Wentworth District Capital Ltd v Commissioner of Taxation

Federal Court of Australia|2010-08-13|Before: Perram J

I - Introduction 1 Wentworth is a small town on the northern side of the border between Victoria and New South Wales. For many years the only bank in the town was a single branch of Westpac Banking Corporation ("Westpac"). In September 1996 Westpac closed that branch leaving the town without a bank. This had adverse consequences for Wentworth. In 1998 members of the Wentworth community incorporated the applicant ("WDCL") which entered into arrangements with Bendigo Bank Ltd ("Bendigo Bank") under which the bank provided banking services in Wentworth through premises, staff and equipment provided by WDCL. WDCL does not distribute profits to its members. Under the income tax laws an association which is "established for community service purposes" is exempt from paying income tax on its ordinary income: s 50-1, 50-10 Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"). The question which arises in this case is whether WDCL is such an association. In my opinion, for the reasons which follow, it is.

II - Facts 2 The town of Wentworth lies at the confluence of the Murray and Darling Rivers at a point at which the Murray River forms the border between New South Wales and Victoria. To those untutored in the location and courses of Australian rivers that evidence does not tell one precisely where Wentworth is. However, recourse to a map shows that it lies about 100 kilometres to the east of South Australia and is just inside New South Wales. Section 144 of the Evidence Act 1995 (Cth) permits a court to take judicial notice of knowledge "capable of verification by a reference to a document the authority of which cannot reasonably be questioned". I would include a map of New South Wales in that category. In Birrell v Dryer (1884) 9 App Cas 345 Lord Selborne (at 346) took judicial notice of the fact that the "great river, which discharges the waters of the North American lakes, and the gulf into which it flows, both bear the name of St Lawrence". His Lordship also took such notice of several other geographical features of the coastal regions of Canada. Lord Blackburn too felt no difficulty in this course because "the Court should take judicial notice of the geographical position and the general names applied to such districts as this, in short, of all that we see on the Admiralty chart of this part of the sea" ((1884) 9 App Cas at 352). I see no reason to approach the matter differently. 3 The population of Wentworth is presently quite modest at about 1,400 people but that population is an aging one. This may be because it is said to be an attractive place to which to retire. Lying on the western edge of the Sunraysia irrigation district it is an old town and relies on agriculture together with wool growing. 4 Mrs Maud Crang was born in Wentworth in 1915 and has lived in Wentworth almost all of her life. She gave evidence that Wentworth was a town which had always been used by country people on its side of the Darling River. She thought that the town had gone through a slightly bad time during the Second World War but apart from that her evidence was consistent with other evidence given that, at least in the 1980s, Wentworth was a busy place which was growing. So much flows, I think, from the evidence given by Mr John O'Connell that he had set up a pharmacy in Wentworth at that time after ascertaining that it "had a doctor, a lawyer, a supermarket, a bank, a school and a delicatessen" and that he would not have established his pharmacy "if it had not had those shops and services and if it had not been growing in size". 5 There had been banks in Wentworth since 1872 and at least from the 1930s what is now Westpac had kept a branch there. The presence of banks at these earlier times may be unsurprising. As a business plan tendered in evidence showed, Wentworth originally had been a "thriving river port" at the junction of the country's two major rivers. Prior to 1993 the Westpac branch at Wentworth was a reasonably sized affair. The bank employed a manager, a manager's assistance, an accountant, two tellers, a batch clerk and a part-time typist. However, in 1993 or 1994 Westpac reduced the size of its operations by about half. This reduction in the scale of Westpac's operations in Wentworth was a prelude to a full closure which eventually occurred in September 1996. After that closure the banking facilities available to the inhabitants of Wentworth were considerably diminished. For a short time the State Bank of New South Wales maintained a branch at Dareton which was about 12 kilometres away but this closed in May 1998 not long after the closure of the Westpac branch in Wentworth. Thereafter the closest bank branches were in Mildura which is about 30 kilometres from Wentworth on the other side of the border. Becauseofthat distance a visit to a bank then involved, for a resident of Wentworth, about a one hour round trip. 6 Within Wentworth itself there remained some very limited banking facilities. The local post office was an outlet for the Commonwealth Bank. The State Bank (and subsequently Colonial State Bank) also maintained agency arrangements originally through the local pharmacist, Mr O'Connell, and then subsequently at the post office. There were, however, limitations on those arrangements. Although the pharmacy accepted deposits they were cleared at the branch in Dareton the following day so that there was a delay in the time it took for the money to get banked. Mr O'Connell gave evidence that although he advertised the bank's loan facilities no-one ever sought his assistance in that regard. I infer that persons are less likely to transact substantial loan business - be it personal, business or otherwise - through an agent such as a pharmacist or a post office. 