Commissioner of Taxation v Word Investment Limited [2008] HCATrans 201 (23 May 2008)

Last Updated: 27 May 2008

[2008] HCATrans 201

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M156 of 2007

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

WORD INVESTMENT LIMITED

Respondent

Application for special leave to appeal

KIRBY J
HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 23 MAY 2008, AT 11.44 AM

Copyright in the High Court of Australia

MR R. MERKEL, QC: If the Court pleases, I appear with my learned friends, MR R.A. BRETT, QC and MS D.M. HARDING, for the applicant. (instructed by Australian Government Solicitor)

MS J.J. BATROUNEY, SC: If the Court pleases, I appear with my learned junior, MR M.T. FLYNN, for the respondent. (instructed by Moores Legal)

KIRBY J: Mr Merkel, you are reading an affidavit of Mr McClure, page 103 of the application book. Is the reading of that affidavit objected to?

MS BATROUNEY: No, your Honours.

KIRBY J: Very well. The Court reads the affidavit of Ross Edward McClure, lawyer, which is sworn 12 February 2008.

MR MERKEL: If the Court pleases.

KIRBY J: Yes, Mr Merkel.

MR MERKEL: If your Honours please, the Full Court of the Federal Court in the present matter has determined that during the relevant period the respondent, Word, is entitled to be endorsed as a charitable institution substantially because, as was found by the court, in pursuit of its religious objects it distributed the profits of its commercial enterprise to one or more charitable institutions.

HAYNE J: And was bound to do so.

MR MERKEL: Well, your Honour, we say that on any fair reading of its objects, its objects fall into three categories and there is a special declaration in the memorandum that says one is not to be read as limiting or reading down the other and a proper reading of the objects, which are in very wide terms, fall into both religious objects, conducive to religion objects and general business objects, and there is no object of actually donating funds to a charitable body. The most that is dealt within the objects is donation of funds to another fund, but we do not say the donation is beyond power because the memorandum is in the broadest terms, but we say there is no way of reading it as having to be so restricted.

But we can put our case on either basis, namely, that there was a mandatory requirement, in which case we say ultimately – and I will come to this shortly – the Full Court totally misapplied to the decision of the Court of Appeal in Christian Enterprises, which was a case where the mandatory requirement for commercial profits was to distribute to a religious body or religious purposes, but Justice Walsh and Justice Asprey found that in those circumstances they agreed with the trial judge, Justice Nagle, that that could not result in the commercial enterprise being a charitable institution.

Their Honours relied on that case in a way that was directly contrary to what was decided. Even if the objects were read in the way the majority did – and we say there is no support for that – it still would not have the consequence of clothing a commercial enterprise with the characterisation of its donee.

HAYNE J: Well, the characterisation commercial enterprise begs the question which is for debate. Do you accept that the Full Court proceeded on the basis that the primary judge was right to conclude that the essential object of this corporation was to be determined in the fashion he did and was, relevantly, the religious purposes identified?

MR MERKEL: We say that the Full Court went in a slightly different direction. The primary judge took a very broad brush approaching on the basis that in modern times charities might have commercial arms and charitable arms and divide them up and then lifted the corporate veil. We say to look at whether a particular company is a charitable institution is not answered by that kind of approach.

The Full Court were much more troubled by the issue and accepted that it did not appear to be covered by authority but, with respect, what the Full Court did, in the majority judgment is the one we would particularly wish to focus on, is to say that because it was distributing its profits for charitable purposes, that made it a charitable institution and we say that that raises an issue of enormous importance because the exemptions given throughout federal and State law to charities are premised – and one can look at competition laws for the example - - -

KIRBY J: We understand that, but the problem is once you acknowledge that in the modern age charities are often involved in ancillary commercial activities, and you make the point in paragraph 27 that it must be ancillary, then whether this particular respondent was within that formulation is really, is it not, a matter of fact in the particular case?

MR MERKEL: With respect not, your Honour. Can I just take your Honours briefly to the line of authority referred to in the majority judgment?

HAYNE J: Before you do that, where do we find in your notice of appeal anything except a series of challenges to factual findings?

MR MERKEL: No, we do not challenge - - -

HAYNE J: No, your notice of appeal is directed solely, is it not, to making challenges about factual findings?

