Understanding Charitable Tax Exemptions: Public Benefit Test in NZ, Lecture notes of Law

Download Understanding Charitable Tax Exemptions: Public Benefit Test in NZ and more Lecture notes Law in PDF only on Docsity! IRRUIP 4/IP3168 THE PUBLIC BENEFIT TEST RULINGS UNIT ISSUES PAPER NO 4 — IP3168 Date of issue: 2 February 2000. Exemptions — Entities eligible for tax exemption available to charities — Common law requirement ("public benefit test") — Satisfaction of public benefit test necessary — Commissioner's view — Courts' approach unclear in applying public benefit test to different types of charitable entities — Uncertainty in application of law — Evidence suggests New Zealand law diverging from UK law — Alternative interpretations of law set out — Which interpretation presents better view of law — Income Tax Act 1994, ss CB 4(1)(c), (1)(e), OB 1. 1. SUMMARY OF THIS PAPER 1.1 This paper discusses the common law requirement that to be charitable an entity, such as a trust, must be for the benefit of the community or an appreciable section of it. That requirement is known as the public benefit test. Satisfaction of the public benefit test is necessary before an entity can, in most cases,1 take advantage of the tax exemption available to charities under sections CB 4(1)(c) and CB 4(1)(e) of the Income Tax Act 1994. 1.2 The Commissioner does not consider that the courts have adopted any clear approach in applying the public benefit test to different types of charitable entities. There is some uncertainty over how the law is to be applied in this area. This paper sets out alternative interpretations of the law and seeks public comment on which of those interpretations should be considered to be the better view of the law. Any such comments or submissions will be taken into account by the Commissioner in forming what he considers to be the best view of the law, and how it applies to the provisions of the Income Tax Act 1994. 1.3 It is accepted that the public benefit test requires that, to be charitable, an entity must be "for the benefit of the public or a sufficiently important section of the public". In some cases the term "community" is used in place of "public". Boundary issues have arisen over the meaning of that term, and whether specific groups or classes of persons satisfy the requirement of comprising the public (or the community) or a sufficiently important section of the public, or community. 1.4 In an attempt to clarify and rationalise the public benefit requirement, the courts developed further tests to establish whether groups benefiting from trusts comprised the community. Through cases such as Re Compton2 and Oppenheim v Tobacco Securities Trust Company Limited3 it has been established that where the beneficiaries are determined on the basis of a personal relationship such as a blood or contractual tie, the trust will be for the benefit of a fluctuating body of private individuals and is therefore not charitable. 1.5 The Re Compton and Oppenheim tests, as they became known, were questioned by the House of Lords (Lord Cross) in Dingle v Turner4, although not overruled. While those tests have continued to be applied in the English courts, Lord Cross's comments have been noted with apparent approval and arguably adopted by the New Zealand Court of Appeal and subsequently the High Court. 1.6 This paper notes that there is evidence that appears to suggest that the law in New Zealand may be diverging from that which has continued to be followed in the United Kingdom. It is arguable that the law is not entirely clear and is not static, and is developing in New Zealand in a different manner than that being followed elsewhere. This paper discusses those developments in the public benefit test and concludes that the law is currently uncertain. 1.7 Given that there appear to be different ways that the law as it relates to the public benefit requirement in respect of charities could be interpreted, the purpose of this paper is to outline those alternatives and to seek public comment. This paper does not propose a preferred interpretation and similarly does not address policy issues, such as whether or not certain entities or charities should be subject to income tax. Such issues fall outside the ambit of this paper because they do not form part of the role of Adjudication and Rulings unless they are relevant to the interpretation of the law. 2 BACKGROUND 2.1 Introduction 2.1.1 Section CB 4(1)(c) of the Income Tax Act 1994 ("the Act") exempts from income tax any income, with ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 1 the exception of business income,5 derived by any entity that is a charity. Section CB 4(1)(e) in turn exempts from income tax the income of any business carried on by, for, or on behalf of a charity. As a first step,6 it is necessary for any entity wishing to take advantage of either section to be a charity. In order to be treated as a charity, it is necessary to satisfy the common law requirements. The common law meaning of "charity" imposes a two step test. Firstly, the entity must be established for a charitable purpose, and secondly it must be "for the benefit of the public or a sufficiently important section of the public". The second step is known as the public benefit test. 2.1.2 As it is the Commissioner of Inland Revenue's role to apply the provisions of the Act, including sections CB 4(1)(c) and CB 4(1)(e), it is necessary for the Commissioner to determine whether an entity is charitable and therefore entitled to the tax exemption. 2.1.3 This paper notes that there appears to have been some development or evolution of the law in New Zealand, but the question remains as to the extent of those developments, if they have in fact taken place, and how far they extend. This paper therefore invites public comment on the various interpretations and views and which should be considered to be the better view of the law. 2.1.4 It is important to note that this paper does not address policy issues, such as whether specific entities or particular purposes should, or should not, be considered charitable. Such policy considerations are outside the ambit of Adjudication & Rulings' role, unless they assist in the interpretation of the law and as such are factors that would, or could, be taken into account by a court when considering such issues as those addressed in this paper. 2.2 Legislation 2.2.1 All legislative references in this paper are to the Income Tax Act 1994, unless otherwise stated. 2.2.2 Section CB 4(1)(c) exempts from income tax the gross income, other than business income, of a charity. It states: To the extent that in the absence of this section the following amounts would be gross income, they are exempt income: (c) Any amount derived by trustees in trust for charitable purposes or derived by any society or institution established exclusively for charitable purposes and not carried on for the private pecuniary profit of any individual, except where the amount so derived is an amount to which paragraph (e) applies: 2.2.3 Section CB 4(1)(e) exempts from income tax the business income of a charity. The section provides, to the extent that it is relevant to the issue being considered in this paper:7 To the extent that in the absence of this section the following amounts would be gross income, they are exempt income: (e) Any amount derived directly or indirectly from any business carried on by or on behalf of or for the benefit of trustees in trust for charitable purposes within New Zealand, or derived directly or indirectly from any business carried on by or on behalf of or for the benefit of any society or institution established exclusively for such purposes and not carried on for the private pecuniary profit of any individual: 2.2.4 Section OB 1 defines the term "charitable purpose" as: 'Charitable purpose' includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community: 2.3 Income tax exemption for charities 2.3.1 Under section CB 4(1)(c), the income derived by "trustees in trust for charitable purposes" or by any organisation "established exclusively for charitable purposes" is exempt from income tax. Section CB 4(1)(e) similarly exempts from income tax the business income of such an entity. The term "charitable purpose" is defined in section OB 1, as: ...includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community: 2.3.2 The Court of Appeal noted in Molloy v CIR8 that the definition of charitable purpose in the Income Tax Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 2 the community for the gift to be charitable, as it was a family trust. Lord Greene said: ...a gift under which the beneficiaries are defined by reference to a purely personal relationship to a named propositus cannot on principle be a valid charitable gift. And this, I think, must be the case whether the relationship is near or distant, whether it is limited to one generation or is extended to two or three in perpetuity. The inherent vice of the personal element is present however long the chain and the claimant cannot avoid basing his claim on it. 3.3.3 Lord Greene drew the distinction between persons who are able to join a class of beneficiaries because of an impersonal common quality, and those who qualify because of a personal element such as a relationship to individuals or an individual. In the former case the beneficiary's status as an individual is not a factor, while in the latter it is the person's status as an individual and their relationship to another individual that provides the qualification. In the latter case, the benefit that arises is of a purely personal nature. 