Commissioner of Taxation v Word Investments Limited [2008] HCATrans 314 (27 August 2008)

Last Updated: 27 August 2008

[2008] HCATrans 314

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M41 of 2008

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

WORD INVESTMENTS LIMITED

Respondent

GUMMOW J
KIRBY J
HAYNE J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 27 AUGUST 2008, AT 10.20 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 appellant. (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)

GUMMOW J: Yes, Mr Merkel.

MR MERKEL: If the Court pleases, the respondent’s application for endorsement as an income tax exempt entity under subdivision 50-A of the 1997 Act was refused by the Commissioner and the respondent then applied subsequently to the AAT to review the Commissioner’s decision to disallow its objection. The AAT’s decision is at appeal book pages 347 to 353. The key findings by the AAT - - -

GUMMOW J: Perhaps we need first to look at the statutory text, do we not?

MR MERKEL: There is a folder I am going to take your Honours to which will trace the history of the legislation up to the present time, but the matter on which the AAT decision turned related entirely to whether or not the respondent was a charitable institution. Its findings critically on those issues are at paragraphs 11 and 12, but at page 353 at lines 30 to 40, particularly at 32, what the AAT found is that the funeral business conducted by the respondent from 1 July 2000 to 30 June 2002 was a commercial operation and therefore found it was not a charitable institution.

The second finding is at paragraph 12 that what happened on 30 June 2002 is the respondent set up a charitable foundation in respect of the funeral business and therefore it was no longer conducting the funeral business as a corporate entity and the AAT found that it was entitled to be a charitable institution when it reverted back to just borrowing and lending money.

KIRBY J: Could I ask a very naïve question. It must have a very clear answer, but I just do not know it. I am sorry if it is too naïve, but I just do not know the answer. Would it have been possible for the respondent to organise its affairs so that it had Bethel Funerals Limited, but then to give the entirety of its income net of costs to Australian Translators Limited as a charitable institution and thereby procure for that payment a complete deduction for its - - -

MR MERKEL: Yes.

KIRBY J: But that would then have to be against any income, would it not? That is the problem.

MR MERKEL: Well, your Honour, the easiest way by which this can be done, but it is another section of the scheme which I will come to shortly, is it could set up a charitable trust and it would then be required under those provisions to apply the income for the purposes of the trust which would be chargeable purposes. But that would not be because it is a charitable institution; it would fall under another exemption, which I will come to in a moment.

KIRBY J: So we are focusing solely on the charitable institution?

MR MERKEL: Yes. The sole question upon which this issue turns is whether or not a company limited by guarantee therefore no benefit can go to its members which carries on business can be a charitable institution because it gives its profits to charities. In other words, does it get clothed with the character of the donees, and there is a lot of law on the principles we apply to that situation and we say the cases all point in the direction that the commercial activity is a secular non-charitable activity and unless ancillary in its entirety to the charitable activity, would disqualify the organisation from being a charitable institution. That is essentially what the case turns on.

It is important that the statutory context, and that is why I did not want to rush straight into the statute because there is a statutory context which all the cases say is a very important starting point for this inquiry and the words “charitable institution” started in the Act back in 1914-1915, but a number of steps have occurred since that would suggest it is not to be given the kind of ambulatory meaning that is really contended for by the respondent in the present case, but I will come to that in a moment, if I may.

The decision of the AAT is at page 355, paragraph 17, where it set aside the Commissioner’s objection decision and substituted for that decision an entitlement that Word, if I can refer to it as that:

be endorsed as exempt as a charitable institution under Item 1.1 of s 50-5 of the Act from 1 July 2002.

That is from when it ceased to conduct in its relevant capacity the funeral business. There were appeals and cross-appeals to Justice Sundberg. I do not need to trouble your Honours with that. The Commissioner appealed against the post-2002 decision and Word appealed against the decision disallowing its endorsement in the pre-2002 decision. The appeals by Word were successful and Justice Sundberg concluded that it was entitled to be a charitable institution as from 1 July 2000, which was the date the new regime that we are concerned with came into operation, and the Full Court upheld Justice Sundberg’s decision and dismissed the Commissioner’s appeal to it.

The Commissioner’s appeal raises the two issues set out in paragraphs 1 and 2 of its written submissions to this Court. In substance, the Commissioner contends that the conclusions arrived by the court below were wrong. The substantive conclusions were that the carrying on by Word of its investment and funeral business and activities was for charitable purposes, being the distribution of profits principally to Wycliffe, which is a charitable institution, and other charitable institutions and the second leg was that because the distributions took place within Australia, Word was pursuing its objectives principally in Australia and, accordingly, it was entitled to endorsement.

If I could hand up to your Honours the history of the legislative provisions to give your Honours the context in which these two questions set out in paragraphs 1 and 2 of our submissions arise.

KIRBY J: This is the Australian federal legislative provisions.

MR MERKEL: Yes, your Honour.

KIRBY J: But the history actually starts with the Statute of Elizabeth, does it not?

MR MERKEL: The history starts with the Statute of Elizabeth, your Honour, but the Commissioner is not contending that “charitable”, in its sense as used in these sections, is other than its technical legal sense. Since Chesterman’s Case that issue has been regarded by the Commissioner as not a matter arising in this context. So it is correct to say that to understand a charitable institution we must understand the Statute of Elizabeth in Pemsel’s Case, but in the present context there is no dispute that the - - -

GUMMOW J: Pemsel was a revenue case, actually.

MR MERKEL: Yes, it is, but it is also a trust case, your Honour.

GUMMOW J: Quite. Well, yes.

MR MERKEL: I will come back to that, but relevantly - - -

GUMMOW J: All I am saying is there is a long history of this in the British legislation as well – revenue legislation.

MR MERKEL: Yes, there is.

KIRBY J: And back to the reign of the first Queen Elizabeth there was recognised that a category of charitable activity was the advancement of religion.

MR MERKEL: Yes. There is no question - - -

KIRBY J: Did that mean the Christian religion only?

MR MERKEL: I think that in this day and age it would be very hard for that to be contended for, your Honour.

KIRBY J: But it is a Statute of Elizabeth. I mean, they would not have been promoting the religions of “heathens”.

MR MERKEL: Your Honours do not need to be troubled about it in today’s case.

KIRBY J: I will try to restrain my enthusiasm for getting into the Statute of Elizabeth again.

MR MERKEL: It is very firmly a Christian missionary organisation. Can I just indicate, the first section that dealt with this was section 11 of the 1915 Act, which is behind tab 1.

KIRBY J: Justice Sundberg whetted my appetite for these historical things by his evocative opening paragraphs in his reasons, which are very well written, if I could say so.

MR MERKEL: Yes. His Honour did some research into Mr Wycliffe and the origin of this organisation.

KIRBY J: He was a great man, Wycliffe.

MR MERKEL: Section 11(d) exempts from income tax the income of a number of institutions including charitable institutions.

HAYNE J: Can I just understand what you are wanting us to look for in going through this? Yes, there is a history of the legislation, but why are we doing this?

MR MERKEL: The reason is this, your Honour, that what has happened progressively since the first Act is that initially income was exempt of a charitable institution. Then there was an addition of exemption for a charitable trust provided that the moneys of the trust were applied for its charitable purposes. That was side by side with the charitable institution and gives a context to a charitable institution, particularly if money could be applied for non-charitable purposes. That would have a charitable institution in disconformity with a charitable purposes trust.

But more importantly, in 1997 the substantive statutory changes came about that brought the Act into its present form as far as the purposes of this case are concerned and the 1997 Act retained exemptions for charitable institutions and charitable trusts where the money was being used for the purposes of the trust that made it charitable but added on a new regime which is essentially a tax avoidance regime which tried to ensure that there was a separate regime established for charitable organisations or trusts that pursued their objectives inside Australia and those that pursued their objectives outside Australia.

The concern was that the pursuit of objectives was an important test for whether that organisation was fully entitled to get its exemption. The concern was that an organisation in Australia that distributed its income to another organisation which appeared to be a charity but conducted its operations overseas, when that money went overseas, could be used for any purpose without the Commissioner being able to ascertain whether it was being used for charitable purposes. So what the post-1 July 2000 regime set up was a system by which, if the charitable objectives were being pursued overseas, the body had to be a prescribed body by the Act and the Commissioner could then vet all the steps by which the overseas objectives were being achieved. But if it was not a prescribed body, the charitable objectives that would give it its charitable status had to be pursued principally within Australia.

One of the reasons this case, in effect, falls through that scheme, not necessarily in respect of Wycliffe, but in respect of the principle established, is that the principle established by the Full Court decision is that if a distribution is made by a company limited by guarantee that carries on business to a charity because it meets the Statute of Elizabeth test, the fact that that charity pursues its objectives outside of Australia would mean the money could be sent outside of Australia as tax exempt income but it may never be applied for the charitable purposes outside Australia. That would defeat the purpose of the regime.

HEYDON J: It would be a breach of trust. You could have equivalent breaches of trust within Australia of which the Commissioner was ignorant.

MR MERKEL: Well, you could, your Honour, but the Commissioner within Australia has a regime no doubt that he is satisfied can enable him to detect or police, if you want, the purposes, but once the money goes outside of Australia, there is no equivalent regime. But the upshot of all this - - -

KIRBY J: By regime do you mean - - -

MR MERKEL: The statutory regime.

KIRBY J: I realise that, but are you relying on the fact that there is the statutory regime, but also that within Australia the Commissioner has employees and others who can check.

MR MERKEL: Yes, your Honour.

KIRBY J: Whereas once it goes to Rwanda, it is much harder for the Commissioner to check it and therefore he wants to have some sort of assurance that it is going to be used for those purposes.

MR MERKEL: Yes, that is so, your Honour, but I do not want to put too much stress on this point. The real point about it is when one looks at the statutory regime, it is clear that we say that “charitable institution” should be construed in its narrow sense, not in some wide ambulatory sense, which means a body engaging in charitable activities, and this body does not engage in charitable activities itself. Most of the mixed purpose cases – take the Salvation Army, for example, where they have charitable activities and have a commercial incident of that activity, the commercial incident will not disqualify it from being a charitable institution, but a different principle applies when a body essentially engages in a commercial business enterprise and relies on a distribution to a charity to clothe it with the characterisation of a charitable institution.

There are instances where that may be permitted, or may be seen to be appropriate, where there is in fact a trust for charitable purposes, but within this hierarchy of organisation there is no trust for any purposes.

GUMMOW J: That is right, so the word “charity” is being stretched and strained, it seems to me. We are not talking about charitable trusts necessarily, are we?

MR MERKEL: No, we are talking - - -

GUMMOW J: This is a corporation. It is not a trustee of anything.

MR MERKEL: That is correct, your Honour.

GUMMOW J: So when you talk about charitable activities, I am not quite sure what you are saying. You are inviting us to assume that it is a trustee and that if it were a trustee, this would or would not be breach of a charitable trust?

MR MERKEL: Can I give your Honour the classic – there is no trust at all created in respect of a corporation conducting a business and distributing income. Even in Christian Enterprises where the income had to be under the memorandum applied for religious purposes, that still could not give rise to a trust. But what has happened in the cases is that when I refer to charitable activities, the Salvation Army Case had a farm which had some incidental income as a result of the training activities; that was regarded as an incidental or ancillary to the Salvation Army’s charitable activities.

KIRBY J: That was a farm that was actually owned by the Salvation Army?

MR MERKEL: Yes. Then in the Adult Deaf and Dumb Case, which preceded that, the Deaf and Dumb Institute encouraged flower growing as a training activity but the flower growing became a commercial activity and far beyond the training and also their grounds were used to raise income for boating and other activities. That was found not to be a charitable purpose and it was contrasted to the Salvation Army Case because the business had become an income earning entity in its own right divorced from the activities that gave those bodies their designation as a charitable body or a charity or a charitable institution and land being used by them for charitable purposes.

CRENNAN J: But how do you assess the objects and powers here? I mean, accepting of course it is a corporation, you might even say trading corporation, but you have objects and powers which, read fairly, show activities of the kind you have been describing as charitable in the context of other cases like the Salvation Army Case.

MR MERKEL: Your Honour, that inquiry on the Royal Australasian College of Surgeons’ Case is an inquiry of both memorandum objects, the purpose for which the body was established and the activities in fulfilment of that purpose. In the present case, even though the first two items in the memorandum which the Full Court focused on are undoubtedly charitable, they are missionary activities, Word never engaged in any meaningful way in any such activities. It was formed on the Royal Surgeons’ Case to earn income for Wycliffe and other similar organisations who carried out charitable activities.

So this is not a case like the Salvation Army or the Deaf and Dumb Institute, or many of the other cases, where the court has been troubled about the nature and extent of commercial activities by the very body that engages in the charitable activities. That is not the case here and that is why the ancillary or incidental test does not, in effect, get to the starting blocks here because what is being put by the respondent is that the conduct of the business, which is its basic function, is somehow ancillary or incidental to earning a profit to give to Wycliffe. We say it is the other way around. Whether there is a profit depends upon whether the business is conducted at a profit and whether the distribution is in fact going to be made to Wycliffe and, if so, to what extent?

So that the objects here are tellingly against any construction of a solely charitable activity, but more importantly, that is not what the body was formed for nor is it what its activities has been conducted in aid of. So this is a case which raised this bald question of a company set up to conduct a business, whether it be investment, trading or otherwise does not really matter, for the purpose of distributing to a charity the profits it determines are to be distributed is a charitable institution. To our knowledge this is the first time a court has held – four judges have held this – that it is a charitable institution. We say there are some fundamental errors in approach to characterisation that have led to that outcome.

KIRBY J: You are throwing around all these cases. I mean, I am a bit familiar with them having sat on the special leave and read the materials, but they would surely depend very much on the state of the statutory law at the time that they were decided, would they not?

MR MERKEL: Yes.

KIRBY J: Has there been any relevant change in the meantime?

MR MERKEL: To an extent, your Honour, the cases come up on the question of whether land is used for charitable purposes or exclusively for charitable purposes; whether the body is a charitable institution, that word being almost a term of art in the law given its long-standing use; and also in wills cases where money is left to an institution but will only be a valid bequest and survive the rule against perpetuities if it is for charitable purposes. But the learning in the cases of these different areas has been distilled to, in effect, adopt a principle that incidental or ancillary activities that are non-charitable will not disqualify you from any of those exemptions or benefits, but non-incidental or non-ancillary activities that are not charitable will. That is the central point by the case.

KIRBY J: I realise that you are answering questions from the Court and in doing so you are trying to, as it were, sketch the conceptual framework of your argument, but Justice Gummow’s question still remains the one that the Court normally asks, well, this is statutory law, we start with a statute, and then you started with some of the earlier statues and we got to a certain point, but I will be anxious to get you to the currently governing statute as quickly as possible because that is how we have to apply.

MR MERKEL: Your Honour, can I just take you through the history? At tab 3 we get the first change in the 1936 Act at paragraph 23(j) which introduces for the first time the income of the particular fund “for public charitable purposes” but that has the requirement “provided that the particular fund is being applied for the purpose for which it was established”, that is, public charitable purposes. Then we go to the 1997 regime at tab 4. I will not waste your Honours’ time on this but basically there was a regime to continue the 1936 Act in operation until the 1997 Act started. There was a plain English writing version of the 1936 Act but eventually the end product was tab 8 and that is the regime that operated as from 1 July 2000.

KIRBY J: Can you encapsulate what you get from this history if we go through the process and study the - - -

MR MERKEL: There is a legislative intent that the exemption for public charitable purposes or a charitable institute relate essentially to bodies engaging themselves in charitable activities as that term is understood in its legal technical sense and a body not engaging in those activities will not fall within the benefit of the exemption.

KIRBY J: At the time of the decision by the AAT and subsequently, is the only activity in which Word is involved now the funeral business, the investment business having fallen away, or not?

MR MERKEL: No, your Honour. What happened is Word was established – the relevant facts are set out in our written submissions at paragraph 4. I will just take your Honour briefly to that. What we have tried to do in paragraphs 4 onwards in our written submissions is to outline Word’s history. It was established in 1975 and initially it engaged in housing development, then became dormant and it was established to raise funds for Wycliffe which is a Christian missionary organisation that is an institution under the Act which engages in activities primarily outside of Australia. That is how it was fought below. I understand there is a different issue now arising which I will come to later, but the key was in paragraph 9. Initially Word raised funds by carrying out housing development and in (b) from the 1980s until 2005 it generated income from interest earned on deposits from members of the Christian public seeking to support Word’s fundraising activities. The individuals lent the funds to Word at little or no interest and Word invested the funds at commercial rates for the purpose of profit.

The magnitude of the funds are set out in footnote 14. Then from 1996 until 30 June 2002 Word also conducted in its own right a commercial funeral business for profit. Then it sets out that the funerals were conducted more or less as a business not restricted to Christian families and the annexure sets out the funds that were generated by that business. During 2005 it began – as from 1 July 2002 the business was conducted under a trust which meant that Word became a different entity for tax purposes which is not the entity that is before the Court, but continued its investment business and it did not at any time send missionaries overseas, train pastors, publish scriptures, or preach the gospel. There are two instances where it in fact paid Wycliffe to translate the Bible, which itself would be a religious activity, but they are very much de minimus in the context of this overall scheme.

In 10 it retained part of the profit generated by the investment and funeral business for its business purposes and distributed the profit not retained by it primarily to Wycliffe but also to other Christian organisations. The amounts distributed were able to be used by Wycliffe and there other organisations as they deemed fit. There was no restriction or purpose use restriction imposed, they were just given to them. That is the history of the activity. So it ceased to conduct the funeral business from 1 July 2002, but continued to conduct the investment business.

HEYDON J: I do not quite get the significance of all of this. I mean, your argument really depends on the proposition that however profits were made, to distribute them to what I will call Christian organisations rather than applying them directly for religious purposes takes the case outside the statute. What does it matter whether there was a funeral business at one stage and an investment bank business at another stage and so on?

MR MERKEL: It does not, your Honour.

HEYDON J: All that matters is that profits were made and distributed to some extent.

MR MERKEL: That is correct. Commercial investment activities do not bear a different character in this context, but there is a second point that is equally important. We say that even if it did engage in direct charitable activities itself, unless the business activities were ancillary in the Salvation Army sense, it still would not qualify it as a charitable institution, but on the facts we do not get there.

GUMMOW J: What does it mean by “business activities”, Mr Merkel? You set up a dichotomy between commercial and charitable which I do not understand at the moment.

MR MERKEL: The dichotomy, your Honour, is that - - -

GUMMOW J: The money has to come from somewhere that goes to the achievement of this purpose.

MR MERKEL: Yes.

GUMMOW J: If it is a charitable trust and it has a trust fund, the trustees will invest it in accordance with the powers they have to do so and, I suppose if they are doing their job well, they will try and maximise the returns they get so that they can then apply that money to the achievement of a purpose. Now, are they to be damned as being commercial? Of course not.

MR MERKEL: No, your Honour.

GUMMOW J: So what is the force of this dichotomy?

MR MERKEL: The force of this dichotomy, your Honour, is that it applies only to a non-trust situation. A trust situation has a different regime because it gets its designation by being a trust established for charitable purposes that applies its funds for the public charitable purposes. How it raises the funds and what it does with it is not relevant to its characterisation. We are concerned with the characterisation of a body as a charitable institution. What the case law establishes, that I will come to, is that unless it is money making activity, whether it be investment or sale of product or otherwise, is incidental or ancillary to its charitable activity, it is not a charitable institution. That is why I gave the example of the Salvation Army.

GUMMOW J: Then the question, as Justice Heydon was putting to you, is, what is the force of this word “ancillary”? It seems to be a distinction that is not a matter of substance.

MR MERKEL: Your Honour, we have relied on it because the case that I will take your Honour to has that test propounded by Justice Gibbs and agreed to by Chief Justice Barwick and Justice Menzies, but based on a long line of authority that has tried to draw a line between the strictness of saying a charitable institution can only engage in charitable activities, which is unrealistic and not the real world, but allowing it to engage in non-charitable activities, such as realising - - -

GUMMOW J: Justice Heydon was putting to you, I think, it is a charitable activity.

KIRBY J: That was the question you identified in the special leave argument with Justice Hayne.