MR MERKEL: With respect, not, your Honour. This case does not involve a dispute about the facts found by the AAT; they were not disputed. What we indicate, your Honour, is that the Full Court misconstrued the memorandum of association by concluding that the profits could only be distributed to a religious body or for religious purposes, and we take issue with that because we say properly construed the memorandum of association gave this body a discretion as to what it would do with its profits, and to such profits as it did distribute it had a wide discretion to distribute to different objects which could be conducive to religious or other objects. But even if they were religious objects, all that happened here is they distributed to religious bodies, which does not cloak them, as a matter of principle, with a - - -

KIRBY J: If there is a ground of appeal that posits the issue affirmatively, it is probably 5 which says:

the Full Court ought to have found that during the relevant period the conduct by the respondent of its commercial and investment enterprise was a substantial, and not an incidental, purpose - - -

MR MERKEL: Yes, 5, but also 2, your Honour.

KIRBY J: But again that does seem to be saying, well, there is a line to be drawn here and it is determined by reference to a criterion of substantiality or incidental character and that just sounds like a factual question.

MR MERKEL: Your Honour, that was previously the view taken based on the Salvation Army Case that incidental commercial activities would not disentitle a body to have charitable status, but this turns that around entirely. There is no significant activity of any kind on any view of the facts of Word in terms of religious function or purposes. It conducted an investment arm and its substantial business was conducting a funeral business, the profits of which were given to a prescribed charity.

CRENNAN J: And the profits were never returned to members?

MR MERKEL: No, it could not be returned to members because no company limited by guarantee can do that. But what we say, your Honours, and can I take your Honours to it, starting at - - -

KIRBY J: So that was the point of distinction you drew between the Salvation Army and the activities of this respondent?

MR MERKEL: Yes, your Honour, but it is important to bear in mind that cases such as the Salvation Army Case, and even Lawlor’s Case, are about the validity of a bequest in a will where the court leans in favour of construing the will to give it validity. The position under tax laws and tax exemptions does not have any leaning of that kind at all and what this decision has done is created a precedent for a company carrying on a commercial activity as its sole function to be able to be called a charitable institution.

HAYNE J: Well, that is the point, Mr Merkel. Does this create a precedent of law or does it decide a particular factual dispute according to certain factual findings? I am astonished that the Commissioner would wish to be heard to say that this creates some principle, but still.

MR MERKEL: Well, your Honour, can I take your Honours to Christian Enterprises, but the step - - -

KIRBY J: You want to knock on the head a series of facts that lead to a decision which you say is conceptually mistaken?

MR MERKEL: Yes, your Honour.

KIRBY J: And in the current age, as charities are increasingly forced to get into commercial activities, you say that is quite an important question for the Court to look at?

MR MERKEL: Absolutely, your Honour.

HAYNE J: So what is the concept that you want to knock on the head, Mr Merkel?

MR MERKEL: The concept which we would wish to knock on the head, your Honour, is that a company that conducts a commercial enterprise for the sole purpose of funding a charitable institution is not itself a charitable institution. That was so held on the only occasion this issue has fallen for decision by the majority of the New South Wales Court of Appeal in Christian Enterprises. Their Honours, as a stepping stone, applied Christian Enterprises, felt they were bound to apply Christian Enterprises, but to reach the directly opposite conclusion and we say that is not a tenable position, which has quite far reaching consequences.

Take, for example, the Trade Practices Act exemption. It would be inconceivable the legislature intended to exempt from the Trade Practices Act charitable institutions in their capacity, and solely in the capacity, of conducting major commercial enterprises. Can I take your Honours to Christian Enterprises because all of the authorities cited from page 49 – can I take your Honours initially to 49. The Salvation Army is at page 49, Lawlor is at page 50, Smith is at page 51 and then Glebe Administration Board at page 52 are all cases leaning in the direction or siding with a commercial activity as the function of a body will generally disqualify it from being charitable or being a charitable institution. Their Honours then turned, at page 54, to Christian Enterprises and at paragraph 33 their Honours say:

For reasons that it is unnecessary to discuss here the company was held by the majority (Walsh JA and Asprey JA, Wallace P dissenting on this issue) not to be an institution, and so the company could not be a charitable institution.”

