Case U38

Members:
P Gerber SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 4 February 1987.

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Dr P. Gerber (Senior Member)

It seems that in Australia anyone is at liberty to found a charity and do good works. Regrettably, these charities depend on philanthropists to achieve their aim.

2. This application bears considerable similarity to the Coppleson case (
Coppleson v. F.C. of T. 81 ATC 4019, 4550). Both applicants were doctors determined to alleviate suffering. Dr Coppleson was anxious to fund research into the causes of cervical cancer; Dr L, the applicant in this case - with no previous history of major charitable donations according to his prior tax returns - was suddenly moved in the dying days of the 1977 tax year to donate $50,000 to the Association for Children with Learning Disabilities (ACLD). Imagine Dr L's surprise when, some days later, he found that this worthy charity made available to him an interest-free loan in the sum of $44,500. Mr Morris, of counsel for the applicant, seemed to take great comfort from the fact that it had not been shown that his client "was at any time aware of or involved in the formation or execution of any such series of transactions, scheme or arrangement". I take it I am to presume that unless the Commissioner proves the contrary, that the interest-free "loan" of $44,500 to Dr L came as a pleasant and unexpected surprise from a charity which was embarrassed by so large a gift and which felt that such a benefactor deserved something more than just an inner glow of satisfaction which comes from performing a noble deed. It only goes to prove that charity really does begin at home.

3. This is how it was done. ACLD, having received Dr L's donation of $50,000, acquired some $2 million of redeemable preference shares in a private company (D Pty. Ltd.). I assume that this amount included donations from other philanthropists similarly moved by the plight of children with learning disabilities. D Pty. Ltd. in turn acquired $44,500 worth of redeemable preference shares in H Pty. Ltd. It was this company which made the interest-free loan to L Pty. Ltd., the trustee of the L Family Trust. The shareholders of L Pty. Ltd. were Dr and Mrs L; the beneficiaries Dr L, his wife and the three children of the marriage. I am able to trace the movement of some moneys and can identify a distribution of $10,000 in 1978 through H Pty. Ltd. to L Pty. Ltd. to Dr L. Dealing with the redeemable preference shares, no evidence of value was led. The conclusion is inescapable - these shares have a nil value. They are no longer redeemable at this point in time. Turning to the balance sheet for H Pty. Ltd. dated 30 June 1977 the following entry appears under the heading of "Preference Shares":

"the shares may be redeemed at the option of

• (a) the holder thereof within 6 months of the date of allotment,
• (b) the company after the expiration of 6 months and within four years from the date of allotment."

(Emphasis added)

Later returns show that the shares had not been redeemed by the end of the stipulated period, that is by the end of the 1981 financial year.

4. I now turn to the evidence. Counsel for both parties entered into some kind of Faustian bargain, reduced to writing, the thrust of which it seems to me amounts to this: that in consideration of the applicant not calling any evidence, the Commissioner would tender his whole file (rivalling for sheer thickness and comprehensiveness the London telephone directory), the fruits of months of investigation, thus enabling counsel for the applicant to submit, at the end of the Commissioner's case, that the latter had not proved his case. Thus the agreement specifically stated that counsel for the applicant will not object to the Commissioner's tender provided that it is

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ATC 300

clearly understood that such failure to object shall not be construed as an admission that the documents (a) are relevant; (b) establish that Dr L was aware of the contents of the documents; (c) establish that the transactions reflected in the "agreed documents" constitute a scheme or arrangement; and (d) that Dr L was at any time aware of or involved in the formation or execution of such transaction, scheme or arrangement.

5. The voluminous documents tendered include the transcript of an interview between one of the respondent's investigators and ACLD's Senior Vice-President which took place on 5 August 1980. The following are some of the questions and answers:

"18. Before ACLD invested $1.2 million in preference shares in the 22 unlisted companies did ACLD investigate each of these companies individually before making these investments? - A. No. It was clearly understood prior to meeting that we would be coming along to receive donations and investing the funds immediately in certain companies. We knew we would get an immediate benefit of some thousands of dollars and future dues but would not have expected anything like the face value of the shares returned on redemption.

19. Have you any written evidence of these enquiries? - N/A.

20. Did ACLD obtain profits and loss accounts, balance sheets, memoranda and articles of association, directors reports etc. in respect of these 22 companies before the decision was made to acquire these shares? - A. No.

21. When did ACLD become aware of its rights in relation to these 22 unlisted companies? - A. In the weeks prior to investments being made. We understood we would have no voting rights, divs would be forthcoming, and redemption of shares was a condition with the shares having some material value at time of redemption.

22. Before ACLD invested in these 22 companies did ACLD know who were the directors and shareholders of each of these companies? - A. No.

