Ipsofactoj.com: International Cases [2004] Part 8 Case 13 [PC]


THE PRIVY COUNCIL

Coram

Latimer

- vs -

Commissioner of Inland Revenue

LORD NICHOLLS OF BIRKENHEAD

LORD MILLETT

LORD WALKER OF GESTINGTHOPE

SIR MARTIN NOURSE

SIR KENNETH KEITH

25 FEBRUARY 2004


Judgment

Lord Millett

(delivered the judgment of the Board)

  1. The issue in this appeal is whether or not investment income of the trustees of the Crown Forestry Rental Trust (“the Trust”) arising in the tax years 1994-96 is exempt from income tax. This ultimately turns on the construction of the relevant statutory provision (section 61(25) of the Income Tax Act 1976, replaced in almost identical terms by section CB 4(1)(c) of the Income Tax Act 1994) and of the trust instrument, that is the trust deed dated 30 April 1990 (“the trust deed”) setting up the Trust. But the circumstances in which the Trust was established are of a very unusual character, and give rise to an issue which, so far as their Lordships are aware, has not previously been considered by the courts either in New Zealand or in England. The arguments have ranged far and wide and have varied from time to time during the course of the proceedings, but the ground upon which their Lordships propose to dispose of the appeal surfaced at a very late stage and after the conclusion of oral argument before the Board. The parties were of course informed of this development and availed themselves of the opportunity they were given to make full written submissions on the question.

    THE BACKGROUND FACTS

  2. Waitangi is on the shore of the Bay of Islands in the northernmost part of the North Island. The Treaty of Waitangi (“the Treaty”) was entered into on 6 February 1840, in the sense that it was then first signed by Captain Hobson, the newly-appointed Lieutenant-Governor, and by many of the Maori chiefs in the northern part of the North Island. Other signatures were later obtained from chiefs from other parts of the country, making in all 512 signatures of men and women chiefs. The Treaty was a very important event in New Zealand’s history. It was hurriedly translated into the Maori language shortly before it was debated by the chiefs, and there have been difficulties in reconciling the two texts. Even apart from translation difficulties, the English text of the Second Article could be recognised as likely to lead to disputes. A retranslation of the Maori text of the whole Treaty is conveniently contained in the judgment of Cooke P in New Zealand Maori Council v Attorney General [1987] 1 NZLR 641, 662-3.

  3. The acquisition of land and other actions which followed the introduction of British rule led to armed conflict especially in the 1860s, to generations of grievances, agitation, negotiations, inquiries and some settlements, and ultimately to the Treaty of Waitangi Act 1975 which established the Waitangi Tribunal. The Tribunal entertains claims by Maori that they have been prejudicially affected by conduct on the part of the Crown which was inconsistent with the principles of the Waitangi Treaty and may make recommendations for remedial action. The Tribunal has played, and continues to play, a very important part in public life in New Zealand.

  4. During the 1980s the New Zealand government adopted a policy of corporatisation, that is of divesting central government of assets and undertakings which were not regarded as core activities. Some of these assets were to be transferred to new corporate entities (called state enterprises) including the Land Corporation and the Forestry Corporation. The assets involved included about 14 million hectares (just over half of the land surface of New Zealand) previously administered by the Department of Lands and Survey and the New Zealand Forest Service. For these and similar purposes a Bill entitled the State-Owned Enterprises Bill was introduced into the House of Representatives on 30 September 1986.

  5. The Tribunal then made an interim report on a series of claims by five Maori tribes. The report expressed concern that the proposed legislation would make it impossible for the Crown to return land to Maori in accordance with any recommendation made by the Tribunal. That led to legal proceedings by the New Zealand Maori Council. The upshot was the Waitangi (State Enterprises) Bill introduced into the House of Representatives on 8 December 1987.

  6. The scope of the state enterprises legislation, and the extent of the Tribunal's statutory remit, were by no means limited to Crown forests. They went much wider. But it was the proposals affecting Crown forests which particularly concerned the Maori Council and led to further litigation. Much of these forests consisted, not of long-lived native hardwoods, but of exotic softwoods which reached maturity in about 40 years, and yielded a good commercial return. The government proposed to sell the Crown's commercial forest assets, including growing trees and the right to fell and remove them, while retaining ownership of the land. Concern was expressed that this would prejudice Maori claims to these assets. After interlocutory proceedings had reached the Court of Appeal negotiations took place to reach a settlement.