7 Mrs Crang, to whom I have already referred, gave evidence that she was disinclined to conduct her banking business at the post office both because of a lack of staff and because of privacy concerns which I accept. I am prepared to infer that such concerns were widespread. Mrs Thomson, who had worked at the Westpac Branch prior to its closure, gave evidence which I accept that the service offered at the post office was a limited service which did not include lending and that, at the bottom line, the people running the post office were running a post office and not a bank. The present Mayor, also called Mrs Thomson, gave evidence that anyone who needed "true banking services" would have to go to Mildura or Merbein. Merbein is across the Victorian border about 18 kilometres away. I accept all of this evidence and I infer what is probably obvious, namely, that the closure of the only bank in the town was likely to present significant inconvenience to those trying to conduct their banking affairs. 8 Commonsense suggests, and the evidence before me confirmed, that this was likely to have had a significant and negative impact upon Wentworth's local economy and its general prosperity. Businesses were obliged to take their cash takings to Mildura which, as already mentioned, involved a substantial round trip. Some businesses, which could not afford that investment in time, resorted to keeping cash on their premises and others were forced to hire third parties to transport their takings to Mildura. Individuals were placed in a similar situation. Mrs Crang, who at this time was in her early 80s, had to drive to Mildura to do her banking which was, as one can well imagine, inconvenient. Hers was not an isolated experience. Another resident, Mr Murray, gave similar evidence. Further, unlike the sprightly Mrs Crang, many of the elderly could not drive at all and were forced to travel by bus to Mildura or to prevail upon their friends or family for a ride in a car. In their cases - which in a town with an aging population cannot be regarded as atypical - the need was perhaps more acute than with the younger generation. So much is apparent from the preference amongst the elderly, likely borne of familiarity, for passbook accounts and cash. It was no doubt for that reason that many of them were somewhat panicked by the closure of the Westpac Branch. 9 Those considerations which, although serious, are largely matters of convenience also had far-reaching implications. They meant, for example, that it was more likely that cash would be spent in Mildura than in Wentworth, particularly on groceries, clothes and fuel. Mr Murray gave evidence that this is what he himself did and that he saw "lots of Wentworth people in Mildura doing their normal business, including their banking and shopping". Ms Thomson was disappointed: … to see cars driving over bridges and out of town taking people away to do their banking because it also meant that those people would generally do other things with their money. 10 The Mayor, who ran a drapery shop in Wentworth at the time, gave evidence that her business was adversely affected by the closure, that after it there was much less traffic in the town and that fewer people were walking around spending money. One particular effect was a significant downturn in business on Fridays when country people apparently do their shopping. Further, the Wentworth Shire paid its employees by cheque. I infer that staff were thereby required to travel to Mildura to cash their cheques where concomitant discretionary expenditure might be expected also to occur. 11 Several witness said that after Westpac's closure the streets were emptied both of cars and of people which I accept. Others said that after Westpac's departure the town had "no life or atmosphere" or that there came to be "a negative attitude about the town". Mr O'Connell, the pharmacist, lived about two kilometres from the centre of Wentworth and noticed, after Westpac's closure, the presence of many more "For Sale" signs in the front yards of houses in the town and that these remained in place for a long time after the bank closed. I have no reason to doubt any of this evidence and I accept all of it. I infer that the departure of Westpac from Wentworth had a very serious negative effect on the community of the town. 12 I turn then to the events surrounding the establishment of the community bank. Understandably enough the business people of the town were concerned about the effect that the absence of a bank was having upon it. Sometime between March and July 1998 a group was formed to consider options about the opening of a bank. There was a suggestion to approach Bendigo Bank and propose the establishment of a community bank in Wentworth given the similar ventures by that entity in the wheat belt towns of Rupanyup and Minyip. Contact was made with the Bendigo Bank and a feasibility study was commissioned by local businesses from a firm of Melbourne accountants. A steering committee was then formed. Several public meetings were held and pledges of about $200,000 were received to get the proposed branch up and running. The pledges actually took the form of deposits with Bendigo Bank which then served as security for a loan facility. 13 The community bank opened in March 1999 with not some little publicity on its opening day. A celebrity, Mr Ray Martin, was used to mark the occasion and arrived at the Wentworth wharf on a boat, the MV Loyalty. Afterwards, there was a barbeque lunch. There were balloons. Because of the nature of the issues which arise it will be necessary to explain in some detail the legal structure of the arrangements which were put in place. I do that below at paragraph [18]. For present purposes it suffices to observe that a company limited by guarantee was incorporated - WDCL - and that that company provided the premises, staff and equipment to an entity owned by Bendigo Bank for the conduct of its banking business. The net revenue from the operation was split between the Bank's subsidiary and WDCL, the latter using its portion to pay its staff, the rent and its other expenses. The premises were fitted out in Bendigo Bank's colour scheme and the staff wore the uniforms of the Bendigo Bank. 14 The business was rapidly successful. By May 1999 the branch had 476 customers, $7 million in business and a monthly gross income (through the revenue split with the Bank's subsidiary) of $5,912. By September 1999 WDCL experienced its first break-even month, having 809 customers, $22 million in business and $17,367 in gross income. The annual report for 30 June 2009 showed that after 10 years the branch had nearly $100 million in business with an annual income before tax of about $200,000. 