With respect, that is not quite right, but I will return to that in a moment. Their Honours then turn to that decision and then found at paragraph 38 which is the middle of page 56, saying that:

The later Court of Appeal decision of Christian Enterprises is authority for the proposition that a body which conducts only commercial activity and directs the profits from same by donation solely in accordance with the charitable objects of the body is capable thereby of being characterised as a “religious society”.

Then their Honours say at paragraph 40 – or Justice Allsop with whom Justice Stone referred at 42 the decision - - -

KIRBY J: Is there a difficulty for you from the fact that, though the companies indeed involved and only involved in a commercial enterprise, it distributes its profits entirely for religious purpose and must do so and cannot return them to members?

MR MERKEL: That was the fact in Christian Enterprises, your Honour, and it is at tab 7 of the joint list and can I take your Honours straight to it. Could I also hand up to your Honours the decision of Justice Nagle with which Justice Walsh agreed. The statute is set out at page 94 at paragraph (e) and the particular words here is whether the enterprises which conducted a commercial operation was a charitable institution and under its memorandum and articles it was required to distribute to charitable purposes or body. The analysis of Justice Walsh concerning the question of a charitable institution starts relevantly at page 98 in the last paragraph and his Honour accepts that, “An institution may be, but is not necessarily, a corporate body” and then referred to the argument that an institution has to have some public purpose.

Then his Honour said at the top of page 99, “For like reasons, I think it must be denied that every company with charitable objects is a charitable institution” based on a Privy Council decision that was to the effect that a trust fund for charity and a charitable institution must be regarded as distinctive. Then his Honour said:

I find myself in agreement with the statement of Nagle J, who said: “Wide and flexible as the word ‘institution’ may be, I do not think it applies to the appellant company in the present situation.” This conclusion makes it unnecessary to consider the further question –

which is whether it is carried on for charitable purposes. Can I take your Honours now to the decision of Justice Nagle with which his Honour agreed because it is squarely against what Justice Allsop found in the present case. His Honour at 759 at the first clear paragraph referred to Minister of National Revenue v Trust and Guarantee, which Justice Walsh had referred to, but can I go down to the bottom of the page:

It is conceded by the respondent Commissioner that the word “charitable” where it appears in the subsections under consideration has its technical meaning and so is wide enough to cover the religious activities of the appellant company. I have come to the conclusion that the legal entity formed by the seven individuals who subscribed to the memorandum and articles of association of the appellant company cannot be said to be a charitable institution within the meaning of s 10(1)(d) of the Land Tax Management Act, 1956-1961. It seems to me that the appellant company is not a “charitable institution”, but would be more accurately described as a commercial enterprise the purpose of which is to apply its net profits to religious purposes.

KIRBY J: I notice Justice Nagle is reversed by the Court of Appeal.

MR MERKEL: Yes. There was a second exemption, your Honour, which is not presently relevant which is whether it was a religious society. The Court of Appeal found for reasons which are special to the notion of religious society that notwithstanding it was not a charitable institution, it was a religious society.

KIRBY J: That is not uncommon to make those distinctions in these Acts.

MR MERKEL: It was a different statutory context, your Honour, but the statutory context in the federal and State legislation with which we are concerned do not talk of religious societies, they talk of charities, charitable institutions and so forth, which falls under this principle. His Honour then put the case of Christian Enterprises which is a stronger one than Word.

It is true that the memorandum of association restricts the membership of the company to those professing certain defined articles of faith.

That is so here.

Also, the primary objects of the association, which I have quoted above, are restricted to matters for the assistance of religion. However, these matters apart, the appellant company perhaps varies from a straight-out business enterprise only in that no dividends are to be paid to any of the members of the company but are to be used for the avowed religious purposes. In this sense it can be said that the company is being carried on for charitable purposes, but I do not think it permits me to hold the company itself is correctly described as “a charitable institution”.

Then his Honour analyses the articles which are not relevantly distinguishable from the present company and then at the end of that paragraph his Honour said:

Looked at in the broad sense, the circumstances merely reveal that seven individuals formed themselves into an association possessing a separate legal entity namely, the appellant company. It purchased and possessed the subject land for the specific purpose of subdivision and development.

Here we say for the conduct of an investment and commercial enterprise of funerals.

KIRBY J: Yes, well, I do not think we are going to decide this application on the basis of reading a lot of what Justice Nagle – I think you have made the point as far as you need to.