  7. The outcome of the negotiations was a written agreement dated 20 July 1989 (“the Compromise Agreement”) between the Crown on the one side and the Maori Council and the Federation of Maori Authorities Incorporated on the other. This provided for, and for present purposes was replaced by, the trust deed; it was not contended that the trust deed failed to give effect to the Compromise Agreement; and it is common ground that in the event of any inconsistency the trust deed must prevail. The only relevance of the Compromise Agreement is as evidence that the trust deed originated as part of a negotiated settlement of a potentially serious constitutional dispute.

  8. Under the Compromise Agreement the Crown was to sell the existing tree crop and other forestry assets with a licence for the purchaser to use the land for a period sufficiently long to make his investment commercially feasible. The consideration was to include an annual rental for the use of the land. Where land was subject to Treaty claims, the parties agreed

    that they will jointly use their best endeavours to enable the Waitangi Tribunal to identify and process all claims relating to forestry lands and to make recommendations within the shortest reasonable period.

  9. When the Tribunal made a recommendation determining Treaty claims, the ownership of the Crown or the claimants as the case might be would be confirmed. The Crown would make any necessary transfers to successful claimants and would pay compensation for the fact that the land was being returned subject to encumbrances. From the time of the Tribunal's recommendation for the return of his land a successful claimant was to be entitled to rental payments under existing licences; to resume possession as and when the tree crop was felled; and to payment of an amount equal to all past rental payments for the land.

  10. The Compromise Agreement provided

    The provisions of this agreement are to be reflected and embodied where appropriate in draft legislation and in any event in a trust deed and consent order, the terms of each of which are to be agreed by the parties, in accordance with this agreement.

  11. Legislation for this purpose was duly enacted as the Crown Forest Assets Act 1989 (“the 1989 Act”), section 34 of which also provided for the responsible Ministers, on behalf of the Crown, to “establish by deed a forestry rental trust”.

    THE TRUST DEED

  12. The trust deed was made by the Crown and executed by Her Majesty The Queen in right of New Zealand acting by her Ministers. The trust deed recited the Compromise Agreement and section 34 of the 1989 Act. It contained (in Clause 1) a number of definitions including “Claimants” (Treaty claimants recognised by the trustees); “Beneficiaries” (the Crown, the Claimants and any other person who registered a claim to Crown forest land); “Confirmed Beneficiaries” (“those Beneficiaries who attain a vested interest in the Trust by virtue of Clause 11”); and “Rental Proceeds” (basically rental or licence fees payable under the licences of forest land to be granted by the Crown). Clause 2.1 and 2.2 must be set out in full:

    2.1

    A trust is hereby established under this Deed, to be a forestry rental trust referred to in section 34 of the Crown Forest Assets Act 1989, to be known as the ‘Crown Forestry Rental Trust’. The Trust is established to:

    (a)

    receive the Rental Proceeds from Licences; and

    (b)

    make the interest, earned from investment of those Rental Proceeds, available to assist Maori in the preparation, presentation and negotiation of claims before the Waitangi Tribunal which involve, or could involve, Licensed Land.

    2.2

    Upon the execution of each Licence the Crown shall then hold the interest of the Crown in all Rental Proceeds, payable to the Crown under that Licence, on behalf of the Trustees. The Crown shall pay the Rental Proceeds to the Trustees, after deduction of Goods and Services Tax or any other tax payable on the Rental Proceeds by the Crown as licensor, within 10 working days after the Crown receives them.

  13. Clause 4 provided for an eighty-year perpetuity period and for the Trust to terminate, at the latest, at the end of that period. It is common ground that at its inception all parties expected or at least hoped that the duration of the Trust would be very much shorter. Other Clauses related to the number, the appointment, the administrative powers and duties and the liability of the trustees. There were normally to be six trustees, three appointed by the Minister of Finance and three by the Maori authorities.

  14. Clause 9 set out the trusts on which the forestry rentals were to be held:

    9.

    APPLICATION OF RECEIPTS

    9.1

    Rental Proceeds received by the Trustees shall be capital of the Trust.