MR MERKEL: Yes.

KIRBY J: Are you raising a fundamental or conceptual characterisation issue as to what is the activity of this organisation?

MR MERKEL: No, we are raising a fundamental characterisation issue about a charitable institution and the fundamental issue we are raising is that the designation of the profit cannot give it its character.

CRENNAN J: But your starting point seems to be this is a trading corporation and despite the objects that we were talking about before, it cannot be a charitable institution. So the ancillary principle does not apply. I thought you were saying Ms Batrouney cannot rely on that because the first base is that you do not have an instrumentality which is conducting charitable purposes, or engaged in charitable purposes.

MR MERKEL: That is correct.

CRENNAN J: But does that not mean you are brushing over the objects which are patently charitable? I do not understand how you make your first proposition that this is a trading commercial entity having regard to those objects.

MR MERKEL: The Royal Australian Surgeons’ Case in this context of characterisation as a charitable or public charitable institution, educational institution and so forth, states that the inquiry has three aspects. One is what do the objects in the memorandum say; two is, what was the real purpose of its creation; and three, what are its activities in fulfilment of those purposes and objects? You do not look at the memorandum alone because we are not asking, what was it established for. We are asking, as at 1 July 2000 is it a charitable institution? Now, in the present case all three paths lead to the same point. Its objects show that it was given broad power to carry on business and broad power to distribute the profits of the business to basically any donees it chose.

HAYNE J: That melds two radically separate questions, Mr Merkel, between corporate power and what a company is formed for, and if you want to run them together, so be it, but recognise what you are doing.

MR MERKEL: With respect, your Honour, I am endeavouring not to run them together, I am trying to run them as three paths. The first path is just looking at the objects.

HAYNE J: Yes. You are trying to run separate objects, giving power into the separate question of what the corporation is formed to do.

MR MERKEL: Your Honour, I was about to come to that next.

HAYNE J: Yes.

MR MERKEL: Because the broad powers in the memorandum reflect the purpose of the corporation in its founders which was that it would engage in trading or other income earning activities for profit which it would distribute to Wycliffe and other similar organisations. That is what the AAT found and that is what the evidence points towards.

So, therefore, the width of the power to carry on any businesses, and initially it set up housing development as its business, and the width of its power to distribute needs to be looked at in the context of the intent of the corporators and that intent was to give them those wide powers to carry on those sorts of businesses and not to restrict the profit donations to religious purposes, but the intent was to give it to Wycliffe or other similar organisations but there are broader powers. So the broad power of the categories of donees might be read down by reference to the intent of the corporators.

That is the second step. But what is not to be found in either the memorandum of association or the intent of the corporators is an intent that the profits be confined to use for religious purposes. That is missing in this memorandum in contrast to Christian Enterprise, but can I come to the - - -

HEYDON J: Can we just look at that and can we go to page 24 so that we see which of us are approaching what issues from what angles. Clause 3 begins:

The object for which the company is established are:

and then in (a) we have 17 purposes. Then in (b) it says:

To carry on any business or activity which may seem to the Company capable of being conveniently carried on in connection with the objects –

Just as a verbal matter that would seem to indicate that the objects are all in (a). Now, you might have argued, for example, that (a)(iv):

To hold rallies and other meetings in Victoria and when occasion arises through the rest of the world -

is not a charitable purpose. It could be a political rally; it could be any sort of rally. But let me put this to you, if you read (a)(i) to (xvii) as a whole it is plain that the correct construction is that they are all basically religious purposes. Those are to be religious rallies. To produce, manufacture and make film slides or other photographic representations are not representations of Michelangelo’s David. They have some religious aspect. What appear from (b) onwards are really powers designed to effectuate the accomplishment of those objects. Do you disagree with what I am saying?

MR MERKEL: Your Honour, the response I give to the point your Honour - - -

GUMMOW J: Before you respond, have you looked recently at Stephenson v Gillanders [1931] HCA 47; 45 CLR 476 at 487, the judgment of Sir Owen Dixon, dealing with this sort of problem? He says what you are looking for from these complicated patterns of words that you see is this, the:

true, main, dominant or paramount purpose is ascertained and general clauses are understood as subsidiary, as conferring powers not independent but subserving the main end.

That is what Justice Hayne is putting to you, I think.

MR MERKEL: We do not have any difficulty with that, your Honour.

GUMMOW J: So you read this word “rally” and you do not think - - -

MR MERKEL: But, your Honour, the way the cases have approached this area of discourse is the religious activity, meaning the advancement of religion, is most accurately set out in 3(a)(i) and (ii).

HAYNE J: But we are starting with a company, Mr Merkel. We have to start with a company and we have to work out what the company can do and we have to, at some point in this inquiry, characterise what the chief object of the company is. Would you accept that?

MR MERKEL: “Main” object is the word I would prefer to use, but same meaning, your Honour.

HAYNE J: Then main object, so be it. Now, why not have regard to the chain of authority that culminates in the winding-up cases founded on failure of substratum. That is what Sir Owen Dixon was talking about. You look at the memorandum. You see that the drafters of memoranda for historical reasons engage in this buckshot approach to drafting with a provision at the end saying every paragraph is a separate paragraph to be treated separately, et cetera. Non constat, the company has a main object. If you read this memorandum what is the main object of this company in your submission?

MR MERKEL: In paragraph 3(a), your Honour, we would say the main object, just reading that alone - - -

HEYDON J: No. I am asking you what you say is the main object of this company.

MR MERKEL: The main object of this company, your Honour, is to engage in investment and trading activities for the purpose of raising funds for Wycliffe and other similar organisations which falls within the objects set out in paragraph 3(a), but it is not itself to engage in any of the activities in paragraph 3(a) because it never did, nor was that the intent of its founders. Can I make this point, because it is an important point in the cases – that 3(a) are basically activities that advance religion which is charitable or are conducive to the advancement of religion which is not charitable.

This memorandum can be contrasted to others where the funds are to be confined to advancement of religion which were not good enough to save those bodies as a charitable institution, but that is by the way. The real point I am trying to make here is not to escape from the fact that there is a religious umbrella of everything that Word has done. It has engaged in these activities for the purpose of raising funds for charitable institutions engaged in advancement of religion. The question really is whether that enables it to be clothed with their characterisation, and we say the case law would not give a path to reaching that conclusion. I am not trying to artificially read down these objects. What the other objects - - -

HEYDON J: You are taking a Roman Catholic Archbishop of Melbourne v Lawlor type of point, though, are you?

MR MERKEL: It is a Roman Catholic Archbishop of Melbourne v Lawlor sort of point but, your Honour, there is a far deeper and more fundamental point about that. The point in that case was that activities conducive to religion – a gift that enabled the money to be applied to that purpose was not a charitable gift. What we are saying here is that we are one step further back. Here the gift is to bodies who may use it in their discretion, so that you do not even get to – if you want the specific requirement in Archbishop v Lawlor. But there is a long line of cases that would say that a charitable gift to an institute that has charitable and non-charitable purposes will not be a good charitable gift unless the charitable purposes are able to be categorised as subsidiary and in aid of advancement of religion.

HEYDON J: The other way round, I think – the non-charitable purposes are to be held as subsidiary.

CRENNAN J: Is this your Christian Enterprises point – the distinction from - - -

MR MERKEL: The Christian Enterprises point, your Honour, had a stronger memorandum - - -

GUMMOW J: You say that case favours you, do you?

MR MERKEL: Yes, because that had a stronger memorandum which required that the sole purpose for which the profits were to be applied be religious purposes. Here, there is no purpose restriction on the application of profit. So we say the relevant items in the memorandum are not just 3(a), but the items that enable Word to distribute its income from its enterprises to donees of its choice, but the width of that is read down by 3(a) to religious bodies or Wycliffe because we know that that was intended, but of equal importance to carry on any businesses that it wishes to carry on to raise profit. It is that last step that gives rise to the problems in the present case. I have not taken your Honours yet to the legislation at tab 8. Can I do that very quickly?

GUMMOW J: I wanted to ask about this, that is why I wanted to know at the beginning. This is not a case about an assessment. This is a case about an administrative procedure, is it not, requiring recognition by the Commissioner?

MR MERKEL: Yes, your Honour.

GUMMOW J: Where is the provision for the endorsement?

MR MERKEL: At tab 8, your Honour, at page 423, bottom right-hand corner. It is 50-105 and 50-110. Relevantly, Word falls to be determined under item 1.1, which takes one back to page 413. The special conditions of item 1.1 are set out in section 50-50 relevantly for present purposes and the one that is relevant for Word is subparagraph (a) where the objective arises and for a prescribed institution, which would be a body that engages in overseas charitable activities - - -

GUMMOW J: Sorry, what are you reading from – 50-50?

MR MERKEL: Yes, 50-50(a), your Honour. That is the role of - - -

GUMMOW J: Yes, “has a physical presence in Australia”.

MR MERKEL:

and, to that extent, incurs its expenditure and pursues its objectives principally in Australia –

So that is the relevant requirement in respect of Word, and that arises if it is a charitable institution under item 1.1 at 50-5. The effect of the decisions is that the Commissioner is obliged to endorse Word as having met the designation of a charitable institution and complied with subparagraph (a).

GUMMOW J: Thank you.

HEYDON J: As I understand it, you are raising three issues. The first in logical order is that if you look at the objects in (a), they are not solely charitable objects. Secondly, even if they were, you could not say of the activities of Word in giving the money over to Wycliffe, that Word is proclaiming the Christian religion. What it is doing is giving money to another company which will proclaim the Christian religion. Your third point is the 50-50(a) point that, whether or not it has a physical presence in Australia, it does not pursue its objectives principally in Australia. Those are the three limbs of your argument. Is that so?

MR MERKEL: That is a fair description of it, your Honour. It gets a little more sophisticated in the points, which I will come to if I may in a moment, which is that we have developed certain legal propositions to endeavour to enunciate the argument and we say that this case fails at a number of levels. Maybe if I can hand up to your Honours those legal propositions and the material on which we rely, because that is really the substantive issue raised on the appeal - if I could hand that up to your Honours.

GUMMOW J: Have your opponents seen these?

MR MERKEL: No. I am just handing them over now, but they stem more or less from our submissions.

GUMMOW J: That is not usually the way we operate here. Yes, go on.

MR MERKEL: The legal propositions – we have handed up some cases that were not on our list of authorities which – so our cases are either on the - - -

HAYNE J: It is usually helpful, particularly with government parties, if the Court is supplied with all of the material upon which that party seeks to rely in ample time before the time fixed for hearing so that – speaking only for myself, I might have an opportunity to examine them. This practice of handing them up in the course of hearing is not helpful and is not, for myself, one I would encourage any party, let alone a government party, to pursue.

MR MERKEL: Your Honour, these propositions are not – first of all they were formulated for the purpose of oral argument. Because of the time constraints it was thought late yesterday it would be desirable to commit them to writing to at least enable the Court to have a record of them, but they distil - - -

GUMMOW J: Yes, you see, but we prepare before hearings.

KIRBY J: I think it is better for you to just bow your head, as Mr Wycliffe would have done at error, and accept error and move on.

MR MERKEL: Yes, thank you.

GUMMOW J: Those who instruct you should take very much to heart what has been said. Yes, go on.

MR MERKEL: Could I say that the propositions in paragraphs 1 and 2 are unexceptional and well established. The proposition in 3 is the one that we say comes form Stratton’s Case and that is that the incidental ancillary test is one that was stated by Justice Gibbs in Stratton and his Honour’s reasons were agreed with by Chief Justice Barwick and Justice Menzies and Justice Walsh was to similar effect and his Honour’s judgment relied very much on the Oxford Group and Harpur’s Will Trusts which were two English cases which drew a distinction on the question of charitable purposes where - - -

KIRBY J: Can I just ask you to pause here. Are you not now falling into the error that this Court has repeatedly over the last 10 years said you should not do, that is to say, looking at what cases have said instead of starting with an analysis of the legislation. Now, have you said everything you wanted to say about the language and structure and context and purpose of the legislation?

MR MERKEL: Yes.

KIRBY J: So that you are taking us into all these cases. I do not know these cases, Mr Merkel, I do not know them. Do not just let them run off your tongue as though you assume everyone knows them. The other judges may, I do not.

MR MERKEL: I will take your Honour to them, if I may. But importantly, your Honour, we have taken the Court to the elements of the legislation which we have expanded upon in our written submissions. I do not think anything useful is to be added by taking your Honours back to the detail of them. But can I take your Honours to Stratton’s Case [1970] HCA 45; (1970) 125 CLR 138 in relation to what is set out at paragraph 3 of the submissions. That is No 7 on our list of authorities. The key passage appears from the judgment of Justice Gibbs at page 159.

GUMMOW J: Well, wait a minute. What was the issue in this case?

MR MERKEL: The issue in that case, your Honour, was that a testator directed that his residuary estate be held upon trust from time to time to distribute the net income between institutions and bodies in respect of which at the date of his death any gift, devise, bequest or legacy was exempt from duty under section 134 of the Western Australian - - -

KIRBY J: I am looking at the catch words of the statutes which are in question, the Administration Act 1903 (WA) and the Trustees Act (WA).

MR MERKEL: The problem was whether that was a valid charitable gift and it would be valid if the institutions who fell within the categorisation of being exempt from duty were charitable institutions or had requirements that they engage in activity exclusively to charitable purposes. If they had mixed purposes, charitable and non-charitable, then they would not be charitable institutions or the gift would not survive.

KIRBY J: First of all, I think you yourself point out in one of the written submissions that different principles apply upholding the will of the testator than apply in interpreting a Tax Act.

MR MERKEL: That is correct, your Honour, but the principle that applies for upholding the will is to interpret the non-charitable purposes in a way that would be subsidiary or ancillary so that the gift survives. But here there was a separate legislative provision that tried to perfect the imperfect gift and the question was whether it was an imperfect gift. It is in that context that his Honour considered these sorts of questions and overlap with the question of are these charitable institutions. At the bottom of 159 his Honour says in respect of the particular institution in question there that:

Paragraphs (d) and (e) –

that is of the Act –

would include institutions whose purposes were charitable . . . but a difficulty is created by the fact that the charitable object mentioned need only be “the main object” –

So the question here is that had the words “main object” been not used in the will, it would have been good in this context, but because it was the main object it left it open for non-charitable purposes to be part of the purposes of the institution and that would mean it is a bad gift. His Honour then said:

It is established that “an institution is a charitable institution if its main purpose is charitable although it may have other purposes which are merely concomitant and incidental to that purpose” or in other words if each of its objects is either charitable in itself or should be construed as ancillary to other objects which themselves are charitable: Congregational Union of New South Wales v. Thistlethwayte. If however the non-charitable purpose is not merely incidental or ancillary to the main charitable purpose, the institution will not be charitable . . . There is no evidence to show whether at the date of the testator’s death there was in Western Australia any institution - - -

GUMMOW J: Anyhow, this is a will case as construed and amongst this multitude of material someone might have looked at the 7th edition of Jacobs, paragraph 1005, where there is a reference to statements by Justice Else-Mitchell and Justice Jacobs as to the muddle that can flow from taking a case like Sykes v Stratton and trying to apply it a rating statute or a taxing statute like this we have got here today where the rating or taxing statute uses its own statutory formula.

KIRBY J: Can I explain why I have the difficulty that Justice Gummow has just raised and it is this; that I could understand adopting a main purpose criterion if the question is, is it charitable for the purpose of upholding a will? But in deciding whether it is charitable for the purpose of tax legislation to give some people in our society a tax advantage because of some peculiarity or belief they have or some religious or charitable object that they propound, I think that is a completely different ball game. I mean, why would a Tax Act give one particular group in society an advantage to propound their religion unless it is very clear, unless it is entirely and wholly the purpose and only the purpose of the charity? Why?

That is the question I ask and that is just not answered by picking up Stratton in a Western Australian Trustee Act and saying, well, that is to be applied in this context. Do not assume I accept that. I mean, essentially the bottom line of this case is that people can run funeral businesses and claim, because of where they put the money in the end, that that is to have a tax free status in Australia. Well, I have to be convinced that that is what the tax statute intends.

MR MERKEL: Your Honour, could I take this in two steps? Stratton’s Case was a wills case. The main authorities his Honour relied upon in that passage, Oxford Group, was an income tax case.

GUMMOW J: I know, and that is a problem many people have with Sykes v Stratton. Many people teaching the law of trusts, I am saying, out of Sykes v Stratton.

MR MERKEL: Your Honour, what we would say is that of course any presumptions that seek to uphold the validity of a will, such as reading a bequest to a religious body is prima facie request for its purposes which is peculiarly a principle of construction for upholding bequests in wills to save it from being defeated by the rule against perpetuities, can have no application and has not been treated as having an application in revenue law. We say that gives rise to this problem that if, as you have here, you have no more than distributions to religious institutions which may be used by them as they see fit. Therefore, it is not a distribution for religious purposes and cannot be a distribution for the advancement of religion.

KIRBY J: Can I ask a factual footnote here? My understanding is on the facts that there has never been a doubt but that Word did distribute all their income for their purpose of promoting religious beliefs and translating bibles and so on.

MR MERKEL: No.

KIRBY J: Is that not - - -

MR MERKEL: No, that is not correct, your Honour. It did two things. First of all, it retained profits it wanted for its own business purposes and distributed such profits as it decided to distribute.

KIRBY J: Yes, but when it did distribute it, it was only for the purpose of promoting - - -

MR MERKEL: No, your Honour, each distribution was made to the body leaving it entirely to the body how it was going to use the money.

KIRBY J: Yes, well, I know that, but did it haemorrhage, that is what I am asking. Did it haemorrhage out to building large televangelist homes for famous preachers? I mean, there is no whiff of that in this case.

MR MERKEL: No, it is not put that the distributions were made to anything other than Wycliffe or similar religious organisations and in fact there is a paragraph of our written submissions that suggest it goes further than that and I would ask your Honours to delete that. That is paragraph 27 of our written submissions. I would ask your Honours to delete the words “or to charitable institutions”.

GUMMOW J: This was taken up in paragraph 13 of the respondent’s written submissions, so you are responding to that by saying - - -

MR MERKEL: Yes, we delete those words. It is not suggested that the way this case has evolved in the AAT is that the distributions were to Wycliffe or similar religious organisations.

KIRBY J: So this is not the like the case in the United States that is mentioned somewhere about the televangelists pocketing all this money and living a high lifestyle and then saying, well, the taxpayers of the United States should pay for this.

MR MERKEL: It is not suggested that these bodies that got the money were other than religious institutions, but what is not accepted is that it follows therefore that they were used for the advancement of religion. They could have been used for any of those bodies’ purposes which may be religious or conducive to religion, which is the Lawlor distinction.

HEYDON J: Have you any evidence of that?

MR MERKEL: No, there is just no evidence at all, other than the evidence given your Honour by one of the witnesses that the distributions could be used – it was left to the bodies to determine how they were to be used. I will just see if I can find that. At 326 of the appeal book the evidence on this particular matter is at line 33:

The money that is donated to Wycliffe and other organisations, it is up to Wycliffe and those other organisations to determine how best to use that money?---Yes.

And there is a table of the moneys that were given. So it is not suggested they were given to other than Wycliffe and similar organisations, but it is important that there is no restriction on their use to advance religion.

HEYDON J: This is the fourth point of yours then?

KIRBY J: Is this the overseas point? Do you lose control - - -

MR MERKEL: No. Can I tell your Honours there are five points we make in our legal propositions. Can I take your Honours to paragraph 7.

KIRBY J: If there are five points, why are there nine paragraphs?

MR MERKEL: No, sorry, it is 7(a) through to (e), your Honour.

KIRBY J: This is in your original submission, not the document you handed up today?

MR MERKEL: In the legal propositions I handed up a short time ago. In paragraph 7, and this encapsulates the entirety of our case:

An entity that does not itself have a main purpose of engaging in religious and therefore charitable activities –

and that means the advancement of religion as is set out in paragraph 4 –

but, rather, conducts investment or trading activities for profit that is to be distributed to one or more charities or charitable institutions is not a charitable organisation.