MR MERKEL: The point here, your Honour, is that Justice Walsh, with whom Justice Asprey agreed and therefore it was a majority decision - - -

KIRBY J: Yes, it was a strong court and Justice Walsh was later a Justice of this court, we all know that, but do you really want to read - - -

MR MERKEL: Yes. He agreed with this analysis, your Honour - - -

KIRBY J: Yes, we know that too.

MR MERKEL: - - - because he picked up the next sentence in his judgment. So that what happened in this case is the majority judgment in the Federal Court applied Christian Enterprises in the way diametrically opposed to what the case actually decided. It was authority directly against the taxpayer’s case, but their Honours went so far as to find at paragraph 42 of page 58 that it was binding.

KIRBY J: Yes, all right. We understand your point on authority. Now, you have to leave a little time to deal with the issues of general principle. You mention in your argument the recent inquiry into charities. What is the point of that?

MR MERKEL: Your Honour, the legislature and the Government in terms of policy and the Taxation Commission in terms of rulings has been proceeding on the basis that a commercial enterprise in the context of the kind of situation that arose in Christian Enterprises is not a charitable institution. This case is the first time that that has been departed from in Australia in terms of a charity or a charitable institution.

KIRBY J: And that is very different from the Salvation Army which might conduct some commercial enterprises to sustain its charitable work, but retains the character throughout of being a religious institution.

MR MERKEL: Yes or if Word had itself conducted the Bible and missionary activities and used some financial enterprise purely to finance that and it was incidental to its main object, one might extend the Salvation Army Case, but what the - - -

KIRBY J: In the last paragraph you make reference to the fact that there is a problem here for the avoidance. I did not quite understand?

MR MERKEL: Can I take your Honour to tab 3 of the book. There are two elements that are required for endorsement. The first is that it be a charitable institution and the second in 50-50 at tab 3. This was discussed by Justice Jessup as an amendment in 1997 to avoid the tax avoidance involved in charitable bodies getting exempt income here and sending them overseas to other bodies which the Commissioner has no control over. What was amended in section 23 and similarly here was the entity to get the endorsement must have, “a physical presence in Australia and, to that extent, incurs its expenditure”, and the words that are critical are, “pursues its objectives principally in Australia”.

KIRBY J: There is no problem with that. Bethel Funerals are in Australia.

MR MERKEL: No, “pursues its objectives”. Its objective was not to conduct Bethel Funerals. The objectives there referred to are the objectives that give it the status or characterisation - - -

KIRBY J: This is spreading the Bible in other lands.

MR MERKEL: Yes, but that happens overseas, your Honour, so the problem with the view taken by the Full Court is it has disconnected the two legs of the objectives that give the body its charitable institution which is to clothe it with the objectives of Wycliffe, which conducts missionary activities overseas, not in Australia and then when it comes to pursuit of objectives in terms of this subparagraph, the court found it was sufficient that it merely distributes its money in Australia, which is for that purpose the pursuit of a very different objective. By that disconformity, the Commissioner contends that we are back to the pre-1997 situation because to become a prescribed charity where you conduct your activities overseas you have to go through a process of approval with the Commissioner under this statutory scheme.

KIRBY J: But is it inconsistent with the decision of the Full Court for the Commissioner not to exempt a body like this body which is distributing its funds overseas?

MR MERKEL: No Wycliffe is a prescribed body, but the Commissioner can be satisfied that Wycliffe in prescribing it is properly characterised as a charity. But this decision has the consequence that anybody with this memorandum and articles conducting a business to distribute to an overseas entity in Australia can get exempt status for income and all the other privileges that that confers, send it to a body overseas which the Commissioner has no control of because the tax status and the tax inquiry finishes with it being a charitable institution.

KIRBY J: I understand, yes, very well.

MR MERKEL: But the objective in that paragraph has been circumvented by this disconnection that I have identified with your Honours.

KIRBY J: Yes, I think you are out of time, Mr Merkel, Thank you for your help.

MR MERKEL: Thank you, your Honour.

KIRBY J: Yes Ms Batrouney?

MS BATROUNEY: If the Court pleases, the respondent argues that special leave ought not to be granted in this case for four main reasons.

KIRBY J: There is an offer of paying your costs as a test case, is that not so?