23. If there was no investigation carried out of these 23 companies before the decision was made to invest $3.2 million (sic) do you consider that ACLD took a prudent management decision in view of the large amount involved? - A. Yes.

24. Before acquiring these shares was ACLD aware of how these companies were going to use the funds raised from the share issues? - A. No, but we were told they were investment coys.

25. Did ACLD own these preferences beneficially or were the shares being held in trust? - A. Yes, beneficially.

26. If held in trust for whom were the shares held? - N/A.

27. Are the shares still owned by ACLD? - A. Yes.

28. When did ACLD receive the share script of these coys? - A. We have received some. Mr Ron Schwartz, our Treasurer would have these. At our auditors' request, Mr Pantzer was asked in 1978 to chase these up but he hasn't got all the script in yet.

29. Has ACLD signed any share transfer in respect of these preference shares disposing of these shares? - A. No.

30. If so to whom were these transfers handed and when? - N/A.

31. To whom did ACLD transfer these shares? - N/A.

32. Under what authority did the Committee of ACLD act in investing these funds in these redeemable preference shares? - A. Conforms with aim number `6' and believe etc. action contains the section dealing with funds in constitution.

33. Do you consider that the investment of public donations in this manner is valid in terms of the New South Wales Justice's Act governing Charitable Associations? - A. I have no knowledge of that Act. Our solicitor advised us that no Act would be contravened.

34. If ACLD hasn't received any dividends on these shares has the executive tried to sell these shares? - A. No attempt to sell or redeem the shares.

35. If not why hasn't this step been taken? - A. I would have thought that would be a fruitless exercise.

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ATC 301

36. Has ACLD received annual reports from these companies? - A. No, and not requested.

37. The rights pertaining to these redeemable preference shares included non-cumulative, non-participating. Is this correct? - A. Not off hand.

38. If so, why did ACLD decide to become a major shareholder in these 23 companies and acquire shares without voting rights? - A. See previous answers.

39. Why didn't ACLD acquire ordinary shares in lieu of preference shares? - A. Not given that opportunity.

40. When did ACLD receive the share script from each of these 23 companies? - A. See previous question re this.

41. Have you any evidence of the receipt of this script? - A. No but there was a substantial lapse of time.

42. Has ACLD ever invested any other donation from the public in similar investments? If so please furnish details. - A. No."

6. The documentary evidence can only lead to one possible conclusion: That Dr L made his donation with the main or dominant purpose of obtaining a substantial tax advantage derived from the privileged tax exempt status that ACLD enjoyed as a public benevolent institution (sec. 78(1)(ii)); and that the latter was prepared to exploit that privilege for its own advantage. Not surprisingly, counsel for the applicant relied heavily on Coppleson. That case exhibits two features: (i) it depended on its own peculiar facts, not least of which being the fact that Dr Coppleson himself gave evidence and persuaded the Tribunal at first instance as to his general charitable intent; (ii) it has added nothing to our jurisprudence; it certainly did not reverse the onus of proof on the issue of intent as counsel urged upon me.

7. The law with respect to gifts to charities has been clearly stated in
F.C. of T. v. McPhail (1968) 117 C.L.R. 111 and
Leary v. F.C. of T. 80 ATC 4438 which I sought to set out in Case T57,
86 ATC 432 at pp. 435-436:

"Once it is shown that the donor of a gift receives an advantage of a material character, whether or not as an immediate cause and effect, the gift is not of the kind encompassed by sec. 78(1); cf. F.C. of T. v. McPhail (1968) 15 A.T.D. 16; (1968) 117 C.L.R. 111, Leary v. F.C. of T. 80 ATC 4438. In the latter case, Brennan J. noted (at p. 4451):

• `... if the disponor is moved to dispose of his property, not to confer a benefaction on the disponee, but to acquire a pecuniary or proprietary benefit for himself, his disposition of that property with the object of effecting that result denies an essential characteristic of a gift according to ordinary notions; and this will be so notwithstanding that the disposition is made for the immediate purpose, and has the immediate effect, of vesting that property in the disponee. Of course, if the purposes of the disposition are to confer pecuniary and proprietary benefits upon both the disponor and the disponee, it would have to appear that the purpose of conferring such a benefit upon the disponee is dominant before a gift according to ordinary notions is established.' (My italics)"

In the instant case, the failure to call Dr L must lead to the conclusion that his evidence would not have advanced his case; cf.
Jones v. Dunkel (1959) 101 C.L.R. 298. In the circumstances, there is no need for me to express any concluded opinion on "sham" or whether or not the scheme is void as against the Commissioner in reliance on sec. 260. A critic with a fine musical ear once observed that an oboe is an ill wind that no one blows good. The same can be said for this "donation" made to the Association for Children with Learning Disabilities.

For the above reasons, the decision under review is affirmed.