Commissioner of Taxation v Wentworth District Capital Limited

Associate: Dated: 28 March 2011 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1144 of 2010

JUDGES: EMMETT, GILMOUR & GORDON JJ DATE: 28 march 2011 PLACE: SYDNEY

GILMOUR and GORDON JJ: 9 The issue on appeal is whether the respondent, Wentworth District Capital Ltd WDCL), is an association established for community service purposes within the meaning of Item 2.1 of s 50-10 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). The trial judge held that WDCL was an association established for community service purposes in each of the income years ended 30 June 2006 and 30 June 2007 (the 2006 and 2007 income years) and was therefore exempt from paying income tax on its ordinary income: ss 50-1 and 50-10 of the 1997 Act. 10 The appellant, the Commissioner of Taxation (the Commissioner), appeals. The Commissioner submitted that although the trial judge correctly accepted that the provision of face-to-face banking for reward could not amount to a community service purpose within Item 2.1 of s 50-10 of the 1997 Act, the trial judge erred when he held that the facilitation by WDCL of face-to-face banking for reward in a small country town did amount to a community service. The Commissioner submitted that the distinction drawn by the trial judge was erroneous. 11 For the following reasons, we would dismiss the appeal.

FACTS 12 The facts are not in dispute. The Commissioner did not seek to challenge any finding of fact by the trial judge. The following summary of the facts is largely extracted from the trial judge's reasons for judgment at [1] to [24]. 13 Wentworth is a small country town on the border between Victoria and New South Wales. In 2010, its population was about 1,400 people. It is an aging population. 14 From 1872 until September 1996, there had been at least one bank in Wentworth. Prior to 1993, there was a branch of the Westpac Bank which was a reasonably sized affair. In 1993 or 1994, Westpac halved the bank's operations and then, in September 1996, closed the branch. In May 1998, a branch of the State Bank of New South Wales at Dareton (some 12 kilometres from Wentworth) also closed. At that time, the closest bank branches were in Mildura about 30 kilometres from Wentworth on the other side of the border. A trip to a branch took about a one hour round trip. 15 After the closure of the branch in Wentworth, some limited bank facilities remained. The local post office was an outlet for the Commonwealth Bank. The State Bank (and subsequently the Colonial State Bank) maintained agency arrangements through local shops. The agency arrangements had limits. There was a delay in clearing deposits. People were concerned about privacy issues. 16 The closure of the only bank in Wentworth presented considerable inconvenience and had far reaching implications. Businesses were obliged to take their cash takings to Mildura and where they could not afford the time to spend an hour on a round trip, to keep the cash on their premises or hire third parties to transport their takings to Mildura. Individuals were in a similar situation. Mrs Crang, in her 80's, gave evidence of the inconvenience of having to drive to Mildura to do her banking. For those who could not drive, they had to catch the bus or prevail upon others for a ride in a car. In addition, the town itself suffered. There was less traffic and fewer people in town spending money. In particular, there was a significant downturn in business on Fridays - the day when country people apparently do their shopping. People from Wentworth went to Mildura to do their banking as well as their shopping. Wentworth was affected. The streets were emptied of cars and people. The town had no life or atmosphere. There was a negative attitude about the town and many more "For Sale" signs in front yards which remained in place long after the bank closed. 