MS BATROUNEY: On a party/party basis, yes, your Honour, there is. Firstly, the first reason we set out on page 109 of the application book and that is that, as the applicant now seeks to argue its case, the issue is simply one of construing a unique and antiquated memorandum of association.

KIRBY J: What is the point about antiquated though? If it is antiquated, you can make it up to date? That is in your power.

MS BATROUNEY: It is not the sort of memorandum of association that one sees today. The memorandum of association empowers the company to, for example, carry on the business of customs agents, shipping agents, forwarding agents, insurance agents, et cetera. It gives us power to conduct an engineering business. It is the classic old-fashioned kitchen sink memorandum of association. The judges in the court below commented on the extremely wide nature of the powers under the memorandum and said that properly construed the memorandum of association confined the company, as his Honour Justice Hayne said, to religious purposes.

HAYNE J: Or statements of objects are no longer required in constituent documents of corporations, are they? Indeed, the whole doctrine of ultra vires has gone, has it not?

MS BATROUNEY: Yes, and in that sense there is no public importance in construing this document, which is what the Commissioner seeks this Court to do. Secondly, we say there is - - -

KIRBY J: Except that it is a further expansion of religious exemption for a corporation which is exclusively a commercial enterprise. I mean, not everybody in our community is religious; some are and some are not. It gives them a very special privilege which arguably has to be very clearly within the statute.

MS BATROUNEY: Yes, your Honour, and that brings me to my second point and that is that there is no contested point of principle. Both parties are in agreement that the purposes of a charitable institution are to be determined by looking at the purpose of its formation, its constitution and its activities. This is described as an integrated holistic inquiry. What the Commissioner is seeking to do in this case is point to one article that says that we can conduct, for example, a customs agency and say - - -

HAYNE J: No, it is not pointing to that at all. It is pointing to the fact that you are engaging in commercial activities, charging people money for the services you provide. That is the critical element, is it not?

MS BATROUNEY: No, with respect, it is not, your Honour. This argument that the Commissioner is running is that the profits are distributed to charities as a result of a mere discretion and that we could - - -

HAYNE J: Well, the discretion identified is either a discretion to retain or to distribute. It is not further identified what the corporation would do if it retained the profits. It is not articulated with great precision.

MS BATROUNEY: No, but in this respect the Commissioner’s argument is that the company was empowered under this memorandum of association to distribute profits to non-charitable purposes. I have taken the customs example as an extreme example, but there are others that the Commissioner can and has pointed to, to say this is in effect the Commissioner’s Pope v Lawler argument that the company is not confined to charitable purposes. It can in its discretion distribute money to non-charitable purposes. For that reason the Commissioner says that the company ought not to be held to be a charity.

KIRBY J: But it does seem to be a different type of company to the Salvation Army. It does seem to be closer to the unanimous decision of the Court of Appeal endorsing what Justice Nagle said in Christian Enterprises.

MS BATROUNEY: Christian Enterprises was a decision about whether or not the entity was an institution. In this case – sadly for the Commissioner – he has conceded that the respondent is an institution.

CRENNAN J: Where do we find that?

MS BATROUNEY: We refer to it at page 112 of the application book at footnote 9 which refers to “Trubunal’s Reasons at [8]”. So if we could go back to the application book page 5 at the top of the page at line 18:

There was no dispute that the applicant is an institution for the purposes of this provision nor that the advancement of religion is a charitable purpose.

KIRBY J: Is not the net result that the Australian taxpayer is subsidising funerals of a particular corporation? I mean, by granting the exempt status the taxpayer is effectively subsidising this particular commercial enterprise; funerals, which is a commercial business, a big one. Everyone needs one, ultimately.

MS BATROUNEY: Yes. But that is taking it at a level of abstraction. The taxpayer is subsidising a charitable purpose and the charitable purpose is the advancement of religion. The means by which the taxpayer undertakes that purpose is the commercial enterprise.

HAYNE J: Well, the expression “commercial enterprise” is intrinsically ambiguous. It is deployed against you to indicate dealing in trade with third parties who are not committed to the religious purpose. That is, as I understand it, the way in which it is deployed against you. If it is deployed against you in some larger fashion about engaging in trade with third parties for a view of profit of the enterprise, that does rather seem to encounter the hurdle of concurrent findings of fact below that this was not for the profit of individuals or the enterprise but for distribution of funds to the charitable purpose. Now, adopt if you will this expression “commercial enterprise”, but at some point you are going to have to grapple with the intrinsic ambiguity of it.