3.3.4 This rule, that the existence of a personal element in the qualification will result in a trust not meeting the public benefit requirement, is known as the Compton test. The Compton test has been applied and expanded on in later cases. 3.4 Re Tree 3.4.1 Re Compton was distinguished by the English High Court (Chancery Division) in Re Tree, Idle v The Corporation of Hastings,22 on the facts of the case. In that case, the charitable status of a trust for the benefit of persons who resided in the borough of Hastings prior to 1880, or their descendants, was considered. The purpose of the trust was considered charitable, being for the relief of poverty, which as has been noted is not subject to the public benefit test. However, Evershed J was nevertheless of the view that he was required to decide whether the trust did satisfy the test and consequently that was the issue considered by the Court.23 3.4.2 Evershed J accepted the judgment in Re Compton, and applied the test postulated by Lord Greene. However, his Honour found, on the facts of Re Tree, that he was able to distinguish it from Re Compton. In Re Compton, in Evershed J's opinion, the issue was that the beneficiaries of the trust were determined by reference to named propositi. In the case under his consideration, the potential beneficiaries were those persons who were able to demonstrate that they either resided in Hastings in 1880 or are descended from such a person. In finding that the trust did meet the public benefit rule, Evershed J noted: ...in my view, proof of descent from a resident in Hastings, that is, not from a named resident but from any resident, is, within the principle of Re Compton proof of a quality which is impersonal in the sense that, as far as this testator is concerned, the residents, or the descendants of residents, as individuals, are not a link in the chain selected by him as such, nor is he in the least concerned who they, as individuals, may be. It is open to any person, who can claim to have the characteristics of a Hastings ancestry, if I may so describe it, to come in and say: ‘I am a member of the class entitled to benefit.’ And that class, however awkwardly ascertained or defined, is a section or portion of the general public.24 3.4.3 While agreeing with the rule in Re Compton, the Judge in Re Tree attempted to refine it by providing that where the beneficiaries are defined by a relationship to named persons, the trust is more inclined to be of a family nature. The absence of such a specific defining factor, as was the case in Re Tree, means that the quality essential to inclusion is the connection with the locality, which is impersonal and therefore satisfies the public benefit requirement. 3.4.4 The relevance of Re Tree does not, however, lie in the comments of the Court in finding that the trust in question was charitable, but in the subsequent comments of the Privy Council in Davies v Perpetual Trustee Co. (Ltd.),25 in which Re Tree was distinguished. 3.4.5 In Davies, (which is discussed in greater detail later in this paper), the issue was much the same as in Re Tree. However, the Privy Council was able to distinguish the case on the grounds that in Re Tree the element of poverty was present. The Privy Council said: Counsel for the respondent relied strongly on Re Tree, Idle v Hastings Corpn. That case is, however, distinguishable from the present case on the ground that the element of poverty was present, but their Lordships doubt if the decision could have been justified had that element been absent.26 3.4.6 The Privy Council elected to distinguish Re Tree, but it is clear from the words used that their Lordships disagreed with the conclusions reached by Evershed J. Clearly, their Lordships were of the view that the ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 5 basis on which Evershed J distinguished Re Compton was wrong and if the element of poverty had not been present he should have found that the trust was not charitable, due to the presence of a relationship to unnamed persons. Such a relationship would have been sufficient to deny charitable status. 3.4.7 The decision in Re Tree can therefore be safely put to one side, in favour of the decision in Davies. 3.5 Re Hobourn 3.5.1 In Re Trusts of Hobourn Aero Components Ltd's Air-Raid Distress Fund, Ryan and Others v Forrest and Others,27 the English Court of Appeal was asked to consider whether an Air-Raid Distress Fund established by the employees of Hobourn Aero Components Ltd was charitable. The purpose of the fund was to "assist employees or ex-employees with the Forces who have suffered the loss of their homes or contents by enemy action". Participating employees subscribed to the fund and the benefits available under the fund were limited to the subscribing employees. 3.5.2 The Court of Appeal confirmed the decision of the lower Court, which had found that the fund was not charitable on the authority of Re Compton. Agreeing with that decision, Lord Greene MR said: The present case has a feature which was not present, of course, in Re Compton, which was not a case of employees, but a case of descendants of particular persons. That feature is that the fund now in question was one put up by the potential and contemplated beneficiaries themselves. We are not dealing with a fund put up by outside persons, although, even if it were, on the authority of Re Compton, I should feel constrained to hold that such a fund would not be a good charity. The point, to my mind, which really puts this case beyond reasonable doubt is the fact that a number of employees of this company actuated by motives of self-help, agreed to a deduction from their wages to constitute a fund to be applied for their own benefit without any question of poverty coming into it. Such an arrangement seems to me to stamp the whole transaction as one having a personal character, money put up by a number of people, not for the general benefit, but for their own individual benefit. I am not concerned for one moment to dispute the proposition that a fund put up for air-raid distress in Coventry generally would be a good charitable gift. I have very little doubt it would be. But there is all the difference in the world between such a fund and a fund put up by, it may be, a dozen inhabitants of a street, or, it may be, a thousand employees of a firm, to provide for themselves out of moneys subscribed by themselves some kind of immediate relief in case they suffer from an air raid. The Attorney-General and Mr Upjohn wish to attribute to the fact that these people were putting up money for their own benefit a very slight importance. To my mind, it is of the greatest importance and is quite conclusive in stamping the character of a private and personal trust upon this fund. ... it is quite clear that the paramount and principal object of this fund was to benefit subscribers and nobody else. That seems to me to stamp it with the character of a private arrangement, a private trust.28 3.5.3 In the case, it is clear that a fund for the relief of air-raid distress is a good charitable gift, within the fourth of the Pemsel heads. However, the fund was not a charity because the beneficiaries were limited to the employees of the specific firm, who were also the subscribers to the fund. The fund therefore lacked the necessary public element. 3.6 Oppenheim 3.6.1 The Compton test was applied in Oppenheim v Tobacco Securities Trust Company Limited,29 but was extended to apply where the common nexus between the beneficiaries was a common contractual relationship. In Oppenheim, property was settled to a trust for the purpose of assisting or providing for the education of children of employees or former employees of the British-American Tobacco Co Ltd (BAT), or any of its subsidiary or allied companies. The question put before the House of Lords was whether the trust was charitable. The majority decision was that the trust was not charitable as it failed the public benefit test. 3.6.2 The principal opinion was that of Lord Simonds, endorsed by Lord Oaksey and Lord Morton of Henryton, the latter also adding his own supporting views. Lord Normand delivered a separate opinion. The only dissenting opinion was delivered by Lord MacDermott. 3.6.3 Lord Simonds commenced his opinion with the following words: My Lords, once more your Lordships have to consider the difficult subject of charitable trusts, and this time a question is asked to which no wholly satisfactory answer can be given.30 Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 6 3.6.4 Despite that apparent concern, his Lordship was able to conclude that the trust in question, which was aimed at the education of the children of the employees of BAT, was not charitable. The reasons for that decision were expressed at page 34 where, after reviewing the facts and the relevant authorities, he stated: I come, then, to the present case where the class of beneficiaries is numerous, but the difficulty arises in regard to their common and distinguishing quality. That quality is being children of employees of one or other of a group of companies. I can make no distinction between children of employees and the employees themselves. In both cases the common quality is found in employment by particular employers. The latter of the two cases to which I first referred, the Hobourn case, is a direct authority for saying that such a common quality does not constitute its possessors a section of the public for charitable purposes. In the former case, Re Compton, Lord Greene M.R., had by way of illustration placed members of a family and employees of a particular employer on the same footing, finding neither in common kinship nor in common employment the sort of nexus which is sufficient. My Lords, I am so fully in agreement with what was said by Lord Greene in both cases and by my noble and learned friend, Morton L.J., in the Hobourn case, that I am in danger of repeating its purport without improving on their words. No one who has been versed for many years in this difficult and very artificial branch of the law can be aware of its illogicalities, but I join with my learned friend in echoing the observations which he cited from the judgment of Russell L.J., in Re Grove Grady, and I agree with him that the decision in Re Drummond '... imposed a very healthy check upon the extension of the legal definition of 'charity' ...' It appears to me that it would be an extension, for which there is no justification in principle or authority, to regard common employment as a quality which constitutes those employed a section of the community. 