The Commissioner of Taxation of the Commonwealth of Australia v. Graham Bargwanna & Melinda Bargwanna as trustee of the Kalos Metron Charitable Trust [2011] HCATrans 211 (12 August 2011)

Last Updated: 15 August 2011

[2011] HCATrans 211

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S104 of 2011

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

GRAHAM BARGWANNA & MELINDA BARGWANNA AS TRUSTEE OF THE KALOS METRON CHARITABLE TRUST

Respondent

Application for special leave to appeal

FRENCH CJ
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 AUGUST 2011, AT 10.02 AM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC: May it please the Court, I appear with my learned friend, MS E.A. COLLINS, SC, for the applicant. (instructed by Maddocks Lawyers)

MR D.B. McGOVERN, SC: May it please the Court, I appear with my learned friend, MR J. HOROWITZ, for the respondent. (instructed by Charles Hockey Solicitor)

FRENCH CJ: Yes, Mr Bennett, it looks like a very short point really.

MR BENNETT: It is, your Honour. Your Honour, the relevant section is section 50-60 of the Income Tax Assessment Act, which deals with public charitable trusts, and it is at page 84 of the application book at line 35. The relevant words are very short:

A fund covered by item . . . 1.5B is not exempt from income tax unless the fund is applied for the purposes for which it was established –

FRENCH CJ: Now, the deviant application in this case is the placing of some of the funds in an offset account?

MR BENNETT: It is two things, your Honour, that and placing a substantial part of the funds in both cases and placing it in the accountant’s trust account, from which interest was used to pay to the accountant, who was the father of the trustees.

FRENCH CJ: Yes, but that was a general practice for all his clients?

MR BENNETT: Yes it was, your Honour, it was. The error, your Honour, the primary error, appears at page 114 of the application book.

CRENNAN J: Paragraph 72?

MR BENNETT: Precisely, your Honour, and indeed line 4:

It seems unlikely that the purpose of s 50-60 is to deny a fund its exempt status merely because a trustee is inept or makes a mistake.

We accept that –

Of course, a deliberate misapplication may justify adverse inferences as to the transaction in question and other transactions.

We accept that. Then they commit the error, with respect –

In this context, though, “deliberate” means “intending to breach the trust”.

That is the error. We submit “deliberate” in this context would mean that the action is consciously taken, but not that it is intended to breach the trust. If that proposition stands and one had a public charitable trust devoted to the relief of poverty and the trustee who had never studied equity or trusts said, “Well, I am pretty poor, I will pay it all to myself and I think that is all right,” that would not be – take it out of the section that the funds are applied for the purpose, and with respect, that cannot be right. The importance of that sentence appears lower down in the paragraph at line 49 where their Honours say:

As we understand it, his Honour found non-compliance with s 50-60 upon the basis of the interest set-off question and the trust account question, treating the Trustees’ explanations as being irrelevant, and without regard to the administration of the Fund as a whole. That approach was erroneous.

Now, what his Honour in fact did appears at pages 72 to 73 of the application book, and your Honours will see that what his Honour says is, at the very bottom of page 72:

The text of s 50-60 is quite clear. It requires that ‘the fund is applied for the purposes for which it was established’. Subject to what is said at [31] below, the intention of the trustees of a fund, where the purpose for which an application of the whole or part of the fund is in question, is not relevant –

Now, if one goes to paragraph 31 below what his Honour says, we would submit, with respect, totally correctly is:

Where the purpose of an application of moneys of a fund is in question, the intention of the trustees or manager/administrator in applying the moneys may be relevant where there is an incidental or inadvertent misapplication of part of those moneys –

so if one pays it into a bank account of an intended charitable recipient and gets the number wrong and it goes to the wrong place that is classic inadvertent or misapplication –

but that is not this case. The assailed applications in this case were intentional applications –

et cetera.

FRENCH CJ: That fits into a larger question, does it not, as to whether the test is one of a sort of characterisation, based on substantial application?

MR BENNETT: Yes. Your Honour, that is the second and secondary issue which arises. The primary issue is when one talks about deliberate does one mean, as the Full Court said, intending to breach the trust? Or does one mean that one simply understands and intends the particular transaction which occurred, which is what we say? The secondary question concerns the proportion of the trust that has to be involved. If your Honours go back to the section at page 84 your Honours will see it merely says:

the fund is applied for the purposes for which it was established –

There were conflicting expressio uniuses – if I can so pluralise the Latin – in the next paragraph. We would say one contrasts “applied” with the reference in the next paragraph to incurring expenditure “principally in Australia”. My learned friend would no doubt take the comparison with the word “solely” in relation to “solely in Australia”, so depending on which one contrasts it with one may get a different meaning.