MS BATROUNEY: But focusing on the nature of the commercial enterprises focuses on the manner of raising funds, not the purpose for raising funds. This Court recently in Central Bayside has said that that is not the appropriate way to characterise the institution. One does not look at the source of the funds. In Central Bayside’s Case the Government was the source of the funds. One looks at the purpose to which those funds are applied, not the manner of organising.

The third matter we raise is that the special leave questions do not arise on the facts. The Commissioner – as I mentioned earlier to Justice Hayne – is now trying to argue that the funds went to religious organisations as a result of a mere discretion and that the directors of the company could have – the implication is that they could have applied them to non-religious purposes. Now, this was not put to the witnesses and we submit that in these circumstances it ought not to be able to be raised against us in an appeal.

Finally, we say, as I have said before, that this is not what we call a Pope v Lawler case. This is not a case, as was Pope, where it was held that the conducting of a Catholic newspaper could not be confined to religious purposes. Our purpose that the client’s purpose of advancing religion by funding missionary work is, as Justice Allsop described it, an avowedly charitable purpose. There is no question that our purpose is charitable, whereas Pope v Lawler concerned whether or not the purpose itself was religious. Our sole object was to raise funds to support mission work and the funeral business was merely a means of achieving that objective.

KIRBY J: But could one not say, sitting in the High Court, the Roman Catholic Archbishop of Melbourne was examined in 1934, the Salvation Army in 1952, that this is going to become a more important issue in revenue law in 2009 or 2008, given the obligation of charities in the modern age to engage in commercial enterprises and, therefore, that it falls within the category of matters suitable for this Court to look at it? You might end up winning, but it appears a suitable sort of matter.

MS BATROUNEY: Yes, your Honour, but, as Justice Hayne has pointed out, each case depends on its own facts and each case - - -

HAYNE J: No, the knife in the napkin, Ms Batrouney. You have to be aware of the knife in the napkin, that the proposition against you is that trade, albeit trade not for profit, does not fall within the requisite statutory description. Now, if the Commissioner goes so far as to embrace that proposition of the bear fact of trade, albeit trade not for profit, takes you outside charity, that is a proposition that is one of deep principle.

KIRBY J: If you think of it in economic terms, if Bethel Funerals can conduct cheaper funerals because of the fact that they have this tax advantage, then it will not only be believers who go to Bethel Funerals. That is the nature of a market. Therefore that raises a question as to whether taxpayers should subsidise effectively a particular commercial enterprise, albeit that its profits will find their way to the pursuits of religious believers. The more I articulate the ground the more attractive it seems.

MS BATROUNEY: We must stop doing this, this often happens to me.

KIRBY J: But also we have got you in the case, you are a good fighter and it is an interesting matter and they have offered to pay your costs.

HAYNE J: Unusual grounds for a grant, I would have thought.

KIRBY J: I am being candid.

MS BATROUNEY: Could I just read out one more passage and then I will sit down. Could I take you to the Incorporated Council of Law Reporting for England and Wales v Attorney-General and Others [1972] - - -

HAYNE J: The Council of Law Reporting Case has always stood apart and excited more academic ink being spilt on it than any other charity’s case you can point to, Ms Batrouney.

MS BATROUNEY: At page 86, at tab 10, of the authorities, Lord Justice Russell said:

The element of unselfishness is well recognised as an aspect of charity, and an important one. Suppose on the one hand a company which publishes the Bible for the profit of its directors and shareholders: plainly the company would not be established for charitable purposes. But suppose an association or company which is non-profit-making, whose members or directors are forbidden to benefit from its activities, and whose object is to publish the Bible; equally plainly it would seem to me that the main object of the association or company would be charitable – the advancement or promotion of religion.

So the focus is not on the activity, it is on the purpose and for those reasons, if your Honours please, special leave ought not to be granted in this case

KIRBY J: Yes, thank you, Ms Batrouney. Yes, Mr Merkel.