15 The unexpected success of WDCL quickly gave rise to an issue about what to do with the excess of funds generated. At first this was resolved by repaying all of the money which originally had been pledged with interest. Subsequently, after the pledges had been repaid a grants scheme was put in place in 2002 under which community groups could apply for, and receive, grants from WDCL. Recipients included football clubs, schools, bowling clubs, the Rotary Club and so on. Recipients were not required to bank with the branch. As at the date of the hearing WDCL had given away in excess of $1 million to such recipients. 16 As might be naturally be expected and, no doubt as intended by its founders, the Wentworth branch improved economic circumstances in the town. Despite the drought, business picked upand traffic returned to the main street to the extent that parking was sometimes an issue. Further the "For Sale" signs which had appeared after Westpac departed now began to disappear. The pharmacist, Mr O'Connell, noted that the majority of his customers now paid their accounts by cheques drawn on Bendigo Bank - up to 10 to 15 per week. Previously, there had only been one or two such cheques per week. No doubt too, the installation of an automatic teller machine in 2005 assisted in the increase of economic activity in the town. The evidence disclosed that the ATM was used about 4,500 to 5,000 times per month. As at the hearing the branch had 2,500 customers and maintained 4,650 separate accounts. 17 There have been other benefits too. The facilitation of face-to-face banking has improved the plight of older customers who, as already noted, are more reliant upon cash and passbook account arrangements. Further, on a weekly basis the branch sends a staff member out to an aged care facility to address the issues of those with mobility problems. It also conducts a school banking programme.

III - The legal aspects of WDCL 18 WDCL is a corporation limited by guarantee and was incorporated on 25 January 1999. It had two principal objects under its initial constitution and these were set out in cl 1.2. They were 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". 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 initial incorporators were 10 in number and seem to have reflected largely the membership of the steering committee. Subsequently, on 29 November 2006, WDCL resolved to change its objects so that, relevantly, they were 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. 20 The legal structure under which the branch operated in Wentworth was as follows. Bendigo Bank granted an exclusive licence to Bendigo Franchising Pty Ltd ("Bendigo Franchising") to conduct the Wentworth franchising operation under which that entity granted franchises to third parties to conduct retail shopfronts for the Bendigo Bank. Bendigo Franchising is a wholly owned subsidiary of Bendigo Bank. On 17 February 1999 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"). This was done pursuant to a franchising deed of that date. Precisely why Bendigo Bank decided to sell itself a franchise is not completely clear to me. There was a suggestion made that it was related to the requirements made by the Australian Prudential Regulation Authority under the Banking Act 1959 (Cth). However, whatever the answer to that question might be nothing turns upon it. On the same date as the franchise deed came into effect BBL Wentworth entered into a management agreement with WDCL. The franchise deed was annexed to the management agreement and that agreement, in effect, passed along to WDCL all of BBL Wentworth's obligations to Bendigo Franchising under the franchise deed. 21 I have experienced some difficulty in understanding precisely how this arrangement worked. Pursuant to the franchise deed, Bendigo Franchising granted to BBL Wentworth the right to establish and operate a "franchised operation" in Wentworth: cl 1.1. The expression "franchised operation" was defined in cl 27.1 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. (emphasis added) 22 I have emphasised the words "selling" to contrast it with the immediately preceding words "retail banking business". Ordinarily the business of banking does not involve the sale of products and services but instead the taking of money on deposit and the making of loans. Neither of those transactions is apt to be described as a sale. The definitions in the franchise agreement of the expressions "Products" and "Services" do not take the matter much further. "Products" is defined in part, to mean "all products authorised by the 'Franchisor' as suitable for sale through [a franchise]" but there was no evidence before me to explain what those products might have been. "Services" is defined in a way which relates it to "Products" and does not take matters very far either. Consequently, one cannot tell from the management agreement or the franchising deed what was physically taking place at the branch. The consequence of those observations is that it is not clear whether the franchise deed operated so that BBL Wentworth conducted banking operations itself or whether, by contrast, it merely provided a shopfront and sold related products so that the actual banking business was conducted by Bendigo Bank. In any event, both parties were in agreement that, whatever else it might have been doing, WDCL did not conduct banking operations within the meaning of the Banking Act 1959. 23 WDCL's important obligations under the management agreement were 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. 24 It will be seen, therefore, that WDCL bound itself, in effect, to provide the physical manifestations of a Bendigo Bank branch. The fee arrangements involved BBL Wentworth in paying WDCL 50% of the amount earned by it through the borrowing and lending transacted through the branch. There were other profit lines relating to the sale of products (such as insurance) but these were not suggested by either WDCL or the Commissioner to be material and may presently be put to one side.

