a standard arrangement he had with all of his clients to forgo interest on funds in his trust account. 20 Amounts held for clients of the accounting practice were applied for the benefit of other clients; at times the balance of the trust account was less than the amount recorded as held for the benefit of the respondents. A sum paid into the trust account by Mr Craik shortly before the Tribunal hearing as compensatory 'interest' was wrongly calculated.

The respondents' interest offset account 21 In March 2004 the respondents (in their personal capacities, not as trustees) obtained a housing loan from the National Bank. As partial consideration for the making of the advance, the respondents (as trustees) applied $210,000 of the Fund's moneys by payment into an interest offset account, under which no interest accrued to the Fund and the interest due on their personal housing loan was reduced. The balance of the offset account was maintained at an amount equal to the home loan debt. 22 Further amounts were paid into and (for renovations) withdrawn from the offset account by the respondents on their own account, and in withdrawing funds from that account the respondents exceeded the amount they had paid into the account and hence effectively withdrew Fund moneys for their own purposes. In June 2007 an amount representing a 'shortfall' in the Fund's funds, some $40,954, was credited to the Fund's trust ledger account by Mr Craik. On 24 September 2007 Mr Craik paid a further $6,706.22 into the Fund's bank account as 'compensation' to the Fund.

THE TRIBUNAL'S FINDINGS ON THE REMAINING LIVE GROUNDS OF APPEAL

The Interest Offset Transaction (Ground 7) 23 The Tribunal made the following findings in relation to the conception and operation of the interest offset transaction and as to whether it met the 'is applied' criterion of s 50 - 60: (1) The ideas underlying this arrangement were that (i) the trustees' mortgage interest obligation to the NAB would be offset by NAB's interest obligation to the Fund on the deposit account, (ii) the trustees would incur an interest obligation to the Fund in substitution for their mortgage interest obligation to the bank, and (iii) the interest payable to the Fund was greater than the interest rate it would have received on an ordinary term deposit of an equivalent amount. [97] (2) The evidence of the trustees and the accountant revealed some confusion about the proper characterisation of the deposit account. The accountant and the wife trustee did not regard the substance of the interest offset arrangement, and the interest offset account in particular, as disclosing a loan by the Fund to the trustees personally. The husband trustee, on the other hand, had some understanding that the interest offset account was effectively a loan to the trustees personally. [102] and [103] (3) The interest offset transaction was clearly conceived as a benefit to the Fund and provided it with the opportunity to achieve an increased rate of interest over that which it might otherwise obtain. The arrangement as proposed, which need not have involved the trustees having direct personal access to the Fund's deposit account, would have had substantially the same effect, save for the increased interest rate, as a term deposit with the bank. In these circumstances the transaction as proposed was an ordinary investment transaction for the benefit of the trust and was a proper application of its funds consistent with the trust purposes. [104] (4) The question whether the irregularities involved in the operation of the interest offset account warrant the conclusion that the fund was applied for extraneous purposes has to be answered in the light of the whole of the circumstances. Those circumstances include the fact that from the outset the trustees accepted an interest obligation in relation to the whole of the Fund's deposit amount, and that this was intended to advantage the Fund by earning interest at a higher rate. They also include both the subsequent accrual of interest, and its payment by the accountant. In addition, the evidence establishes that although the male trustee's withdrawals from the interest offset account contributed to a temporary shortfall in the balance of the Fund's deposit, that shortfall was unintended and later remedied by the accountant. These circumstances justify the conclusion that the interest offset transaction was in the nature of an ordinary commercial investment for the benefit of the trust fund itself. [105]

Whether the 'is applied' criterion is satisfied by administration substantially in accordance with its constituent terms (ground 8) 24 The Tribunal's findings and reasons in relation to this ground are set out at [51], the terms of which are extracted at [9] above.