17 Between March and July 1998, a group formed to consider options about opening a bank in Wentworth. Contact was made with Bendigo Bank Ltd (Bendigo Bank) and a feasibility study commissioned. A steering committee was formed. Public meetings were held and pledges of about $200,000 were received. The pledges took the form of deposits with Bendigo Bank and served as security for a loan facility. 18 WDCL, a company limited by guarantee, was incorporated on 25 January 1999. There were ten initial incorporators. WDCL had two principal objects under its initial constitution: to take over the funds and other assets and liabilities of the steering committee and "to operate and manage the ongoing action (if any) stated at Item 3 in the 1st schedule": cl 1.2. That action was as follows: The ongoing action (if any) that the Company proposes to Operate and Manage are: 3.1 To take over the funds and other assets and liabilities of the Unincorporated Association; 3.2 To conclude a Management Agreement with Bendigo Bank Limited and one or more of its subsidiaries to enable the Company to manage a franchised office of Bendigo Bank Limited; 3.3 To manage such franchised outlet at Wentworth and such other places as the Company may decide; 3.4 If and when possible, to conduct Commercial Banking within New South Wales under franchise from Bendigo Bank Limited or from such other Banking Corporation as the Company may from time to time decide; 3.5 To distribute such portion of any profit derived by carrying on the Management of (or conducting the business of) Banking Franchise for such community service purposes within the areas in which such management or franchise is conducted as the Board may from time to time decide. 19 The legal structure under which the branch operated in Wentworth was described by the trial judge at [20] - [24]. In short: 1. Bendigo Bank granted an exclusive licence to Bendigo Franchising Pty Ltd (Bendigo Franchising) to conduct the Wentworth banking franchise. Bendigo Franchising is a wholly owned subsidiary of Bendigo Bank. 2. On 17 February 1999, pursuant to a franchising deed (the Franchise Deed), Bendigo Franchising granted the franchise to conduct a Bendigo Bank branch to another wholly owned subsidiary of Bendigo Bank, BBL Wentworth Franchising Pty Ltd (BBL Wentworth). 3. Also on 17 February 1999, BBL Wentworth entered into a management agreement with WDCL (the Management Agreement). The Franchise Deed was annexed to the Management Agreement. Under cl 1.1 of the Management Agreement, BBL Wentworth engaged WDCL: … to manage, as an independent proprietor and not otherwise, the Franchised Operation at the Location using the Marks and Intellectual Property for the Term and otherwise upon the terms and conditions contained in this Deed. 4. The expression "Franchised Operation" was defined in cl 28.1 of the Management Agreement to mean "an outlet of the Business to be conducted by the Franchisee" and "Business" was itself defined to mean: a retail banking business selling the Products and the Services under the "Bendigo Bank" name and logo and using the Marks and the Intellectual Property used or owned by the Franchisor. 5. "Products" was defined in the Franchise Deed, in part, to mean "all products authorised by the Franchisor as suitable for sale through [a franchise]". "Services" was defined to mean the merchandising of "Products" and other related and non-related services as may from time to time be prescribed or nominated by the Franchisor. 6. Under cl 2.7.1 of the Management Agreement, WDCL: … acknowledge[d] that it [had] read the covenants and obligations on the part of the Franchisee to be performed and observed under the Franchise Deed (Specific Duties) and further acknowledge[d] and agree[d] to be bound by those Specific Duties as though they apply directly to [WDCL] with all the necessary changes being made and with particular reference to the clauses of the Franchise Deed described in Schedule 5 of this Deed including the following specific covenants … 7. WDCL's important obligations under the Management Agreement were described by the trial judge as follows: (a) To use its very best endeavours in the management and conduct of the franchise and to use the same endeavours actively and diligently to promote the franchise and the interests of Bendigo Bank, Bendigo Franchising and BBL Wentworth. (b) To pay all of the fees payable by BBL Wentworth to Bendigo Franchising and also to receive all of the fees to which that company was entitled under the franchise deed. (c) To provide staff, including a manager, for the operation of the branch. (d) To ensure that the staff wore Bendigo Bank uniforms. (e) To lease premises for the conduct of the branch. (f) To fit out those premises to the satisfaction of Bendigo Franchising. 