3.6.5 Lord Simonds noted that, in accordance with the clearly established law of charity, a trust is not charitable unless it is directed to the public benefit. He added that the difficulty lies in determining what is sufficient to satisfy the test.31 By way of example, his Lordship noted that at one end of the scale a trust established by a father for the education of his son is not a charity. The public element is not present, despite the public benefit that may accrue from that son's education. At the other end of the scale, the establishment of a college or university is beyond doubt a charity. 3.6.6 The difficulty arises, according to his Lordship, when the trust is not for the benefit of any institution either already existing or to be brought into existence by the terms of the trust. Rather, the trust is for the benefit of a class of persons at large. The question then turns to whether that group of persons can be regarded as such a "section of the community" to satisfy the public benefit test. 3.6.7 In considering the latter point, Lord Simonds noted: These words ‘section of the community’ have no special sanctity, but they conveniently indicate (i) that the possible (and I emphasise the word ‘possible’) beneficiaries must not be numerically negligible, and (ii) that the quality which distinguishes them from other members of the community, so that they form by themselves a section of it, must be a quality which does not depend on their relationship to a particular individual. It is for this reason that a trust for the education of members of a family, or, as in Re Compton, of a number of families, cannot be regarded as charitable. A group of persons may be numerous, but if the nexus between them is their relationship to several propositi, they are neither the community nor a section of the community for charitable purposes.32 3.6.8 Lord Normand echoed those views. His Lordship also noted that to be charitable a trust must be of benefit to the community or a section of the community, and although there is no general rule that assists in determining this: ... the element of public benefit must be found in the definition of the class of persons selected by the truster as the objects of his bounty. ... The truster may have selected a class of persons which forms an aggregate that is not a section of the community, and if he has done that the trust will fail for perpetuity. All depends on the attribute by which the selection of the class is determined. It is on the difficulty of defining the attribute or qualification which differentiates a section of the public that all attempts to define the public element in charitable trusts have foundered.33 3.6.9 While Lord Normand ultimately reached his view that the trust was not charitable on the basis of precedent, his Lordship also considered the matter in terms of principle, and said: If the issue is to be decided on principle and without reference to authority the question is whether a class with the common attribute that the members are the children of the employees of the same ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 7 themselves, in their Lordships' view, a section of the community. They are certain Presbyterians who can establish a particular descent. ... In their Lordships' opinion, the qualifications laid down by the testator have the result of making beneficiaries under the trust nothing more than a 'fluctuating body of private individuals', and the gift must fail because the element of public benefit is lacking.41 3.7.5 The effect of Davies was to confirm both Re Compton and Oppenheim and to make it clear that the personal relationship involved does not have to be to named propositi, as suggested in Re Tree. It is the fact that the class of beneficiaries are determined by their relationship, whether by blood or contract, to another party, whether a named or unnamed, that is fatal to charitable status. 3.8 Arawa Maori Trust Board 3.8.1 The decisions in Re Compton, Oppenheim and Davies were followed by a New Zealand Court in Arawa Maori Trust Board v Commissioner of Inland Revenue.42 The case was a decision of the Magistrates Court and concerned whether the members of a Maori tribe and their descendants are a sufficient section of the community in order to qualify the trust's purposes as charitable.43 In his decision, Donne S M referred to Verge v Somerville,44 in which it was held that "a trust for a fluctuating body of private individuals cannot (be charitable)" and Oppenheim. The Judge noted that the principle in Oppenheim45 "applies whether the relationship be near or distant, whether limited to one generation or extended to two or three or in perpetuity."46 3.8.2 Having regard to those authorities, the Judge held that the beneficiaries were a "fluctuating body of private individuals", and for that reason the trust was not charitable. Donne S M said: Now, the beneficiaries of the appellant Board are ‘the members of the Arawa Tribe and their descendants’.... To qualify as an Arawa one must trace one's ancestry to someone living in a defined area. The area is fixed and accepted by anthropologists as being exclusively populated by the members of the Arawa Tribe from the time of its landing in New Zealand up to 1840. In my view, therefore, the nexus between the beneficiaries is ‘their personal relationship to the several propositi’, i.e. to certain persons living in the defined area prior to 1840. ...I am satisfied that the beneficiaries here are ‘a fluctuating body of private individuals’ and for that reason also I hold that the trust administered by the appellant is not a charitable one.47 3.8.3 This case was not appealed. Rather, section 24B of the Maori Trust Boards Act 1955 was enacted, deeming specific trusts established, for charitable purposes, by Maori Trust Boards to satisfy the requirements of the Income Tax Act in order to obtain the tax exemption available to charities. 3.8.4 A public binding ruling has been issued by Inland Revenue on the application of section 24B of the Maori Trust Boards Act. BR Pub 97/8 "Maori Trust Boards: declaration of trust for charitable purposes made under section 24B of the Maori Trust Boards Act 1955 — income tax consequences". That ruling is discussed further in section 6 of this paper.48 3.9 Conclusions 3.9.1 The above authorities represent the traditional approach to the public benefit test. The key aspects of that approach can be summarised as follows: • To be charitable a trust must be for the benefit of the community or an appreciably important section of it; • A trust will not be charitable if it confers a private benefit; • A trust will not be charitable if it is for the benefit of a fluctuating body of private individuals; • The prospective beneficiaries cannot be numerically negligible in number; • The common nexus between beneficiaries must be impersonal; • If the common nexus between beneficiaries is a blood or contractual relationship, whether or not to a named person or persons, that is a personal nexus and therefore the trust is not charitable. 4 LATER CASES ON THE PUBLIC BENEFIT TEST 4.1 Introduction 4.1.1 As previously noted, the House of Lords decision in Oppenheim was a majority view. The minority view Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 10 was delivered by Lord MacDermott. Lord MacDermott's view was subsequently adopted in the obiter dicta comments of Lord Cross in the House of Lords decision in Dingle v Turner. In that later case, Lord Cross expressed the view that the test in Re Compton, which as noted above had been applied, expanded and clarified in Hobourn, Oppenheim and Davies, was too broad and its application should be limited. 4.1.2 Although Lord Cross's comments in Dingle v Turner were obiter dicta, they were cited with apparent approval by the New Zealand Court of Appeal (Richardson J) in the New Zealand Society of Accountants case49 and, according to Gallen J in the New Zealand High Court case of Educational Fees Protection Society Inc, they represent the "trend in current authority"50 in New Zealand. 4.1.3 While these more recent cases appear to be inconsistent with the cases that represent the "traditional approach", it is arguable that the law is not clearly stated in them. As a consequence, it is no longer possible to determine, with any degree of certainty, whether trusts for the benefit of persons who are determined by either a blood or contractual relationship will satisfy the public benefit test. This section of this paper discusses those more recent cases and the developments in the law that they arguably represent. 