Whether it is the application of the Fund's funds by Mr Craik not the conduct of the trustees themselves that is relevant in deciding whether the 'is applied' criterion is satisfied (ground 9) 25 The Tribunal made the following findings in relation to this ground: (1) The question of the application of the Fund's funds should properly be determined by the conduct of the trustees themselves. They are not implicated in the accountant's apparent failure to apply the funds in his trust bank account exclusively for the benefit of each of the persons entitled to them. Consequently that failure does not contradict the inference, otherwise required by the general evidence about the conduct of the Fund's affairs, that the fund was applied for the purposes for which it was established. [96] (2) The accountant, although aware of the fact of irregularity in the administration of his trust account, did not appreciate either the possible significance or extent, until he carried out the extensive spreadsheet analysis during the course of the review proceedings. [96] (3) He has at all times believed that he had access to sufficient funds to cover any debit balances that occurred within the trust ledger accounts. In these circumstances, the occurrence of those debit balances, or the shortfalls revealed in the spreadsheet exercise, does not evidence that the Fund was applied for purposes other than those for which it was established. [96] (4) Given the general evidence about the nature, purpose and extent of the Fund's investment and administration, including the accountant's acknowledgement of his obligation to compensate the Fund for his irregular administration, the proper conclusion is that the Fund was applied for the purposes of its establishment. [96]

Whether the use of Mr Craik's trust account into which part of the Fund's moneys were paid and held and his entitlement to the interest on all moneys in that account satisfies the 'is applied' criterion (ground 10) 26 The Tribunal made the following findings in relation to this ground: (1) At least until the 2004 financial year, and most likely also the end of the 2005 financial year, the supposed 'interest foregone' by the Fund as a result of the accountant's standard practice, must have been very small. [60] (2) The fact the trustees allowed the accountant to administer the Fund's accounting records through his practice trust bank account does not relevantly inform an assessment of the purpose for which the Fund's funds were applied. [64] (3) The irregularities that have occurred in the accountant's management of the Fund's funds do demonstrate deficiencies in the extent to which he diligently and properly carried out that purpose. But the basic and dominant purpose of his administration remained those for which the Fund was established. [64] (4) His deficiencies, which the Commissioner contends includes the fact that the funds held in his practice trust bank account did not accrue interest for the benefit of the Fund, do not significantly detract from that purpose. [64]

Whether the loan of $120,000 to Rocfish Pty Ltd on the terms of the agreement dated 7 May 2004 satisfied the 'is applied' criterion in s 50 - 60 (ground 11) 27 The Tribunal made the following findings in relation to this ground: (1) The loan agreement provided for security for the advance, but none was ever provided. It provided for 7% interest that was payable annually in arrears. It contemplated interest default and permitted capitalisation. No interest was in fact paid throughout the currency of the loan. [111] (2) By 9 August 2007 the total outstanding amount was the original principal of $120,000 and capitalised interest of approximately $35,000. At that time the accountant provided Rocfish Pty Ltd with a replacement loan from his own funds and the loan was fully repaid to the Fund. [111] (3) The Commissioner contended that this advance was uncommercial because of the combined circumstances that (i) it was unsecured, (ii) it provided for capitalised interest, (iii) Rocfish Pty Ltd had no significant assets, and (iv) in the circumstances the interest rate did not properly reflect the level of risk. The Commissioner stresses that, despite the apparently religious nature or association of Rocfish Pty Ltd's business, the accountant said he regarded the loan as a purely commercial transaction. [114] (4) The Commissioner's criticisms of the loan to Rocfish Pty Ltd are forceful. But it is necessary to take into account the nature of Rocfish Pty Ltd's business and the fact that its religious connotations apparently favourably influenced both the accountant and the trustees. To recognise the relevance of this consideration to their decision is not to contradict the accountant's evidence that he regarded the loan as a proper commercial investment. What it does is provide an insight into some of the reasoning that was likely to have influenced his assessment of the loan as a sound commercial transaction, but one that might not permit the consistent timely payment of interest during the whole of the loan term. The accountant's evidence that he regarded the loan as a sound and proper investment for the Fund to make should, in my opinion, be accepted. As the principal adviser to the Fund's trustees, and in practical reality, the Fund's principal benefactor, he is hardly likely to have knowingly hazarded a significant part of the fund's assets in a doubtful transaction. Moreover there is no suggestion that either the accountant or the trustees benefited in any way, directly or indirectly, from the loan advance to Rocfish Pty Ltd. In these circumstances, whilst objective assessment of the Rocfish Pty Ltd advance suggests that its commerciality was questionable and its favourable resolution perhaps fortuitous, the evidence does not warrant rejection of the accountant's evidence that he regarded it a proper investment in conformity with the trust purposes. The circumstances of the loan do not evidence that the Fund was applied other than for the purposes for which it was established. [115]

