James N Kirby Foundation v Attorney-General NSW

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3722/04 JAMES N KIRBY FOUNDATION LIMITED v ATTORNEY-GENERAL IN AND FOR THE STATE OF NEW SOUTH WALES JUDGMENT 1 HIS HONOUR: On 17 October 1967 the late Sir James Norman Kirby founded a trust for the purpose of providing money, property and benefits to eligible charities falling within s 78(1)(a) of the Income Tax and Social Services Contribution Assessment Act 1936 (Cth) as amended from time to time. The trust is known as the James N Kirby Foundation or "the Foundation". The plaintiff is its trustee. 2 The plaintiff claims an order that the terms of the deed of trust be varied by substituting for the existing provisions, the provisions contained in what is called a model trust deed prepared by the Australian Taxation Office enabling the Foundation to meet the requirements under current income tax legislation for it to qualify as a prescribed private fund as defined in sub-s 995-1(1) of the Income Tax Assessment Act 1997 (Cth). 3 The Foundation was established as a public fund under s 78 of the Income Tax Assessment Act 1936 (Cth) but in the last thirteen years has received only one donation from a person outside the Kirby family or companies associated with the Kirby family. The Australian Taxation Office has approved the Foundation being a prescribed private fund. This would mean that gifts made to the plaintiff would be deductible for the donors and the Foundation would remain an income tax exempt charity. However to remain a prescribed private fund it is thought necessary that the trust deed be amended. 4 Since its creation the Foundation has made grants of almost $8,000,000 to eligible charities. It has also built up assets, which at 30 June 2003 exceeded $5,500,000. A substantial proportion of the Foundation's investment income is applied annually in making grants to charities. If the donors are not entitled to a tax deduction for gifts which they make to the Foundation, or if there is doubt as to their entitlement, it is likely that donations will no longer be forthcoming. 5 There is no doubt that, subject to some fine-tuning, the proposed amendments to the trust deed are expedient. The principal issue is whether there is jurisdiction to make the order sought. 6 The Attorney-General of New South Wales is a party to the proceedings and has consented to the order sought. 7 The plaintiff invoked the inherent jurisdiction of the Court but relied primarily upon s 81 of the Trustee Act 1925 (NSW). It provides: "81 Advantageous dealings (1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court: (a) may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and (b) may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income. (2) The provisions of subsection (1) shall be deemed to empower the Court, where it is satisfied that an alteration whether by extension or otherwise of the trusts or powers conferred on the trustees by the trust instrument, if any, creating the trust, or by law is expedient, to authorise the trustees to do or abstain from doing any act or thing which if done or omitted by them without the authorisation of the Court or the consent of the beneficiaries would be a breach of trust, and in particular the Court may authorise the trustees: (a) to sell trust property, notwithstanding that the terms or consideration for the sale may not be within any statutory powers of the trustees, or within the terms of the instrument, if any, creating the trust, or may be forbidden by that instrument, (b) to postpone the sale of trust property, (c) to carry on any business forming part of the trust property during any period for which a sale may be postponed, (d) to employ capital money subject to the trust in any business which the trustees are authorised by the instrument, if any, creating the trust or by law to carry on. (3) The Court may from time to time rescind or vary any order made under this section, or may make any new or further order. (4) The powers of the Court under this section shall be in addition to the powers of the Court under its general administrative jurisdiction and under this or any other Act. (5) This section applies to trusts created either before or after the commencement of this Act." 8 The trust deed contains no provision for its amendment. The plaintiff submitted that the Court has inherent power to vary a trust where the intentions of the settlor would otherwise be thwarted. Counsel cited Tickle v Tickle (1987) 10 NSWLR 581. The plaintiff also submitted that the proposed amendments to the trust deed were expedient in the management or administration of the trust and of the trust property. It submitted that the alteration of the trust instrument was itself a "transaction" within the meaning of sub-s 81(1). (Bowmil Nominees Pty Ltd [2004] NSWSC 161 at [16]; Re Philips New Zealand Ltd [1997] 1 NZLR 93 at 101). The plaintiff submitted that where the trust is charitable, where its sole property is a fund of money, and its sole activity is the provision of donations to other charities, the distinction between the management and administration of trust property, and the management and administration of trust affairs generally, has little scope for meaningful operation. Alternatively, the plaintiff relied upon sub-s 81(2) which, it submitted, provided a general jurisdiction for the Court to alter the trust deed where it is satisfied that the alteration is expedient. It was submitted that in such a case the Court may authorise the trustee to "do an act", where the act itself could be the variation of the trust instrument, although such variation would otherwise be a breach of trust. 9 I do not consider that the Court has inherent jurisdiction to alter the terms of the trust deed. Tickle v Tickle, upon which the plaintiff relied, concerned the alteration of a trust involving infants, where circumstances had occurred which tended to thwart the settlor's intentions and the parties or their guardians had consented to the proposed alterations which would give effect to such intentions. (Tickle v Tickle (1987) 10 NSWLR 581 at 586). The conclusion that such inherent jurisdiction existed was heavily influenced by the enactment of s 50 of the Minors (Property and Contracts) Act 1970. Tickle v Tickle has nothing to say about the jurisdiction to alter charitable trusts. 