    9.2

    Interest earned from investment of the Trust Fund shall be accumulated by the Trustees to be applied at the Trustees' sole discretion:

    9.2.1

    To pay the expenses of the Trustees and of the Trust, including the remuneration of the Trustees and all taxes and other levies on income or assets of the Trust; then

    9.2.2

    Subject to Clause 10, to assist any Claimant in the preparation, presentation and negotiation of claims before the Waitangi Tribunal which involve, or could involve, Licensed Land.

    9.3

    The Trustees need not distribute in any one year the whole or any part of the income for that year but may at their discretion retain the whole or any part of the income.

    9.4

    Any surplus income may be distributed in a later year, or accumulated from year to year. Any surplus income remaining upon winding up the Trust shall be paid to the Crown, free from the Trust.

    9.5

    The Trustees shall not distribute any part of the capital, except in accordance with Clause 11 or on the determination of the Trust in accordance with Clause 4. For the purposes of this Deed Section 41 of the Trustee Act 1956 [statutory power of advancement] shall not apply.

  15. Clause 10 set out the principles and procedures by which the Trustees should recognise claimants. Clause 11 (headed “ALLOCATION AND DISTRIBUTION OF TRUST FUNDS”) provided as follows in Clause 11.1:

    11.1

    If the Waitangi Tribunal recommends under Section 8 HB (1)(a) of the Treaty of Waitangi Act 1975 that any particular Licensed Land be returned to Maori ownership, then:

    (a)

    the person or persons to whom ownership of that Licensed Land is to be returned shall from the date of that recommendation be Confirmed Beneficiaries of the Trust;

    (b)

    those Confirmed Beneficiaries shall be entitled to receive from the capital of the Trust the amount of the Rental Proceeds received by the Trustees in respect of that Licensed Land since the commencement of the Licence;

    (c)

    those Confirmed Beneficiaries shall be entitled to receive the Rental Proceeds in respect of that Licensed Land directly from the Licensee for the remaining term of the Licence.

    Clause 11.2 made corresponding provision for claims determined in favour of the Crown.

  16. Clause 12 (headed “PROCEDURE ON WINDING UP”) was as follows:

    12.1

    The Trustees may retain out of any Assets of the Trust in its hands full provision for, and may pay out, all expenses and liabilities incurred and anticipated by the Trustees in connection with the Trust or arising out of the liquidation of the Trust, including the fees of any agents, solicitors, bankers, accountants or other persons whom the Trustees employ in connection with the winding up of the Trust. The Trustees shall be entitled, out of the Assets so retained, to be indemnified and saved harmless against any of those expenses and liabilities.

    12.2

    The Trustees shall, upon completion of any realisation of the Trust and after any retentions pursuant to Clause 12.1, distribute the net proceeds, together with all other cash forming part of the Trust Fund:

    (a)

    in respect of any capital to be distributed pursuant to Clauses 11.1 or 11.2, to the Confirmed Beneficiaries or legal representatives of the Confirmed Beneficiaries; and

    (b)

    in respect of any other money, to the Crown.

  17. Clause 13 provided for the Crown to lend to the trustees by instalments a total of $5 million, to be used as if it were income of the Trust Fund, and to be repaid, interest-free, out of future income of the Trust Fund. These loans, which were intended to provide initial funding, were duly made and have all been duly repaid.

  18. The general structure of the Trust, therefore, is that the Crown receives rental payments from its licensees (which are income in its hands) and promptly passes them on to the trustees in whose hands they become the capital of the Trust. The trustees invest the rental payments and hold the investments until the eventual determination of claims affecting the land in respect of which the rental payments were made (or, at any rate in theory, the expiration of the eighty-year period). This has been referred to in argument as the “stakeholder” function. The dispute is not concerned with these trusts, which affect the capital of the Trust, but with the trusts of income. Trust income, representing the income of the invested rental payments, is to be made available at the trustees' discretion to assist claimants in the preparation and pursuit of their claims before the Tribunal. Any ultimate surplus of income is payable to the Crown, but only on the final winding up of the Trust.

    THE FUNCTIONING OF THE TRUST: EXPECTATION AND REALITY

  19. Much of the argument in the lower courts, and some argument before the Board, was devoted to the parties' expectations, at the time when the Trust was set up, as to the manner in which it would function, and how far those expectations have been fulfilled. It is understandable that a great deal of attention was paid to those matters below, since in both lower courts there was a dispute as to whether the primary purpose of the Trust (assisting Maori claims before the Tribunal) was a charitable purpose under the law of New Zealand. But that is no longer an issue before the Board. It is therefore unnecessary to spend time on these questions.