ANALYSIS 28 It can be accepted that where Parliament has enacted legislation to encourage a particular activity, for example, legislation which gives particular concessions to the mining or petroleum industries, the legislation must be construed so as to promote Parliament's purpose and not so as to detract from that purpose: Totalizator Agency Board v Commissioner of Taxation (1996) 69 FCR 311 at 323A per Hill J, with whom Tamberlin J and Sundberg J agreed. Thus an exemption which exists for the purpose of encouraging, rewarding or protecting some class of activity is to be given a liberal rather than a narrow construction and application: see Commissioner of Taxation v Reynolds Australia Alumina Ltd (1987) 18 FCR 29 at 35 per Beaumont J and at 46 - 47 per Burchett J; Diethelm Manufacturing Pty Ltd v Commissioner of Taxation (1993) 44 FCR 450 at 457 per French J. But in the case of a provision which confers an exemption upon a particular kind of body or fund which meets certain requirements, Parliament's purpose is not promoted by construing the provision in a manner favourable to the body or fund referred to in it: see TAB at 323C per Hill J. Indeed, there is much to be said for the view that the privileged status of exemption from income tax on the income of a fund which aspires to that status demands strict adherence to the requirements that must be met before that status is conferred; in the present case, the requirements of s 50-5, Item 1.5B, and s 50‑60. General or holistic examination or assessments of compliance with, or satisfaction of, those requirements 'directed towards an overall characterisation of the conduct of the fund' ([50] of the Tribunal's reasons) runs the risk of detracting from, rather than promoting, Parliament's purpose. 29 The text of s 50-60 is quite clear. It requires that 'the fund is applied for the purposes for which it was established'. Subject to what is said at [31] below, the intention of the trustees of a fund, where the purpose for which an application of the whole or part of the fund is in question, is not relevant although the intention of the settlor and other promoters of the fund is undoubtedly relevant to the s 50-5 requirement that the fund be established for public charitable purposes (Item 1.5B). So much is implicit in what was said in the joint judgment in Word Investments at [70]: In s 50-50 it was thus not necessary to provide in terms that the assets of a charitable institution be 'applied for the purposes for which it was established'. On the other hand, s 50-60 applies to item 1.5A in the table in s 50-5 (a 'trust covered by para 50-80(1)(c)') and to item 1.5B (a 'fund established in Australia for public charitable purposes by will or instrument of trust (and not covered by item 1.5 or 1.5A)'). And s 50-57 applies to item 1.5 (a 'fund established for public charitable purposes by will before 1 July 1997'). Further, s 50-65 applies to item 1.6 (a 'fund established to enable scientific research to be conducted by or in conjunction with a public university or public hospital'). In context the expression 'fund' means a fund held by a trustee for charitable purposes. The trust covered by s 50-60, and the funds covered by ss 50-57, 50-60 and 50-65, continue to have their status as a trust or a fund even if the trustees are acting in breach of trust and not applying the assets to the relevant trust or fund purposes. Hence it was necessary to do in relation to ss 50-57, 50-60 and 50-65 what it was not necessary to do in relation to s 50-50, namely make express provision for loss of tax exemption where the trust or fund was not applied for the purposes for which it was established. As Word submitted, the difference in drafting flows from the fact that ss 50-57, 50-60 and 50-65 (unlike s 50-50) speak of funds or trusts which were 'established' for certain purposes, and the legislation requires not merely that they be established at the outset for those purposes, but also that their assets be applied for those purposes from time to time thereafter. 30 Moreover, the text of s 50-60 requires that 'the fund is applied for the purposes for which it was established', not that it is 'substantially' or 'principally' applied for those purposes: cf., s 50-50(a), 'pursues its objectives principally in Australia' (emphasis added). If the legislature had intended that substantially applied for those purposes was sufficient, it would have been easy enough to say so. 31 Where the purpose of an application of moneys of a fund is in question, the intention of the trustees or manager/administrator in applying the moneys may be relevant where there is an incidental or inadvertent misapplication of part of those moneys, but that is not this case. The assailed applications in this case were intentional applications; in at least two of the cases for significant sums of money representing substantial proportions of the Fund; and carried significant benefits for persons who were clearly not objects within the ambit of the purposes for which the Fund was established. 32 With respect, such misapplications are not cured or exculpated by: (1) Oversight; (2) a lack of intention to benefit a person who was not an object within the ambit of the purposes for which the fund was established, but who was in fact benefited by an intentional act; (3) making good the detriment to the fund, particularly where there is no corresponding detriment to the person who benefited; or (4) any holistic characterisation of the conduct of the fund by, or the benevolence of, those administering it. 33 Turning to the specific transactions that are assailed in the remaining live grounds of appeal:

(1) The interest off-set account It is not in dispute that the substantive economic effect of this account, by reason that it was non-interest bearing, was to reduce the interest payable by the respondents to the National Bank on their home loan by an amount referrable to the balance of the interest off-set account for the time being and from time to time. The respondents, who were the trustees of the Fund, did not pay interest to the Fund, either concurrently with the effective reduction of their interest liability to the Bank or, it seems, at any time afterwards. Compensation to the Fund for the interest foregone was effected by and through the instrumentality of Mr Craik. But this does not, in my view, cure the misapplication of the Fund's funds to purposes other than purposes for which the Fund was established.

(2) Mr Craik's trust account The same observation can be made of the fact, again not disputed, that no interest was paid to the Fund on the amounts Mr Craik held in his trust account for the Fund. Putting to one side the 'irregularities' in his recording of his trust account which made it impossible to ascertain what amount of money was available to answer the Fund's claims, such failure to pay interest and Mr Craik's application of trust account funds to payment of debit balances recorded in such accounts, even if small as found by the Tribunal '…over the whole 4 year period was less than $1000' ([82]) - and, albeit late in the peace, compensated by Mr Craik, does not, in my view, cure or exculpate the intentional misapplication of the Fund's funds, even if Mr Craik did not intend to benefit himself.

The Rocfish loan 34 There are, undoubtedly, aspects of this transaction which call into question whether it involves an application of the Funds' funds for the purposes for which it was established. On the other hand, if it were the only assailed transaction, I would not be prepared to answer that issue in the negative. In the circumstances of my view in relation to the other assailed transactions, in particular the interest-offset transaction, my view of the transaction does not matter.

CONCLUSION 35 In conclusion, for the foregoing reasons, I am of the view that the Tribunal erred in the test it applied in determining whether the Fund was applied for the purposes for which it was established, that the Commissioner's appeal must be allowed and the Tribunal's decision set aside. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Associate: Dated: 12 June 2009 Counsel for the Applicant: Mr AH Slater QC with Ms EA Collins

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: Ms J Batrouney SC with Mr J Horowitz

Income Tax Assessment Act 1997(Cth)ss 50-5, 50-60, 50-75(1)

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