We say the meaning is somewhere between those. We would submit it means that it must be wholly applied for the relevant purposes, subject to a de minimis exception and subject, of course, to the question of the expenses of the trust. They do not have to be applied for the ultimate purposes, they can be applied indirectly for the purposes, but in this case, of course, neither occurred and the amounts were quite substantial.

FRENCH CJ: Can I ask you how your grounds of appeal at 129 and 130 throw up the invention question?

CRENNAN J: You state your special leave question 1 in terms of intention, but the draft notice of appeal seems to be raising the issue about part versus whole and whether the part must be substantial.

MR BENNETT: Yes. Well, your Honour, paragraph 4 of the notice of appeal raises the intention question, which is the primary question, although it is the last ground. The substantial question, the secondary question about substantial, is raised by three. If one goes to the statement at the beginning of our summary of argument on page 132 the special leave question is put in a composite form, which combines both questions.

CRENNAN J: That is complained about, of course.

MR BENNETT: Yes. Well, my learned friend’s answer really begs the question as to what is intentional. If one means intention to breach the trust he is one hundred per cent right. We say that that is not what it means and therefore that just is not the question. We say the question is was the transaction deliberate in the sense that it was intended to be what it was and whether there was an intention to breach the trust or not is not a necessary element of the Commissioner’s case. Your Honours, the case - - -

CRENNAN J: Was there any argument originally that it was inadvertent or accidental or anything of that sort?

MR BENNETT: No, your Honour.

CRENNAN J: I thought not.

MR BENNETT: No there was not, your Honour, and his Honour specifically says that, the trial judge, at paragraph 31 on page 73. He says:

Where the purpose of an application of moneys of a fund is in question, the intention of the trustees or manager/administrator in applying the moneys may be relevant where there is an –

CRENNAN J: You did take us to that.

MR BENNETT: Yes, but that was not in issue.

CRENNAN J: That is what I was asking about, whether it was in issue or not?

MR BENNETT: No, your Honour, and one can see from the facts, what was done was done deliberately, but it was not thought to be a breach of trust. So the case - - -

CRENNAN J: Then all the forensic weight went into saying why it was done, and it had been remedied in terms of the offset interest account.

MR BENNETT: Yes, in the offset interest account, although it may not have been remedied in relation to the interest on the interest, but I do not want take your Honour to that.

CRENNAN J: Yes, I understand.

MR BENNETT: It will not be necessary to go into the facts in great detail in the hearing of the appeal. The primary question is a very short one and, we submit, a very clear one. The secondary question is a little diffuser, but

still can be argued very shortly. We would have thought between half a day and a day, and we submit that special leave should be granted.

FRENCH CJ: Yes, thank you. Yes, Mr McGovern.

MR McGOVERN: Your Honours, in our submission, the first broad point we wish to make is that the AAT, as the primary finder of fact, did not, in fact, make any finding that there was a misapplication of trust funds, and, accordingly, if that point is correct then the special leave question posed by our learned friends does not arise on the facts of the case. The second proposition we wish to advance is that the Full Court applied the correct test, and applying the correct test devolves the case into being essentially a factual question, and as the Full Court recognised that involves taking into account a number of factors, one of which may well be the intention of the trustees.

Your Honours, we would submit that it is a misnomer to describe these transactions in any pejorative terms, having regard to the findings that were made by the tribunal. The statutory question requires a consideration of – and I should say parenthetically accepting that the Commissioner’s test, as proposed for tax exemption, is that every dollar of the trust must be applied for charitable purposes. The question that arises, in relation to the interest offset account, is for what purpose was the $210,000 deposited into the account?

Just to backtrack shortly, your Honours would appreciate that the trustees devised a way by which the trust would be able to earn more interest that would otherwise have been available than on a standard deposit. The trustees had a mortgage for $210,000 with the National Australia Bank, and that was an interest offset linked mortgage, and they arranged for the deposit of the $210,000 into that account so that instead of paying the mortgage to the bank they would pay the mortgage interest to the trust. So then if one applies or asks the question, what was the purpose, the Commissioner would say that it was to enable the trustees to avoid paying interest on the mortgage.