10 In Ku-ring-gai Municipal Council v Attorney-General (1954) 55 SR (NSW) 65 the Full Court of the Supreme Court held (at 74) that the Court has no inherent power to vary a charitable trust which is defined and is legally capable of being executed. If it becomes impossible to continue to give effect to a charitable intention, or if it becomes impracticable to carry out the declared trusts, the Court may direct a scheme. (Ku-ring-gai Municipal Council v Attorney-General at 74; Attorney-General v Whitely (1805) 11 Ves Jun 241 at 247; 32 ER 1080 at 1083; Attorney-General v Whitchurch (1796) 3 Ves Jun 141 at 144; 30 ER 937 at 939). However the present case is not one where it is impossible to execute the trusts. 11 The principal question is whether the proposed amendments are expedient "in the management or administration of [the] property vested in [the] trustee", and may be authorised pursuant to s 81(1) of the Trustee Act. The section applies to charitable trusts. (Freeman v Attorney-General [1973] 1 NSWLR 729). 12 The expediency must be in the management or administration of the trust property, not in relation to other matters. (Ku-ring-gai Municipal Council v Attorney-General; N M Superannuation Pty Ltd v Hughes, McLelland CJ in Eq, 5 March 1996 unreported, BC9600423 at 8-9; Re Gaydon [2001] NSWSC 473 at [10]). 13 However, the concept of the expedient management and administration of trust property is wide ranging. In Re Cosaf Pty Ltd (Young J, 18 December 1992 unreported) the Court authorised amendments to a trust deed of an industry superannuation fund to provide for a greater variety of benefits to be paid to members. This was within the compass of management or administration of trust property. A similar view of the scope of s 81 was taken by Hamilton J in Re Bowmil Nominees Pty Ltd [2004] NSWSC 161. In Arakella Pty Ltd v Paton [2004] NSWSC 13 amendments were sought to the trust deed of a trading trust, whose business was carried on by the trustee for the benefit of newsagents. The newsagents were expected to become unitholders when they commenced business and redeem their units when they ceased to do so. Austin J held that matters touching upon the issue, redemption and transfer of units, were matters arising in the management and administration of the stationery and office supply business conducted by the trustee. A proposal which was expedient for the process of issuing, transferring and redeeming units was held to be expedient in relation to the management and administration of the trust property. 14 In the present case the plaintiff has accumulated funds of in excess of $6,000,000 and is endeavouring to establish a capital base of $15,000,000 by 2017. Each year the trustee has to make decisions as to how funds will be invested, how much of the investment income will be distributed and how much will be transferred to capital. The accounts for the Foundation for the financial years ended 30 June 1999 to 30 June 2003 show that each year a substantial amount has been transferred to capital. 15 These decisions involve the administration of the existing trust property. In making the decisions, a relevant consideration must be what expectations the directors of the trustee reasonably have as to the trustee's ability to continue to attract donations to the Foundation. If the objective of establishing a capital base of $15,000,000 by 2017 is to be achieved, presumably either donations to the Foundation will have to continue to be forthcoming or a greater amount of investment income will have to be re-invested rather than distributed to charities. Clearly, continuing to attract donations is desirable. However it is not only desirable in itself. It is expedient in the administration of the existing trust property, which includes making decisions as to investment and distribution of income to charities, that the trust deed be amended so that there is greater assurance of continued donations. 16 In Re Bowmil Nominees Pty Ltd [2004] NSWSC 161 at [16], Hamilton J held that the amendment of the trust deed itself fell within the definition of a "transaction". His Honour followed a decision to that effect of the High Court of New Zealand in Re Philips New Zealand Ltd [1997] 1 NZLR 93 at 101. I see no reason not to follow those authorities. 17 For these reasons I am satisfied that there is jurisdiction pursuant to sub-s 81(1) of the Trustee Act to confer upon the trustees the necessary power for them to amend the trust deed so as to satisfy the requirements for the Foundation to qualify as a prescribed private fund as defined in sub-s 995-1(1) of the Income Tax Assessment Act 1997. 18 Subject to one qualification there is no reason to doubt the propriety of the proposed amendments of the trust deed. The qualification is this. The settlor, Sir James Kirby, was at pains to ensure that a majority of the board should be persons drawn from a limited class who could be expected to be highly responsible in administering the Foundation's affairs. The Trust Deed provides: "13. To ensure that the settled property shall be controlled and administered by persons who because of their tenure of some public office or other position or activity in the community may be expected to have a high degree of responsibility to the public in exercising that control or administration the Trustee shall be the sole Trustee of the settled property and the Articles of Association of the Trustee shall at all times provide that the Trustee and the business affairs and property thereof shall be managed and controlled by a Board of Directors comprising not less than three nor more than eleven Directors and that a majority of the Directors holding