  20. Their Lordships would however make three general observations about the evidence and the judge's findings.

    • First, it is apparent that at the inception of the Trust there was, inevitably, great uncertainty on almost every aspect of how the trustees would set about fulfilling the Trust's primary purpose. That is not a point of criticism; the Compromise Agreement and the trust deed represented a bold and imaginative attempt at resolving a very difficult problem. The fact is, however that many matters were unpredictable. These included the number and complexity of the claims to which the Trust might give financial assistance; the degree to which that assistance would be provided by the Trust's own personnel (either employed or on contract) rather than by simply distributing money; the degree to which assistance on different individual and tribal claims could be integrated and so made more efficient; the speed with which claims would be settled or determined by the Tribunal; and the amount of income to be generated by the investment of rental proceeds. The income's debateable liability to income tax has since emerged as a further uncertainty. Their Lordships are satisfied that it would have been impossible for anyone to determine, at the Trust's inception, whether or not the net income (after paying the Trust's expenses and tax, so far as due) would exceed what would be needed to carry out its primary purpose. The Judge made no finding on that point, and in their Lordships' view he could not possibly have done so.

    • Secondly, the present financial position of the Trust was not predictable and is not in any case strictly relevant to the issues which have to be decided. But since both counsel referred to it their Lordships briefly record that the gross annual investment income (that is, the income generated by the fund representing undistributed rental receipts) has, for the period covered by the evidence, been of the order of NZ$18 million. The trustees had at 31 March 2000, the most recent accounting date covered by the evidence, retained income of over $17 million, but notes to the financial statements referred to over $23 million of unpaid and disputed tax not recognised in the financial statements. The sums at stake on this appeal are therefore substantial.

    • Thirdly, counsel for the Commissioner has expressed some temperate criticism of some of the projects on which the trustees have spent trust money, and questioned whether such expenditure was within the Trust's permitted purposes. Their Lordships express no view on the matter, which is not relevant to anything they have to decide. In New Zealand (unlike the United Kingdom) the relevant tax exemption does not depend on income actually being applied for the intended charitable purposes. Any alleged deviation from the terms of the Trust would be a matter for the Attorney-General, who has taken no part in the proceedings.

    THE STATUTORY EXEMPTION FOR CHARITY

  21. Section 61(25) of the Income Tax Act 1976 was part of a long list of categories of income which are exempt from income tax. Its terms were as follows:

    Income 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 that income so derived is income to which paragraph (27) of this section applies:

    Paragraph (27) contained a more specific and more limited exemption for certain business income which it is not necessary to consider. Section CB 4(1)(c) of the Income Tax Act 1994 is not materially different.

  22. By section 2 of the Income Tax Act 1976 “charitable purpose” is defined as including “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”. The same definition appears in the Income Tax Act 1994, section OB 1.

    THE PROCEEDINGS BELOW

  23. The Judge ruled in favour of the Commissioner on the ground that the Trust was not “established for charitable purposes” because it had two purposes, assisting Maori claimants and acting as stakeholder, the latter being a separate stand-alone purpose which was not charitable (Latimer v Commissioner of Inland Revenue [2002] 1 NZLR 535[1]). That concluded the matter in favour of the Crown but the judge went on to consider the remaining issue on which he had heard argument and held that the purpose of assisting Maori claimants was charitable.

  24. The Judge briefly addressed the significance of the Crown's right to any ultimate surplus, and observed that it was not relevant to the issue before him, being essentially a declaration of the trust which would have arisen in any case even if it were not included expressly in the trust deed. Their Lordships think that in saying that the trust was not relevant to the issue before him the judge may have overlooked or underestimated the significance of the trustees’ power to refrain from distributing the whole of the income.

  25. The trustees appealed to the Court of Appeal and the Commissioner cross­-appealed on the issue whether the provision of assistance to Maori claimants was a charitable purpose.

  26. The judgment of the Court was delivered by Blanchard J. It shows that the Court entertained an argument by the Commissioner that the existence of the ultimate trust in favour of the Crown deprived the Trust of charitable status.