We set out five reasons, first:

The rule of construction in respect of charitable bequests to an entity being construed as prima facie for the purposes of the entity, has no application in the present statutory context. Rather, a distribution to a charity for its general purposes, or to be used as it considers appropriate, is not a distribution that is confined to charitable purposes:

and then set out the cases that make good that point.

KIRBY J: Does that mean not a distribution that is confined in law to charitable purposes?

MR MERKEL: Yes – well, confined in law or in fact.

KIRBY J: Well, here is it not fair to say on the concession you have made that it was confined in fact to charitable purposes?

MR MERKEL: No, to charitable institutions, your Honour. But that does not mean that money is expended on what is set out in paragraph 4 because a religious institution will engage in religious and non-religious – it will engage in activities conducive to religion, which is the Lawlor distinction. What makes it charitable is solely what is set out in paragraph 4 of these submissions.

KIRBY J: Give me a clue as to what Wycliffe might be spending it on that would not be a charitable purpose. Its object is, as I understand it, to translate the Bible and bring it to the heathens.

MR MERKEL: Your Honour, there was no evidence, but it could be, for example, on the range of activities in paragraph 3(a) onwards, such as holding rallies, that were not necessarily limited - - -

KIRBY J: Do not get so upset about holding rallies. Holding rallies are a manifestation or can be a manifestation of belief.

MR MERKEL: But if, for example, they were engaged in activity - - -

KIRBY J: It is a very Protestant view of faith. It is not doing it all in a closed church, it is going out and manifesting your belief.

MR MERKEL: Could I give your Honour an obvious example in third world countries that would come up from time to time. There are a lot of laws against proselytising. It would be a legitimate activity for Wycliffe or its parent body, but Wycliffe in this context, to go and put submissions to the government of India or other countries that the missionary activities they wish to engage in be lawful or not be the subject of discrimination or be permitted. That would be conducive to religion but it would not be an activity that is spreading or strengthening the spiritual teachings.

KIRBY J: Why not? Because unless you can get the power to overcome the apostasy laws, how can you spread the word?

CRENNAN J: I thought you accepted before that missionary activity was indubitably charitable.

MR MERKEL: Yes, it was, but if you start to spend money on lobbyists to change the laws of a country, that is a step away from advancing the religion in the sense that that is meant in the Statute of Elizabeth.

KIRBY J: Yes, but if the laws of a country cut your head off if you change your religion, the only way you are going to be able to spread the word that you believe in is by lobbying, rallies, doing all these uncomfortable, unpleasant things that lawyers do not like. They just like to have documents.

MR MERKEL: Your Honours, I can do no more than say that the discussion by Chief Justice Dixon in Lawlor’s Case, the decision of the Privy Council in Dunne v Byrne are all to the effect that giving money to a religious body cannot be equated to giving it to its exclusively and solely religious purposes.

GUMMOW J: That is not what Lawlor’s Case decided.

MR MERKEL: No. It is not what it decided, your Honour, but the discussion of his Honour - - -

GUMMOW J: I have been looking at Justice Starke at 25, because he is ever so succinct. At the bottom of page 25.

KIRBY J: What we wanted was Chief Justice Latham writing this because he was a rationalist.

GUMMOW J: Justice Starke said:

The objects and purposes of a Catholic newspaper are not, and can by no means be, confined to strictly charitable purposes. The conduct of such a paper is “open to such latitude” in the advancement and propagation of the religious, education, social, political, economic and other views or policies of the Catholic Church, that no Court could control or execute the trust.

MR MERKEL: We say that is precisely what these organisations are able to do and can do with the money. There is no confinement in what they do. But also at page 32 of Lawlor, his Honour Justice Dixon says:

In order to be charitable the purposes themselves must be religious. It is not enough that an activity or pursuit in itself secular is actuated or inspired by a religious motive or injunction : the purpose must involve the spread or strengthening of spiritual teaching - - -

GUMMOW J: What did his Honour then say in Thistlethwayte’s Case about what he had said in Lawlor? Thistlethwayte is later.

MR MERKEL: In Thistlethwayte, your Honour, ultimately that was an application of the will construction principle, as I understood it. For example, at 441 in Thistlethwayte [1952] HCA 48; (1952) 87 CLR 375, which is No 9 on our list, the joint judgment was looking at the objects of the union in that case and it said:

It is contended, and this contention was upheld by his Honour, that at least two of these objects, those numbered (3) and (4) - - -

GUMMOW J: I think the answer to my question is that although there was plenty of reference to Lawlor’s Case in argument, there was a deafening silence about it in the joint judgment in Thistlethwayte.

MR MERKEL: But, your Honour, what the Court did in Thistlethwayte - - -

GUMMOW J: Lawlor was an evenly divided decision, was it not?

MR MERKEL: It was an evenly divided decision but really not so much on the dichotomy of conducive versus religious, but whether the majority felt that the newspaper could be religious or ancillary. But the case that was considered and discussed by a number of their Honours was Dunne v Byrne where a gift was left to the discretion of the archbishop and was found not to be a good gift because the archbishop could apply it for religious purposes or purposes that were conducive to the good of religion. That was found not to be a good gift because it was not confined to religious purposes or purposes that might be said to be incidental or ancillary.

The point that we would make about Thistlethwayte is it is clear that the other objects which on their face appeared to be independent and non-charitable, in effect did not cause the gift to fail because of the prima facie rule that it was a bequest for a charitable purpose. That was the rule of construction which we say should not, and would not be applicable in the present context.

I had taken your Honours to the different points. The first point is that a distribution to a body is not a distribution confined to charitable purposes and that is what has happened here. Probably Dunne v Byrne is a very strong authority to that effect, as are the other cases.

HEYDON J: You would need to know what the purposes of the body were and compare them with the postulated narrower class of charitable purposes before you could say anything dogmatic one way or the other.

MR MERKEL: Your Honour, all we can say is the evidence below about Wycliffe was it is a missionary organisation that is a charitable institution, that the other bodies – there is very little evidence about, but they were similar charitable organisations or institutions, but there is nothing in the evidence that suggests that activities have to be confined to what would be the advancement of religion as against what might be conducive to the advancement of religion. That is why we say the Dunne v Byrne type of analogy where it is given is a matter of discretion to the body to use as it sees fit means you cannot construe these gifts as confined to charitable purposes.

KIRBY J: Is the distinction between, as it were, religious institutions expending money on advancing their core beliefs and their spiritual content and the activities of religions to pursue, say, political objectives in a society to support particular organisations that have a specific social view about families and who constitute families and excluding others from families and so on? Is that the sort of distinction that is being drawn?

MR MERKEL: That is one example of it, your Honour. There could, for example – I do not want to say this is what Wycliffe as a missionary organisation would do – but many Catholic organisations may devote large expenditures to promoting the fight against the legislative changes to the abortion law in Victoria. They are doing that because that is conducive to their religious beliefs, but that is not advancing religion; that would not be regarded as a charitable activity.

KIRBY J: But maybe a Roman Catholic would think that is advancing a religious belief in the precious feature of human life?

MR MERKEL: That is why I read to your Honour the passage - - -

KIRBY J: It is a very hard distinction to draw, is it not?

MR MERKEL: I could do no better than cite what Justice Dixon said at page 32, your Honour, of Lawlor, which is No 8 on our list, where his Honour said:

In order to be charitable the purposes themselves must be religious; it is not enough that an activity or pursuit in itself secular is actuated or inspired by a religious motive or injunction : the purpose must involve the spread or strengthening of spiritual teaching within a wide sense, the maintenance of the doctrines upon which it rests, the observances that promote and manifest it - - -

HAYNE J: In that respect do you accept what Justice Sundberg said at paragraph 4 of his Honour’s reasons as reproduced at 367 concerning Wycliffe?

MR MERKEL: I think the evidence would sustain that is its main function, your Honour. But its main function does not mean it is its sole function and the main function - - -

HAYNE J: Do you accept the statement there made as accurate?

MR MERKEL: Yes, your Honour, that is an accurate statement of what the evidence is about Wycliffe, but our point at paragraph 7(a) is that there is no confinement to the use to which the money is put to charitable purposes, and we say that - - -

KIRBY J: No confinement in law by its documentation or no confinement in law and in fact on this case?

MR MERKEL: In law and in fact, your Honour.

KIRBY J: I am sorry?

CRENNAN J: There would have to be a restriction on the donee in relation to the advancement of religion.

MR MERKEL: Yes, or it could be a special purposes advancement for the purpose of advancing religion.

CRENNAN J: Advancing the religion.

MR MERKEL: Yes.

CRENNAN J: But absent that, that is your point?

MR MERKEL: Yes, your Honour. Can I go to paragraph (b):

The investment and trading activities for profit have a secular and therefore non-charitable purpose that is not incidental or ancillary to any charitable activity or purpose of the entity –

We make the emphasis on the word “entity” –

It is not enough that the motive or object of the profit is to distribute it to one or more charities.

And we cite a number of cases where a charitable institution or similar designation has failed.

HEYDON J: Christian Enterprises is flatly against you, is it not?

MR MERKEL: No, your Honour, because Christian Enterprises - - -

HEYDON J: It turned on whether there was an institution in that case, not whether there was a religious institution.

MR MERKEL: It turned on whether there was a charitable institution, your Honour, and it was found that the concept of charitable institution involves pursuit of some public – we would say what is really underlying both Justice Nagle and Justice Walsh’s decision that to be an institution you must pursue something in the nature of a public object or have a public character about your activity.

HEYDON J: You concede that the respondent here is an institution, do you not?

MR MERKEL: No, your Honour, that is - - -

HEYDON J: Where do you put that in issue in either your correspondence before litigation began or since the litigation has begun?

MR MERKEL: Your Honour, from the outset the Commissioner’s case on this point is set out in the statement of facts and contentions which we have annexed to our reply submissions.

KIRBY J: Which paragraph?

HEYDON J: Would it not be issues on page 185, the second last page of the material?

MR MERKEL: We have set out in our written submissions, your Honour, what the – in the statement of facts and contentions the Commission sets out the issues.

GUMMOW J: What document are we looking at?

MR MERKEL: Sorry, your Honour, this is the statement of facts and contentions that are annexed to the Commissioner’s submissions in reply, and it is a document headed - - -

GUMMOW J: Yes. This was in the AAT, was it?

MR MERKEL: Yes, your Honour.

GUMMOW J: Yes.

KIRBY J: I thought Mrs Batrouney said in the special leave application that the concession was made that the respondent was an institution?

MR MERKEL: No, and we said there was no concession. Can I make it clear, your Honour. Does your Honour have the document, the respondent’s statement of facts issues - - -

KIRBY J: Yes.

MR MERKEL: The preamble starts that the Commissioner:

was not a party to any of the transactions relevant to this Application, and his knowledge of the facts is primarily derived from documents and information furnished to him by the Applicant and the Applicant’s agents.

The Respondent relies on section 14ZZK of the Tax Administration Act 1953 and save for any facts expressly agreed to or admitted in writing puts the Applicant to proof on all facts on which the Applicant seeks to rely to establish that the assessment the subject of this Application is excessive.

Then at the bottom of what is page 185, it is the second last page:

Whether the Applicant is entitled to endorsement under section 50-110 of the Income Tax Assessment Act as an income tax exempt entity being a charitable institution under item 1.1 of the table in section 50-5 of that Act.

The Commissioner’s submissions, and I will take your Honours to them, has always been that the words “charitable institution” is a composite phrase and must be interpreted as a composite phrase and it is not a charitable institution. Then:

Whether the Applicant is an institution established for the advancement of religion.

Then in the written submissions - - -

HEYDON J: Just have a look at “Contentions” on page 186 that follow on from that statement of issues. Where does it distinctly say that you put in issue the characterisation of the then applicant, present respondent, as an institution as distinct from what is imported from the word “charitable”?

MR MERKEL: Paragraph 5. But can I just say this, your Honour, the Commissioner has always argued that the words in question “a charitable institution” as a composite phrase - - -

HEYDON J: Well, that is flatly contrary to what the Court of Appeal held in 1967 in New South Wales. They did not treat it as a composite phrase.

MR MERKEL: Your Honour, his Honour Justice Nagle found that it was not a charitable institution because of its commercial activities. His Honour Justice Walsh found that it was not an institution because of its commercial activities and agreed with the reasoning of Justice Nagle. We say that as a matter of principle you cannot divorce the two words from each other, but - - -

HEYDON J: You may be right, but it is different from what Mr Justice Walsh said near the top of page 104 in (1968) 2 NSWR 99. He said:

the religious objects of the company must be regarded as charitable objects.

But I do not think it was an “institution” –

He did not treat the phrase as a composite one. He treated it as having two integers, one satisfied and one not. Now, was he wrong?

MR MERKEL: Your Honour, with respect, reading what his Honour said literally, I cannot quarrel that his Honour ultimately had the case turn on the word “institution”, but at 104 his Honour says:

the conclusion to which I have come is that the appellant was not a “charitable institution” –

GUMMOW J: Which line?

MR MERKEL: First paragraph, line 6, your Honour.

GUMMOW J: Yes, I see.

MR MERKEL: With respect, your Honour, he then goes on to say:

“I do not think it was an “institution” –

But with respect to his Honour, it is not possible to define what an “institution” is divorced from that which describes it. It is the word “charitable” that gives it, if one wants, its public service nature, its public nature. His Honour goes on to give a reasoning which we would say is necessarily embracing “charitable” as an element of what it must be to be an “institution”, because his Honour goes on and says what the Commissioner has always accepted:

an institution may be, but is not necessarily, a corporate body.

Then at line 33 his Honour then said:

But Mr Helsham asked the court to say that every company, or at any rate every public company, is an institution. But I do not agree with this. Mr Helsham submitted further that, in so far as the word “institution” is considered to include a notion of something which has a public character or serves a public purpose, this notion is sufficiently supplied once it is known that the objects are charitable because this necessarily imports a “public flavour”. A charity always serves a public need.

Then his Honour refers to the Trusts and Guarantee Case where:

Their Lordships denied the proposition that every charitable trust is to be regarded as a charitable institution. For like reasons, I think it must be denied that every company with charitable objects is a charitable institution.

I find myself in agreement with the statement of Nagle, J –

who did not treat the phrase as divided into two separate concepts –

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”.

GUMMOW J: I do not think that is an entirely accurate description of the point that was being debated by the Privy Council in that Canadian appeal in [1940] AC. Was it not a gift to the poor of some city, some town, deserving poor of some town, and the question was whether that charitable trust is an institution within the meaning of a rating or a taxing statute and their Lordships said, “No, it is just a trust. It is not an institution”.

MR MERKEL: I think that is right, your Honour.

GUMMOW J: Which sounds perfectly sensible.

MR MERKEL: It is interesting, in Stratton’s Case, your Honour, Justice Windeyer - - -

GUMMOW J: He picked this up, I think.

MR MERKEL: Justice Windeyer picked this very point up at 144 to 145 and then makes the point at the top of 145:

The word “institution” is a word of wide denotation. It is not uncommonly used in collocation with other words as here “institutions and bodies” –

Then his Honour goes on to say –

It has been said that every charitable trust is not necessarily to be regarded as a charitable institution.

He then mentions that that is what Justice Walsh had said. Then his Honour comments on that particular case and the particular - - -

GUMMOW J: The point in the Canadian case was you only got the benefit if you could answer that a statutory description of “institution”. It was not enough that there was a fund dedicated to charity held by trustees.

KIRBY J: That lays emphasis on reading the meaning of “charity” in different contexts in different ways. What is appropriate for the purpose of a will may not be necessarily appropriate for extending an exemption from income tax under a general taxing statute.

MR MERKEL: Of course that is so, your Honour, but what his Honour Justice Windeyer says at point 8 – and the Commissioner has approached this case very much on the words need to be used together and understood together:

Whether or not it would be a charitable institution would, of course, depend upon the trusts on which it was held. Funds raised for the relief of distress caused by bushfires or other disasters are well known. If the object to which the fund must be devoted is the continuing advancement of charity in the legal sense, it is a charitable institution.

Now, we say if one takes that approach, even querying the Trusts and Guarantee approach, if the objects to which Word’s profits must be devoted is the continuing advancement of charity in the legal sense, it is a charitable institution.

KIRBY J: What is the reference to that passage?

MR MERKEL: That is 145, Justice Windeyer, Stratton v Simpson [1970] HCA 45; 125 CLR 138.

KIRBY J: So this is a “must” obligation?

MR MERKEL: Yes, because the public element of the body is procured by the purpose to which it applies its funds and what we say Christian Enterprises should be understood as is saying that the commercial activity of a company limited by guarantee cannot designate that as an institution – we would say a charitable institution – merely by reason of the fact that it gives its money to a charity and there the articles required that its money be applied for those religious purposes. So it was a much stronger case than the present case.

The point I was really taking your Honours to was that to say that Commissioner in that context has conceded the point is totally inaccurate and we would say the Commissioner put submissions on this and we have set out the submissions at footnote 20 of the annexure to the reply submissions, which is page 6, and that is to be preluded by paragraph 2 which is the various ways on which Word put its case at the AAT. It was not just on a charitable institution and then in the written submissions in relation to the question whether Word is a charitable institution, the Commissioner stated:

The expression “charitable institution” is a composite one” –

and then set out those two paragraphs and relied on Glebe to say that it cannot be a charitable institution carrying on business, nor can it be a religious institution and in oral submissions said much the same thing. So we have not seen anything which can be called a concession that it was an institution. In fact to say that runs counter to what the thrust of what the Commissioner was putting to the AAT and we say there appears to be some misunderstanding on that point because it is inconsistent with the way in which the Commissioner has conducted the case from the outset.

HAYNE J: Can I take you back, please, to paragraph 7(b) of this last written submission you have supplied us with entitled “Legal Propositions”?

MR MERKEL: Yes, your Honour.

HAYNE J: You seek to establish a dichotomy, do you, between investment and trading activities for profit with charitable activity or purpose of the entity, is that right?

MR MERKEL: Yes.

HAYNE J: Can I take you to the first line of that subparagraph, “The investment and trading activities for profit”. For profit of whom?

MR MERKEL: Your Honour, it is the profit of the entity - - -

HAYNE J: It is for the profit of the company, not the corporators. Is that plain?

MR MERKEL: Yes.

HAYNE J: Is it also plain from paragraph 4 of the memorandum, see page 32 of the appeal book that:

The income and property of the Company wheresoever derived shall be applied solely towards the promotion of the objects –

Is that plain?

MR MERKEL: Yes, your Honour, cannot be returned to the corporators.

HAYNE J: If that is so, it cannot be distributed to corporators, can it?

MR MERKEL: Correct, your Honour.

HAYNE J: If that is so, the investment and trading activities for profit, of which you speak in the first line of subparagraph (b) is to be understood, is it not, as the investment and trading activities for profit of the company, which must then be applied in the fashion described in clause 5 of the memorandum of association, have a secular and therefore non-charitable purpose. Is that the content of the first limb of this proposition?

MR MERKEL: Your Honour, the content of it is a little wider than just - - -

HAYNE J: Well, it is a little sloppier, Mr Merkel. What is its content?

MR MERKEL: Your Honour, with respect, the content is designated by the opening words of paragraph 7 of those submissions which is a profit that is to be distributed to one or more charities or charitable institutions because there is a very wide power to distribute profit to who they want in the memorandum, not just in clause 4 where there are a number of powers, but we are accepting for the purpose of this - - -

HAYNE J: No. I am sorry, that is a proposition of company law which you will need to make good.

MR MERKEL: Apart from incorporators, your Honour

HAYNE J: Clause 4 obliges it “solely towards the promotion of the objects”. Is that right?

MR MERKEL: Yes, your Honour, but the objects there referred to have to be read and construed if that is the process by reference to (ii) at the bottom of page 31 if this is a matter of power, which says:

The objects specified in each of the paragraphs of this clause and the powers of the Third Schedule of Companies Act –

and I will come to that in a minute –

which are referred to in Object No.(aj) shall be regarded as independent objects and accordingly shall in no wise be limited or restricted . . . by reference to or inference –

The particular object picked up at (aj), your Honour, is in our legislative provisions folder and it is not the only one at tab 10. Paragraph 1 gives it a power to carry on any business, but the funds that are to be applied in 7:

To establish and support or aid in the establishment and support of associations, institutions, funds, trusts, and conveniences calculated to benefit employees or directors or past employees or directors of the company or its predecessors in business, or the dependants or connexions of any such persons; and to grant pensions and allowances; and to make payments towards insurance; and to subscribe or guarantee money for charitable or benevolent objects, or for any exhibition, or for any public, general, or useful object.