20 The Bendigo Bank opened in Wentworth in March 1999. It was said to be common ground that WDCL did not conduct banking operations within the meaning of the Banking Act 1959 (Cth). In fact, the language of the Banking Act is to "carry on banking business" or derivatives of that expression. Accordingly, we regard it as common to the parties that WDCL did not carry on a "banking business" within the meaning of s 5 of the Banking Act. WDCL provided to BBL Wentworth (an entity owned by the Bendigo Bank) the premises, the staff and equipment that were needed for the conduct by Bendigo Bank of its banking business in Wentworth. The net revenue from the operations was split between BBL Wentworth and WDCL. WDCL used its share of the net revenue to pay the rent, its staff and its other expenses. 21 The branch was successful. By May 1999, the branch had 476 customers, $7 million in business and a monthly gross income of $5,912. By September 1999, WDCL had its first break-even month with 809 customers, $22 million in business and $17,367 in gross income. 22 WDCL used its share of the excess funds generated from the bank to repay all the money pledged (with interest) and then, after establishing a scheme under which community groups could apply for and receive grants from WDCL, to distribute funds to community groups. In 2005, an ATM was installed. It was used about 4,500 to 5,000 times per month. 23 On 29 November 2006, WDCL resolved to change its objects, relevantly, as follows: The ongoing action (if any) that the Company proposes to Operate and Manage are: 3.1 To do such things as may be necessary to re-establish for the Wentworth and district community a face-to-face banking service in view of the withdrawal of face-to-face banking services from the Wentworth district by all major banks; 3.2 To conclude a Management Agreement with Bendigo Bank Limited and one or more of its subsidiaries to enable the Company to manage a franchised office of Bendigo Bank Limited; 3.3 To manage such franchised outlet at Wentworth and such other places as the Company may decide; 3.4 If and when possible, to conduct Commercial Banking within New South Wales and Victoria under franchise from Bendigo Bank Limited or from such other Banking Corporation as the Company may from time to time decide; 3.5 To distribute such portion of any profit derived by carrying on the Management of (or conducting the business of) Banking Franchise for such community service purposes within the areas in which such management or franchise is conducted as the Board may from time to time decide; 3.6 For the avoidance of doubt, the Company's main and or dominant purpose and or object is the promoting, providing, or carrying out activities, facilities or projects including but not limited to community banking services, for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. Any other ongoing action or object otherwise stated or inferred is secondary and subservient to the extent of any inconsistency to the Company's main or dominant purpose and or objective as expressed in this item 3. This amended constitution relates to the activities of WDCL for part of the 2007 year. 24 In the 2006 income year, the Commissioner assessed WDCL as having an assessable income of $28,577. In the 2007 income year, the Commissioner assessed WDCL as having an assessable income of $189,827. WDCL objected to the assessments and the Commissioner disallowed the objections.