IV - The tax question 25 By s 4-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") income tax is payable by each individual or company usually for the year ending 30 June: s 4-10(1). By s 4-10(2) income tax is calculated by reference to a taxpayer's "taxable income" in that year. The calculation of taxable income involves a number of steps which are set out in s 4-15. One of those steps involves the calculation of "assessable income". Assessable income consists of "ordinary income" (s 6-5(1)) and "statutory income" (s 6-10(2)). Ordinary income includes income according to ordinary concepts: s 6-5(1). Broadly speaking, statutory income includes amounts of money which would not otherwise be characterised by the law as income according to ordinary concepts. One simple example of statutory income is a financial gain earned on the disposal of a capital asset. 26 However, not all "assessable income" is liable to tax. Section 6-20(1) provides that: An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law. 27 Section 50-1 erects a series of such exemptions. It provides: The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions. 28 In ss 50-5 to 50-45 there are then set out nine tables of different classes of exemptions. One such a table in s 50-10 deals with "community service" and is in the following terms: Community Service Item Exempt entity Special conditions 2.1 society, association or club established for community service purposes (except political or lobbying purposes) see section 50-70

29 The table picks up, by reference, the special conditions set out in s 50-70. There is no debate in this case that the requirements of that provision have been met and it may be put to one side. 30 The question which arises is, instead, whether WDCL is a "society, association or club established for community service purposes" in terms of the expressions appearing in the table. WDCL took the view that it was established for "community service purposes". The Commissioner took the opposite view. In the taxation years 2006 and 2007 he issued notices of assessment to WDCL in which he assessed it as having an assessable income of $28,577 and $189,827 respectively. WDCL objected to these assessments but the Commissioner disallowed those objections. The present case is the appeal from that decision brought by WDCL pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth).

"established for community service purposes" 31 One should start, I think, with the obvious and that is that this expression is inherently vague. It is not clear whether "established" means presently established or originally established and the expression "community service" has such a wide and sweeping range of meanings that it is difficult to be sure what is connoted at all. No less obscure is the relationship between the word "purposes" and the balance of the phrase - questions at once prompted include whether the purposes involved are the subjective purposes of particular individuals or whether, instead, they refer to a more concrete and objective assessment of aptness or suitability. 32 Section 15AB(1) of the Acts Interpretation Act 1901 (Cth) provides: Use of extrinsic material in the interpretation of an Act (1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material: (a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or (b) to determine the meaning of the provision when: (i) the provision is ambiguous or obscure; or (ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. 33 Subsection (2) then sets out in a non-exhaustive way a list of materials which may be examined once the requirements of subsection (1) have been satisfied. Included in that list are explanatory memoranda laid before, or furnished to, the members of either House of Parliament by a Minister before the provision was enacted: s 15AB(2)(e). Before resort may be had to that kind of material, however, the preconditions to the operation of s 15AB(1)(b) must first be satisfied. That depends, in turn, on whether the expression under consideration is "ambiguous or obscure". 34 In the context of interpretation provisions such as s 15AB it has been held that the phrase "ambiguous or obscure" is "not limited to lexical or verbal ambiguity and syntactic or grammatical ambiguity" but "extends to circumstances in which the meaning is, for whatever reason, doubtful": see R v Sharma (2002) 54 NSWLR 300 at 312-313 [55] per Spigelman CJ (with whom the other members of the Court agreed). The expression "established for community service purposes" no doubt falls within that rubric. If the ordinary rules of statutory construction can resolve that uncertainty then resort to the use of such extrinsic materials will not be authorised for "it is erroneous to look at extrinsic materials before exhausting the application of the ordinary rules of statutory constructions": Saeed v Minister for Immigration and Citizenship (2010) 84 ALJR 507 at 515 [33] per French CJ, Gummow, Hayne, Crennan and Kiefel JJ. Presumably, for similar reasons, "reading the Explanatory Memorandum and the Second Reading Speech is much less helpful than reading the legislation itself" as Heydon J remarked at 224 [74] in the same case. 35 There may be difficulties with reconciling those statements (or indeed the text of s 15AB(1)) with the High Court's prior pronouncement in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ: It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses "context" in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent. (footnotes omitted) 36 It is not necessary in this case to decide whether it is permissible, despite what was said in Saeed, to examine the explanatory memorandum and second reading speech to determine the context or mischief of the legislation. This is so because ambiguity within the meaning of s 15AB(1) is present. Essentially that same conclusion was reached by Olney J in Douglas v Commissioner of Taxation (1997) 77 FCR 112 at 118 who concluded, in relation to the same expression, that resort to extrinsic material was appropriate. 