Now, your Honour, that is why I say – and the more one goes through this memorandum the broader it is. But we have not framed paragraph 7 by reference to a literal approach to the memorandum. We have accepted that on the College of Surgeons approach the purpose of this body’s activities was to make profit for itself that is to be distributed - insofar as not retained – to one or more charities or charitable institutions. That is the profit referred to in paragraph 7(b).

We say that all of the cases set out there would be authority that would suggest or even find that those commercial activities would not properly characterise the body engaging in them as engaging in other than secular activities for a non-charitable purpose that is not incidental to a charitable purpose of giving the money away to charity. That is the third point.

The fourth point, which we say is equally important, the commercial activities and purposes lack a requisite nexus of being immediately or directly related to the achievement of the charitable purposes and we say the words “directly” and “immediately” were discussed by Justice Dixon in Lawlor. I will take your Honours in a moment to Oxfam, if I can, to show why a nexus is plainly important where you have commercial activities said to be for a charitable purpose. We are many, many steps away from a charitable purpose in the present case. We say in fact there is no nexus but there is certainly no sufficient nexus. That is the third point.

The fourth point is that the entity lacks the requisite character, purpose or object to enable it to be characterised as a charitable institution. We rely on what was said in Christian Enterprises and Stratton. The fifth point is that those propositions above apply a fortiori where there is no legal obligation which requires that profits be applied for charitable purposes. We say that the second document that we handed up to your Honours - - -

KIRBY J: Could you just help me to understand that fifth point. Why did the law, for this purpose, focus on what obligation is required of the company propounding itself as a religious institution as distinct from what in fact happens?

MR MERKEL: Your Honour, we are looking here at a body that does not have religious activities and relies on its religious charitable characterisation by giving money for charitable purposes. The only way that Word can be designated as a charitable institution is that it gives money for the advancement of religion. If it gave it on a trust, you might have a case where its money was necessarily devoted, by law required to be devoted, to the advancement of religion. That could give it the designation of a charitable institution.

It was not good enough in Christian Enterprises where the memorandum required that profits be used for that purpose, but for argument’s sake we are prepared to say that if the profits must be expended on religious advancement, that at least is a step towards linking the character of the commercial body with that of the charitable bodies to whom it gives its money.

KIRBY J: My question is a bit anterior to that. I can understand that then the taxpayer is in a much better position. It can just point and say we are obliged; it must; you have to spend it; therefore that fixes our character by our document. But assume they have not been cunning enough at the beginning to word their documents in those senses, but in fact they only give it to translating bibles – that is all they give it for. Why would that not then colour the character of the body, of the company, as a charitable institution?

MR MERKEL: If, your Honour, they translated themselves that would be a charitable activity that could give them the designation - - -

KIRBY J: No, but they are not translators.

MR MERKEL: No, if they gave it to Wycliffe to translate bibles in India, and the money was tied to that purpose, the distribution was formally tied to that purpose, being a requirement that they agree to apply for that purpose, we would still have the arguments that we have set out in paragraphs (a) to (d), but you would not have the argument in (e). But we say that the proposition that it is a charitable institution when there is no legal obligation on the donees to apply the funds for charitable purposes as that is understood in this context, means a fortiori it cannot be clothed with the character of its donee.

KIRBY J: I am still uncertain as to why that is if in fact they have the objects we have seen on page 24. They receive money from believers, they invest it well and prudently, they make some profit, and then they always and only spend it on Wycliffe which has this object. Let it be assumed Wycliffe’s only object is to translate bibles, then why is not the taxpayer able to go to the Tax Commissioner and say, “I am a charitable institution because that is the way we are organised. We are not a bible translator. We are making the money, which is then expended and expended only on this.”? There is no haemorrhage. This is not being spent on, say, the international political activities of a foreign power or a religious power or something of that kind, only translating bibles.

MR MERKEL: Your Honour, it would run into the problem in the cases set out in (b), (c) and (d). The cases in (b), your Honour, for example, Christian Enterprises was such a case where the objects required it to be for the advancement of religion but that did not save it to be a charitable institution or an institution. Glebe Administration Board was a board set up by the church to administer its properties.

KIRBY J: Yes.

MR MERKEL: Its money had to go to the church for the church’s activities, any profit it made. That did not – Appeal Justice Priestley with whom Appeal Justice McHugh agreed said basically it was a commercial entity, the fact that its money necessarily went to the church for its activity - - -

KIRBY J: What is the policy that lies behind the requirement of a legal obligation? What is the legal policy that is at work here? Why have the courts drawn this dichotomy?

MR MERKEL: Your Honour, because it gives the nexus between the income-earning activity and the charitable purpose that is relied upon to designate the body as a charitable body. The income-earning activity alone is not enough because it is a secular activity, so it is because it is an incident or an ancillary to some charitable activity or purpose that the body gets its characterisation. Absent that nexus it cannot have the characterisation of being a charity at all, so it relies upon the destination of its funds to give it the characterisation.

KIRBY J: That is, is it, because what it is seeking under the taxation legislation is a privileged position?

MR MERKEL: Yes.

KIRBY J: And it does not win that privileged position unless it is and is exclusively and by law must be devoted to religion, and then it picks up this special charity and gets a privileged position in a community many of whose people, even if they are of a different religion, would not necessarily support this activity.

MR MERKEL: Yes, but, your Honour, it goes much further. It gives them exemptions under trade practices law, state rating laws. There is a raft of exceptions made for charitable institutions or charities which all depend upon it being in the public interest that charities are unburdened by many aspects of the law that would otherwise apply to commercial bodies. In the special leave application book we set out about five pages of different federal and State legislation that give exemptions for property used for charitable purposes, property used by charitable organisation, charitable institution and so forth - - -

KIRBY J: There is no distinction between the expressions used in the federal taxation legislation and in these other statutes, State and - - -

MR MERKEL: Every statute has its own particular designation. “Charitable institution” is commonly used, but the designation is always intended to exempt from the application of normal rating or tax laws or even competition laws and in some instances discrimination laws, activities of bodies because they are charitable and are acting in the public interest and therefore it is in the public interest that they be exempt because of the very charitable nature which they represent. Now, there may be a good argument for saying that it is time to take charity back to its colloquial meaning in that context, but that is not the point here. The point here is that we say that these cases and propositions are designed to say that that characterisation is necessarily linked to that body’s activities and purposes in themselves being charitable.

KIRBY J: You underline “that body”. You say it is not enough that they then devote, as they are entitled to, their funds out of the goodness of their heart for charitable purposes down the track.

MR MERKEL: Yes, your Honour.

KIRBY J: It must be amongst the obligatory objects of that body.

MR MERKEL: Yes.

KIRBY J: The taxpayer?

MR MERKEL: Well, it must be - we say not only obligatory objects. It must be part of its activities subject to the proposition in paragraph (e). Can I give your Honour an example of some of the cases. I will not have time to take your Honours to them all, but McGarvie Smith was about a research institute that sold its vaccines, that it did not need, for profit. The question is was it no longer an institute - - -

GUMMOW J: What is the citation?

MR MERKEL: It is [1965] NSWR 1641 at 1646 to 1467. It is in the hand up folder at case No 5, your Honours. Justice Windeyer in Stratton referred to his Honour’s judgment. There the exemption under the Local Government Act was:

“public charities” are exempt from rates.

The appellant Institute was incorporated by statute and carried on the business of veterinary research, developing vaccines for the prevention and cure of various diseases in sheep, cattle and poultry. Surplus vaccines were sold to pastoral agencies and pastoralists. From these sales the Institute derived profits, part of which it devoted to bodies also engaged in veterinary research and part of which it used to finance and expand its own activities.

His Honour found it was a “public charity”. But the passage that grapples with this particular problem – now, here it was a charity primarily because of its own activities and it had to do something with the vaccines and because it exploited them commercially did not mean it was doing something that was not ancillary or incidental to its charitable activities. At the bottom of page 1646 his Honour refers to Inland Revenue Commissioners:

that the conduct of trade by a charitable trust does not derogate from its charitable character because any gain from the trading operations must be used in furthering the purposes of the trust. This appears to me at root the critical distinction which must be borne in mind in those cases where the benefits are of a character which can seldom be provided entirely free of charge or where the only mode in which the charity can be carried into effect is by the adoption of some commercial transaction. The conduct of educational institutions, hospitals and various other institutions has traditionally been accompanied, in Australia at any rate, by the payment of charges or fees and whilst one might not characterize these institutions as conducting trades or businesses it is plain that they engage in commercial activities, each student, patient or inmate being a party to a contract of some sort with the trustees or controlling body of the institution . . . Each such institution, provided it is carrying out one of the four classes of public purposes which are regarded as charitable in a legal sense, is none the less a charity and the fundamental reason why it is so treated is that there is no element or prospect of private profit. This, of course, is simply another way of saying that the trust or institution which is charitable has been created or established not with private persons or [entrepreneurs] as beneficiaries but with the object of benefiting the public generally; in other words the objects of the trust or institution are purposes, not persons.

Now, I understand that a company limited by guarantee excludes the private element of profit, but of course the Australian Football League is a company limited by guarantee and that would not be regarded as a sporting institution because of that. The point that his Honour makes which we say, with respect, is supported by the case law, is really that what gives the body its charitable character is that its activities are for charitable purposes, not persons. Now, Word’s activities are for the benefit of Wycliffe for Wycliffe’s purposes. It forms no part, as his Honour would say here:

Each such institution, provided it is carrying out one of the four classes of public purposes -

and when one goes to these cases that we have here - - -

HEYDON J: But you take general words from a case that does not throw up the present problem and say that it supports your construction of the present problem. That is not very convincing, with respect.

MR MERKEL: Your Honour, the point that we want to make in paragraph (b) is that the cases there – the Canadian Supreme Court in the Dame du Bon Pasteur Case which I have - - -

GUMMOW J: Just before we go to that, whilst we are on McGarvie Smith, Justice Else-Mitchell referred at 1646 to the Scottish case in Falkirk, do you see that - Falkirk Temperance Café, which must have been a lively place?

MR MERKEL: Yes, your Honour.

GUMMOW J: That view of the matter was taken up by the Privy Council and it is something we should have regard to, I imagine. It is the Privy Council in the Resch Case. Le Cras v Perpetual Trustee (1967) 2 NSWR 706 at 709 by Lord Wilberforce.

MR MERKEL: I will have a look at that over the adjournment if we may, your Honour. What I am endeavouring to say to your Honour Justice Heydon in response to what your Honour put to me is that these cases are concerned with struggling with the problem of commercial activity by a body that engages in charitable activities. Where there is no such activity, we say that they fall outside the principle stated in paragraph (b) because those activities are not ancillary to any charitable activity or purpose pursued by the body seeking to be characterised as a charitable institution.

KIRBY J: Is Wycliffe itself an English institution?

MR MERKEL: I think the way it is emerging, Wycliffe itself is an Australian body which is a member of Missions Interlink or Wycliffe International and the precise link between it to Wycliffe International and Missions Interlink, which is a governing body, is not altogether clear. But each of them, from Wycliffe to the international body to Missions Interlink are missionary organisations of the kind Justice Sundberg described.

KIRBY J: If in this case, subject to your overseas point, Word had not been the company but an organisation framed as Wycliffe Australia had been the body which had previously conducted funerals and so on, would the same issue arise?

MR MERKEL: It would run into the issue considered by the Canadian Supreme Court, your Honour, in the case that is in the hand up folder, but can I refer to the version that has paragraph numbers.

KIRBY J: Is this the Sunny Brae Case?

MR MERKEL: No. This is the Dame du Bon Pasteur. I am sorry, yes, the Sunny Brae Case, your Honour.

KIRBY J: This is (1952) 2 SCR 76.

MR MERKEL: Yes, thank you, your Honour. This decision, which is a 4-3 decision, throws up the precise problem your Honour had just raised for me. Could I just read the headnote to get the picture of it because it discusses a number of the policy issues that have been raised in the course of argument.

Appellant society, a religious, philanthropic and educational institution, claimed that under s. 4(1)(d) all its property used in the laundry and dry-cleaning business was exempt so long as the income therefrom was altogether used for the purpose of the society. Held, this contention could not be agreed with. The society as a religious organization, must find its exemption, if any, in the terms of paragraph (d) of s. 4(1) exclusively. Paragraph (d) of s. 4(1) being particular, applied to all religious organizations, charitable and non-charitable, and paragraph (g), being general, applied to all other charitable societies and institutions. In any case, appellant society was not a “charitable society or institution” within the meaning paragraph (g) of s. 4(1). It was a society of mixed objects and works or activities, some of which were charitable –

which was its actual religious activities.

KIRBY J: And some of which were pulling down the dry-cleaning equipment and pressing the pants.

MR MERKEL: And some of which were purely running a dry-cleaning business out of the same premises that it was using for its charitable activities:

To characterize certain bodies as charitable institutions merely because of the ultimate destination of the net revenues, would be to distort the meaning of familiar language; and to make that ultimate application the sole test of their charitable quality would introduce into the law conceptions that might have disruptive implications upon basic principles not only of taxation but of economic and constitutional relations generally. The fact that the business was being carried on as “incidental” to the charitable work of appellant did not alter the fact that the use of the property was for business purposes, and it was immaterial that appellant, after receipt of the profits from the business, devoted such profits to the support of its actual charitable work.

So it raises directly the problem your Honour has identified. Can I say that it was a split court because the joint judgment of three of their Honours, which included the Chief Justice, regarded the laundry as incidental to the charitable activities and that dissenting view is captured at paragraph 17. His Honour says:

I have reached the conclusion that notwithstanding the operation of the laundry and dry-cleaning business the appellant remains a charitable institution within clause (g). The Act of Incorporation and the material filed make it clear that the primary purposes and objects of the appellant are purely charitable. It will be observed that in s. 3 of such Act, after the enumeration of certain purposes, all charitable, it is provided that “incidental thereto for the maintenance of the said institution, hospital, dispensary, asylum and home” the appellant may carry on the business of a laundry. In the contemplation of the legislature as expressed in the Statute and in fact as shewn by the material filed, the operation of the laundry business, large though it be, is merely incidental to the charitable purposes of the appellant and for the maintenance thereof. This is not the case of an institution carrying on a commercial business and incidentally performing sundry charitable works or paying over its profits to be used by others for charitable purposes but rather that of a society or institution of which all the primary purposes are purely charitable which is actively engaged in carrying on charitable works and which as an incidental means of providing some of the money which is required for the prosecution of such charitable works carries on a business under statutory powers.

That is the minority view which we can say is fully supportive and not inconsistent with any of our propositions because Word is a far cry from anything that their Honours had accepted as being within a charitable institution. Can I take your Honours next to the joint judgment of Justice Rand and Locke at 32 onwards.

KIRBY J: Are you reading out of a different – you are reading the Dominion Law Reports?

MR MERKEL: No, I am reading from the paragraphed version, your Honour.

GUMMOW J: We are reading it from the proper citation which is [1952] 2 SCR 76.

MR MERKEL: Sorry, your Honour. What I have done, in the folder I handed up to your Honours this morning - - -

GUMMOW J: I know, but that is not the authorised report.

MR MERKEL: No. Sorry, your Honour.

KIRBY J: They might have slipped something in. We are suspicious.

MR MERKEL: Sorry, your Honours, I will check to see that there is nothing different in these paragraphs, but I had hoped that the paragraph references - - -

GUMMOW J: Anyhow, this case was decided in Canada in 1952. Has it been referred to later in Canadian decisions?

MR MERKEL: I have not checked on that.

GUMMOW J: It had better be checked.

MR MERKEL: I will check on that, if I may, your Honour.

GUMMOW J: Someone had better look at Professor Waters’ book and see what it says about it.

KIRBY J: The case was decided on the very last day of the life of King George VI, so it is the King. I notice it is 5 February 1952.

MR MERKEL: Could I take your Honours to paragraph 32 in the paragraph version? I will check the authorised version, if I may.
The argument is:

the use of the property is within clause (d) by reason of the fact that the entire net income from the business is to be applied to purposes mentioned –

that is charitable purposes - - -

HAYNE J: Well, it is necessary then to look at paragraph (d), and if you go to the headnote of the Supreme Court Report rather than the West law print you will find that paragraph (d) of the statute invited attention to whether:

Every building of a religious organization used exclusively . . . for the religious, philanthropic or educational work –

et cetera. It is a radically different question.

GUMMOW J: It is rather like Oxfam in a way.

HAYNE J: Oxfam was a user case too. Now, what do we get out of cases which are directed to the factual question of whether land is used exclusively, dominantly, predominantly for charitable purposes?

MR MERKEL: Your Honour, what one gets out of those cases and what has been derived from those cases is the designation “charitable purposes” embraces incidental and ancillary purposes which does not deny the character of charitable purposes.

HAYNE J: Decisions of courts which have to be read in the context of the problem that the courts were considering, that is what you get.

MR MERKEL: I think, your Honour, in this case 4(1)(g) did have the words “charitable society or institution” and - - -

HAYNE J: Yes, but you are taking us to a passage about the application of clause (d). Now, Mr Merkel, what are we doing?

MR MERKEL: Your Honour, what I was doing was endeavouring to respond to what Justice Kirby had put to me about the hypothesis of a body that carried on charitable activities but also carried on commercial activities and this case is authority for the view that if those commercial activities are not incidental or ancillary to the charitable activities, which is the Stratton principle enunciated by Justice Gibbs upon which we rely, then we say that the charitable purposes are not able to be saved – if I can retrace that – the commercial purposes do not disqualify the body from a designation as a charitable institution. Its property in these instances is not being used for charitable purposes or incidentally for charitable purposes. That formula picks up the way in which it has been approached in Thistlethwayte and picked up in Stratton.

GUMMOW J: Now, Mr Merkel, I think in answer to Justice Heydon earlier this morning there were three main areas of the appeal marked out. We are spending some time on paragraph 7 of the hand up submissions this morning. Where does paragraph 7 fit in that framework that was traced earlier this morning as to the three branches of the case?

MR MERKEL: Sorry, your Honour, paragraph 7 sets out the branch of the case that says why Word is not a charitable institution by reason of the commercial and investment activities. The second branch of the case, your Honour, is whether or not, if it is a charitable institution, it pursues its purposes principally in Australia. They are the two issues in the case. The third issue which was the general issue really is a restatement more or less in terms of paragraph 7 of the first issue.

GUMMOW J: Thank you. How are we going for time?

MR MERKEL: I think I should be finished in about 10 minutes, your Honour.

GUMMOW J: Thank you.

MR MERKEL: I did want to say something about the Oxfam Case [1976] AC 126, and I will be very quick about that. The Oxfam Case is No 10 on our list of authorities. Again, this is use of land for a rate exemption on whether the land is used for charitable purposes.

KIRBY J: Nothing about it being a charitable institution?

MR MERKEL: No, your Honour. But we say that the learning on where the land is used for charitable purposes by a charitable body when the charitable purposes are said to be retained, notwithstanding the commercial use of the land, helps throw light on the kind of nexus that is required between a commercial activity and the charity’s charitable activities to enable that body to be properly regarded as a charitable institution. What happened here is Oxfam had a chain of shops, and can I just read the head note:

The shops were used for reception and sorting of articles given to it and the sale of those donated articles which could not be used in its work overseas in order to convert the articles into money which could be so used. The shops also sold “village handicraft” articles made in the “developing world” in order to encourage village industries and provide employment in poor countries, such sales accounting for about 7 per cent of the total sales in the shops. They also sold articles produced by a wholly owned subsidiary formed for the purpose of trading, such sales accounting for about 13 per cent of total sales.

The question was whether the shops were used for charitable purposes and their Lordships found they were not. Lord Cross discusses the problem first at page 139 at paragraph E to F where, after discussing a number of cases, his Lordship says:

Oxfam, therefore, is entitled to rating relief in respect of premises which it occupies and which are not being used for the actual relief of poverty of distress, if – to quote Lord Reid – the use which it makes of them is “wholly ancillary to” or “directly facilitates” the carrying out of its charitable object – the relief of poverty or distress.