We would respectfully submit that that is wrong for the reason that the tribunal found that the $210,000 was deposited into the interest offset account for the purpose of benefiting the trust fund by allowing the trust to earn greater interest than would otherwise have been obtained. So that it was really a question of our learned friends looking at the matter in isolation, looking at the means, rather than looking at the end, and the relevant end is to ask the question whether or not the fund is applied for charitable purposes or for the purposes for which it was established.

The same test can also be applied in relation to looking at the trust account. The second transaction that the Commissioner complains about is the deposit of the moneys into the accountant’s trust account. That was a trust account which administered the trust at the direction of the trustees, and essentially that was done in three ways. Firstly, investing the moneys that were in the trust account into shares and term deposits and loans and thereby generating interest income for the trust, and in so doing the accountant provided financial advice to the trustees as to how the moneys or the funds were to be invested.

Secondly, he made distributions of trust moneys from the trust account to various charitable objects, and we have set out in our written submissions a number of the details of those distributions, including about $300,000 to the organisation that was charged with the care or assistance to Bangladesh orphans. Also, the third thing was that he used the trust account records as a basis for preparing accounting records for the trust, such as annual financial statements. So, just at that point the Commissioner would raise, we understand it, no complaint about the transaction.

In fact, as Justice Crennan observed, the accountant did provide similar services to other clients, and administering the clients’ funds through the trust account there was a standard arrangement, pursuant to which they agreed to forego interest on the funds in the account, and any interest was then credited to the practice account as a means of – as the tribunal found – defraying the accountant’s costs of maintaining the trust account and its related accounting requirements. So that in this arrangement, this is basically the arrangement the Commissioner complains about, and in answer to the question, “For what purpose were the trust moneys deposited into the accountant’s trust account?” the Commissioner says, “To enable the accountant to earn interest on the trust’s moneys”.

Once again, we submit that that is wrong on the facts as found by the tribunal because the tribunal found that the purpose of having the trust administered through the trust account was to “facilitate the investment and growth of the trust fund”, and that appears at paragraph 64 of the reasons. So once again that is a factual finding which, we would submit, is not open to challenge on the appeal. Whatever Justice Edmonds did by way of reviewing the matter in the Federal Court at first instance was, of course, conditioned upon the matter being presented to him as a question of law under section 44 of the AAT Act and the findings of fact are those findings made by the tribunal.

So we would submit that as a matter of a finding of fact the deposit of the trust moneys into the trust account was held not to be an application of the fund for non-charitable purposes and did not form a basis for removing the tax exempt status of the fund, whatever the nature of the statutory test. So, in short compass, we would submit that the findings of fact of the tribunal preclude any agitation of the question, which we have described in our submissions as a hypothetical question. Could I then just deal with the - - -

CRENNAN J: What about the whole versus part issue?

MR McGOVERN: I am just going to come to that, your Honours. Firstly, we would submit that the Full Court was perfectly correct at paragraph 69 of the Full Court’s reasons where it starts off in its conclusions at paragraph 69 talking about the fact that:

s 50-60 does not speak of “substantial” application of a fund –

and, in particular, their Honours note that –

The relevant words are “the fund is applied” –

for charitable purposes. In our respectful submission, it is impermissible to restate the statutory question, other than in statutory language, and deductive reasoning, as put by our learned friends, that because the Full Court rejected the notion of substantially applied, that means that the obverse applies that the test is that the fund was wholly applied is, in our respectful submission, an erroneous approach, it departs from the statutory language.

Moreover, we would submit that the notion of substantially implies a quantitative analysis, and the word “substantially” does not lead to the alternative conclusion that the statute is intended to apply some sort of proportionate analysis, depending upon the nature of the distributions. In our respectful submission, the correct approach – and this is recognised by all of the cases that we have referred to in our outline of submissions, in particular the reference, I think, of Sir Isaac Isaacs in The Trustees, Executors Case – that the language of the section talks about the fund is applied, it does not say anything about transactions or income, and what is focused upon is a qualitative test.

That also appears from the judgment of Justice Owen in the Mahoney Case where his Honour talks about the test or the circumstances that have to be identified as being very embracing and all encompassing, including looking back to the genesis for the trust fund, looking at the way in which it is managed and administered and the way in which the distributions occur, is just a component or an element in that process, and as he concludes, the question is whether or not the fund is applied in a real sense.