37 The present provisions are relevantly identical to the terms of s 23(g)(v) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") as it stood before being repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 (Cth): Sch 1 [40]. There is no reason to think that Parliament intended something different when enacting s 50-10 of the 1997 Act. Indeed, the present form of the exempt income provisions was introduced into the text of the 1997 Act by force of the Tax Law Improvement Act 1997 (Cth). On the introduction of the Tax Law Improvement Bill 1997 the Treasurer, Mr Costello, circulated an explanatory memorandum to the members of the Senate. That memorandum stated (at 148): The exempt income provisions in this Bill will not change the legal effect of the corresponding provisions in the 1936 Act. 38 This confirms what is likely to have been the case any way. What was the meaning of the expression in s 23(g)(v) of the 1936 Act? That provision was itself inserted into the 1936 Act by s 6 of the Taxation Laws Amendment Act (No 2) 1990 (Cth). On its introduction the then Treasurer, Mr Keating, also circulated to the members of the House of Representatives an explanatory memorandum. There are two passages in that memorandum which are pertinent for present purposes. The first, which in clause six appeared under the heading "Introductory Note: sporting bodies and the community services organisations", was in the following terms: Among the institutions exempted from income tax under paragraph 23(e) are charitable institutions. However, many organisations that undertake a range of activities for the benefit or welfare of the community are not charitable, and so such bodies as the traditional community service clubs - Apex, Rotary, Lions, Zonta, Quota and the like - have not qualified for exemption. 39 There then followed a section detailing the exemptions. Relevantly that memorandum went on to say: Paragraph (b) of this clause will introduce subparagraph 23(g)(v) which will exempt from income tax the income of not-for-profit bodies established for community service purposes. The words "for community service purposes" are not defined but are to be given a wide interpretation. The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to promoting, providing or carrying on activities, facilities or projects for the benefit or welfare of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes. As with sporting clubs, the bodies exempted include any qualifying society, association or club, whether incorporated or not. Similarly, a body's present conduct and activities show the purpose for which it is presently established, even if its constitution or its formation and history suggest a different purpose in the past. The provision does not impose a narrow geographic limit by its reference to the community. Charitable purposes beneficial to the community may properly be carried out overseas, or among people everywhere; they need not be confined to the population of a particular region. Similarly, community service purposes are not required to be limited to the population, or part of the population, of a region. When purposes are directed to the benefit or welfare of members of the community in particular need, that need must arise by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. These causes of need are intended to be read broadly. Infirmity of disablement, for example, could be intellectual or physical, and could be congenital or the product of disease or of injury. Similarly, social or economic circumstances could include such varied matters as sex, living in a remote area, or inability to speak English. Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisations may engage in political or lobbying activities, provided these are no more than merely incidental to other purposes beneficial to the community. But a body will be unable to claim exemption from income tax under this subparagraph if its only undertakings for the benefit of the community are political or lobbying ones. All the traditional service clubs such as Apex, Rotary, Lions, Zonta, Quota and the like and community service organisations such as the Country Women's Association of Australia and its constituent Associations are considered to be exempt from income tax under the new subparagraph. 40 So far as the present interpretative task is concerned I would take from the explanatory memorandum the following matters: (a) the provisions were intended by the Treasurer to extend tax exemption status beyond charitable institutions to embrace, at least, community service clubs such as Apex; (b) the expression was intended by the Treasurer to have a wide meaning; (c) the concept of services was intended by the Treasurer to extend to "activities, facilities or projects", which were to be promoted, provided by or carried on by the organisation; (d) those undertakings had to be for the benefit of the community or for the members of the community who had particular need for those undertakings; (e) the need in question could include those arising from social or economic circumstances and that, in turn, could include the circumstances of living in a remote area. 41 I approach these points as part of the interpretative material available to construe the words of the statute. They are not, however, the sole materials and they cannot dictate the meaning of s 50-10 to this Court. Like Jessup J, who considered the same explanatory memorandum in Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1 at 33 [82], I would not regard "myself under an executive injunction, not carried into the legislation, to give the words a wide interpretation". It may be, in that regard, that the author of the explanatory memorandum proceeded on an assumption as to its definitive effect which is not warranted. 42 In Navy Health Jessup J approached the interpretation of "community services" this way: (163 FCR 1 at 33 [83]): Although a composite expression, I consider that the essence of "community service" is that a service is provided to the community, or a section of the community. Here the word "service" is used in the sense of "help, benefit or advantage", particularly "the action of serving, helping or benefiting, conduct tending to the welfare or advantage or another" (Oxford English Dictionary (2nd ed)). 