Then his Lordship sets out the nub of the problem at page 146, paragraphs A through to D. His Lordship says, second line:

For my part, I agree with counsel on both sides that one cannot well draw a distinction between using premises to get in money by managing existing trust property and using them to raise fresh money.

His Lordship said there is not a distinction between an investment and a trading activity. Then down at paragraph C, his Honour Lordship says:

I think, in agreement with counsel, that the choice is between (A) drawing the line so as to exclude from relief user for the purpose of getting in, raising or earning money for the charity, as opposed to user for purposes directly related to the achievement of the objects of the charity, and (B) only excluding from relief user for the purpose of carrying on a business to earn money for the charity. If the second be the true view, the further question arises whether Oxfam shops can be distinguished – for the purposes of the section – from a shop run by a charity on ordinary commercial lines.

His Lordship prefers the first alternative and we say embraces a proposition which we have embraced in our submissions of nexus:

(A) drawing the line so as to exclude from relief user for the purpose of getting in, raising or earning money for the charity, as opposed –

to not excluding, we would interpolate –

user for purposes directly related to the achievement of the objects of the charity -

That is its charitable object. So there is a direct nexus. His Lordship at page 147 at paragraph B also emphasises the artificiality of distinguishing between managing property and earning money and I will come to that in a moment concerning one of the arguments we wish to put. The other Lords agreed with Lord Cross. Lord Morris gave a separate judgment at page 148 and his Lordship said at G:

There being a distinction between, on the one hand, activities which a charity may undertake, and, on the other hand, activities which consist in the actual carrying out of its charitable purposes –

Then his Lordship at the bottom of the page says:

While care must always be taken to adhere to the statutory words and not to supplement them or to supplant them, I consider that user “for charitable purposes” denotes user in the actual carrying out of the charitable purposes: that may include doing something which is a necessary or essential or incidental part of, or which directly facilities, or which is ancillary to, what is being done in the actual carrying out of the charitable purpose. There may, on the other hand, be things done by a charity, or a use made of premises by a charity, which greatly help the charity, and which must be in one sense be connected with the charitable purposes of the charity and which are properly within the powers of the charity, but yet which cannot be described as being the carrying out, or part of the carrying out, of the charitable purposes themselves. The nature of the user may not be sufficiently close the execution of the charitable purpose of the charity. A charity may be entitled to occupy premises and to use them other than for its charitable purposes: only if to occupation by a charity there is added user “for charitable purposes” will the benefit given by the section accrue.

Now, we say that their Lordships draw a nexus which is highly relevant in the present context between the income earning activities and that which is relied upon to give the body the designation of charity. What we have endeavoured to do in our submissions in reply at paragraph 7, we have set out the intermediate steps which show the lack of any nexus in the present case between the fulfilment of Word’s commercial object of profit from the conduct of its business and the charitable object of advancing religion. They include making a profit, determining to distribute rather than retain for its own purposes the profit, determining to whom a distribution is to be made and making a distribution in a manner that ensures it will be utilised by the donee for the advancement religion. We say that the nexus that would be required in such a situation is lacking. They are the submissions we would wish to put on why the court below erred in finding that Word is a charitable institution.

KIRBY J: Have you said everything you want to say as to why in this statutory context the necessity of a strict nexus is essential to uphold the purpose of the Federal tax law, because we have not really discussed what that purpose is and what it is getting at.

MR MERKEL: We endeavour to grapple with it in paragraph 8. Can I just endeavour to summarise our point as follows; that when one looks at the legislative history starting with the charitable institution, trust for charitable purposes provided the expenditure is for those charitable purposes together with the subsequent 1997 regime which seeks to ensure that in addition to those categories the objects are being pursued, that is the charitable object principally in Australia. We say that it is clear that what the legislature is seeking to do here is to only protect bodies or funds which are employing their funds necessarily for charitable purposes being the charitable activities that are relied upon to clothe them with the character of a charitable institution or other fund for charitable purposes.

KIRBY J: Why is it endeavouring to do so with the requirement of a strict nexus?

MR MERKEL: Because, your Honour, they are given an exemption in the public interest.

GUMMOW J: If you are talking about poverty and eduction, philanthropy relieves the public purse, does it not?

MR MERKEL: Philanthropy relieves the public purse but fell outside the categories of the Statute of Elizabeth.

GUMMOW J: No, I am not using philanthropy in that sense. To relieve poverty and to advance education is helpful to government because other people are paying.

MR MERKEL: I am not sure whether that would be comfortable under the - - -

GUMMOW J: That drives a whole lot of this law in the United States.

MR MERKEL: I understand that, your Honour, but we are looking at the Statute of Elizabeth and the advancement of religion.

GUMMOW J: I am not looking at Statute of Elizabeth, I am looking at the taxation policy. Now, religion becomes a bit more difficult because of the provisions in the Constitution about religion, so charity is a mixed bag in one view of it, but a legislative view has been taken for some time as to how the tax system should accommodate it.

MR MERKEL: But we would say at the heart of that exemption lies a view that the bodies concerned are acting in the public interest by what they are doing in respect of the charitable activities and if no better example can be given by the charitable trust exemption which is exempt provided that the money is being used in pursuit of the public charitable purposes, this case slides round that and we say it is that kind of principle that context can be relied upon, both the context of an income tax exemption and the counterpart exemption for a charitable trust fund that would suggest one does not take an ambulatory or broad reading of the matter as has been taken by the courts below. Certainly, the cases that we have cited in paragraph 7(a) and (b) would strongly suggest that there would be no public policy served by taking such a wide reading.

They all tend to the finding that either use of property for charitable purposes or a charitable institution, an independent commercial activity that is not ancillary to the actual charitable activity itself, eg the Salvation Army situation is disqualifying, and we say that is consistent with the purpose of an income tax exemption, consistent with the purposes that one can discern from these legislative provisions. So that is what we would say - - -

KIRBY J: Is there any explanatory memorandum for the 1997 amendments that helps to understand?

MR MERKEL: Yes. That is what we deal with in paragraph 8, your Honour. The explanatory memorandum for the 1997 amendments is tab 14. They deal with all of the amendments concerning the added bodies bringing together gift deductible recipients, but the offshore aspect – can I just say the 1997 amendments initially retained charitable institutions and the trust fund exemptions. They were in item 1.1 and 1.5 as they were since the 1936 Act.

GUMMOW J: This is not what Justice Kirby is asking you. The question is what is it in the first place that has animated this treatment in the tax law since 1915?

MR MERKEL: No, I cannot give any answer other - - -

GUMMOW J: I understand what is going on here. This is an anti-avoidance measure.

MR MERKEL: Yes.

GUMMOW J: But why was there the favourable treatment in the first place?

MR MERKEL: I will see if - - -

KIRBY J: I may be wrong about this, but it is not only an anti-avoidance measure though it is that, but it is also a civic equity measure that you do not give one funeral home a tax advantage which other funeral homes do not get, and that they have to compete on the general market and that just because the money is flowing on to some other charity you do not give their activities of a non-charitable, but commercial character an advantage as against others in the community who are investing their money, making their money, running funeral homes, running housing estates and so on. It is an equity and in a sense it is a principle of civil equality; at least that is what I would think.

MR MERKEL: That seems undoubtedly right and the broad approach to exemptions certainly supports that, both in rating Acts and in revenue Acts. It has been historically one that has been long accepted.

KIRBY J: Similarly, with a dry-cleaning business you do not give them a special status just because they send their money on to the “Sisters of Our Blessed Saviour” or whatever they were called.

MR MERKEL: The problem lies, your Honour, in the relief of the public purse approach, which obviously has some substance. But because of the definition of “charitable” to embrace religious, it must be something more than that. What we would say is that charitable activities themselves are being regarded by the legislature as being in the public interest and that is why we say - - -

KIRBY J: There is case law in the United States, where of course their constitutional situation is a bit different, which says one of the most oppressive things you can do to a citizen in a free society is to impose upon them an obligation of giving subventions to a religious or political belief that they do not accept and that therefore has to be done very clearly. One can test it here. Would we be happy about giving a lot of money to a religious belief we strongly disagree with? I mean there are still people in our society who feel strongly about religion or non-religion.

MR MERKEL: Chesterman’s Case and the construction of “charitable” in its legal sense puts that in a sense to one side. But I must look for something more general for the basis or policy basis for the exemption. We would say that whichever way one looks at it, it would not be a reading up of the exemption of the kind sought in the present case.

KIRBY J: You are referring to Chesterman in this Court or in the Privy Council?

MR MERKEL: I think it was the Privy Council.

KIRBY J: Because this Court was reversed in the Privy Council. It is always a question to me as to whether their Lordships were right.

MR MERKEL: Your Honour, I think everyone has acted on the basis that charity is in its legal sense and I do not wish to - - -

KIRBY J: I know they have and lawyers do not like to question things. I am learning this about tax lawyers. They hate to question received “wisdom”.

MR MERKEL: I will not trouble your Honours with it, but the avoidance provisions are explained at 5.24 and 5.25 of the explanatory memorandum and I have tried to encapsulate those and they are summarised in our submissions. We have set out our arguments on the special condition at paragraphs 32 to 40 of our original submissions and the way we have relied on it in paragraph 8 as a construction ground is that the way Word, in effect, bypasses the principal pursuit of objectives in Australia, we say essentially it is charitable purposes objectives that give you the designation or characterisation that must be pursued principally within the country. We say if that is defeated then it should be not accepted as being defeated by a reading up of a charitable institution and we say that that is what we say in paragraph 8, but if we are wrong in that, then we say that the 50-50 condition should be read so that they mean that the objectives that are relied upon for the characterisation of charitable must be pursued principally in Australia and the argument has been put and the courts have acted on the basis below that Wycliffe’s objectives are not pursued principally in Australia.

So we say for those reasons the Court of Appeal and Justice Sundberg were wrong. They did not apply the ancillary or incidental test that we have relied upon in Stratton. Their Honours, the majority in the Court of Appeal, construed a memorandum of association or purposes of Word as necessarily requiring that the money be applied for the advancement of religion, and we say for reasons we have said that that is simply wrong. Their Honours considered clause 3(a)(i) of the memorandum as if it were determinative of all the issues in the present case, and for reasons we have endeavoured to outline that 3(a)(i) religious object is not one that is pursued at all by Word and is not one to be relied upon and their Honours were wrong in doing so.

Can I just deal with one last issue? We have asked the Court to consider the appeal on the basis that we are considering the post-1 July 2000 period. What has occurred below is that before the AAT and Justice Sundberg, the Commissioner argued - - -

GUMMOW J: Is this paragraph 17 of your submissions in reply:

The Commissioner seeks leave to contend that the investment arm alone resulted –

et cetera?

MR MERKEL: Yes, your Honour. What has occurred is that the investment arm was a matter in issue before the AAT and before Justice Sundberg. Before the Full Court the Commissioner did not argue that the investment arm post-1 July 2002 was not disqualifying. The arguments that we have put before your Honours are to the effect that there is no rational distinction – and indeed, Lord Cross makes this point in Oxfam between “investment activities” which bear a secular character and “trading activities” which also bear a secular character.

So even though the matter was not argued by the Commissioner in the Full Court, we would say that the issues that are required for determination on the appeal really raise the entirety of the post-1 July 2000 period, and we say that this is a case where we ought to be permitted to argue that.

GUMMOW J: Does this require an amendment to your notice of appeal?

MR MERKEL: No, it does not, your Honour, because it is really as from 1 July 2000, but we accept that we are raising – to the extent that the
argument goes from 1 July 2002, we do not need an amendment to the notice of appeal, but we are raising a point that was not argued in the Full Court, and if leave be necessary, we would ask for that leave. It has not affected and cannot affect the way the matter has been conducted at earlier stages, and indeed, was in the Commissioner’s grounds of appeal before Justice Sundberg. We say it does throw up the issues of significance in the present case. Can I just say there are one or two slight errors in the orders that the Commissioner would seek, and if I can hand those up after the adjournment?

GUMMOW J: Very well.

MR MERKEL: If your Honour pleases.

GUMMOW J: Ms Batrouney, what do you want to say about that last point?

MS BATROUNEY: The respondent would not consent to any late argument about its investment activities. However, our argument is that it is the purpose of the organisation that is relevant and that the activities by which it pursues those purposes are not relevant, subject to illegal purposes and purposes that are against public policy. So it ought not to matter what activities the respondent engaged in.

KIRBY J: But is there any prejudice to you from a procedural point of view of allowing the Commissioner to enlarge the arguments?

MS BATROUNEY: No. We do not argue that there is a procedural disadvantage.

GUMMOW J: Very well. This might be a convenient moment to adjourn, I think, and we will resume at 2.00 pm.

AT 12.42 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.00 PM:

GUMMOW J: Yes, something you wanted to hand up?

MR MERKEL: Yes, your Honours, could I hand up the proposed orders. There were some typographical errors in the ones at page 448? We would ask that these orders be substituted. There is one other brief matter. There was a typographical error at page 24, paragraph 3 of the objects. It should read in the plural, “the objects” not singular, and we are agreed on that, your Honour.

HEYDON J: Yes, it should, but on what basis do you say that is so?

MR MERKEL: Your Honour, it was a transcription error. That was typed out from an original draft which had highlighting on it and it is common ground that the - - -

GUMMOW J: The registered copy in the corporation records - - -

MR MERKEL: Yes, it will read, “the objects”.

GUMMOW J: - - - is the object, okay. Thank you.

MR MERKEL: Sorry about that, your Honour.

HEYDON J: Not decisive though.

GUMMOW J: Yes, Ms Batrouney.

MS BATROUNEY: If the Court pleases, we have obviously handed up written submissions, and I do not propose to go through those written submissions. We propose to address the Court on the three matters that Justice Heydon raised, and they seem to be the three matters that are in argument before you, that is, the first matter is that the objects of Word are not solely charitable; secondly, that Word did not itself do anything that was charitable; and, thirdly, the Australian question.

HEYDON J: I think there is a fourth matter which is that there is no guarantee that the money handed over to Wycliffe, for example, was going to be used solely for charitable purposes because we do not know anything about Wycliffe’s objects. That came up in the course of argument.

MS BATROUNEY: I will call that my Helen Slater point.

CRENNAN J: Wycliffe is a prescribed - - -

MS BATROUNEY: Wycliffe is a charitable institution. As I understand it, the Commissioner now concedes that each and every organisation to whom were distributed was itself a charitable institution that was endorsed by the Commissioner of Taxation under this current regime, or was a public benevolent institution, in one case, itself endorsed as a public benevolent institution by the Commissioner and there were several very small grants given to individual overseas missionaries.

KIRBY J: But that, by the discretion of your client, not by the requirement of its memorandum and articles.

MS BATROUNEY: That is, in our submission, a matter of construction and I will address that now. One of the matters which your Honours have raised with us is that the various cases that we have looked at are rating cases or cases dealing with English legislation or Canadian legislation. There is one case that deals exactly with this legislation and that is Incorporated Council of Law Reporting of Queensland.

KIRBY J: That was not the law reporting case Justice Hayne referred to in the special leave application. There is an English law report.

MS BATROUNEY: There is two. There is a Queensland one and an English one.

KIRBY J: And the suggestion sub silentio in the special leave argument was that amongst the cognoscenti these cases are regarded as standing out all on their own because the, shall we say, special sympathy and understanding that the law has for the great need for law reporting.

MS BATROUNEY: It is our submission that that aside, this case is relevant because it is the only case in this Court dealing with the very provision we are considered with. It is [1971] HCA 44; 125 CLR 659. It is a decision of Chief Justice Barwick and Justices McTiernan and Windeyer. You will see over at page 661 of the report at about point 2, the exemption that was applicable was section 23(e) of the Income Tax and Social Services Contribution Assessment Act 1936-1962, which is in fact the predecessor of the item we are considering today. The section reads:

The following income shall be exempt from income tax: -

(e) the income of a religious, scientific, charitable or public educational institution –

At about point 4 on the page Justice Barwick sets out what are the memorandum and articles of the incorporated council. You will see that the council was incorporated on 7 November 1907 as a company limited by guarantee. If you have a look over the next few pages you will see that the memorandum and articles of association were similar to the memorandum and articles of association of Word in the sense that we would say many of the expressed objects were in fact powers.

KIRBY J: It is interesting that one of the objects is to produce law reports at a moderate price.

MS BATROUNEY: If only that were the case today. Also you will see, while we are looking through them, at page 662 at about point 3 one of the objects was:

The acquisition of the newspaper called ‘The Queensland Law Reporter’ and the publication of the same and the taking over of the assets and liabilities of the present Council of Law Reporting.

On page 663 there were provisions dealing with the application of profits. It was quite clear from the word go that the incorporated Council of Law Reporting, despite the modest price, was to make a profit. Over at page 664 there is an article that allows the articles to be varied:

but so as always strictly to adhere to the Rule prescribed by the Memorandum of Association that the income and property of the Association whencesover derived shall be applied solely towards the promotion of the objects of the Association as set forth in the Memorandum of Association.

Over at page 665, the Chief Justice sets out where the council’s gross income is derived from and there are a number of sources there. He comes to the question, unfortunately, at page 666 at point 2 he says:

But is the council nonetheless, a “charitable institution” within the meaning of s 23(e)? If its purposes are charitable, it will be such an institution for the nature of the institution inheres in the purposes it is created to and does pursue.

He goes down at point 5 to say that:

The Act attempts no definition of charity or of what for its purposes will be charitable.

He goes on to talk about Chesterman’s Case and Pemsel’s Case and over the page at page 667 he refers to the four categories of charity in Pemsel’s Case. Then he deals with the issue of profit at the very bottom of page 669 where he says:

All that remains is to add the lack of private gain by the members of the Council. That the Council itself should profit by the production of the law reports cannot prevent the Council being a charitable institution.

This is important, I think, your Honours. Indeed, the very fact that the Act exempts the income of a charitable institution concedes that such an institution may derive profits from its activities. Down at point 5 he says:

In sum, we have here an incorporated body, an institution, not carried on for private gain which produces reports of the decisions of the Supreme Court of Queensland in book or magazine form. The production of such law reports is its sole purpose.

KIRBY J: I see a distinction here though between the very objects of the Council of Law Reporting, which is to do law reports, which is promoting knowledge of the law and so on, and an institution which is running a funeral home. That is not a charitable purpose at all. It is a business.

MS BATROUNEY: Yes, and, with respect, that was not the charitable purpose of the respondent. The charitable purpose of the respondent was to raise funds and apply those funds to advancement of religion by way of - - -

KIRBY J: Someone else. Arguably it is the something else. It is Wycliffe that has the charitable character and purpose and institution, whereas arguably, at least in my present thinking, your client is a business.

MS BATROUNEY: That was the second point I was going to come to, but you will recall that at the very beginning of our submissions we said that the Commissioner’s position is based on a false premise. That false premise is that the respondent did nothing charitable itself. Everything the respondent did was charitable. It is a charitable purpose - - -

KIRBY J: But you had to pay for funerals, they were not given away and non-believers could have their funerals at the Bethel Funeral Home.

MS BATROUNEY: Nor were the law reports given away. The point being that the advancement of religion by providing support to missionary organisations is a charitable purpose. So we could have provided housing to the missionaries. We did not. We provided money to them.

KIRBY J: I just cannot get out of my mind that if I had the Michael Kirby Funeral Home I would really be very cheesed off that there was this Bethel Funeral Home that was getting a tax advantage of being a charitable institution.

MS BATROUNEY: That was going to be my very last point, which was not a Justice Heydon point.

KIRBY J: All right. Well, come to it in due course, but I am retiring in six month’s time and I have to turn my mind to what I do afterwards.

HEYDON J: Must not end up on struggle street.

MS BATROUNEY: So the point being that - - -

KIRBY J: As I commented in the special leave, funerals are something we all ultimately need, so it is not a business that is going to go out of business.