We would submit that the fact that the word “applied” is attached to fund and not to “income” and that one looks at the whole of the circumstances that the approach that was adopted by the Full Court at paragraph 69 and then at 70, the question hinges on a number of factors, only one of which is a quantitative analysis. As part of an overall inquiry about whether or not the fund is applied for charitable purposes, taking into account a host of different factors, and as I put, only one of which is the extent to which any apparent misapplication, having regard to the size of the fund, would be relevant. So it is essentially, we say, a contextual factual inquiry having regard to the way in which the fund is conducted, the particular applications, the way the capital is utilised - - -

CRENNAN J: If you go to application book 63, the way in which the appeal to his Honour Justice Edmonds was framed was – if you look at the grounds there, if you look at 7, 10, 11 – it is all framed in terms of the use of part of the fund. So that is the way the questions of law seem to have been framed. So he has gone on, naturally enough, to deal with the specific transactions on the basis, I would apprehend, that those transactions were indicators that the trustees and Mr Craik were using the fund partly for their own purposes.

MR McGOVERN: Yes, well, that was a way in which it was framed by the Commissioner, but that is at odds with the findings of fact that I have already sought to demonstrate were made by the tribunal itself. Of course, the tribunal itself in paragraphs 49 through to 51 of its reasons does express itself in terms that suggest what I have called a qualitative approach to the question of the fund is applied. Admittedly, at paragraph 51 of the reasons there is a reference there to the issue about whether or not and what the role of a fund being substantially applied may be.

As a matter of the usual principles of a fair reading of the decision of a tribunal not astute to discern error, one can go back to paragraph 49 at page 23 of the application book, and in particular the observations there made by the tribunal which emphasise that it is not just a question of looking at the capital and the income of the fund, but it is also looking at a whole host of other matters, and then concluding with the observation that:

What it is directed to is an enquiry as to whether the fund is “in a real sense” . . . being applied for the purposes for which it was established.

So that was the approach that the tribunal adopted, and that was the approach that was at odds, put in issue so to speak, by those grounds of appeal that your Honour has referred to.

CRENNAN J: It is hard to brush aside an issue that if trustees partly use the fund for their own purposes, that raises an issue of whether the fund is applied?

MR McGOVERN: Your Honour, that was the point, that is that there was no using of the funds for their own purposes. I mean, the money was put into the offset account, true enough, but they - - -

CRENNAN J: We are back to the facts now.

MR McGOVERN: That is right, they submitted to an interest regime, which was greater than the interest that the trust would otherwise have derived, and it was equivalent to the interest that would otherwise have been attained. So it was not really correct to suggest that there was any benefit that they obtained. Even so, let it be accepted that there is a breach of trust somewhere. We would submit that is simply a factor that one takes into account in terms of coming to this qualitative analysis, and that is the approach that the Full Court adopted, and that is really the nub of what they were saying in paragraph 72.

What they were doing in paragraph 72 was really just giving a few examples of the circumstances in which the indicators can point one way or point the other, and that is also demonstrated by the cases. For example, take the case of Bray where there was an issue about whether or not a payment of a manager’s fee would be regarded as an ordinary administration fee of a trust. If it transpires that the totality of the fee being the whole of the income of that particular year was applied to the salary of the agent or the manager that is a factor which might indicate that the purposes that were being pursued were not the purposes of benefiting the charity or for charitable purposes, but were for private purposes.

On the other hand, if there was some explanation that the manager was a particularly sought after manager and it was necessary to pay those fees for that particular year being equivalent to the entire quantum of the income of the trust that would just be a factor to take into account. That is why we would submit that questions of intention are, on all of the authorities and we have extracted the references, all the cases show that intention is a relevant consideration.

Going back to Sir Isaac Isaacs and the example given about radium, the fact that one pays £5,000 into a bank account year by year really does not tell you anything about purpose, unless you actually ascertain that the reason is in order to buy radium so that it could be used in a hospital, or something of that sort. Again in the Compton Case, the fact that there were four directors of a company and there were investments that were actually made which were in conformity with the powers under the trust, would not hold the day if it were proved, as I think it was, that there was a deliberate keeping away from the general body of the employee’s knowledge of the existence of that fund.

So that is again a question of how intention can operate in this context. So when at paragraph 72 the Full Court goes on to talk about Justice Edmonds’ error, which we say is really looking at the matter in blinkers and not doing, as the tribunal did, appreciating the full context of these transactions, and not taking into account intention, which was relevant in the particular circumstances, that that was a correct statement by the Full Court that that is an appropriate approach and was mandated in these circumstances.