43 His Honour went on to conclude that the notion of service had about it an element of concreteness. The submission put in that case was that by selling tailored insurance policies to members of the armed forces the activities of Navy Health had a tendency to promote the efficiency of the armed forces and therefore had a tendency to benefit the community as a whole. For Jessup J that kind of community benefit was simply too vague to constitute a "community service". This was because, so his Honour reasoned, the provision (163 FCR at 34 [84]): … deals with "service" in a much more concrete setting, and requires, in my view, the community, or a section of the community, to benefit by way of the receipt of some identifiable help, benefit or advantage bestowed or provided directly by the putative benefactor. Such a requirement, I consider, is not satisfied merely because, in this case, the operations of the applicant had a tendency to promote the efficiency of the armed forces, thereby benefiting the community as a whole. 44 Subject to one matter, which I return below, this accords not only with the ordinary meaning of the word "service" but also with the reference in the explanatory memorandum to activities, facilities and projects all of which suggest that the assistance to be rendered is practical, tangible or real. The only other judge to have examined the question in any detail apart from Jessup J is French J in Victorian Women Lawyers' Association Inc v Federal Commissioner of Taxation (2008) 170 FCR 318. Although his Honour did not need to reach a concluded view he did say (170 FCR at 355 [163]-[164]): The concept of "community service" does seem to import the notion of the delivery of some practical "help, benefit or advantage" in the sense used by Jessup J. That criterion is not necessarily met by an organisation whose purpose is to change practices and attitudes in such a way as to facilitate the entry and advancement of women within the profession generally. The matter is not without difficulty and it is unnecessary to reach a concluded position on it. It is sufficient unto the day that I have found that VWL is a charitable institution, that it attracts the relevant exemption and that its appeals must therefore be allowed. 45 Neither the reasons of Jessup J in Navy Health nor those of French J in Victorian Women Lawyers form part of the ratio decidendi of either decision. This is so in Navy Health because Jessup J concluded that the applicant was not an association to which the provision could apply (163 FCR at 32 [76] and [80]). The Commissioner argued that paragraph [85] of his Honour's reasons showed that he had decided the case on this basis. There his Honour said: For the reasons explained above, I am not satisfied that, in the three years ending 31 March 2001, 2002 and 2003, or in any of those years, the applicant was a "non-profit association, … established for community services" within the meaning of s 65J(1)(j) of the FBTA Act. However, that has to be read in light of paragraph [81] which says: Although not strictly necessary, for the sake of completeness I shall deal also with the question whether the applicant was "established for community service purposes". (emphasis added) This is a plain indication that what followed was not the basis for his Honour's decision. 46 Be that as it may, however, on this aspect - namely the need for the service to involve a tangible or practical benefit for the community or part of the community - the decision seems, with respect, plainly to be correct. 47 Granted then that a community service involves a concrete benefit to the community there remains the question of what community service purposes might be. As a matter of first principles it would seem likely that "purposes" would be likely to cover a broad range of aims. One obvious purpose would be the purpose of providing a community service. However, there is no reason to think that other purposes are not included. They could include, for example, purposes such as funding, promoting or organising community services. It is likely that so long as the proposed purpose can be seen as having a reasonable connexion to the delivery of a community service it will be within the class of contemplated purposes. 48 That view is supported by the explanatory memorandum which made clear, at least the Treasurer's view, that the expression not only had a broad meaning but that it "would extend to promoting, providing or carrying out" community service activities. There the matter might rest save for the second passage I have quoted from above in Navy Health at paragraph [43]. In that passage however Jessup J not only said that the benefit had to be identifiable (with which I agree) but also that it should be "bestowed or provided directly by the putative benefactor". If his Honour meant by this that the exemption would not apply unless the association in question in fact itself provided a tangible benefit to the community then I must respectfully differ. Such a reading would remove from the exemption all entities whose purposes were other than the direct supply of community services. It would, for example, remove from the exemption organisations pursuing tangible community service by means of fundraising activities or those who would provide voluntary labour to service providers. 49 I am, however, by no means persuaded that this is what his Honour meant. His Honour's reference to "the putative benefactor" may instead be read as a reference to the person who supplies the tangible or practical benefits rather than to the exempt entity itself. That reading is supported somewhat by the observation that there was no issue about this question in Navy Health. It is to be emphasised that in that case there was no suggestion that Navy Health was not the party who conferred the benefit; the difficulty was that that benefit admittedly conferred by it was too vague to constitute a community service. 