MS BATROUNEY: Not necessarily. The point I am addressing the Bench at the moment on is whether or not the objects of Word are solely charitable. Now, I am taking you through the Incorporated Council of Law Reporting Case because it is interesting in that at the very last page of the report at page 672 Justice Windeyer refers to the main object, and so it is not necessary if in fact the Incorporated Council of Law Reporting is to be followed by this Court. It is not necessary that the sole object of Word be the following of charitable purposes. Justice Windeyer refers at point 2 of the page to the “main object” of the Council:

The main object which the Council exists to carry into effect is the publication of law reports. Any profits it makes by so doing must be devoted to aiding the law libraries of the Supreme Court of Queensland. They cannot be diverted into the pockets of individuals.

He notes that:

in times past it was not a charitable undertaking –

to publish law reports –

because it was done for private profit . . . Profits it thereby gains are devoted to the further advancement of legal learning. This combination of objects and purposes suffices to make it a charitable institution.

HEYDON J: This is a very valuable precedent because judgment was reserved for over four years, so it must have been thoroughly considered.

MS BATROUNEY: I am very heartened to see that they received further evidence, not that I will be troubling the Bench with further evidence today.

KIRBY J: What, further evidence in the High Court?

MS BATROUNEY: Apparently so.

KIRBY J: Well, I must make a note of that and bring that out in support of my so far descending view that you can.

MS BATROUNEY: I have read Anderson’s Case. You will see at page 661, I think Justice Heydon just showed you:

After the case was argued before the Court some years ago and after the Court had reserved judgment, the Court was requested not to proceed further in the matter to enable the parties to supplement the case stated by additional facts which had come to their notice. A supplementary statement was subsequently filed.

GUMMOW J: There was a case in the original jurisdiction, so I do not see what we are talking about. It is the case stated under section 18 of the Judiciary Act and the attempt to amend the case never came to anything, so let us get on with it.

MS BATROUNEY: The second case in relation to the Commissioner’s argument that the objects were not solely charitable we meet by reference to the decision of this Court in Royal College of Surgeons [1943] HCA 34; (1943) 68 CLR 436 The Court will see that at page 452 - - -

KIRBY J: Could you just tell me, before we leave the Law Reporting Case, why is that not distinguishable because of the fact that Word had business activities whereas from first to last, in and out, up and down, throughout the Incorporated Council of Law Reporting was for a charitable purpose. that was to produce law reports, not for the private gain of those who were writing them and reporting on them, but for the benefit of the legal profession as an authorised set of reports. So it just seems to me it is not a business, it is not a profit making activity, it is thoroughly suffused with its charitable objectives, whereas you are a hybrid. You have charitable purposes but they are being pursued through a commercial arm which is in business, in competition in the economy with organisations which do not have the advantage of being charities and tax deductible or having tax exemption.

MS BATROUNEY: The answer to your Honour’s query is that the nature of the activities is not the relevant inquiry. The relevant inquiry is whether or not Word was established and maintained for a charitable purpose, for a charitable object. How it achieves that charitable object is, in a sense, neither here nor there and I say “in a sense” because it can be relevant if it is pursuing illegal purposes or if it is pursuing political purposes and also there is some question about national security purposes, but those purposes have been hived off into a separate category.

KIRBY J: They have no foundation in the statute. These are judge made rules?

MS BATROUNEY: They are judge made rules. Political objects are referred to of course in Pope v Lawlor. But the activities through which the company pursues its, we would say, solely charitable object are neither here nor there. Our argument – as I said before the luncheon adjournment – must be and is that putting aside immoral, illegal activities it would not matter what activities we pursued as long as we pursued those activities for the purpose, for a charitable purpose.

KIRBY J: So the test is an intention test, is it?

MS BATROUNEY: It is not an intention test. It is not a motivation test. At the end of the day we say it comes down to the dichotomy that was posed in Christian Enterprises about whether what is being done is in fact a commercial enterprises applying its profits to charity, or is it a charitable corporation that is devoted to and does pursue charitable objects. That was what Justice Allsop in the Full Court referred to as the fine but real distinction.

HAYNE J: What part does consideration of activities of the kind reflected in the College of Surgeons Case have in the application of the relevant test?

MS BATROUNEY: The activities are relevant in the sense that if the activities are not being conducted in accordance with the purpose of the company then the activities might in fact become a separate purpose of their own and that is what happened in the Cronulla Case and in the Northern Suburban Case. It is a question of whether or not the activities engaged in are engaged in for the purpose of furthering the charitable object or whether they have become an end in themselves. So if I could just take you to the passage that I was going to in Royal Australasian College of Surgeons?

KIRBY J: So it really is essentially a characterisation function - - -

MS BATROUNEY: It is a characterisation - - -

KIRBY J: - - - that a decision-maker is involved in?

MS BATROUNEY: Yes.

KIRBY J: Why is it not an available or better characterisation to say this, that your hybrid organisation brings you down? You have your commercial activities and you have long-term flow into the charitable purpose, but Wycliffe is the charitable institution; you are a commercial institution.

MS BATROUNEY: With respect, that is melding two questions into one. That is melding the question of whether or not we ourselves did anything charitable or left it to Wycliffe to do charitable things, which I was going to come to. We say our submission is that the mere fact of raising money to apply to financially support missionary and church organisations is itself a charitable purpose. In order to advance religion - - -

KIRBY J: Even though it is done through a drycleaner or a funeral home?

MS BATROUNEY: Yes. In order to advance religion, one does not need to do religion.

KIRBY J: No, but insofar as you are doing business, then those who are in competition with you in the market would understandably think there is an equity issue here. Why should they not be a charity and you are a charity?

MS BATROUNEY: I can put this off no longer. That very point was considered by:

In 1995 the Industry Commission conducted a review of charities. Appendix K to the Industry Commission Report considered the arguments for and against the tax exempt status of charities, in particular, having regard to what was said to be the unfair competitive advantage of charities. It concluded in paragraph K2.4 –

which I am handing up to your Honours -

that –

“Income tax exemption does not compromise competitive neutrality between organisations. All organisations which, regardless of their taxation status, aim to maximise their surplus (profit), are unaffected in their business decisions by their tax or tax-exempt status.”

KIRBY J: That runs counter to what was said by this Court in Westraders, was it not, that every business now makes its decisions having regard to the tax implications of those decisions.

MS BATROUNEY: It may or may not, but that was the conclusion of the Industry Commission. The more recent inquiry into charities that we refer to at the end our submissions, also considered whether or not commercial purposes ought to be disqualified and there was a number of submissions made to the inquiry into the definition of “charities” about commercial subsidies, et cetera, and despite these, the inquiry decided that there was no reason to change from the present situation.

KIRBY J: Except that, as I read the materials, some of the materials, religious, charitable institutions have a specially privileged place in Australia, notwithstanding section 116 of the Constitution, because they pick up this large raft of rating and other advantages that put them outside making contributions for their business activities to the pool of taxes that are recovered for the benefit of the people of Australia.

MS BATROUNEY: Whether that is or is not the case is surely a matter for the Parliament to determine.

KIRBY J: Mr Merkel says it has determined it. It is just you are trying to push it that little bit extra and the little bit extra is a bridge too far.

MS BATROUNEY: I do not want to jump all over my submissions, but - - -

KIRBY J: No, I am sorry. You have been very patient with me and I am grateful for this material.

MS BATROUNEY: In fact, we submit that we need not push it any further than the very seed that grew this tree of charitable learning, and that is Pemsel’s Case. If you think about the facts of Pemsel’s Case, in Pemsel’s Case, Mrs Bates left some land on trust for trustees to make profits out of renting out the lands and those profits were to be applied toward the missionary activities of the Moravians. The trustees of that trust did nothing themselves that was charitable other than hand over money to the Moravians. Our case is indistinguishable from that case. Yes, that was a trust case and we are an institution case, but in both cases, the purpose for which the commercial activity was undertaken was a purpose of advancing religion by providing financial support to church and missionary organisations. Far from pushing the envelope, your Honour, we are going right back to where it all started.

HAYNE J: But the legislative premise for the provisions under consideration is that the entity would otherwise be taxable. The legislative premise is that the entity would have income. It would have done something to derive income.

MS BATROUNEY: That is what Chief Justice Barwick said in Incorporated Council.

KIRBY J: You are getting advantage, or seeking to get advantage of an exemption from the norm that would apply to you as an income-earning taxpayer in Australia.

MS BATROUNEY: That would assume that we were an income-earning entity.

KIRBY J: You are running a funeral home. You are getting money for providing funerals and not just to your believers, to any customer that comes off the street. You get an income and then you turn to the Commissioner and say “We have the purest of heart, we have the purest of motives, we have the purest of cheque books. We pay it all to a charitable purpose and therefore we are exempt. We are not going to make any contribution to the pool of taxation in this country, though we are earning income.”

MS BATROUNEY: That is because, your Honour, heart, motivation and cheque book are irrelevant. The only thing that is relevant is the purpose, the purpose for which we do this and what distinguishes us from Tobin Bros and Le Pine is that the purpose for which we conduct our funeral activity is the purpose of raising funds to apply to church and missionary organisations. The purpose for which Tobin Bros does what they do is for the private benefit of individuals and that is why - - -

KIRBY J: I can see why this could lend itself – I am not saying at all that it is in your case, but the principle you are urging could lend itself to tax avoidance at a merchant banking company. The Protestant merchant banking company could say “Well, we are going to do this and flow it all through to a charitable purpose. Therefore, though we are making an enormous amount of money, we are not going to pay tax on it.”

MS BATROUNEY: But, with respect, your Honour, that is not a tax avoidance purpose. It is our submission, and it must be our submission, that we could run a stockbroking business and still be entitled, because it is not an activity test, your Honour, it is a purpose test. So the means by which we earn our income ought not to matter.

KIRBY J: Well, I understand the submission, but I think if you are going to escape your ordinary obligations as a citizen and a taxpayer in the country, then it is not unreasonable for the Parliament, supported by decisional law, that you have to have in your memorandum and articles at the least an actual legal obligation to pay it over to the charitable purpose and nothing less and never anything else and no element of discretion. It is a siphon.

MS BATROUNEY: Clearly that would not work because in order to run a business, one must have provision set aside to buy a new hearse or to upgrade the business. Your Honour, can I urge upon you that the lower courts in this country have been jealously guarding this privileged position that charities and others are involved in and that this Court can have confidence in the way in which this exemption has been administered by the lower courts. They have drawn the line. They have said no, in this case you have gone too far.

So, for example, with our stockbroking example, the Courts would perhaps say you have gone too far. When they say you have gone too far, they say that your purpose of your commercial purpose has become an end in itself and not a means to fulfil your purpose. So, for example, in the Cronulla Case it was held that the commercial purpose or the non-charitable purpose, if you like, of running a leagues pokies club had taken on a life of its own and it was no longer an entity that was raising funds for the promotion of sport. The courts are administering this exemption to protect the citizens of Australia.

In Northern Suburban the Administrative Appeals Tribunal held that a bike club had ceased to exist for the promotion of a bike sport because all it was existing to do was – I think it was another pokies club case. All these cases are referred to in our submission. In St Mary’s Justice Hill said it is not a bright line, it is a difficult line to draw, but the courts do know and are able to draw the line where it becomes an end in itself.

KIRBY J: I realise this, but we have granted special leave in this case and it is now before us. We cannot say, well, they do their best in the lower courts. We now have to reach our own decision in this case. To do that we have to try and get a clear concept of what Parliament has said and what permissible judicial elaboration requires in this case.

MS BATROUNEY: If I could go back to the objects, the argument put against us being that our objects are not solely charitable. I took the Court to Incorporated Council in Queensland to say that the question is, what is our main purpose? In Royal College of Surgeons - - -

KIRBY J: You say that, but if you are seeking an exemption, why should it not be not just your main purpose but your sole or dominant or overwhelming purpose? You are asking for a benefit from the taxpayers of Australia because effectively they are then subsidising your funeral business. I mean, you may not find that mildly surprising and may be I should not, but I find that from an economic point of view surprising that other taxpayers are subsidising a particular funeral business which is a business.

MS BATROUNEY: But even in Incorporated Council of Law Reporting it could not be their sole purpose.

KIRBY J: That is a different thing. It is suffused with its charitable object. Dry-cleaning and funerals are not charitable of nature.

MS BATROUNEY: Well, there is some authority that funerals are. Scottish Burial said that burying the dead is itself a charitable nature, but we do not rely on that in this case.

KIRBY J: They are big business. Anyway, I have said enough. I will keep quiet for a few minutes. That is a promise.

MS BATROUNEY: Was your Honour the Presiding Judge wanting to ask a question?

GUMMOW J: You were at page 452?

MS BATROUNEY: Yes, your Honour. At about point 3 of the page Justice Williams said:

But, in order to determine what is the main or dominant purpose of the College, it is a mistake to examine the objects contained in the memorandum in this disjunctive fashion.

by merely picking out one objective and saying that is a non-charitable objective. He says:

They should be examined in conjunction with one another and in the light of the circumstances in which the College was formed and of the manner in which the College is fulfilling the purposes for which it was incorporated.

Lastly, if I could hand up to the Court a decision of this Court in Brookton Co-operative [1981] HCA 28; 147 CLR 441. This was a question about whether or not what was the primary object of a co-operative company. If I could take the Court to page 450 of the extract we have handed up, Justice Mason, as he then was, says at about point 9 of the page, “The Federal Court proceeded - - -

HEYDON J: I think we have 454, but not 450.

KIRBY J: Always the way. We always get the wrong page up here.

MS BATROUNEY: If I could just read it out because the main point is in fact over the page at 451.

The Federal Court proceeded, in conformity with authority in this Court, according to the view that in ascertaining the purpose for which a company “is established” it is necessary to look, not only to the circumstances existing at the time of incorporation, but also to the activities of the company at the time when its status as a co-operative company is to be determined . . . Moreover, in Ruffy (24) the Court explicitly rejected the suggestion that the objects of the business were to be gathered solely from the objects clause in the memorandum. In that case the Court, in characterizing the object of the business, looked to the business activities of the company after its incorporation as well as to the purpose of its incorporation –

So, in relation to the submission that the respondent’s objects are not solely charitable, we submit that the appropriate inquiry, as was undertaken by the Full Court and by Justice Sundberg, is in fact a holistic inquiry looking at, indeed, the objects, purposes – this is at paragraph 14 of our submission – is that our true character, whether charitable or non-charitable, is to be assessed by reference to its objects, purposes and activities. This assessment, we say, is an integrated, holistic inquiry directed to whether a body of facts and circumstances satisfies a legal category or conception.

In our submissions we then go through what are in fact words, objects and its purposes and its activities and we say that the appropriate construction of the memorandum of association in this holistic fashion is to say that our object is, in fact, a sole or main or dominant object of advancement of religion by the provision of financial support to church and missionary charitable institution.

I do not think I need to bother the Court taking the Court through all the facts of this case. I think they have been rehearsed sufficiently, but the second matter that is put against us is that the respondent did not itself do anything charitable.

HAYNE J: Just before you come to that - this question about the objects of the company - the Tax Act must be approached from an understanding of some basic company law history. In particular, it has to be approached having regard to the fact that the drafter’s response to the ultra vires doctrine that developed in company law, which saw this proliferation of statement of objects and the inclusion of separate objects provisions, was that if you were to work out the object or purpose of a company, yes, you started with the document but you could not finish with the constituent documents. You had to look also to what the company did, lest, as Mr Justice North’s colourful example in the Crown Bank Case was shown to have occurred, where the company had given up banking business and had embarked in a business with the object of establishing a line of balloons between the earth and the moon. That is why there is a practical inquiry to be made. Look at what they have done but start with the constituent documents.

MS BATROUNEY: Indeed, with respect, and that was the point made by Justice Allsop at page 415 of the appeal book and if we might also hand up a copy of the relevant part in Ford which says exactly what your Honour has just said.

HAYNE J: That is not surprising because that is where I got it. I am not suggesting I had an original thought.

MS BATROUNEY: Ford, Principles of Company Law, Third Edition at paragraph [510]. I will just take your Honours to about point 3 on the page. At paragraph [510], the learned author says:

Strictly speaking, the proper course was to have stated the company’s objects and then to have said that for the achievement of those objects the company was to have the powers listed. It became usual, however, to list all powers in the objects clause as if they were objects. But courts were concerned to identify the real or main objects of the company and to isolate them from mere powers which were to be read as giving only powers ancillary to the main objects. This mode of construction developed in cases in which the court was asked to order the winding up of a company on the ground that it was not operating for the purpose for which it has been formed, a reason commonly expressed by saying that the company’s substratum had failed. Such cases could prompt a similar construction where the question related to the company’s capacity.

The next question that we need to address is the question of whether or not Word needed to, itself, do anything that was charitable. Our submission is that the advancement of religion by the provision of financial support to church and missionary charitable institutions is itself a charitable purpose. There are a number of cases that we rely on for that point, the first being Hester’s Case which is a decision of the Court of Appeal in New Zealand.

GUMMOW J: Is this in your written submissions?

MS BATROUNEY: It is, your Honour. It is at the very beginning at page 2 and the relevant extract that I was taking the Court to is at the bottom of page 2 there and for the report it is [2005] 2 NZLR 172 and if I could take you over to the reasons of Justice Hammond and at paragraph [9] he says:

The position in the United Kingdom, Canada, Australia and this country has, for many years now, been that gifts on trust for the support of active, and also retired, ministers of religion are charitable. And the privilege of charity was not confined solely to the direct support of the clergy – if the gift helps, even indirectly, to support the clergy that was enough.

He refers to Picarda, the - - -

KIRBY J: That cannot be expressed in that terms of generality or you will not explain the dry-cleaning case and other cases. I mean, it cannot just be indirect, can it, otherwise I mean it might come after a lot of time or after a lot of intermediate people have creamed off a little bit on the way?

MS BATROUNEY: Well, that is the question of application, of applying the profits to the purposes, but each time we come back to purposes, and if I might put some more - - -

KIRBY J: The trouble with that is though that the devil himself knoweth not the mind of man, and the purposes are best shown in most cases from the documents, and the documents if they do not have an obligatory purpose and object are then left to a degree of speculation and inquiry and investigation.

MS BATROUNEY: These submissions I am now making are based on the premise that we have established that our objects are solely to advance religion by the provision of financial support to religious and missionary organisations. If our objects can be construed to include some other object then we ought not to be entitled to the exemption. If that object is indeed a separate object there is not an object ancillary or an object that is pursued in fulfilling the charitable purposes.

So I am now meeting the argument that in order to ourselves be categorised as a charity we must ourselves do charitable work, and the allegation – the submission made against us is that Word did not perform any charitable activities. The submission we are making to rebut that allegation is that everything Word did was done for the charitable purpose, and it is a charitable purpose, to raise funds to apply them to support missionary organisations. Pemsel’s Case, as I said before, is a case in point.

Baptist Union (1945) 26 TC 335 is also a case. That is a 1944 decision of the High Court of Justice of Northern Ireland. Your Honour, the Baptist Union Case is a case that goes through a number of different activities or purposes and looks at whether or not they are in fact charitable purposes as the advancement of religion. If I could take you to page 348, you will see that Justice MacDermott goes through in fact almost all of the cases on advancement of religion by a provision of support to missionary and religious purposes.

I will not take you through all of them, but in those few short pages from 348 over to 350 Justice MacDermott reviews most of the authorities in relation to the support of missionaries. I am not going to read out three pages worth, but if I could just take you to the passage at 348 point 3, he looks at what are the purposes of the fund. I ought to say in introduction that Baptist Union was a case where moneys were paid into a fund and that fund paid annuities out to retired clergy, et cetera. So Justice MacDermott says:

First, then, as to the benefits payable to members of the Fund. They belong to a class consisting of those who, whether as pastors, missionaries, teachers of officer-bearers, all endeavour to advance the cause of the Christian religion in accordance with the basis of doctrine adopted by the Baptist Union. Had the purpose of the Fund been to supplement the stipend of such persons during their active ministry there could not, in my opinion, be any question as to its charitable nature. It would come within that part of the Statute of Charles which speaks of “the maintenance of any Minister and Preacher of the Word “of God”; and apart from this, the maintenance of ministers and teachers of religion as such, has, I think, always been regarded as charitable since the word acquired a legal meaning.