  27. It was this argument which was ultimately decisive in the Court of Appeal with the consequence that the judgment for the Commissioner in the High Court was confirmed. The Court dismissed both the trustees’ appeal and the Commissioner’s cross-appeal. It confirmed the Judge’s ruling that Trust’s primary purpose of assisting Maori claimants was charitable, but held that the ultimate trust carrying surplus income to the Crown was fatal to the trustees’ case. The Court of Appeal held

    1. that what was important was the terms of the trust deed, not the parties' expectations;

    2. that in any case there was no evidence of an expectation that the return of surplus income to the Crown would be minimal nor was the possibility so minor as to be dismissed as ancillary; and

    3. that the return of surplus, if it took place, would not be given to the Crown for a charitable purpose.

    THE APPEAL TO THE BOARD

  28. The trustees now appeal to the Board with the leave of the Court of Appeal. The Commissioner does not challenge the decision of the judge and the Court of Appeal that assisting Maori claimants to pursue their claims is a charitable purpose. He does, however, maintain his contention that, to attract exemption from tax, the Trust must be established for charitable purposes, a contention on which he succeeded before the judge but failed in the Court of Appeal.

  29. Their Lordships would begin by stating some general principles. It is of the essence of a charitable trust that it is a trust for the promotion or advancement of social purposes rather than a trust for individual beneficiaries. Of course, individuals may benefit from the application of trust moneys, but they are not, as individuals, the beneficiaries of the trust and may not enforce its terms. If the purposes of the trust are charitable, they may be enforced by the Attorney-General; if they are not charitable then, with certain anomalous exceptions, they are not enforceable and the trust is not valid. Whether the purposes of the trust are charitable does not depend on the subjective intentions or motives of the settlor, but on the legal effect of the language he has used. The question is not: what was the settlor’s purpose in establishing the trust? but: what are the purposes for which trust money may be applied?

  30. A charity may take the form of a corporation, an unincorporated society or a trust. Section 61(25) draws a distinction, to which the Court of Appeal rightly attached significance, between a society or other institution on the one hand and a trust on the other. Societies and institutions may be established for purposes which are wholly or partly charitable, but they normally hold their property beneficially and not in trust. Their Lordships consider that this is a sufficient explanation of the distinction drawn in section 61(25) between income derived by trustees “in trust for charitable purposes” and the income derived by any society or institution “established exclusively for charitable purposes”. Their Lordships agree with the Court of Appeal that, in order to qualify for exemption from tax, it is not necessary that a trust, as distinct from a society or institution, be established for charitable purposes; it is sufficient that the trust funds are applicable for charitable purposes. That requires them to be applicable for exclusively charitable purposes, for to qualify as a charitable trust its purposes must be exclusively charitable.

  31. This does not preclude a charitable trust from co-existing with a private trust either (so to speak) vertically or horizontally. For instance a testator may leave his estate to be held (by the same trustees) as to part on charitable trusts and as to part on private trusts (Public Trustee v Commissioner of Inland Revenue [1971] NZLR 77 is a striking example, since the annuities and the income used for scholarships were derived from a single unappropriated fund). Alternatively a trust instrument may provide for trustees to pay or apply income for charitable purposes for 21 years, and then to hold it on non-charitable trusts for individual beneficiaries. In re Sir Robert Peel's School at Tamworth (1868) 3 Ch App 543 is a good example of the latter case. It concerned a trust under which income was, until exercise of a power of revocation, if valid, subject to a mandatory trust for expenditure on the maintenance of a school. The Court of Appeal in Chancery held that, unless and until the power of revocation if any was duly exercised, the trust was a valid charitable trust. Any revocation would not be retrospective, and pending revocation the income was to be devoted to exclusively charitable purposes. The judge was, therefore, wrong to conclude that the fact that the capital of the trust is held in trust for a non-charitable purpose (the “stakeholder function”) deprived the Trust of charitable status quoad the income of the Trust.

  32. A trust may, however, authorize the trustees to apply the trust income for a number of different purposes. In such a case the trust is not a valid charitable trust unless every purpose is wholly charitable. Where the trustees are authorized to apply trust money for a range of charitable and non-charitable purposes it cannot be said with certainty of any particular sum that it will be applied to charitable purposes: it may be applied to non-charitable purposes. Thus a trust “for charitable or benevolent purposes” is not charitable: see Chichester Diocesan Fund and Board of Finance v Simpson [1944] AC 341.