50 The Commissioner submitted that to constitute a community service the nominated benefit had to be directly conferred on the community by the entity. Particular reliance was placed on the passage just referred to. However, for reasons just given I do not think that that is what his Honour meant. Further if it is what his Honour meant it is, for reasons I have already given, an obiter dictum and one which would be inconsistent with the breadth of the word "purposes". In those circumstances it should be concluded that purposes which are reasonably connected to the delivery of community services will be within the exemption. 51 There are three further matters which should be mentioned. The first is the requirement that the body in question be "established" for community services purposes. It was settled by the Full Court in Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23 FCR 82 at 89-90 ("Cronulla") that this issue was to be addressed in each income year so that, perhaps contrary to ordinary parlance, an entity might be "established" for the requisite purpose in one year but not another. This point was made by Lockhart J (23 FCR at 89) and Beaumont J reached the same conclusion (see, 23 FCR at 116-117): Section 23(g)(iii) is concerned with the periodic or recurrent, not the static, with the purposes of the relevant body in the year of income. It is relevant, however, to look at the objects or purposes for which the body was incorporated including the objects clauses in the memorandum of association, also any subsequent activities of the body which may throw light on its activities in the relevant year of income. A society, association or club is not a stationary entity. It may change its activities and perhaps its purposes during its life which together make up the body itself and enable the questions posed by the subparagraph to be answered in the year of income, namely, the identification of the objects or purposes for which the body is established. 52 There is no reason for that principle not to apply to s 50-10 and, indeed, clause six of the original explanatory memorandum contained the statement that bodies "are established for exempt purposes according to their actual objects and activities from time to time". 53 The second matter concerns the characterisation of bodies established for multiple purposes. The requirement of s 50-10 is that the body be established for the specified purpose. In order to meet that requirement the entity must have the purpose as its main or predominant purpose: Cronulla 23 FCRat 93-95. The answer to that question is to be ascertained by examining the "true character and nature of" the body in question: Cronulla 23 FCR at 95. That other purposes exist does not necessarily affect that analysis unless those purposes can be said to supplant the identified purpose's role as the main or dominant purpose. The issue at hand is, I think, a commonsense question whose answer should not be obscured by an overzealous attendance to the taxonomy of purposes. 54 The third matter concerns the provision of a benefit in return for a reward. In Navy Health Jessup J was of the view that it could not be a community service to provide insurance products at normal market rates (163 FCR at 33 [83]). This was because such an arrangement was not properly to be described as a benefit or advantage. His Honour did not need to, and did not, address the position of subsidised services. Since this case does not involve that question it is not necessary to pass upon it either. 55 From the above the following principles may be distilled: (a) 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; (b) a service provided for reward is not a community service at least where there is no element of subsidisation; (c) community service purposes include the purpose of providing a community service but 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 connexion to the delivery of a community service. Facilitation and promotion are, therefore, purposes which are squarely within s 50-10; (d) the entity claiming the exemption must be "established" for those purposes. This requires an analysis of what the entity is doing in the relevant income year both as a matter of its constitutive documents such as its constitution and also by reference to its actual activities; (e) the purpose must be the entity's main or dominant purpose which is a practical question. 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

VI - Application to the facts of the present case 56 It is necessary in light of the above to identify the purposes for which WDCL was "established" in the years 2006 and 2007. This in turn requires attendance to the constitutive documents of WDCL in those years as well as its actual activities. Further, although the issues arise in the 2006 and 2007 years, it would be to take a blinkered approach to ignore the context in which WDCL originally came into existence. The question at hand, in light of these matters, is the isolation and identification of WDCL's main or dominant purpose. 57 The history of WDCL dictates a connexion between a serious and precisely definable problem and the company's incorporation. That problem was the absence of face-to-face banking services in the town of Wentworth. The solution to that problem was the incorporation of an entity to manage a franchised branch of Bendigo Bank. As would be natural in any franchise relationship (including those conducted through a management arrangement like the present one) WDCL was bound to further the interests of the franchisor as the commercial documentation required by Bendigo Bank made clear. But it would be quite unrealistic to suggest that WDCL's principal purpose when originally established was to help the Bendigo Bank in its commercial endeavours. No doubt WDCL had that purpose but it did so, so it seems to me, only to further its basic purpose of restoring banking services to Wentworth. 58 As the Commissioner correctly submitted the purpose of WDCL was not to provide banking services in Wentworth and it did not do so. The only entity conducting the business of banking in the town was Bendigo Bank (or its wholly owned subsidiary, BBL Wentworth). But WDCL's purpose was to facilitate the provision of banking services in the town by making it commercially viable for a bank to return to Wentworth. This was the purpose for which WDCL was originally established and that remained its purpose in the 2006 and 2007 years. In those years there was no other bank in the town except Bendigo Bank and the conduct by WDCL of the shopfront operations of that bank on a not-for-profit basis continued its purpose of facilitating the provision of banking services in the town. Further, by 2006 its formal objects in its constitution included the promotion of community banking services which confirmed what its activities otherwise demonstrated. 