RELEVANT LEGISLATION 25 Income tax is payable by each individual and company for each financial year: ss 4-1 and 4-10(1) of the 1997 Act. Income tax is calculated by reference to a taxpayer's taxable income in that year: s 4-10(2) of the 1997 Act. Calculation of a taxpayer's taxable income involves a number of steps: s 4-15. One step, usually the first step, is to add up all your "assessable income" - ordinary income and statutory income. However, not all assessable income is liable to tax. Ordinary income or statutory income is exempt income if it is made exempt by a provision of the 1997 Act or another Commonwealth law: s 6-20(1). 26 Section 50-1 erects a list of exemptions. Item 2.1 of s 50-10 exempts from liability to tax, subject to special conditions, a: society, association or club established for community service purposes (except political or lobbying purposes).

CONSTRUCTION OF THE STATUTE - "ESTABLISHED FOR COMMUNITY SERVICE PURPOSES" 27 The first step to be taken in construing the statute is to observe the text of Item 2.1 of s 50-10 (see [26] above): Spencer v The Commonwealth of Australia (2010) 241 CLR 118 at [50] and the authorities there cited. 28 The only issue at trial, and on appeal, was whether in the 2006 year and in the 2007 year, WDCL was "established for community service purposes". There was no dispute that WDCL was an association, that it met the special conditions in s 50-70 and it was not established for political or lobbying purposes. 29 What then does "established for community service purposes" mean? 30 First, the word established. It is past tense. On its face, it would appear that the enquiry to be made about the purposes for which a body was set up is limited to the past or, more particularly, to the time when the body was first established. It was common ground, however, as the trial judge stated, that the issue of whether a body in question was "established" was to be addressed in each income year by looking at its activities in that year while at the same time it was relevant to look at the objects or purposes for which the body was incorporated, including the clauses in its memorandum of association or constitution: see Cronulla Sutherland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 89-90 and 116-117 (which considered s 23(g)(iii) of the Income Tax Assessment Act 1936 (Cth), the predecessor to Item 2.1 of s 50-10), s 4-1 of the 1997 Act and the Explanatory Memorandum to the Taxation Laws Amendment Act (No 2) 1990 (Cth), cl 6. Thus, an entity might be established for the requisite purpose in one year, but not another: see Cronulla at 89-90 and 116-117. The word established therefore means existing in the year of income. 31 The next issue is one of characterisation of the purpose for which the body was established. Again, it was common ground that the trial judge was correct to conclude that s 50-10 requires the body be established for a specified purpose. Where that body is established for multiple purposes, the body must have the relevant purpose as its main or dominant purpose and its main or dominant purpose is ascertained by examining the "true character and nature of" the body in question: Cronulla at 93-96. 32 These observations about the construction of s 50-10 lead to a close definition of the particular issues on appeal - (1) ascertaining what was the main or dominant purpose for which WDCL was "established" and (2) determining whether that main or predominant purpose was a community service purpose? As noted earlier, the Commissioner submitted that although the trial judge correctly accepted that the provision of face-to-face banking for reward could not amount to a community service purpose within Item 2.1 of s 50-10 of the 1997 Act, the trial judge erred when he held that the facilitation by WDCL of face-to-face banking for reward in a small country town did amount to a community service. We do not accept the Commissioner's contentions. 33 The trial judge identified the following principles as presently relevant: 1. The kind of community service referred to in s 50-10 is a practical or tangible help, benefit or advantage conferred on the community or an identifiable section thereof: Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1 at [83] and [84]; Victorian Women Lawyers' Association Inc v Federal Commissioner of Taxation (2008) 170 FCR 318 at [163] and [164]. 2. A service provided for reward is not a community service, at least where there is no element of subsidisation: Navy Health at [83]. 3. Community service purposes include the purpose of providing a community service, although the purposes contemplated are not limited solely to the act of provision. The expression is broad and may extend to encompass any activity whose purpose has a reasonable connection to the delivery of a community service. Facilitation and promotion, therefore, are purposes that are squarely within s 50-10: see the Explanatory Memorandum to the Taxation Laws Amendment Act (No 2) 1990 (Cth), cl 6. 4. The entity claiming the exemption must be established for those purposes. That requires an analysis of what the entity is doing in the relevant year of income, both as a matter of its constitutive documents, and also by reference to its actual activities: see [30] above. 5. The purpose must be the entity's main or dominant purpose. The existence of other purposes will not lead to a different conclusion so long as a matter of true characterisation, the main or dominant purpose is still reasonably connected to the delivery of a community service: see [31] above. 1. These propositions were not challenged and should be accepted. 34 Against this background, the task is to ascertain the main or dominant purpose for which WDCL was "established" in each year of income and, then to determine whether that main or dominant purpose was a community service purpose: see [30], [31] and [32] above.