  33. Accordingly, and following the decision in Peel’s case, their Lordships are satisfied that, had the trust deed required the whole of the net income (after expenses) to be used for assisting Maori claims, the Trust would have qualified for exemption under section 61(25). But the Trustees are not obliged to apply the whole of the trust income as it arises. They may carry it forward and apply it in future years; and insofar as it is not wholly expended when the Trust comes to an end any remaining balance is to be returned to the Crown. It follows that it cannot be said of any sum of income in the hands of the Trustees that it will be applied for charitable purposes; it may be retained and ultimately become payable to the Crown. The ultimate trust in favour of the Crown is a substantial trust in its own right, and unless the Crown is a charity or holds on charitable trusts or the trust in its favour can be dismissed as merely ancillary or incidental to the primary trust to assist the Maori claimants its existence makes it impossible to contend that the trust income is applicable to exclusively charitable purposes.

  34. Trustees of a charitable trust may be authorised to charge their own fees and expenses to the trust without causing the loss of the trust's charitable status. It cannot be said to be a purpose of the trust to enable the trustees to charge fees and expenses; such expenditure may be justified only if it helps to further the trust’s charitable purpose,­ and may accordingly be classified as ancillary to that purpose.

  35. Again, some trusts for charitable purpose cannot help but confer incidental benefits on individuals; they do not thereby lose their charitable status: Royal College of Surgeons of England v National Provincial Bank Ltd [1952] AC 631 provides a good example of this. The College was established to promote and encourage the study and practice of the art and science of surgery. The professional protection of members of the College (not a charitable purpose) was held to be “an incidental though an important and perhaps necessary consequence of the work of the College in carrying out its main object”.

  36. The distinction is between ends, means and consequences. The ends must be exclusively charitable. But if the non-charitable benefits are merely the means or the incidental consequences of carrying out the charitable purposes and are not ends in themselves, charitable status is not lost. The residual trust in favour of the Crown in the present case, however, is neither a means of furthering the Trust’s charitable purpose nor an incidental consequence of carrying out that purpose. The trust may never take effect, but if it does it will do so only after the primary trust has come to an end. It cannot be dismissed as merely ancillary or incidental to the Trust’s charitable purpose. If the ultimate trust were in favour of a private individual, therefore, the Commissioner’s claim to tax would be beyond challenge.

  37. Accordingly, the critical feature of the present case is that the ultimate trust is in favour of the Crown. Their Lordships cannot accept the Trustees’ contention that the Crown is itself a charity, or that it holds all its funds to be applied exclusively for charitable purposes. If either were true there would be no need to exempt the Crown from income tax. But like other public authorities (which have their own exemption) its money is applicable and is applied for numerous non-charitable purposes. It is true that these are public purposes rather than private purposes; but this means only that the Government of the day considers it expedient to make public funds available for such purposes. It cannot be doubted that the Crown was entitled to establish a trust to assist the Maori to bring their claims, and would have been entitled to do so whether or not this was a charitable purpose. Governments can and do make public money available for a variety of non-charitable purposes. All charitable purposes (with well known exceptions) are public purposes; but not all public purposes are charitable purposes.

  38. It is sometimes possible to impress a gift in favour of a recipient which is not itself a charity with an implied trust which limits the application of the property comprised in the gift to charitable purposes. In In re Smith [1932] 1 Ch 153, a gift “unto my country England” was construed as a gift for the benefit of the inhabitants of England and, by analogy with the cases on gifts to a parish, town or city, as impressed with a trust that it be applied for charitable purposes only. In Thellusson v Woodford (1799) 4 Ves 227 a gift over to the Crown was held to be impressed with a charitable trust for the relief of the national debt and so charitable (see also Newland v Attorney-General (1809) 3 Mer 684; Ashton v Langdale (1851) 4 De G & S 402; and Nightingale v Goulbourn (1847) 5 Hare 484 (1848) 2 Ph 594, where a testamentary gift to the Chancellor of the Exchequer was expressly impressed with a trust for Great Britain.