So, yes, it was. He then referred to the Statute of Charles, but I think it - - -

GUMMOW J: I think the critical passage in the reasoning may be at page 348 in the last paragraph after the reference to the Haberdashers’ Case:

it has, I think, to be borne in mind that the charitable purpose of a trust is often, and perhaps more often than not, to be found in the natural and probable consequences of the trust rather than its immediate expressed objects.

MS BATROUNEY: Yes, your Honour. I was going to take your Honours to that one. Indeed, in this Court in Stratton’s Case [1970] HCA 45; 125 CLR 138, which I understand your Honours have, if I could take you to page 145 at point 8 - - -

GUMMOW J: Is this in Justice Windeyer’s judgment?

MS BATROUNEY: Yes, it is, your Honour. Justice Windeyer said at page 145 point 8:

If the object to which the fund must be devoted is the continuing advancement of charity in the legal sense, it is a charitable institution.

We say in this case that the object to which the fund that Word has created is, indeed, the advancement of charity in the sense of the advancement of religion. Of course, I have referred your Honour to Pemsel’s Case. It is important to recognise that Word is not claiming to be a religious institution.

GUMMOW J: Some of these considerations really work their way out in the law through the setting of schemes, do they not?

MS BATROUNEY: Yes.

GUMMOW J: Suppose if you just left money to trustees to hold the trust fund and invest it for the purposes of the advancement of religion, it would be perfectly valid, but you have to have a scheme. So the scheme has to be brought in. Then these questions of incidental connection and so on really get played out. But I do not quite understand what the anxiety is that runs up and down the Bar table on this question really. Anyhow, go on.

KIRBY J: It may be that the anxiety is the one that Lord Denning observed in the Educational Grants Association Case. It is quoted by Justice Windeyer, “But when we come down to earth, we run into difficulties” for distinctions in practice becomes illogical. I mean, this is the basic problem here. There are so many individual instances and finding a path through them and finding the way through them by reference to principle as distinct from what was said in this case and what was said in that case, is quite a challenge, I think.

MS BATROUNEY: There is only one principle. The principle is, what is the object of the respondent? In order to determine whether that object is in fact a charitable object, there is a number of signposts that the cases provide. But the question in the end is a simple question of categorisation and that is the sort of question that the lower courts deal with every day.

KIRBY J: Yes, and this Court deals with every year or so supervising the lower courts to make sure they are dealing with it correctly. They do their job. We do our job.

MS BATROUNEY: And in this case we submit that the Tribunal did not get it right. The Tribunal made a fundamental error of law in its conclusion that because - - -

GUMMOW J: I was wondering about that. What is the critical passage in the Tribunal that has triggered all this? It starts at 348.

MS BATROUNEY: The fundamental error, we say, is at page 353 at line 34. The Tribunal said:

While it is accepted that management and staff of the funeral business were all committed Christians, the business was a commercial operation for the purpose of making a commercial profit. As such –

this is the error –

I do not accept that the applicant was itself a charitable institution while operating - - -

GUMMOW J: That assumes the dichotomy that I was trying to explore with your opponent this morning.

MS BATROUNEY: Yes, and it focuses, in error, on the activity rather than the purpose, that the error that the Administrative Appeals Tribunal made was that the conclusion that because Word engaged in a commercial activity its purpose could not be charitable.

KIRBY J: But the problem, you see, is that taxpayers looking after their own interests will propound their purpose, they will devise their own documentation to assert their purpose. This is a real bootstrap argument. You say the thing is foreclosed by the purpose, but courts do not always accept what people say is their purpose, that is why they look at the activity, to see whether the activity bears out the purpose and when you look here, the activity is the activity of a funeral home. So you cannot just say it is the purpose because the taxpayer will have self-interest in declaring, “My purpose is very pure. It is to promote conversion of the heathens”.

MS BATROUNEY: If that is the case, then the decision in Salvation Army is wrong because the purpose there was the purpose of farming but the point is that the purpose for which the farming was undertaken was to give the boys who were under the care of the Salvation Army an object.

KIRBY J: I am only saying that you have to test the asserted purpose by reference to the activity because that may bear out that, despite the protests and maybe despite the documents, it is not the purpose propounded but it is something else, it is another purpose.

MS BATROUNEY: Indeed, and that is what has happened in the
Cronulla-type cases, is that the purpose has taken on a life of its own and become another purpose.

HEYDON J: This error does not matter much, does it? Did not Mr Merkel this morning say that it does not matter whether the profits were derived from the difference between a low interest rate paid out and the high interest rate earned or whether the profits were earned from the funeral business. On his arguments, if his arguments are good, they are good for all purpose and if they are not good they are not good.

MS BATROUNEY: Yes, it must be the case and if our arguments are bad they must be had for all.

HEYDON J: No one is concerned to defend the Tribunal, in terms.

MS BATROUNEY: Except that the Tribunal made a finding, or I ought to say a conclusion, that the purpose for which the respondent was established was a charitable purpose for advancing religion. It just went on to make the error following that that the activity changed the purpose, or it was not even that. It was that because the activity was commercial it could not be charitable which we do not say is the case.

The next issue that I wish to talk about is the application of the funds. The Commissioner’s argument today is that because there is no legal direction given by Word to Wycliffe that Wycliffe must use its money in charitable or religious activities that we fall within the Pope v Lawlor argument so that our activities judged by reference to the donees of our fund, cannot be confined to religious purposes. I have called this our Helen Slater point. Our answer to that is, we submit, found in the case of Internal Revenue Commissioners v Helen Slater Charitable Trust [1982] 1 Ch 49. If I could take you to page 56 of the reasons of Lord Justice Oliver, his Honour says at about - - -

GUMMOW J: His Lordship. What was the point in this case?

MS BATROUNEY: The point was whether or not one charity was discharged its charitable functions by distributing money to another charity.

GUMMOW J: What were the two charities?

MS BATROUNEY: The first charitable company was “for the relief of suffering amongst the aged, impotent, or poor”. Then there was a foundation having almost identical objects to the trust that was established. Then I think as I recall the trust distributed to the foundation. The same argument was run against the trust that is run against us. At about point B on page 56 Lord Justice Oliver says:

The Crown’s proposition is a startling one; it involves this, that the trustees of a grant-making charity, although they may discharge themselves as a matter of law by making a grant to another properly constituted charity, are obliged if they wish to claim exemption under the subsections to inquire into the application of the funds given and to demonstrate to the revenue how those funds given have been dealt with by other trustees over whom they have no control and for whose actions they are not answerable. Anything more inconvenient would be difficult to imagine, and I find myself quite unable to accept that the legislature, in enacting these sections, can possibly have intended such a result. For my part, I entertain no doubt whatever that, as a general proposition, funds which are donated by charity “A,” pursuant to its trust deed or constitution, to charity “B” are fund which are “applied” by charity “A” for charitable purposes.

If I could take your Honours lastly to page 60 at point G, Lord Justice Oliver says:

Any charitable corporation which, acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said by the transfer itself, to have ‘applied’ such money for ‘charitable purposes,’ within the meaning of the two subsections –

When one stands back and thinks about the proposition that is made by the Commissioner it is a remarkable proposition that in order to be able to satisfy an exemption it is not sufficient that moneys are paid over to a charitable institution that he himself has endorsed under the charitable regime, but that one must somehow inquire further than that. The last point I wish to make in relation to the main case is a point about the legislation.

HAYNE J: Just before you pass from that last point, is the position that some directors of Word were also directors of Wycliffe?

MS BATROUNEY: It was that position.

HAYNE J: And that at least there would be a lively question about the degree of knowledge of Wycliffe of the purposes of any gift made to Wycliffe?

MS BATROUNEY: It would be. If it is necessary to go that far we would make that submission, but in our submission it is not.

HAYNE J: I just wondered whether the Commissioner’s argument was, in effect, that absent express limitation there could be no trust impressed on funds, which would be a rather large proposition, I would have thought but there were are. These are perhaps side issues.

MS BATROUNEY: Indeed, to the extent to which it is relevant, all the advertising material to do with the investment fund and to do with the funeral business represented that all the profits from both the investment operation and the funeral operation would in fact be applied to Christian missionary organisations. All that advertising material is in the appeal book if you wish to look at it.

KIRBY J: The overlap of directorships is to Wycliffe Australia, is it, as distinct from Wycliffe International?

MS BATROUNEY: Yes. Could I take you to the book of legislation the Commissioner handed up to you. At tab 8 is the endorsement legislation we are dealing with. Could I take you to page 427 of that extract at tab 8 and it is section 50-145 of the Income Tax Assessment Act 1997. Section 50-145 is headed “Telling Commissioner of loss of entitlement to endorsement”. Subsection (1) states that - - -

GUMMOW J: Where do we find this?

MS BATROUNEY: It is tab 8 at page 427. At about point 6 on the page, section 50-145, subsection (1) states:

Before, or as soon as practicable after, an entity that is endorsed as exempt from income tax ceases to be entitled to be endorsed, the entity must give the Commissioner written notice of the cessation.

GUMMOW J: What if it does not?

MS BATROUNEY: I beg your pardon, your Honour.

GUMMOW J: Is there are continuous – is a possible situation that recognition is given but given by the Commissioner on terms of continuous reporting of some sort by the taxpayer?

MS BATROUNEY: I am not aware of that, except that this obligation is a continuing obligation in a sense that if the respondent had given some money to stray cats or something like that it would immediately be under an obligation to notify the Commissioner that by giving money to stray cats, if indeed that is not a charitable purpose, or indeed if it was in breach of its own constituent documents, it would be under an obligation to notify the Commissioner of that fact and if it did not it would of course be subject to the provisions of the Taxation Administration Act dealing with not providing information - - -

GUMMOW J: What about 50-140?

MS BATROUNEY: I am sorry, maybe I misunderstood you, your Honour.

GUMMOW J: We are trying to get to the practical situation where the Commissioner gives the recognition but he is suspicious that something is going wrong and he wants to find out. Now, can he subject the entity that has been approved to a continuous reporting requirement? True enough, there is an obligation on them to tell him, but life does not quite work when things are going wrong.

MS BATROUNEY: As you point out, under section 50-140 the Commissioner can ask the entity to provide it information, but I misunderstood your Honour’s question.

GUMMOW J: If they do not, what happens?

MS BATROUNEY: There are offences in the Taxation Administration Act of refusing to comply with a requirement made by the Commissioner.

GUMMOW J: Yes, thank you.

HAYNE J: And revocation under 50-155(1)(b). If you request and you do not provide within the time specified, the Commissioner may revoke your endorsement.

MS BATROUNEY: The last matter that remains for me to address, subject to any queries from the Bench, is the question of whether or not Word had a physical presence in Australia. The only submissions that we wish to make in that regard is to say that what the respondent did, and that is to raise money and apply that money to the charitable purpose of advancing religion by providing money to charitable and missionary organisations, those activities were done in Australia. It is our submission that whether Wycliffe pursued its objectives in Australia or overseas is irrelevant. If the Court pleases, they are the submissions.

KIRBY J: It is said that that runs counter to the analysis of the legislation that has been introduced whose purpose is to recognise the practical reality that the Minister does not have the wherewithal to check on what is done once the charitable fund has moved offshore.

MS BATROUNEY: If indeed that was what the legislature intended. It would have been a very easy matter for it to have said so. So that it could have said that Word must pursue its activities and its objectives in Australia and indeed any entities to whom it distributes must also pursue their objectives in Australia. It could have said that. I think that point was made by the Full Court and it did not say that.

KIRBY J: Where is the relevant provision?

MS BATROUNEY: Of the requirement?

KIRBY J: The offshore provision.

MS BATROUNEY: It is in 50-50, in tab 8.

HAYNE J: In 50-50(a), page 417, is it not?

MS BATROUNEY: Yes, thank you, your Honour. Section 50-50(a), an entity covered - - -

KIRBY J: What is the full section?

MS BATROUNEY: Section 50-50(a), page 417, tab 8. It says:

An entity covered by item 1.1 or 1.2 is not exempt from income tax unless the entity:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia -

KIRBY J: What you pursue in Australia is your business activity. You are not pursuing your charitable activity, are you?

MS BATROUNEY: It is our submission that the business activity is a means to fulfil our sole charitable purpose, being the raising of funds for the provision to missionary societies.

KIRBY J: This would apply if this charitable purpose was the promotion of the Islamic religion in Saudi Arabia? I mean, we have all just assumed that this is just good old-fashioned biblical Christianity, but it has to apply neutrally.

MS BATROUNEY: Of course, your Honour. But the question is, what is the object, is it a charitable object, and is that object pursued in Australia?
If, indeed, the Muslim objectives were pursued in Australia, that would be sufficient.

KIRBY J: And running schools in Pakistan, Madrasa schools in Pakistan?

MS BATROUNEY: In each case it would be a question of characterisation as to what is the purpose of the organisation and where is that purpose being pursued.

KIRBY J: I just want to make sure that is what our Parliament has enacted.

MS BATROUNEY: It is, and if it wanted to restrict organisations from distributing to other charitable organisations, then it could have said so.

KIRBY J: Yes, it is a question of interpreting the words and understanding how they are meant to operate, not just in a friendly biblical Christian organisation but a whole range of – I mean, there are thousands of religions in this world.

MS BATROUNEY: Indeed. If the Court pleases, they are the submissions of the respondent.

GUMMOW J: Thank you. Yes, Mr Merkel.

MR MERKEL: If the Court pleases, my learned friend has relied on a number of cases, Pemsel, Helen Slater, Hester and the same with the Baptist Union. Each of them are cases where the trust is established for charitable purposes and the question of whether a commercial activity such as investment activities of the trust would somehow characterise the trust in some different ways being other than for charitable purposes was decided in favour of the retention of the charitable status and the best example is Helen Slater. Can I take your Honours briefly to the decision of Lord Justice Oliver. My learned friend read out the passage at page 56 about the startling proposition of the Crown, namely, that it would have to, in effect, assume a breach of trust. The reference to the startling proposition takes one back to page 55 just below paragraph C where his Lordship said:

It was not in dispute that the income and gains of the Trust were income and gains which were, under the Trust’s constitution, applicable for charitable purposes only; nor was it contested that the trusts of the Foundation are trusts for charitable purposes only.

The same with Pemsel. We say that the dichotomy in the present case between what Wycliffe does with its money and what Word does under its objects is absolutely critical. There is no restriction in Word’s objects to raise money or give money to charitable purposes only. My learned friend took your Honours to the passage of Justice Windeyer in Lawlor.

KIRBY J: There is a stream of authorities, is there not, and we have had it read to us and Justice Hayne raised the earlier case with you this morning, that says, given the purpose for which this scattergun approach arose in the statement of the objects of corporations that courts are not blind to the fact that they are meant to be a catch all, but that the real search is what the corporation actually does and therefore, that the search in this case is to what Word actually did in distributing its money to Wycliffe?

MR MERKEL: Except for this, your Honour. That is right, but much has been founded upon the objects clause in the memorandum of association. Objects 3(a)(i) and (ii) are the advancement of religion, but they are not the objects pursued. Nor were the funds raised under the business objects and powers dedicated to clauses 3(a)(i) and (ii), nor were they required to be dedicated to 3(a)(i) and (ii). They were able to be used for any of the objects which carry into effect – in this case in actuality – such purposes as the directors of Wycliffe determined.

In fact, that was the evidence at page 202. Your Honour Justice Hayne asked my learned friend about the coincidence of directors. At 202 is the witness statement of Mr Wilkerson. He is an accountant and a director of Word and he is also a director, in paragraph 7, of Wycliffe. He says at - - -

KIRBY J: This is Wycliffe United Kingdom or Wycliffe Australia?

MR MERKEL: Wycliffe Australia, your Honour. He says at 202 in his witness statement at lines 44 through to 50 about the two payments for Bible translation and what he says is they paid those sums – this is at about line 47 – “leaving the choice of applying those funds” – the other distributions – “to the discretion of Wycliffe”. The same thing in evidence at page 326. The same answer is given at 326 at line 44 by Mr Wilkerson:

The money that is donated to Wycliffe and other organisations, it is up to Wycliffe and those organisations to determine how best to use that money?---Yes.

The Commissioner is not suggesting that this is a tax avoidance scheme, but what the Commissioner is putting very forcefully is that this is not a trust case of the kind that my learned friend has taken your Honours to in Pemsel and in Slater. It is not possible to be a trust case and indeed item 1.5B is set up to deal with the kind of case my learned friend is postulating before the Court, which requires that in 50-60 the moneys be applied for the purposes for which the trust fund was established. We say that at the passage relied upon by my learned friend in Stratton from Justice Windeyer at page 145 his Honour makes the point at point 8:

Whether or not it would be a charitable institution would, of course, depend upon the trusts on which it was held. Funds raised for the relief of distress caused by bushfires or other disasters are well known. If the object to which the fund must be devoted is the continuing advance of charity in the legal sense, it is a charitable institution.

“Must be devoted”, and the passage that I have taken to your Honours to of Justice Gibbs about the ancillary and non-ancillary objects, that finds its birthright in part in a long line of case law that has treated the capacity of a charitable institution or charity to use money for a non-charitable purpose. There is nothing derogatory about that comment. As was clear in Lawlor, there are many lines between what are the advancement of religion and what may be conducive to the good of religion or even beyond those boundaries. So it is not a matter of bad faith of the directors of Wycliffe to spend money given to them for something that may not be advancement of the religion, which is the charitable purpose.

So we say that this is not a case where your Honours are considering the status of Wycliffe. Your Honours are considering the status of a body set up to conduct enterprise for the purpose of giving to Wycliffe and such other bodies as they determine like Wycliffe to be used by them as they see fit. The charity cases have held that such gifts as that will fail unless the rule of construction will save them, and those cases have been relied upon and referred to in Harpur’s Will Trusts, for example, like Stratton’s Case, to say that if there is a non-ancillary, non-charitable purpose then it will lose its designation as a charitable institution and - - -

HEYDON J: Could I just – sorry, I just wanted to go back to page 202 where you pointed to the evidence of Mr Wilkerson. You are using it to support the proposition that Wycliffe had, as it were, a discretion to use the money for non-charitable purposes if it wanted to. Is that really what he is saying? He is saying:

WIL determined that WIL should ensure the translation of certain Christian Scriptures. To ensure this, WIL requested Wycliffe to carry out translation –

paid the money –

leaving the choice of applying those funds to the discretion of Wycliffe -

that is to say, the choice of which translators, when, what volume, in other words, within the overall purpose, not some non-charitable purpose. Surely, if Wycliffe had come back and said, “We did not spend it on translating scriptures, we spent it on cakes and ale”, they would be open to severe criticism from WIL, would they not?

CRENNAN J: Disendorsement, revocation.

HEYDON J: And disendorsement by your client.

MR MERKEL: Your Honour, we had construed it in conjunction with what was said at 326 - - -

HEYDON J: Yes, well, the trouble is they sort of rise and fall together. I would read 326 in the light of 202 in a narrow sense, as it were.

MR MERKEL: But I think the money – I think that examination, cross-examination, at that stage, your Honour, is a more general one. It goes to what its activities are and then it says:

The money that is donated to Wycliffe and other organisations –

this is all of the distributions –

it is up to Wycliffe and those other organisations to determine how best to use that money.

We had construed the passage about the bible translation as being the only – and the evidence would suggest this is correct – exception where in fact it was not an exception truly so-called because it was actually a bible translation on behalf of Word, so it was the one activity that Word had engaged in that might fall, or would fall, on its face, within 3(a)(i), but that only stands in contrast to the rest of its business activities since the 1970s which have never engaged 3(a)(i) at all.

So we would say that to talk in terms of a trust in those circumstances – and I do emphasise, it is not even a matter of Wycliffe losing its endorsement. Wycliffe no doubt has power to engage in activities that may be conducive to the good of religion without losing its charitable status. The question is not Wycliffe’s charitable status, but it is Word’s charitable status, by giving grants that do not tie the use of the money in the way 1.5B would require that it be used for the charitable purpose, which is the advancement of religion in the technical sense.

HEYDON J: I just have an uneasy feeling that there is an issue here which has not been explored at trial with microscopic precision, and that if we penetrate it in behind Mr Wilkerson’s statement it might well support my point of view, it might support your point of view, but it has not really been closely examined.