Main or dominant purpose? 35 The trial judge accepted that the purpose of WDCL was not to provide banking services in Wentworth. His Honour found that it did not do so. Rather, the only entity conducting the business of banking in Wentworth was Bendigo Bank or its wholly owned subsidiary, BBL Wentworth. On the other hand, his Honour found that WDCL's purpose was to facilitate the provision of face-to-face banking services in Wentworth by making it commercially viable for Bendigo Bank to operate in Wentworth. His Honour found that that was the purpose for which WDCL was originally established and that remained its purpose in the 2006 and 2007 years, during which there was no bank in Wentworth other than Bendigo Bank. At a practical level, the provision by WDCL to BBL Wentworth, on a not-for-profit basis, of premises in Wentworth and staff by which BBL Wentworth could conduct either its or Bendigo Bank's banking businesses, continued WDCL's purpose of facilitating the provision of banking services in Wentworth. 36 The trial judge found that the improvement in the economic condition of Wentworth was not the purpose of WDCL. Rather, it was the expected consequence of the fulfilment of its principal purpose, which was to facilitate the reintroduction of banking services to Wentworth. While his Honour accepted that the purpose of conducting and managing a franchise of the Bendigo Bank was one of WDCL's purposes, the management of the branch was a means rather than an end. The end was to facilitate the reintroduction of face-to-face banking in Wentworth. The accomplishment of that end was achieved through the means of the Management Agreement. The trial judge thus concluded that the main or dominant purpose of WDCL in the 2006 and 2007 years of income was the facilitation of previously absent face-to-face banking services in Wentworth. WDCL was established in those years for that purpose. 37 On appeal, the Commissioner submitted that a consideration of WDCL's objects and activities in the 2006 and 2007 income years shows that its main or dominant purpose was to conduct and manage a franchise branch of the Bendigo Bank. We reject that submission. As the trial judge found, it is a description of no more than an aspect of WDCL's activities during the relevant years and appears to carry with it the implication that WDCL was conducting those activities for profit (which of course it was not). The Commissioner's description identifies the means - the management of the bank through the Management Agreement - rather than the main or dominant purpose (the end) for which WDCL carried out those activities in those years. That main or dominant purpose was the facilitation of the provision of face-to-face banking services in Wentworth. This reflects the text of Item 3.6 of Sch 1 of WDCL's amended constitution, relevantly, that " … the Company's main and or dominant purpose and or object is the promoting, [or] providing … [of] facilities … including … [for] community banking services": see [23] above. "Facilities" means "favourable conditions for the easy or easier performance of something, esp. the physical means or equipment required in order to do something": Shorter Oxford English Dictionary (5th ed, Oxford University Press, 2002) Vol 1, p 911.

Main or dominant purpose a community service purpose? 38 Having ascertained the main or dominant purpose for which WDCL was "established" in each year of income, was that main or dominant purpose a community service purpose? 39 The trial judge accepted that the provision of banking services to customers of a commercial bank could not be the provision of a community service. Such a service, his Honour held, would be the provision of an ordinary retail service, for reward, to customers. Such an arrangement could not be characterised as having about it the requisite element of community service. However, his Honour found (and it was common ground) that the provision of banking services was not a service provided by WDCL. Rather, the service that WDCL provided was the creation of circumstances that would make it possible for a commercial bank to operate in Wentworth. 40 The trial judge eschewed the proposition that the facilitation of the commercial supply of services in a town that would otherwise not be provided would always be a community service. Nevertheless, his Honour considered that the facilitation of the commercial supply of some services would be a community service, if the facilitation of the commercial supply of such services could be characterised as a real or tangible benefit to the community. His Honour thus drew a distinction between providing face-to-face banking services in Wentworth, on the one hand, and facilitating the provision of such services by making it commercially viable for a commercial bank to operate in Wentworth, on the other hand. 41 The trial judge concluded that, in a town with no face-to-face banking services, the facilitation of such services provided a substantial benefit to the community of Wentworth and that that benefit was both real and tangible: cf Navy Health at [83]-[84]. The benefit consisted of the fact that local banking once again became available, increasing, in a concrete way, the amenity of Wentworth. His Honour concluded, therefore, that in the 2006 and 2007 years of income, WDCL was established for community service purposes and that its income was therefore exempt. 42 We agree. The Commissioner did not dispute that the existence of face-to-face banking in Wentworth was a good thing for the town's residents. However, the Commissioner submitted that any benefit to the community was economic and general and was derived from banking services provided for reward by a commercial enterprise (BBL Wentworth) with the result that it precluded the indirect provision or facilitation of banking services by WDCL from being characterised as a community service purpose. In support of this contention, the Commissioner referred to Royal Australasian College of Surgeons v The Federal Commissioner of Taxation (1943) 68 CLR 436 at 447 which identified that the inclusion of an institution within an exemption depended upon the intrinsic character of the object promoted by the institution and not upon the scope of the benefits which may result from the transaction. 43 In our view, WDCL was within the exemption - the main or dominant purpose for which it was established was a community service. Here, the community service purpose was the facilitation of face-to-face banking services which provided a substantial benefit to the community of Wentworth that was both real and tangible. Contrary to the Commissioner's submissions, there was no blurring of purpose and benefit and it was a "service". As the Commissioner submitted, "service" imports delivery of some practical help, benefit or advantage: Victorian Women Lawyers' Association at [163]. In the present case, WDCL provided practical help, benefit or advantage - as its Constitution provided, it entered into the Management Agreement with Bendigo Bank and one or more of its subsidiaries to enable WDCL to manage a franchised office of Bendigo Bank (Item 3.2 of Sch 1 of the Constitution (see [23] above)) and it conducted the shop front operations of Bendigo Bank on a not-for-profit basis by providing the premises, the staff and the equipment that were needed for the conduct by Bendigo Bank of its banking business in Wentworth.