4.2 Dingle v Turner 4.2.1 In Dingle v Turner,51 the House of Lords was asked to determine whether a trust established for the relief of poverty was charitable. A difficulty arose because the testator's will provided for the establishment of a trust to pay pensions to the poor employees of the testator's company. The appellant argued that the trust was not charitable. The appellant's argument is best summed up in the words of Lord Cross, delivering their Lordships' judgment: The appellant says that in the Oppenheim case this House decided that in principle a trust ought not to be regarded as charitable if the benefits under it are confined either to the descendants of a named individual or individuals or the employees of a given individual or company and that although the ‘poor relations’ cases may have to be left standing as an anomalous exception to the general rule because their validity has been recognised for so long, the exception ought not to be extended to ‘poor employees’ trusts which had not been recognised for long before their status began to be called in question.52 4.2.2 The House of Lords dismissed the appeal and found that the trust was charitable. The decision was reached on the basis of precedent. After reviewing the relevant cases, involving ‘poor relations’, ‘poor employees’ and ‘poor members,’ Lord Cross concluded: After this long — but I hope not unduly long — recital of the decided cases I turn to consider the arguments advanced by the appellant in support of the appeal. For this purpose I will assume that the appellant is right in saying that the Re Compton rule ought in principle to apply to all charitable trusts and that the ‘poor relations’ cases, the ‘poor members’ cases and the ‘poor employees’ cases are all anomalous — in the sense that if such cases had come before the courts for the first time after the decision in Re Compton the trusts in question would have been held invalid as ‘private’ trusts. Even on that assumption — as it seems to me — the appeal must fail. The status of some of the ‘poor relations’ trusts as valid charitable trusts was recognised more than 200 years ago and a few of them recognised are still being administered as charities today. In Re Compton Lord Greene MR said that it was 'quite impossible' for the Court of Appeal to overrule such old decisions and in the Oppenheim case Lord Simonds in speaking of them remarked on the unwisdom of— ‘[casting] doubt on decisions of respectable antiquity in order to introduce a greater harmony into the law of charity as a whole.’ Indeed counsel for the appellant hardly ventured to suggest that we should overrule the ‘poor relations’ cases. ... So it seems to me it must be accepted that wherever else it may hold sway the Re Compton rule has no application in the field of trusts for the relief of poverty and that there the dividing line between a charitable trust and a private trust lies where the Court of Appeal drew it in Re Scarsbrick.53 4.2.3 Having reached that decision independently of any consideration, or criticism, of Oppenheim, Lord Cross nevertheless took the opportunity to record his views on the deficiencies of the rule laid down in Oppenheim. Although his Lordship's comments were obiter dicta, they have, as will be discussed later in this paper, arguably been adopted in New Zealand. In his opinion, Lord Cross suggested that the tests established in Re Compton and Oppenheim should not be treated as conclusive of whether or not public ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 11 benefit exists and therefore whether or not a particular entity is charitable. 4.2.4 It is worthwhile to set out in full Lord Cross's comments on the Compton and Oppenheim tests. His Lordship stated, from page 888: The Oppenheim case was a case of an educational trust and although the majority evidently agreed with the view expressed by the Court of Appeal in the Hobourn Aero case, that the Re Compton rule was of universal application outside the field of poverty, it would no doubt be open to this House without overruling Oppenheim to hold that the scope of the rule was more limited. If ever I should be called on to pronounce on this question — which does not arise in this appeal — I would as at present advised be inclined to draw a distinction between the practical merits of the Re Compton rule and the reasoning by which Lord Greene MR sought to justify it. That reasoning — based on the distinction between personal and impersonal relationships — has never seemed to me very satisfactory and I have always — if I may say so — felt the force of the criticism to which my noble and learned friend Lord MacDermott subjected it in his dissenting speech in the Oppenheim case. For my part I would prefer to approach the problem on far broader lines. The phrase a ‘section of the public’ is in truth a vague phrase which may mean different things to different people. In the law of charity judges have sought to elucidate its meaning by contrasting it with another phrase ‘a fluctuating body of private individuals’. But I get little help from the supposed contrast for as I see it one and the same aggregate of persons may well be describable both as a section of the public and as a fluctuating body of private individuals. The ratepayers in the Royal Borough of Kensington and Chelsea, for example, certainly constitute a section of the public; but would it be a misuse of language to describe them as a ‘fluctuating body of private individuals’? After all, every part of the public is composed of individuals and being susceptible of increase or decrease is fluctuating. So at the end of the day one is left where one started with the bare contrast between ‘public’ and ‘private’. No doubt some classes are more naturally describable as sections of the public than as private classes while other classes are more naturally describable as private classes than as sections of the public. The blind, for example, can naturally be described as a section of the public; but what they have in common — their blindness — does not join them together in such a way that they could be called a private class. On the other hand, the descendants of Mr Gladstone might more reasonably be described as a ‘private class’ than as a section of the public, and in the field of common employment the same might well be said of the employees in some fairly small firm. But if one turns to large companies employing many thousands of men and women most of whom are quite unknown to one another and to the directors the answer is by no means so clear. One might say that in such a case the distinction between a section of the public and a private class is not applicable at all or even that the employees in such concerns as ICI or GEC are just as much ‘sections of the public’ as the residents in some geographical area. In truth the question whether or not the potential beneficiaries of a trust can fairly be said to constitute a section of the public is a question of degree and cannot be by itself decisive of the question whether the trust is a charity. Much must depend on the purpose of the trust. It may well be that, on the one hand, a trust to promote some purpose, prima facie charitable, will constitute a charity even though the class of potential beneficiaries might fairly be called a private class and that, on the other hand, a trust to promote another purpose, also prima facie charitable, will not constitute a charity even though the class of potential beneficiaries might seem to some people fairly describable as a section of the public. 4.2.5 Therefore, while accepting that Re Compton represented the law, Lord Cross doubted the very basis of the rule established in Re Compton and expanded upon in Oppenheim — namely that a valid basis upon which to distinguish a public trust from a private one is the distinction between personal and impersonal relationships. Rather than basing the test on whether the beneficiaries are "a section of the public", a phrase that Lord Cross found to be vague and imprecise, his Lordship considered that a broader approach should be adopted.54 Similarly, Lord Cross disagreed with the Courts' practice of comparing the phrase "a section of the public" with "a fluctuating body of private individuals", the latter group not satisfying the former test. Lord Cross concluded that all the tests achieve is to require a contrast between whether the trust is ‘public’ or ‘private’, which means that "one is left where one started". 