MR MERKEL: Except for this, your Honour, that under the burden in the Act, it is for Word to put its case as to why, if my learned friend’s reliance on commercial activities of trust funds is to be transferred across to a corporate entity which has no trust, that the monies are necessarily designated for the advancement of religion in the narrow sense and silence on that cannot fill that vacuum. That is why this case does have far-reaching ramifications because all of the cases that we have relied upon in our written submissions in the propositions I handed up to your Honours this morning at paragraph 7(d) are in the most part stronger and clearer cases than the present.

For example, Christian Enterprises as we have discussed this morning limits the application of the funds to the advancement of religion. Glebe Administration Board necessarily meant the money went to the church, but in MK Hunt Foundation you did have a trust, but again it was not a use of funds that required them to be applied for charitable purposes. Justice Else-Mitchell in McGarvie Smith drew the distinction between funds that would be applied for charitable purposes and funds for a person. These are funds for a person, not a corporator or the profit of that individual.

So we say that for my learned friend to do as she has – and Dame du Bon Pasteur, the difference between the majority and the minority, and this was on a charitable institution which is subparagraph G fell on the ancillary point, the laundry was ancillary to that body’s charitable activities. That was what divided the majority and the minority in that case. But here we have no activities of that kind. What my learned friend says it is designation or destination of the fund that gives Word its charitable activity.

KIRBY J: She says the test is not activity. The test is purpose. What is your answer to that proposition?

MR MERKEL: Your Honour, the test is to look at the main purpose of the organisation by reference to its objects, the purposes for which it is formed and the activities which it carries out. That is the test in the Royal Surgeons Case but I was going to take your Honour to what was said by Justice Rich because it is this strain that gets picked up in Stratton because what the Royal Surgeons Case did not do is deal with the problem that arrises in the present case where you have a plainly non-charitable secular activity being the conduct of the business for profit in a normal commercial sense as another purpose. What Justice Rich said at 68 CLR page 447 was:

I have come to the conclusion that the main or real object of the College is the promotion and advancement of surgery. By this I mean that its essential purpose is to enlarge and extend the boundaries or area of the science of surgery. Its other objects are not collateral or independent but merely concomitant and incidental to the main object.

Now, all the ancillary cases, even in the Dame du Bon Pasteur Case are where the activity itself was a runoff of the charitable activity, eg, the Salvation Army Case. In the Deaf and Dumb Society Case they lost the exemption claim because their activities became a commercial object in themselves. They were not the growing of flowers as a training exercise, but the growing of flowers as a business so that they were not able to say they fell under the designation of exclusively charitable purposes.

We say that the second leg of the inquiry in the present case is there is plainly an activity, the purpose of which is profit, the purpose of the profit is to give the money to Wycliffe and similar organisations to be used at their discretion. So we say that there is intermediate purpose, namely, business for the purpose of profit and the cases at paragraphs 7(a) and (b) of our legal propositions would all suggest that is a purpose that is not an ancillary purpose and, for the reasons I had identified this morning in our submissions, it is a purpose in itself to make that profit. Whether it goes to a charitable purpose requires another few steps to be made. We say even the retention of profit power takes it one step further away from charitable purpose.

GUMMOW J: Can you just look at paragraph 50-60 on page 419 of the statute which you took us to a few minutes ago:

A fund covered by item 1.5A or 1.5B is not exempt from income tax unless –

Now, in respect of funds that provision which seems to me to operate independently of the disendorsement provisions. Do you see what I mean?

MR MERKEL: Yes, your Honour.

GUMMOW J: Is there in relation to institutions a comparable provision to 50-60 as to not exempt income and, if not, what is the significance of the difference?

MR MERKEL: No, the way it works, your Honour, at page 413 one has at 1.1 a “charitable institution” that takes you to “50-50” and then 1.5B a “fund established in Australia for public charitable purposes”. So that when you go to 50-50 there is no requirement that it - - -

GUMMOW J: Does the presence of 50-50 which is linked to funds throw any light on the construction of “charitable institution” and what the charitable institution does?

MR MERKEL: We say it does. It shows a legislative intent that the charitable objectives that give you your characterisation are those objectives which fall within the technical definition of charity when engaged in by you because otherwise you would have an anomalous operation, 50-60 and 50-50 would fall out of kilter and that is why we made the point that it is in the narrow term that a charitable institution must itself engage in charitable activities, not merely engage in non-charitable activities for the purpose of designating income to charities.

We say that it is a very fundamental distinction and it is interesting that my learned friend to uphold the decision of the Full Court has had to go only to trust cases, trust fund cases, because each time this matter has come before the court where a body has independently conducted a commercial activity the court has found it does not get the required exemption. The point, your Honour Justice Hayne raised with my learned friend, of course the income tax exemption presupposes income, but the income that is presupposed, with respect - - -

GUMMOW J: The question is whether it is exempt.

MR MERKEL: Income that could be exempt. The income that we would say is anticipated, if you took a body like World Vision that had $50 million of donations for one of these emergencies, no one is expecting and, indeed, it would be a breach of trust if they did not invest the money and earned interest on their funds. That plainly is incidental and ancillary. But if World Vision then went out and used this money to go into a margin lending scheme for share trading and said, “Look, we have $50 million, we will take another $50 million on loan from the ANZ Bank and we will now go share trading”, the fact that those funds were designated for World Vision’s activities which are charitable would not, on any of the authorities that have been put before your Honours, result in it being characterised in that context as a charitable institution.

KIRBY J: Yes, but there is no suggestion in this case, is there, of some activity by Word or Wycliffe that is alien to the purpose that has been identified?

MR MERKEL: Yes, but, your Honour, that is the point. The purpose that has been identified is the advancement of religion. The housing development, the borrowing and re-lending of funds and the funeral businesses are not the advancement of religion. They are all alien activities in the context which your Honour has put to me.

KIRBY J: Your point is the one I put to Ms Batrouney about the Law Reporting Case that it is suffused with the charitable purpose, whereas here the funeral home, the housing purposes and the borrowing and investment are alien to the charitable purpose.

MR MERKEL: Yes. The Law Reporting Case is one of the strongest cases that we can put forward.

KIRBY J: One of the strongest cases lawyers can put forward.

MR MERKEL: Well, lawyers can put forward. But is the same as the Salvation Army example, your Honour, it is on all fours. Of course they sold. Or the vaccine case. Of course they would sell the farm produce, but the purpose of getting the produce was the training of the boys which gave them the charitable designation of being a religious institution.

My learned friend threw up activities that are political or illegal or immoral. One can say they have maybe some emotive context, but in principle whether it is a political activity or not or whether it is regarded as moral or immoral, is not really the relevant question here. The question is the purpose of the conduct of the business, which is profit. It can be any business. When one goes to the Word’s documents, one sees Word considered going into offering financial products and services, a range of commercial activities. It has never been put that it was either within the objects, within the purpose of the founding members or in any of the activities for Word to engage in anything that is charitable in the sense of it advancing religion.

KIRBY J: That is not quite right to say that it has never been put, because it was put to us that it is all – if I can use the word again – suffused by the overall objective of Word, which was to stream the money to Wycliffe for the purpose of Bible translation. That is its purpose. It is not only its purpose, but its activity, because that is all that they ever have done.

MR MERKEL: But, your Honour, that is looking at the destination of its funds as if you are not concerned with the anterior purpose. The anterior purpose is to establish a business for profit and that, in all these cases, has been treated as a secular non-charitable activity and save in the trust cases where you can say that the profit must be applied for charitable purposes – that is in this context advancement of religion – that is Justice Windeyer, it is Helen Slater, it is Pemsel itself – save in those cases an independent commercial operation has never been accepted as being capable of being a charitable institution merely because the destination of the funds is to be to a charitable institution.

We say that it is not possible to look at the facts of the present case and stamp the destination of the funds with any charitable trust. Nor would we say if Wycliffe was engaging in activities that were conducive to religion, but not religious in themselves, that is not a breach of trust or a breach of its powers because the cases accept there may be all sorts of activities it may engage in, but without losing its own charitable organisation. So this is not a case where we are having to look at it engaging in some breach of its own constitution. We do not even have that constitution, but there is no reason to regard Wycliffe’s activities or constitution as any more limiting in its objects than any normal constitution of companies.

So we say that it is that last step that my learned friend slides over that is a fatal flaw in the case that is being put here and it is that fatal step of not giving a direct and immediate relationship between the conduct of the business and the advancement of religion.

There are too many intermediate steps which the cases have not accepted as resulting in an organisation that conducts a business, albeit it for the benefit of another charity to be able to be called a charitable institution. My learned friend has put nothing forward to meet the Justice Walsh point about the absence of a public object or a public purpose or a public policy that is pursued to give an institution a distinguishing characteristic from a company, because the mere destination of the funds was not accepted in Christian Enterprises as sufficient to create that body as an institution.

So we say, with the greatest respect, my learned friend has not put forward cases that should persuade your Honour that this kind of approach of interpreting the Constitution and the relevant events in this case as somehow prima facie requiring a charitable purpose, we say that is not a proper extension of the law in this area and we say that the error of the Administrative Appeals Tribunal was to not focus on this purpose of essentially being a body to raise funds by commercial activities and that is a commercial purpose which is non-charitable and it is not ancillary or incidental to anything that Wycliffe does. It is an end in itself. We say that for those reasons the appeal should be allowed.

KIRBY J: Can I ask two questions? First of all, you have not in your reply sought to answer the point about offshore. Do you want to say anything at all about what was put to us on that by reference to the terms of the Act, the actual language of the statute which we have to apply?

GUMMOW J: What is the force of the phrase “to that extent” for example, in paragraph (a) of 50-50? No one has told us anything about that.

HAYNE J: What does it govern?

MR MERKEL: I think, your Honour, there were three preconditions there. The entity, that is, the entity seeking endorsement as a charitable institution must have a physical presence in Australia. To that extent, the extent it has its physical presence, it must incur its expenditure in Australia and pursue its objectives principally in Australia. I think, your Honour, if an entity does not have a physical presence in Australia it falls outside that particular regime.

KIRBY J: I suppose a question arises, what “pursue” means, pursue its objectives. You see, if pursue – it is enough that you actually give the money and though the money goes offshore you are pursuing your Australian objectives of converting the heathen by giving the money in Australia to offshore, and I think that is what it suggested conforms to the requirement statute. What is wrong with that reading?

MR MERKEL: Your Honour, there is nothing wrong with that reading, but the problem with that reading is that it exposes the point that merely giving money to another body is said to be itself, because that body is a charity, to be a charitable objective that entitles you to be designated as a charitable institution. What we are saying here is the real reason and the only reason Word can fall under the rubric of this statutory scheme is because of Wycliffe’s pursuit of its charitable objectives, not anything pursued as a charitable objective in itself by Word. What is created by our learned friend’s construction is a disconformity between the objectives of Wycliffe which are said to be charitable, that are relied upon by Word to give it its characterisation, and then when it comes to pursuing its objectives in Australia, it no longer relies on the objectives that gave it its characterisation as charitable, but merely says giving money to a charitable body is itself a charitable objective. But that lies at the heart and is a central point to the whole of the appeal before your Honours.

GUMMOW J: This expression “principally” in 50-50, paragraph (a) is found again in 50-60 that you took us to, paragraph (a).

MR MERKEL: It does, your Honour. One finds different designations. In (a) it is pursuit – these are alternatives. If it falls in (a) it has to be solely in Australia. If it falls in (c) it has to incur expenditure principally in Australia and pursue its charitable objectives solely and if it is falls under (d) then one gets into a different categorisation.

The different categories themselves relate to the complexity of the different funds that are sought to be captured under this new statutory scheme which is both operating in the past and the future.

KIRBY J: I said I had two questions. The other is this. If either you or Mrs Batrouney find any academic writing on this subject, if there are any Law Review articles that have considered this and looked at it from a conceptual point of view rather than a wilderness of single cases, none of which in Lord Denning’s view, on one view of it, come down to earth and look at it conceptually, then I would be grateful if they could be referred to the Court.

GUMMOW J: We already have Professor O’Connell’s article, do we not, (2008) 37 Australian Tax Review 17. Is there anything else that we know of?

MR MERKEL: If we can each put any articles before your Honours in the next seven days.

KIRBY J: Even in the professional books on this subject there is a discussion of what is the policy on principle that is behind what the courts have been struggling in so many cases to draw what has been rightly said “the line”. The line is not entirely bright in my mind at this stage, but if there is anything that helps make it brighter, that would be helpful to me to read.

MR MERKEL: If we can each do that within seven days, your Honour.

MS BATROUNEY: If the Court pleases, I might assist - - -

GUMMOW J: No, just sit down for a minute. You will both do that within seven days?

MR MERKEL: Yes, your Honour.

MS BATROUNEY: Yes, your Honour

GUMMOW J: Yes, thank you, Ms Batrouney.

MR MERKEL: The last matter is we did have a look over the luncheon adjournment at the Canadian Supreme Court case - Dame du Bon Pasteur has been cited. It was cited in two lower courts but not in relevantly similar circumstances. It was distinguished, so unless we find anything that is more relevant if we could inform the Court of that within seven days as well. If the Court pleases.

GUMMOW J: Thank you, Mr Merkel. Ms Batrouney, I want to ask you a question about 50-60 and the absence of a comparable provision to 50-60 when dealing with charitable institutions and what is the rationale for that?

MS BATROUNEY: If I could take you to the explanatory memorandum which deals with the in Australia point, it is at tab 14 of the - - -

GUMMOW J: I am not worried about the in Australia point at the moment. Just take a minute and look at 50-60. It is talking about funds and it says that in certain circumstances the exemption is lost. That is a provision which is independent from disendorsement. Is that right?

MS BATROUNEY: Yes, it is.

GUMMOW J: There does not seem to be a comparable provision for this sort of case, which is not 1.5 but is 1.1, namely, a charitable institution. My worry is that there must be perhaps some reason for the legislation having been drafted in that way and is the reason found and some meaning to be given to 1.1 “charitable institution” which is implicit in it and did not require spelling out for 1.1 as was done for funds in section 50-60? Do you see what I mean?

MS BATROUNEY: Yes, your Honour. It is our submission that there is no implication. If the legislature wished to specify any further conditions under the heading of “Special conditions” it would have done so, as it has in fact done so under 50-60. So it would have expressed special conditions rather than to have left them to be implied.

GUMMOW J: Does it not throw some colour on the phrase “charitable institution” as to what it is doing?

MS BATROUNEY: In my submission, no, your Honour.

HEYDON J: You say this, do you not? If one looks at 50-5 we have four institutions mentioned in 1.1 to 1.4, then in 1.5 we have a fund, in 1.5A a trust, .5B a fund, society and so on. Section 50-50 deals with 1.1 and 1.2. Section 50-52 deals with 1.1 but also three other paragraphs or items. Section 50-55 sets up special conditions with some other items and so on until we get 50-60 when we get down to 1.5A and 1.5B. There seems to be a structural similarity between 50-60 and 50-50, an entity is not exempt and then a fund is not exempt. Now, in 50-60 there is a necessity that it be “applied for the purposes for which it was established”. That is missing from 50-50. The question is, is there any significance in that?

MS BATROUNEY: I think we dealt with that in our written submissions by saying that there is no – the Commissioner was trying to submit that to the extent to which the funds were not applied towards a charitable purpose, so, for example, if they were put into a reserve to apply for new equipment or what not, that it would not be an application of the funds to charitable purposes. It is for the same reasons that I said to his Honour the Presiding Justice, if it was a requirement that the entirety of a charitable institution’s funds must be applied in the year of income in question to the charitable purposes, then it would have specifically said so, as it has specifically said so in relation to charitable funds, but in any event we say - - -

GUMMOW J: But what would be the rationale? You cannot just answer it by saying they would have said it? You can say it, but it is not very attractive.

MS BATROUNEY: The rationale, as I understand it, is that in relation to charitable funds they do not want charitable funds simply accumulating for years and years and years. They actually want charitable funds to apply the funds for the purposes to which the funds were established. So it is a question of – and no doubt I will be back here before your Honour on another day arguing the point about what is and what is not a sufficient application of funds. We refer to in our written submissions the trustees and executors’ case where it was stated that the accumulation of funds is sometimes an appropriate application of the funds.

GUMMOW J: Yes, I understand that.

MS BATROUNEY: If your Honour pleases, I wanted to take you to the principally in Australia point because it is dealt with in the explanatory memorandum.

GUMMOW J: Yes. We will have to hear what Mr Merkel then says.

MS BATROUNEY: I apologise for not taking it to you.

GUMMOW J: All right. Go on.

MS BATROUNEY: At tab 14 of the Commissioner’s bundle of legislation you will see at page 47 there is the heading there “Meaning of “in Australia””. Clause 5.28 states that:

5.28 The Bill provides that for an organisation to remain exempt it must generally have a ‘physical presence’ in Australia or in some cases be ‘located’ in Australia. These terms are not defined in the legislation and therefore take their ordinary or everyday meaning.

5.29 In the case of ‘physical presence’ a broad interpretation is to be adopted - - -

GUMMOW J: Yes, we can read it.

MS BATROUNEY: Yes, I am sorry. Then it goes on to say that “located” is a more narrower expression, whereas a mere physical presence would be sufficient.

If I could have the indulgence of the Court to make one further point. My learned friend said that the purpose of carrying on of funerals is alien to the purpose of Word, could I take you to the purpose statement that was unchallenged evidence before the Tribunal at page 211 of the appeal book where it is stated that:

The Purpose of Bethel Funerals is to help extend the Kingdom of God, Through the Unique Service and Ministries of Genuine Caring for People in their hour of grief, and the provision of financial support for Christian Ministries which the Board of Directors are committed to encourage and support.

It is page 211 of the appeal book at about point 3. So, in our submission, it simply cannot be said that the purpose of funerals is alien to the purpose of Word. In contrast, it is in fact a means by which the evangelising purpose of Word was undertaken. If the Court pleases.

GUMMOW J: Mr Merkel, anything you want to say? You are entitled to the last word.

MR MERKEL: Thank you, your Honour. My learned friend took your Honours to the philosophy statement, but at page 213 of the philosophy statement, which is only one piece of evidence, under the heading of “Pricing” and “Financial” the commercial nature of what is done overrides any religious intent. It is:

to capture a section of the current market, especially amongst the Christian community.

And then “Financial”:

That the business will be run as a professional funeral business and may expand into any allied aspects of the funeral business, such as coffin manufacturing, cemetery management or ownership, chapel ownership etc.

In the document we handed up to your Honours – sorry, your Honours, I thought a document had been handed up to your Honours which sets out a summary of the evidence. At this stage I will not do that, I thought it had been handed up to your Honour. Can I just say there is a lot of evidence, but, more importantly, the AAT made a finding that the funeral business was a commercial operation and there was more than ample evidence for that finding to be made and there is no suggestion by the AAT and nor has any court since said that there was any religious advancement aspect of the funeral business. So we say it is not a point that is reasonably open, but there is a lot of evidence on those points, if your Honours please.

KIRBY J: Is the document that you thought had been handed up simply an index to help us find our way through the appeal book?

MR MERKEL: The document, your Honours, I thought had been handed up was a document that says evidence that supports each of the – it is a reference to the evidence.

CRENNAN J: Does Ms Batrouney have it?

MR MERKEL: I thought it had been handed around to everybody.

KIRBY J: Well, just speaking for myself, if it is a mere index to evidence, I would find it useful, but maybe if it is shown to your opponent - - -

MR MERKEL: Could I ask your Honours, if I could hand it up to your Honours and my learned friend can put - - -

GUMMOW J: No, you can hand it up within seven days having first shown it to your opponent and any references she wishes to add could be added to a composite to be provided within seven days.

MR MERKEL: Yes, thank you, your Honour.

GUMMOW J: The parties have seven days within which to provide any further academic writings or materials, and we will consider our decision in this matter.

MR MERKEL: If the Court pleases.

GUMMOW J: We will adjourn until 9.15 am to do a pronouncement of orders and certain special leave applications.

AT 3.49 PM THE MATTER WAS ADJOURNED