MR MERKEL: Your Honours, it is said that there was a concession of the Commissioner, contrary to the present position. That is not so. What the Commissioner did not do is argue that because it was a corporate body it could not be an institution and, indeed, Justice Walsh in the passage I took your Honours to made the point that an institution may be but is not necessarily a corporate body. What the Commissioner’s position throughout has been that because this company is a commercial enterprise in the sense that it trades, we would add at a profit, but not for the benefit of its members, but at a profit for the purpose of distributing to the charities, but it has wider objects, it is not a charitable institution.

Insofar as my learned friend says that this is about the construction of particular articles of association, we say no, that raises its own general point that corporate bodies, as his Honour Justice Hayne had pointed out, now the ultra vires doctrine is no longer there, will have powers beyond that that founded the rejection of a charitable institution characterisation in the Christian Enterprises Case. S we do, with respect, say it is a matter of some importance and a vehicle - - -

HAYNE J: Does the Commissioner go so far as to contend that conducting trading activities with third parties but not for the profit of the enterprise concerned or its corporators necessarily takes you beyond charity?

MR MERKEL: Yes, your Honour, that has been the central contention throughout that - - -

HAYNE J: Where do I find that reflected in what has been said, Mr Merkel?

MR MERKEL: Your Honours, the central contention throughout has been that this is a commercial enterprise trading for a profit and that that is not capable of being a charitable institution.

KIRBY J: As I understand and correct me if I am wrong, your argument is that at a certain point a charity engaging in commercial enterprise can take its particular character of the enterprise out of the charitable purpose and thereby lose the advantage of the tax or revenue position, that this is what distinguishes this case, you say, from Salvation Army.

MR MERKEL: Yes, your Honour.

KIRBY J: They do it as a side issue, St Vincent’s do it as a side issue, but this does it as the purpose of this particular taxpayer.

MR MERKEL: The sole activity, your Honour, with a de minimis exception, but its sole activity, so it does not even fall within the dominant incidental purpose of Salvation Army.

HAYNE J: Let there be no doubt, what is the proposition that the Commissioner advances? Does the Commissioner advance the proposition that the conduct of trade whether substantial, incidental, anything more than de minimis, not for profit of the corporation or its corporators necessarily takes you outside charity?

MR MERKEL: No, your Honour, the Commissioner does not advance the proposition that trade as an incident of conducting your charitable enterprise, being your charitable activities, which is the Salvation Army Case - - -

KIRBY J: But you want to say where it was substantial, as it says in paragraph 5, then it loses the character of a commercial - - -

MR MERKEL: Yes, your Honour, that is the basis upon which we would submit the legislatures and tax rulings have proceeded to date and this case changes that, not only from a substantial, but to the whole activity and we say that is an issue of some considerable importance in this area of the law. If the Court pleases.

KIRBY J: There will be a grant of special leave in this matter and it would be a one-day case, I think, would it not?

MS BATROUNEY: Yes, your Honour.

MR MERKEL: Yes, your Honour.

HAYNE J: Do we need to impose a condition about costs or is that agreed between the parties?

MR MERKEL: I think that will be agreed, your Honour. I think the position has been the subject of correspondence and there is a standard procedure - - -

KIRBY J: There seems to be some sort of complaint about the quantum of the Commissioner’s costs. I find this very hard to believe, but there is a sort of hint that it is at a very low – “part only” is the language used on 117.

MR MERKEL: I think there are two alternatives, your Honour, but I understand and I do not think it is objected that they are unreasonable. What they do not amount to is indemnity costs, as I understand it. I do not see any need for a condition, your Honour.

KIRBY J: Do you ask for any condition to be imposed on the grant of special leave?

MS BATROUNEY: As I understand it, in the last one I was involved in, Justice Crennan mentioned that there ought to be undertakings given by the Commissioner that the grant would be conditional on the undertaking of the Commissioner to pay costs. The problem in the costs order that I mention was that it was to be test case funded, which is only part of the costs. Around about half of the taxpayers’ costs get paid under a test case funding agreement.

HAYNE J: Well, that is the difference between party/party and solicitor and client costs is it not, Ms Batrouney?

MS BATROUNEY: Yes.

HAYNE J: Why should you have indemnity costs?

MS BATROUNEY: We are not seeking indemnity costs. We are seeking party/party costs.

KIRBY J: I think it is enough for us to note the undertaking of the Commissioner and the grant of special leave is upon that basis.

MS BATROUNEY: If your Honour pleases.

AT 12.25 PM THE MATTER WAS CONCLUDED