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29 Mar 12 Fund not applied for charitable purposes - Bargwanna

The High Court (French CJ, Gummow, Hayne, Heydon and Crennan JJ) has upheld the Commissioner's appeal from the decision of the Full Federal Court in Bargwanna (Trustee) v FCT [2010] FCAFC 126 (8 October 2010).

The taxpayers were the trustees of a trust fund established by a deed of trust (the Trust). The Commissioner refused the taxpayers' request for endorsement as a fund established for charitable purposes under Div 50 of Pt 2-15 of ITAA 1997. The Commissioner contended that between 2002 and 2007 there had been a number of applications of the assets of the Trust which were not for the purposes for which it was established.

Notwithstanding the misapplication of assets, the AAT upheld the taxpayers' appeal on the basis that the Trust had been administered "substantially in accordance with its constituent terms". An appeal by the Commissioner from the decision of the AAT was upheld by Edmonds J.

An appeal by the taxpayers' from the decision of Edmonds J was upheld by the Full Federal Court (Dowsett, Kenny and Middleton JJ). As French CJ, Gummow, Hayne, and Crennan JJ said at para 35 of their judgment:

"The conclusions reached by the Full Court respecting the contravention of s 50-60 resemble those of the AAT. The Full Court approached the case on the footing that '[i]t 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', although deliberate misapplication, in the sense of intending to breach the trust, 'may justify adverse inferences as to the transaction in question and other transactions'. Their Honours considered that the primary judge had erred in finding non-compliance with s 50-60 without treating the explanations of the trustees as relevant and 'without regard to the administration of the Fund as a whole."

This approach was rejected by the High Court. French CJ, Gummow, Hayne, and Crennan JJ said at para 44:

"The terms of s 50-60 of the Act require that this fund be 'applied' for those purposes. That term is used in the sense of so administered as to give effect to the trusts established by the relevant instrument. Not all breaches of trust will deny the conclusion that the fund nevertheless has been applied for the relevant 'public charitable purposes'. But, on the other hand, and contrary to the reasoning of the Full Court, upon which the respondents relied, the term 'applied' is not to be understood as if s 50-60 used such an expression as 'substantially applied' or 'on the whole, applied'. The taxpayer seeks to gain a valuable benefit through establishment of exempt status."

The Commissioner's appeal was upheld and the taxpayers' appeal to the Full Federal Court from the decision of Edmonds J was dismissed: FCT v Bargwanna [2012] HCA 11 (High Court; French CJ, Gummow, Hayne, Heydon and Crennan JJ; 29 March 2012).

 


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