59 There were, no doubt, other purposes of WDCL. I would accept that it aimed to distribute any generated profits through the community grants programme but I do not think that that was its raison d'être. The origins of that programme lay in the unexpectedly rapid accumulation of excess money in WDCL with the attendant need to dispose of that surplus. The surplus was, in that sense, a collateral benefit of WDCL's principal operation. I am unable to accept that such a collateral benefit was the principal purpose for which WDCL existed in the relevant years. So too, whilst it is true that WDCL was able to provide additional services to the elderly in the form of a weekly visit by a staff member to the aged care facility, this is again to be seen not as a central purpose of the company but rather as an incidental benefit of its operation. Largely for the same reasons, no different characterisation should apply to the provision by WDCL of banking visits to schools. 60 WDCL submitted that one of its purposes was to increase the general prosperity and development of Wentworth. There is little doubt either that the establishment of the branch had that effect or that this was an effect which was intended. However, there were many ways in which the general prosperity of Wentworth might be increased - for example, by attracting government infrastructure grants through the promise of partial cost subsidisation by local residents - but WDCL was not authorised to pursue purposes of those kinds. That suggests that WDCL's true purpose did not exist at this level of generality. So viewed the improvement in the economic condition of the town was not the purpose of WDCL; rather, it was the anticipated consequence of the fulfilment of its principal purpose, namely, the reintroduction of banking services to the town. 61 The Commissioner submitted that WDCL's real purpose in the relevant years was to conduct and manage a franchise branch of the Bendigo Bank. It would be unrealistic to deny that WDCL had that as one of its purposes. However, its management of the branch was a means rather than an end. The end was to the facilitation of face-to-face banking in Wentworth. The accomplishment of that end was achieved through the means of the management contract. Any other view of what occurred leads one to the conclusion that the principal reason WDCL existed in 2006 and 2007 was to provide management services and the fact that this facilitated much needed face-to-face banking in the town was a secondary or subordinate benefit. That interpretation of the activities and purposes of WDCL is foreclosed by the order of events originally bringing it into existence: it managed the branch in order to facilitate face-to-face banking. 62 For those reasons the main or dominant purpose of WDCL in the 2006 and 2007 years was the facilitation of previously absent face-to-face banking services in Wentworth and, in the requisite sense, WDCL is to be seen as established in those years for that purpose. The question then is whether that purpose is a community service purpose. I accept the Commissioner's submission that the provision of banking services to customers of Bendigo Bank could not be the provision of a community service. Such a service would be the provision of an ordinary retail service, for reward, to customers. For the reasons given by Jessup J in Navy Health it is impossible to characterise such an arrangement as having about it the requisite element of community service. This observation, although correct, is not material, for the provision of banking services was not the service provided by WDCL. The service it provided was the creation of the circumstances which would make it possible for a bank to operate in the town. 63 Was it a service to the Wentworth community to bring about circumstances apt to lead to the re-introduction of banking in the town? It is not to be thought that the facilitation of the commercial supply of services which would otherwise not be provided is always a community service. Had WDCL been incorporated to facilitate the provision of a toy shop in Wentworth it might be doubted that the community was much thereby served. The question in each case is whether the facilitation of the service in question provides a real or tangible benefit to the community. If it does, then a community service is established. Naturally, questions of degree are involved. There may be a difference between facilitating the bringing of a doctor to an outlying district and the bringing of a florist. Other examples may lie closer to the line. Further, where the service already exists in the location in question the tangible benefit may be more difficult to discern. 64 In this case, those issues are susceptible to a straightforward answer. It a town with no face-to-face banking services the facilitation of such services provided a substantial benefit to the community. That benefit was both real and tangible. It consisted of the fact that local banking then became available, increasing in a concrete way the amenity of the town. It follows that in 2006 and 2007 WDCL was established for community services purposes. The income of WDCL was, therefore, exempt under s 50-1 of the 1997 Act. 65 The parties are to bring in short minutes of order giving effect to these reasons within 14 days. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006(Cth)

Tax Law Improvement Act 1997(Cth)

Income Tax Assessment Act 1997(Cth)ss 4-1, 4-10, 4-15, 6-5, 6-10, 6-20, 50-1, 50-10, 50-70

At a glance

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Judgment (7 paragraphs)

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Legislation Cited (8)

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Cited By (2)