CRENNAN J: You have remitted it back for rehearing on that basis?

MR McGOVERN: It has been remitted back on that basis for the tribunal to – the matter that seems to have concerned the Full Court, although perhaps in summation what the Full Court said was that by reason of looking at each of these transactions in isolation there did not seem to the Full Court to be any particular point at which the totality of the transactions in a cumulative sense were then, as it were, presented to the language of the section and the test applied, so it has gone back for that limited purposes.

We sought, as your Honours would have seen from the application, we sought to persuade the Full Court that the language of the tribunal was such as to indicate that it was actually conscious of the fact that it was looking at the matter in the holistic qualitative way that I have suggested. Your Honours, the only other matter is, if minded to do so, there is a question about the terms of the special leave application which - - -

FRENCH CJ: I notice that the applicant has undertaken to pay the costs of the appeal, in any event, but you seek also a condition that the orders of the Full Court in relation to costs not be disturbed?

MR McGOVERN: Your Honours, there is a reluctance to embrace this because it cuts against the thrust of the submissions I put, but in the event the “even if” position is that the case started as a case where it was funded before Justice Edmonds and the Commissioner apparently determined that because it was just a factual matter he would not fund the matter to the Full Court, and now, of course, has sought to fund the matter to this Court.

FRENCH CJ: Leaving you between two stools, as it were.

MR McGOVERN: Your Honours, we would submit that the application, on the basis that the issue does not really arise for the reasons that we have put, that the application should be dismissed with costs.

FRENCH CJ: Thank you. Yes, Mr Bennett.

MR BENNETT: I have a number of short matters, your Honours. First, my friend keeps saying that it was a finding of fact by the tribunal. The matters he refers to as findings of fact are ultimate conclusions of mixed fact in law as to whether the fund was applied for a purpose and so on. There is no relevant issue of fact there. The second matter is that if the Court does find that there is a detailed analysis of the facts required beyond the fairly straightforward analysis, which is in the judgments, it is always open to the Court to say the matter should be remitted to the tribunal, but of course, for a determination in accordance with the decision of the Court, rather than in accordance with the views of the Full Court. The problem is that remission to the tribunal can involve, with certain directions of law, in effect, can involve a result one way or the other. The third matter is - - -

CRENNAN J: Does that put the weight of any appeal on the whole versus part point, rather than the intention point?

MR BENNETT: It would do, your Honour.

CRENNAN J: It would have to, would it not?

MR BENNETT: Yes. Your Honour, in relation to that may I just say this? It is hard to see how my friend’s submissions on the question of substantiality and so on fit with the sentence at page 113, line 43, where they say, in the course of their conclusions:

The question is not limited by concepts of substantiality.

I understood my learned friend’s submissions to be the precise opposite of that. What the tribunal is to make of that if it goes back to the tribunal with that sentence in the Full Court’s judgment is almost impossible to work out. The final matter is, of course, that when the section uses the word “purpose” it is talking about applied to the purposes. It is not talking about necessarily being applied with an ultimate purpose. Although, as I say, we of course accept that expenses, proper expenses, of the trust do not take it outside that provision. May it please the Court.

FRENCH CJ: Mr Bennett, what do you say about the submission that there should be a condition that the orders of the Full Court not be disturbed if special leave is granted and your appeal is ultimately successful?

MR BENNETT: Your Honours, if that were required as a condition of leave we would be prepared to accept that, obviously. I would submit it should not be required because, in a sense, the question of the correctness of

the orders for costs below may be affected by the order this Court makes, and if the Court were to allow the appeal even though we do not seek costs in this Court there would be no reason why those orders should not stand. As I say, if your Honours regard that as a necessary condition my client is content to accept that.

FRENCH CJ: Thank you, Mr Bennett. There will be a grant of special leave on the basis that the Commissioner will pay the respondent’s costs of the appeal in any event and that the orders of the Full Court in relation to costs will not be disturbed. Would this go more than half a day?

MR BENNETT: My estimate would be between half a day and a day. That may not be very useful to the Court.

FRENCH CJ: What do you think, Mr McGovern?

MR McGOVERN: I agree, your Honour.

FRENCH CJ: All right, so half a day to a day. There will be a grant of special leave on that basis, thank you.

AT 10.36 AM THE MATTER WAS CONCLUDED