CONCLUSION 44 As the trial judge found, the town of Wentworth had faced a problem - the absence of face-to-face banking services in that town: see [16] above. To solve that problem, a number of steps were taken culminating in the incorporation of WDCL and the entry of it into the Management Agreement. WDCL was not established to help Bendigo Bank. WDCL was incorporated to provide a solution to the problem of the absence of face-to-face banking services in Wentworth. As the Commissioner accepted at trial and on appeal, the purpose of WDCL was not to provide banking services in Wentworth and it did not do so. BBL Wentworth conducted the business of banking. 45 From the outset, WDCL was established to facilitate (without profit to the company or its corporators) face-to-face banking in Wentworth by making it commercially viable for Bendigo Bank to operate in Wentworth. As its Constitution provided, it achieved that purpose by entering into the Management Agreement with Bendigo Bank and one or more of its subsidiaries to enable WDCL to manage a franchised office of Bendigo Bank: Item 3.2 of Sch 1 of the Constitution (see [23] above). The facilitation of face-to-face banking in Wentworth remained its purpose in the 2006 and 2007 years, during which there was no bank in Wentworth other than Bendigo Bank. The conduct by WDCL of the shop front operations of Bendigo Bank on a not-for-profit basis continued its purpose of facilitating the provision of banking services in Wentworth. 46 The trial judge made no error in reaching the conclusion that he did.

OTHER MATTERS 47 The Commissioner identified two practical difficulties that were said to arise from the trial judge's conclusion about the benefits to the community from the introduction of face-to-face banking in a town that had lost them. The first was that an entity which "facilitates" the introduction of a competitor to Bendigo Bank in Wentworth would not be able to rely upon the same benefits and would fail to obtain tax exempt status. In short, the complaint was that a "first-mover" would obtain concessionary tax status to which a subsequent competitor would not be entitled. The second practical difficulty identified by the Commissioner, related to the first, is that WDCL would lose its tax exempt status if, for example, a competitor bank in fact opened a branch in the following year. 48 These "practical difficulties" may be put to one side. An entity's tax status is to be addressed in each income year by looking at its activities in that year while at the same time it is relevant to look at the objects or purposes for which the body was incorporated, including the clauses in its memorandum of association or constitution: see [30] above. 49 Whether or not WDCL would have tax exempt status in other years in which the circumstances are different does not demonstrate that it does not have tax exempt status in the years in question.

ORDERS 50 It follows that the appeal should be dismissed. The Commissioner should pay WDCL's costs of the appeal, such costs to be taxed in default of agreement. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Gilmour and Gordon.