  39. Their Lordships do not question the proposition that an ostensibly outright gift to the Crown may be subject to an implied trust in favour of charity. The difficulty in the present case is that, as the Court of Appeal observed, it does not concern a gift to the Crown. The Crown is merely resuming its own property; and the idea that it should be taken to have limited the purposes for which it may apply its own money when it is no longer needed for the purpose for which it was made available is unrealistic. Before the trust deed was executed the income of the forest rentals (like the forest rentals themselves) belonged beneficially to the Crown and was at its free disposal. It did not commit itself by the trust deed to the application of the whole of the income for charitable purposes; and it remained at its free disposal subject only to the prior trusts in favour of charity. As the Judge rightly observed, the ultimate trust in favour of the Crown merely provided expressly for what would occur under a resulting trust if it were not included.

  40. In their Lordships’ opinion there is a real distinction between a gift by a third party to the Crown, which can sensibly be made subject to an implied limitation in favour of charity; and a gift by the Crown for charitable purposes which do not exhaust the fund, with the result that, so far as not applied in favour of charity, the fund remains at the free disposal of the Crown. In the former case the Crown takes as donee; in the latter it resumes possession of its own. In the present case the Crown is the designated beneficiary under the ultimate trust, not because it is the object of the settlor's bounty, but because it is the settlor.

  41. But in their Lordships’ opinion this very distinction supports the Trustees’ case. The trust deed is an elaborate mechanism which serves much the same purpose as a Quistclose trust: see Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 and Twinsectra Ltd v Yardley [2002] 2 AC 164 at paras. 13, 81 and 99-100. It allows the Crown to make its funds available for a specified purpose and, insofar as not required for that purpose, to remain throughout its own property: see General Communications Ltd v Development Finance Corporation of New Zealand Ltd [1990] 3 NZLR 406. The only difference is that in the present case a resulting trust in favour of the settlor is express; whereas it is more usually implied.

  42. What the Crown settled in the present case, i.e. the forest rentals, was tax-exempt income. This constitutes the capital of the Trust. Insofar as the forest rentals are not otherwise applicable, they remain beneficially the property of the Crown. The income of the Trust consists of the income derived by the Trustees by investing the forest rentals. Insofar as such income is needed for the purpose of assisting Maoris to prosecute their claims, it is to be devoted to charitable purposes and so exempt from tax; and insofar as it is not applied for such purposes it remains beneficially the tax-exempt income of the Crown. In their Lordships’ opinion it never comes within the scope of the tax at all.

  43. The Commissioner observes that the issue is not the tax treatment of sums in the hands of the Crown but the tax treatment of the interest earned by and in the hands of the Trust. This is true; but the distinction is not a relevant one. Liability to income tax depends on the status for tax purposes of the person beneficially entitled to the income in question; and the Crown is exempt from income tax in respect of all its income whether such income is simple or compound interest, that is to say whether it is income which it derives directly from capital or income which it derives from its invested income. To succeed in his claim to tax, the Commissioner must show that the income in question is not the income of the Crown, which is exempt, but the income of some other party not being a charity. He cannot do this.

  44. For these reasons their Lordships will humbly advise Her Majesty that the trustees' appeal should be allowed and the Commissioners' cross-appeal dismissed with costs before the Board and in the lower courts.


Cases

New Zealand Maori Council v Attorney General [1987] 1 NZLR 641; Latimer v Commissioner of Inland Revenue [2002] 1 NZLR 535; Public Trustee v Commissioner of Inland Revenue [1971] NZLR 77; In re Sir Robert Peel's School at Tamworth (1868) 3 Ch App 543; Chichester Diocesan Fund & Board of Finance v Simpson [1944] AC 341; Royal College of Surgeons of England v National Provincial Bank Ltd [1952] AC 631; In re Smith [1932] 1 Ch 153; Thellusson v Woodford (1799) 4 Ves 227; Newland v Attorney-General (1809) 3 Mer 684; Ashton v Langdale (1851) 4 De G & S 402; Nightingale v Goulbourn (1847) 5 Hare 484 (1848) 2 Ph 594; Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Twinsectra Ltd v Yardley [2002] 2 AC 164; General Communications Ltd v Development Finance Corporation of New Zealand Ltd [1990] 3 NZLR 406

Legislations

Income Tax Act 1976: s.61(25)

Income Tax Act 1994: s.CB 4(1)(c)

Notes

[1] See Latimer v The Commissioner of Inland Revenue @www.ipsofactoj.com/international/index.htm [2003] Part 5 Case 10 [NZCA]


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