4.2.6 Lord Cross noted that in some cases the distinction is clear. For example, the blind, his Lordship stated, are clearly a section of the public, while "the descendants of Mr Gladstone might more reasonably be described as a ‘private class’ than as a section of the public." The former are a ‘section of the public’ because "what they have in common — their blindness — does not join them together in such a way that Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 12 present trust been framed so as to provide for the education of the children of those engaged in the tobacco industry in a named county or town, it would have been a good charitable disposition, and that even though the class to be benefited would have been appreciably smaller and no more important than is the class here. That concession follows from what the Court of Appeal has said. But if it is sound, and a personal or impersonal relationship remains the universal criterion, I think it shows, no less than the queries I have just raised in indicating some of the difficulties of the problem, that the “Compton test” is a very arbitrary and artificial rule.60 4.2.18 The second concern that Lord MacDermott had with the Re Compton rule was that it did not appear to have any regard to the size of the class to benefit. His Lordship continued: This leads me to the second difficulty I have regarding it. If I understand it aright, it necessarily makes the quantum of public benefit a consideration of little moment. The size of the class becomes immaterial and the need of its members and the public advantage of having that need met appear alike to be irrelevant. In my mind, these are considerations of some account in the sphere of educational trusts for, as already indicated, I think the educational value and scope of the work actually to be done must have a bearing on the question of public health.61 4.2.19 His Lordship's final point was that the application of the Compton test would be likely to create confusion, in that it would bring into doubt the basis of the charitable nature of some existing charitable organisations: Finally, it seems to me that, far from settling the state of the law on this particular subject, the 'Compton test' is more likely to create confusion and doubt in the case of many trusts and institutions of a character whose legal standing as charities has never been in question. I have particularly in mind gifts for the education of certain special classes, such, for example, as the daughters of missionaries, the children of those professing a particular faith or accepted as ministers of a particular denomination, or those whose parents have sent them to a particular school for the earlier stages of their training. I cannot but think that in cases of this sort an analysis of the common quality binding the class to be benefited may reveal a relationship no less personal than that existing between an employer and those in his service. Take, for instance, a trust for the provision of university education for boys coming from a particular school. The common quality binding the members of that class seems to reside in the fact that their parents or guardians all contracted for their schooling with the same establishment or body. That the school in such a case may itself be a charitable foundation seems altogether beside the point and quite insufficient to hold the 'Compton test' at bay if it is well founded in law.62 Conclusion on Oppenheim and Dingle v Turner 4.2.20 As noted, the views of Lord MacDermott were adopted by Lord Cross in his obiter comment in Dingle v Turner. However, by themselves, both Lord MacDermott's opinion and the obiter comments of Lord Cross would have limited precedent value, particularly in light of the earlier case law on the matter (such as Re Compton, Hobourn, Oppenheim and Davies). The Re Compton and Oppenheim tests still appear to be good law in England. Halsbury's Laws of England ("Charities", vol. 5(2), 4th edition) states at paragraph 8: To satisfy the test of public benefit, a purpose must benefit the community, or an appreciably important class of the community, which must be sufficiently defined and identifiable by some quality of a public nature, but may be restricted within narrow limits. ... The question what is a sufficient section of the public must be considered in the light of the particular purpose, for they are interdependent; the argument that what is a sufficient section to support a valid trust in one category must be sufficient to support a valid trust in any other category cannot be accepted. In ascertaining whether a purpose is public or private, the salient point to be considered is whether the class to be benefited, or from which the beneficiaries are to be selected, constitutes a substantial body of the public. The beneficiaries must not be numerically negligible, and must not be ascertained or determined by their connection with a private individual or private individuals or with a company or other employer; nor may they be merely particular private individuals pointed out by the donor or a fluctuating class of private individuals. ... 4.2.21 Therefore, the law in England (and Northern Ireland) still accepts that a trust whose beneficiaries comprise a class of persons identified by a personal relationship, such as a contractual relationship with an ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 15 employer or a relationship based on descent from a named or unnamed person will not be for a section of the public and therefore not charitable. In the relatively recent Northern Ireland case of In Re Dunlop,63 although he expressed a preference for the approach of Lord Cross in Dingle v Turner, Carswell J said: I am conscious, however, that it may not be open to me to adopt this approach to the law, since it is not in harmony with the ratio decidendi of the House of Lords in Oppenheim v Tobacco Securities Trust Co. Ltd., which still stands despite the doubts concerning its underlying reasoning expressed by Lord Cross and the concurrence with him of the other members of the House in Dingle v Turner. 4.2.22 Consequently, the English and Northern Ireland courts are still bound by Oppenheim, although it is noted that, unlike the situation in New Zealand, the case remains a direct precedent. 4.3 The New Zealand approach 4.3.1 In New Zealand, the position may be less certain, as reference has been made to Dingle v Turner and the dissenting opinion in Oppenheim. Some of the comments in those cases have been embraced by the Court of Appeal in New Zealand Society of Accountants v CIR64 and subsequently by the High Court in Educational Fees Protection Society Inc. v CIR.65 On this basis, it is arguable that the Dingle v Turner approach has made inroads into the law in New Zealand and the Re Compton and Oppenheim tests may no longer have unquestioned application. 4.4 New Zealand Society of Accountants 4.4.1 In New Zealand Society of Accountants, the Court of Appeal was asked to determine whether the fidelity funds operated by the New Zealand Society of Accountants and the New Zealand Law Society were charitable. In unanimously determining that the funds were not charitable, the Court considered the public benefit test and canvassed the authorities already considered in this paper. 4.4.2 Two judgments were delivered, by Richardson and Somers JJ. Casey J concurred with both judgments. Richardson J 4.4.3 At page 152, Richardson J (as he then was) commenced his discussion of "the public character requirement". His Honour noted that there were no reported decisions that were comparable to the facts under consideration and therefore preferred to approach the matter in terms of basic principle. In doing so, Richardson J specifically accepted the statement in Tudor on Charities (7th ed., 1984, p.4) that to be charitable a trust "must be for the benefit of the community or an appreciably important section of the community." His Honour stated: The learned editors then go on to say that this requirement may involve the consideration of two questions which are closely related: first, whether the purposes of the trust confer a benefit on the public or a section of the public, and second, whether the class of persons eligible to benefit constitutes the public or a section of it; that so far as the first question is concerned, not every purpose that is beneficial to the public is charitable — it must be within the letter of spirit and intendment of the preamble to the Statute of Elizabeth I; and that while it is difficult and perhaps impossible to formulate a satisfactory test by which to determine whether in any particular case a particular class of persons constitutes a sufficiently important section of the public to establish the validity of a trust alleged to be charitable, a trust for a particular class of private individuals will not be charitable no matter how large the class may be.66 4.4.4 This represents what this paper has referred to as the traditional approach to the public benefit test. Richardson J continues: However, as Lord Cross of Chelsea observed in Dingle v Turner [1972] AC 601, 624: 'In truth the question whether or not the potential beneficiaries of a trust can fairly be said to constitute a section of the public is a question of degree and cannot be by itself decisive of the question whether the trust is a charity. Much must depend on the purpose of the trust. It may well be that, on the one hand, a trust to promote some purpose, prima facie charitable, will constitute a charity even though the class of potential beneficiaries might fairly be called a private class and that, on the other hand, a trust to promote another purpose, also prima facie charitable, will not constitute a charity even though the class of potential beneficiaries might seem to some people fairly describable as a section of the public.' Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 16 Finally, and as also bearing on the significance of the second consideration, the question is not whether a particular object in the abstract is a good charitable object, but whether the purposes of the fund are a good charitable object from the point of view not of the type of misfortune at which it is aimed, but of the beneficiaries (Re Hobourn Aero Components Ltd's Air Raid Distress Fund [1946] Ch 194, 202).67 4.4.5 It is arguable that by referring to Dingle v Turner in that manner Richardson J was adopting Lord Cross's comments and therefore raising them to a level of precedent higher than their status as obiter dicta would otherwise merit. An alternative interpretation would be that, as Richardson J said, he approached the case on the basis of common law principle, rather than applying any precedent (because none exist). Consequently, it could be said that his Honour was simply setting out the accepted law that he was required to have regard to when forming his view. 4.4.6 Richardson J determined that the two funds were not charitable. His Honour rejected the argument that as a consequence of the existence of the fidelity funds there existed a wider public benefit, because the community had "the benefit of knowing that there is a safeguard and protection of their interests."68 His Honour accepted that there would be instances where a trust that improves the lot of a class of persons may also be for the public benefit. Richardson J noted Re Good69 where a gift on trust for the maintenance of a library and the purchase of plate for an officers' mess was held to be charitable on the basis that "it is the public, not the officers, that are benefited by better means being put at the disposal of the officers to enable them to make themselves efficient servants of the King for the defence of their country."70 4.4.7 In the case of the fidelity funds, however, such a benefit did not exist. Richardson J noted that while some members of the community who have not actually suffered loss from "the depredations of professional advisors"71 may gain some degree of peace of mind, such a benefit was "far too nebulous and remote to be regarded as a public benefit".72 4.4.8 Richardson J concluded that the community that benefited from the funds was only those who are entitled to claim from the fund, i.e. those who suffer an otherwise uncompensated loss. On that basis, his Honour concluded that the funds were not for the benefit of the community or a section of the community. Richardson J defined the class to benefit in the following manner: The class of persons benefited consists of persons who entrust money to a solicitor or accountant in public practice and lose that money by reason of his theft.73 4.4.9 Having determined the class of persons to benefit, and the criteria necessary to fall within that class, Richardson J considered the characteristics of that class and whether they constitute the community or a section of the community. He found that there were three factors that counted against those persons constituting a section of the community and the Fund therefore being treated as a charity. 4.4.10 The first factor was that in providing compensation, there was no selection amongst those who qualify. Compensation was provided on the basis of satisfying criteria of entitlement, rather than need. On this point, Richardson J noted: It cannot fairly be described as a trust for the relief of distress and suffering or for the economic welfare of the public. The persons concerned are certainly advantaged but I cannot see that through compensating those qualifying for compensation in this way any substantial benefit occurs to the public.74 4.4.11 The second factor was that the funding of the compensation arrangement (the fidelity fund) was part of the costs of carrying on business and the contributions and levies paid by practitioners were deductible expenses incurred in their ordinary income activities. Consequently: They form part of the overheads of the professional firms and are built into the general cost structures of the professions so that in a real sense clients too contribute to what may be loosely described as a co-operative fidelity insurance scheme. All this is a far cry from the eleemosynary underpinning traditionally associated with the concept of charities.75 4.4.12 The third and final factor was that the claimants come within the trust by reason of their relationship with the particular defaulting practitioner.76 4.4.13 While it was only one of the factors that was taken into account, the last point is of particular relevance to the issue being considered in this paper. In his judgment, Richardson J said: ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 17 Society was established for a charitable purpose, so the matter turned on whether the Society was for the benefit of the public. In the course of the judgment, Gallen J undertook a comprehensive review of the relevant authorities. 4.5.4 His Honour noted the history of the public benefit requirement and the efforts of the courts to establish tests that assist in determining whether or not a particular trust is for the benefit of the public. His Honour discussed at length the conclusions in Oppenheim and in particular the dissenting judgment of Lord MacDermott. Gallen J then said at page 8,209: I have cited at considerable length from the decision of Lord MacDermott because although his opinion was the dissenting judgment in Oppenheim's case, the views which he expressed have been referred to with approval in the House of Lords more recently. Mr Wilson83 referred to the decision of the House of Lords in Dingle v Turner and Others [1972] AC 601. That was a case where funds were to be held in order to pay the income in paying pensions to poor employees of a named company. The fact that the relief of poverty was involved meant that the considerations which arose in the Oppenheim case did not fall to be considered. Nevertheless the Oppenheim case was referred to by Lord Cross of Chelsea whose decision was concurred in by the other members of the House. Lord Cross specifically but obiter, indicated that the Re Compton rule which found favour in Oppenheim, did not seem to him satisfactory and said at p.623: “... I would as at present advised be inclined to draw a distinction between the practical merits of the Re Compton rule and the reasoning by which Lord Greene MR. sought to justify it. That reasoning — based on the distinction between personal and impersonal relationships — has never seemed to me very satisfactory and I have always — if I may say so — felt the force of the criticism to which my noble and learned friend Lord MacDermott subjected it in his dissenting speech in Oppenheim.” He also said at p 624: “In truth the question whether not [sic] the potential beneficiaries of a trust can fairly be said to constitute a section of the public is a question of degree and cannot be by itself decisive of the question whether the trust is a charity. Much must depend on the purpose of the trust. It may well be that, on the one hand, a trust to promote some purpose prima facie charitable, will constitute a charity even though the class of potential beneficiaries might fairly be called a private class and that, on the other hand, a trust to promote another purpose, also prima facie charitable, will not constitute a charity even though the class of potential beneficiaries might seem to some people fairly describable as a section of the public.” The comments of Lord Cross were referred to and quoted by Richardson J in New Zealand Society of Accountants v C of IR (supra) at p.152 and also by Somers J at p.156. 4.5.5 Gallen J considered that the obiter comments of Lord Cross have been sufficient to bring into doubt the universal application of the test established in Re Compton and refined in Oppenheim. His Honour accepted that a trust, to be charitable, must be for the benefit of the public, but stated, having completed his review of the authorities: There is no overall test accepted by the Courts which determines for all purposes whether a particular class of beneficiaries does or does not constitute a section of the public. The comments in Oppenheim's case indicate that the question will not be answered by mere numbers. In that case it was accepted that if the qualification as a beneficiary is personal in nature as occurs when that qualification derives from relationship then the class will not constitute a section of the public. The common nexus of employment was considered in Oppenheim's case to be a disqualifying factor as being analogous to the nexus of relationship. Following the comments of Lord Cross in Dingle v Turner however, the distinction between personal and impersonal relationships may no longer be totally acceptable as a test and the decision in Oppenheim's case may no longer represent unquestioned law. Further, following on the decision in Dingle v Turner, the ultimate conclusion will be at least influenced by the purpose of the trust.84 4.5.6 Gallen J also noted that such a conclusion, (that the purpose of the trust rather than just the class of beneficiaries must be considered in determining whether or not the public benefit requirement is met), would agree with the views of Lord MacDermott in The Baptist Union of Ireland (Northern) Corporation Limited v Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 20 Commrs of Inland Revenue [1945] NI 99.85 In that case, his Lordship, (as MacDermott J), said: ... I am of the opinion that the mark or test of what is truly charitable, in the limited field of what I have described, is that it should be substantially, not necessarily absolutely, altruistic in character. That, I think, is the element for which one must seek.86 4.5.7 In the Educational Fees case, the Society had entered into contracts with three private schools. In exchange for the payment of a fee by those schools, the Society would meet the cost of any tuition fees payable in respect of any pupil who lost a parent. The purpose, as previously noted, was accepted as being charitable (being the advancement of education), but it was also accepted that to be charitable the activities of the Society had to benefit the public. 