office for the time being are persons each of whom at the time of his first appointment or first election or within three years prior to such first appointment or first election as a Director of the Trustee is or has been: (i) A Justice of the High Court of Australia or of the Australian Capital Territory or of the Supreme Court of New South Wales, or (ii) A Member of the Parliament of the Commonwealth of Australia or of the Parliament of the State of New South Wales, or (iii) A Member of the Council or governing body of any University within the Commonwealth of Australia, or (iv) A Director of National Heart Foundation of Australia (N.S.W. Division), or (v) A person whose election or appointment as a Director of the Foundation is approved by a unanimous resolution passed by all the Directors then holding office and by the Chancellor or Vice-Chancellor of an Australian University or by the Chief Justice of the Supreme Court of any State in Australia." 19 However the model trust deed which the trustee wishes to adopt contains a much wider provision as to who should be directors of the trustee. The proposed clause 7.1(3) provides that the Board of Directors of the trustee should include "at least one Responsible Person". A "Responsible Person" means: "…. An individual who:`` (a) performs a significant public function; (b) is a member of a professional body having a code of ethics or rules of conduct; (c) is officially charged with spiritual functions by a religious institution; (d) is a director of a company whose shares are listed on the Australian Stock Exchange; (e) has received formal recognition from Government for services to the community; or (f) is approved as a Responsible Person by the Commissioner, and who, unless the Commissioner otherwise agrees, is not an Associate of the Founder or the Trustee or a Donor or the directors of members of the board or other controlling committee of the Trustee other than (i) in a professional capacity (ii) as a member of the Board or other controlling committee of the Trustee or (iii) as a member of the Trustee."

It appears from evidence filed by Mr Kirby after the hearing of the proceedings in response to matters raised during the hearing, that the present requirements of the trust deed in relation to the composition of the board are onerous and that it would be expedient that they be relaxed to provide the plaintiff with sufficient flexibility in relation to the classes of persons who would be entitled to be directors of the trustee including members of the Kirby family. On the other hand, the settlor's expectation as to the qualifications of directors should continue to be met so far as practicable. The evidence of Mr Kirby is that the administration and management of the Foundation has always been undertaken by members of the Kirby family, as have the preparations for Board meetings and research concerning the identification of proper recipients of the Foundation's support. 20 Taking all of those matters into account I think it appropriate that the draft model trust deed to be adopted to meet the requirements for the Foundation being a prescribed private fund be altered to limit the category of persons who would qualify as "Responsible Persons" to those who are presently specified in paragraph 13 of the existing trust deed, as well as those persons falling within paragraphs (c), (e) or (f) of the definition of "Responsible Person" in paragraph 2.1(9) of the model deed. In my view the class of persons falling within paragraph (a) (someone who performs a significant public function), paragraph (b) (a member of a professional body having a code of ethics or rules of conduct), or paragraph (d) (a director of a listed company) are so wide as to involve an inappropriate departure from the settlor's wishes as to who should be the directors of the trustee. Whilst it is not expedient that the majority of the board should be persons who would so qualify as Responsible Persons, it is inappropriate to authorise an amendment which would require only one such Responsible Person to be a director. The trustee has proposed that there be at least three such persons. That is appropriate. 21 By letter dated 25 November 2004 the Attorney-General, through the Crown Solicitor, advised that he did not wish to be heard upon the proposed change to the amendments to the trust deed dealing with the qualification of directors. The Australian Taxation Office has advised that the proposed amendment to the clause relating to the qualification of trustees and the change to the meaning of "Responsible Persons" in the proposed trust deed would not affect the Tax Office's continued acceptance of the Foundation as a prescribed private fund. 22 I am of the view that the proposed amended clause 7 dealing with the qualifications of trustees and the definition of Responsible Persons referred to in the letter from Messrs Deacons to the Australian Taxation Office dated 28 September 2004 is appropriate. It is expedient in the management or administration of property vested in the trustee that the trust deed be amended by substituting for the terms of the deed of trust entered into on 17 October 1967, the terms of the proposed deed of trust which is annexure A to the summons subject to the changes referred to in the letter from Messrs Deacons to the Australian Taxation Office dated 28 September 2004. The appropriate form of order to comply with s 81(1)(a) of the Trustee Act is one which confers power upon the trustee to make the amendment. 23 I therefore direct that short minutes be brought in in conformity with these reasons for an order conferring upon the trustee the power to amend the trust deed to substitute for the present terms the terms of the proposed deed of trust which is Annexure A to the summons, subject to the amendment to clause 7 and to the definition of "Responsible Person". 24 The short minutes should provide also for the payment of the defendant's costs of the proceedings.

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