4.5.8 While Gallen J had gone to some length to demonstrate that, in his view, the Re Compton and Oppenheim tests no longer had universal currency, he still considered that it was necessary to distinguish the facts of the matter he was considering and to show that the tests did not apply in respect of the Society. His Honour noted that there did not exist the type of relationship that existed in either Re Compton or Oppenheim, but he did see the reasoning in Oppenheim as causing problems for the Society. His Honour said at page 8,212: I accept however that the reasoning and approach in Oppenheim's case does present difficulties in the present situation. If children become beneficiaries only because their parents enter into contractual arrangements with particular schools which are themselves contractors with the trust there is at least an analogy with the facts of the Oppenheim case. That case raises difficulties. 4.5.9 Gallen J overcame those difficulties by finding that the trend in the New Zealand authorities was moving away from Oppenheim and tending to follow Dingle v Turner. His Honour continued, also at page 8,212: In my view the current trend of authority is exemplified by the comments in Dingle v Turner and the general tenor of the decision in New Zealand Society of Accountants v C of IR. If the test was that postulated by Lord MacDermott in Oppenheim's case rather than that of the majority, I think that it would in this case be satisfied. Perhaps the best way of dealing with the matter now is to pose the question following the approach adopted by Lord MacDermott, 'is the trust substantially altruistic in character?' 4.5.10 His Honour answered that question in the affirmative, in that the purpose of the Society was "to provide education to children who would otherwise be disadvantaged socially, financially and emotionally". In doing so his Honour rejected the Commissioner's argument that the scheme was no more than an insurance arrangement. Gallen J also did not consider it fatal that a child would only benefit if the school had entered into a contractual arrangement with the Society, and therefore the beneficiaries were linked by that common contractual relationship. While accepting that Oppenheim was analogous, Gallen J distinguished the case on the basis that Oppenheim related to one trust in respect of one company,87 while the Society was involved with a number of schools. 4.5.11 It is arguable, therefore, that the decision in Educational Fees was reached only on the basis of the facts of that case and the principles established in Re Compton and Oppenheim are still applicable. This would be consistent with the judgment of Richardson J in New Zealand Society of Accountants where his Honour found that one of the bases for finding that the funds were not charitable was the contractual relationship between the practitioners and their clients. Nevertheless, Gallen J did adopt the reasoning of the dissenting opinion in Oppenheim and the obiter dicta of Lord Cross in Dingle v Turner. 5 CONCLUSION: THE “PUBLIC BENEFIT TEST” TODAY 5.1 In cases such as New Zealand Society of Accountants and Educational Fees Protection Society there is evidence that the Courts may be moving away from a strict adherence to the principles of Re Compton and Oppenheim and have aligned themselves more with the approach advocated by Lord Cross in Dingle v Turner. As Gallen J noted in Educational Fees Protection Society, the trend seems to be moving away from the nature of the beneficiaries being determinative of whether a trust is charitable. Gallen J considered that Lord Cross's obiter comments in Dingle v Turner were adopted in New Zealand Society of Accountants. 5.2 Certainly the case that Dingle v Turner disapproved of the reasoning in both Re Compton and Oppenheim. In New Zealand Society of Accountants, Somers J was neutral, having noted the view of Lord Cross but not choosing between that view and Oppenheim. Richardson J, on the other hand, appeared to ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 21 accept Lord Cross's view, in discussing the public character requirement, but it is arguable that he ultimately decided the case in a manner that was consistent with Oppenheim. Gallen J considered, in the Educational Fees case and on the basis of Society of Accountants, that the judicial trend was towards adopting Lord's Cross's view. 5.3 However, in the case of trusts for the benefit of persons linked by a common employer, the courts may draw a distinction, in line with Lord Cross's dicta, between a trust for the benefit of the employees of a "small company" and one for the benefit of a "large company". The determinative issue would then become whether or not the purpose of the trust is, to adopt Gallen J's suggestion, sufficiently altruistic. However, his Honour did not go on to give any indication of what would, or would not, be considered sufficiently altruistic. Such consideration can only be given on a case by case basis. 5.4 That said, it is by no means clear, from the judgment in Dingle v Turner or from Gallen J's comments in Educational Fees, whether the same distinction would be drawn in respect of a trust for the benefit of a group of people who are determined on the basis of a blood relationship. That issue was not directly considered in the cases discussed. Although Lord Cross noted that while he agreed with the practical merits of the Re Compton rule, he had doubts about the reasoning that gave rise to it. 5.5 It may be that the New Zealand courts would take the opportunity afforded by Dingle v Turner, and its apparent acceptance in New Zealand Society of Accountants, to draw a distinction between a trust for the benefit of a close family unit and a trust for a large group of potentially disparate, although technically related, persons. For example, a court may not today decide a case such as Arawa, based as it is on Re Compton and Oppenheim, in the same manner. The court may elect to draw a distinction between the rules established in the "traditional" cases where the beneficiaries are a group such as an iwi or a hapu, albeit that they are, in respect of the particular group, defined on the basis of a common, although potentially distant, blood relationship. If the court determined that a large group such as an iwi satisfied the public character requirement, the charitable nature of the trust would turn on the wider purpose of the trust and how the actual persons to benefit are selected from the wider group of potential beneficiaries. Lord Cross 5.6 In Dingle v Turner, Lord Cross's fundamental concern with the Compton test was that, while he agreed with the practical merits of such a test,88 the basis of the test ("the reasoning by which Lord Greene MR sought to justify it") would seem to be suspect. 5.7 Lord Cross noted that Lord Greene's reasoning in Re Compton was based on drawing a distinction between personal and impersonal relationships, trusts based on the latter being public and the former private. His Lordship noted that in applying the distinction, judges have drawn a comparison between trusts for the benefit of "section of the public", such trusts being potentially charitable, and a "fluctuating body of private individuals". Lord Cross's concern was that they are both vague phrases and in his Lordship's view the same group of persons could fit in the terms of either phrase. Lord Cross illustrated this point with the example of the residents of a town ("the ratepayers in the Royal Borough of Kensington and Chelsea") meeting both descriptions. 5.8 Lord Cross concluded that the real issue was, therefore, whether the trust in question was for the benefit of a "public" or "private" class, but, as his Lordship noted, this means that "one is left where one started". 5.9 Having concluded that the matter to be determined was whether the class of beneficiaries was private or public, Lord Cross accepted that some classes are more naturally describable as sections of the public than as private classes, while the opposite will apply to some other classes. Lord Cross gave what he saw as two clear examples of a public and a private class: The blind, for example, can naturally be described as a section of the public; but what they have in common — their blindness — does not join them together in such a way that they could be called a private class. On the other hand, the descendants of Mr Gladstone might more reasonably be described as ‘a private class’ than as a section of the public; 5.10 That quote suggests that Lord Cross agreed that a class of persons determined on the basis of a common line of descent would properly be treated as a private, and not charitable, class. However, the issue is arguably not so straightforward. Lord Cross effectively linked the Re Compton and Oppenheim tests by comparing "the employees in some small firm" with Mr Gladstone's descendants and therefore describing them as a private class. By comparison, Lord Cross considered that in the case of the employees of a large Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 22 charitable, as they lacked the necessary public element. 6.7 However, it should be noted that both the decision in the Arawa case and the section 24B amendment to the Maori Trust Boards Act pre-date the decision of the House of Lords in Dingle v Turner and the subsequent developments in the public benefit test. While those cases will not affect the application of section 24B, it is accepted that had the Arawa case been heard after the decision in Dingle v Turner, the judge may have elected to apply the distinction suggested by Lord Cross. 7 CONCLUSION 7.1 The purpose of this issues paper has been to consider the various authorities that have sought to develop, refine and clarify the public benefit test. By doing so, it is hoped that it will serve to stimulate discussion and that it will provide a basis for submissions. 7.2 That aim was motivated by the Commissioner's view that, with regard to the public benefit requirement, the law of charity has become unclear. There would seem to be some support for the proposition that the law in New Zealand has diverged from that which is still the case in England and arguably in other common law jurisdictions. 7.3 However, it is unclear whether the New Zealand Courts have intended to cast doubt over the application of the public benefit test, or whether they would be prepared to modify the test in any way. As this issues paper has noted, the English Courts appear to have retained the test as it was enunciated in Oppenheim. It may be that the New Zealand Courts would, as Lord Simonds suggested in Oppenheim when referring to the "poor relations" cases, hesitate before "[casting] doubt on cases of respectable antiquity". The Courts may hesitate to take it upon themselves to modify the common law requirement of the public benefit test. 7.4 In Vancouver Society of Immigrant & Visible Minority Women, Iacobucci J commented on the limits imposed on the Court when seeking to advance the common law of charity in order that it "reflect more completely the standards and values of modern Canadian society".94 He said, at page 73:95 In the absence of legislative reform, Canadian courts must contend with the difficulty of articulating how the law of charities is to keep 'moving' in a manner that is consistent with the nature of the common law. As this Court held in R v Salituro, [1991] 3 SCR 654 (SCC) at p.670: Judges can and should adapt the common law to reflect the changing social, moral and economic fabric of the country. Judges should not be quick to perpetuate rules whose social foundation has long since disappeared. Nonetheless, there are significant constraints on the power of the judiciary to change the law. As McLachlin J indicated in Watkins, supra, in a constitutional democracy such as ours it is the legislature and not the Courts which has the major responsibility for law reform; and for any changes to the law which may have complex ramifications, however necessary or desirable such changes may be, they should be left to the legislature. The judiciary should confine itself to those incremental changes which are necessary to keep the common law in step with the dynamic and evolving fabric of our society. There are thus limits to the law reform that may be undertaken by the judiciary. 7.5 The same issues would need to be considered by the New Zealand judiciary before expanding the scope of the common law meaning of charity as it applies in New Zealand. Such consideration would necessarily take into account the fact that Parliament has seen fit to allow a substantial tax benefit to entities that meet the common law requirement of being charitable, including satisfying the public benefit test. In allowing that benefit, it can be assumed that Parliament had regard to the scope of the public benefit test as it applied at that time. Any subsequent widening, or relaxing, of the test would result in an expansion of the scope of the charity exemption for income tax purposes. It is certainly arguable that such an expansion should be left to Parliament. 7.6 That said, it is not the role of the Inland Revenue Department, and more specifically the Rulings Unit within IRD, to advance the common law development by adopting a view of the law that is not in accord with the current thinking of the courts. Whether this means that the approach applied in Oppenheim should still be followed, or whether the current judicial position has moved beyond this, is the subject upon which technically-based views are sought. 7.7 It is acknowledged that this is a difficult and evolving area of the law and it must be stressed that the ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 25 Commissioner has not formed a final view on this matter. In looking into this area of the law, in so far as it relates to income tax, the Commissioner's aim is to determine what is, in his opinion, the better view of the law. This will allow the Commissioner to take a more consistent approach to such matters and also provide a greater degree of certainty to those entities who may seek to be treated as charitable for tax purposes. 7.8 As this area of the law is difficult, the purpose of this paper is to set out the issue that is being considered, to outline what is thought to be the relevant existing law on the matter, and to stimulate discussion and comment. If you have a comment or a submission on this matter that you wish to make, please send it to us. All such submissions will be considered and taken into account by the Commissioner in reaching the better view of the law. 8 POLICY REVIEW 8.1 In addition to the above review being undertaken by Adjudication & Rulings, Inland Revenue's Policy Advice Division business group is undertaking a separate review of the public benefit test as part of a wider review of the taxation of Maori Authorities. That review is also intended to clarify the test and, if appropriate, develop legislative options on ways to amend the test to give greater certainty to iwi and hapu-based structures and other entities seeking charitable "status". 8.2 In order to also assist with that policy review, copies of any comment or submissions received in respect of this issues paper will be provided by the Rulings Unit to Policy Advice Division for their consideration also. Draft items produced by the Adjudication & Rulings Business Group represent the preliminary, though considered, views of the Commissioner of Inland Revenue. In draft form these items may not be relied on by taxation officers, taxpayers and practitioners. Only finalised items represent authoritative statements by Inland Revenue of its stance on the particular issues covered. 1. The exception is those entities established for the relief of poverty. 2. [1945] 1 All ER 198 3. [1951] 1 All ER 31 4. [1972] 1 All ER 878 5. Auckland Medical Aid Trust v CIR (1979) 4 NZTC 61,404 6. Section CB 4(1)(e) imposes a number of additional requirements, in addition to being a charity. 7. Section CB 4(1)(e) contains a number of further requirements that are not relevant to whether the entity is a charity. 8. (1981) 5 NZTC 61,070 9. This view has also be confirmed in subsequent cases, such as CIR v Medical Council of NZ (1997) 18 NZTC 13,088. 10. [1891] AC 531 11. Cairns, Elizabeth, Charities: Law and Practice, 2nd edition, Sweet and Maxwell, London, 1993, p.18. 12. [1951] 1 All ER 31 13. [1999] 2 CTC 1 14. Paragraph 147 of the reported judgment. 15. D W M Waters Law of Trusts in Canada (2nd ed. 1984). 16. Tudor on Charities, 7th edition, 1984, p.4. Approved by Richardson J in NZ Society of Accountants, p.152. 17. [1924] All ER 121. (Privy Council sitting for Australia.) 18. Ibid., p.123 19. Ibid., p. 123 20. Halsbury's Laws of England, Volume 5(2), Page 11. 21. Re Compton, Powell v Re Compton, [1945] 1 All ER 198 22. [1945] 2 All ER pp. 65–71 (Chancery Division) 23. Ibid., p.67 24. Ibid., p.69. 25. [1959] 12 All ER pp. 128–133 (Privy Council, Australia) Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 26 26. Davies, p.133. 27. [1946] 1 All ER 501 28. Ibid., p.506. 29. [1951] 1 All ER 31 30. Ibid., 32. 31. Ibid., 33. 32. Ibid., 34. 33. Ibid., 36. 34. (1885), 16 QBD 163; 55 LJMC 21; 54 LT 175; 50 JP 278; 8 Digest 243, 26. 35. Oppenheim, 36. 36. [1972] 1 All ER 566 37. Oppenheim., p.39 38. Davies, 129. 39. Ibid., 131. 40. Ibid., 133 41. Ibid., 133. 42. (1961) 10 MCD 391 43. Ibid., 396 44. [1924] AC 469, All ER Rep 121 45. The principle being "[a] group of persons may be numerous, but, if the nexus between them is their personal relationship to a single propositus or to several propositi, they are neither the community nor a section of the community for charitable purposes", Oppenheim, p.306, cited in Arawa at p.396 46. Arawa, p.396, vide In re Compton, Powell v Re Compton [1945] 1 All ER 198 47. Arawa, p.396 48. The ruling can be found at page 4 of Tax Information Bulletin, ¶98-101 Volume Nine, No. 8 (August 1997). The TIB, including the public ruling, can also be viewed on the IRD website (http://www.ird.govt.nz/). 49. Gallen J in Educational Fees, p.8,210, citing Richardson J in New Zealand Society of Accountants, p.152. 50. Educational Fees, p.8,212. 51. [1972] All ER 878. 52. Ibid., 882. 53. Ibid., 888 54. Dingle v Turner, 889, Lord Cross: "The phrase ‘a section of the public’ is in truth a vague phrase which may mean different things to different people." 55. He noted that this was particularly so in the case of educational trusts. 56. Oppenheim, p39. 57. Ibid. 58. [1914–15] All ER 223. Re Drummond, Ashworth v Drummond concerned a trust established to earn income for the purpose of contributing to the holiday expenses of the workpeople employed in the spinning department of James Drummond & Sons Ltd. 59. Oppenheim, 40. 60. Ibid., 41 61. Ibid., 41–42 62. Ibid., 42. 63. [1984] NI 408 64. [1986] 1 NZLR 147; 65. (1991) 13 NZTC 8,203 ~ Inland Revenue ~ ~ Te Tari Taake Issues papers produced by the Tax Counsel Office represent the Inland Revenue’s initial views only. Taxation officers, taxpayers or practitioners may not rely on issues papers. Only finalised public statements represent Inland Revenue’s authoritative view on the issues covered. UNCLASSIFIED 27