Economics of Non-Profit Accounting

Case Notes: Asia Pacific

The International Journal
of Not-for-Profit Law

Volume 5, Issue 1, September 2002


Possible De-Registration in Fiji.

In June 2001 the Registrar of Charitable Trusts, acting on the instructions of the Ministry of Justice, published a notice in the Government Gazette canceling the registration of the Citizens Constitutional Forum on the grounds that it was engaged in political activities inconsistent with its stated educational purposes.  CCF’s role in the adoption of the 1997 Constitution and its participation in a court challenge to the legitimacy of the caretaker government were cited as examples of non-charitable activities.  It is reported that CCF is seeking judicial review of the decision.  PB  from the Europe Pacific Solidarity Bulletin, Volume 9 Issue ½.

New Zealand

Commissioner of Inland Revenue v Dick , AP 64-SW00, High Court, 31 October 2001, 4 ITELR 317.

A foundation was established to operate gaming machines, which can only lawfully be operated in New Zealand if the income is distributed to authorized purposes, and to distribute the profits to charitable purposes.  One of these purposes involved supporting the New Zealand League of Rights in making educational videos, and to this end the foundation paid the Australian League of Rights to produce these videos.  The initial nominal capital of the foundation was provided by an employee of the founder.  The founder did not settle any capital on the foundation until 7 years after its creation, but provided interest free loans and guarantees to the trustees to enable them to by the machines and provided locations for some machines.  The foundation paid the founder for servicing the machines, and acted as a middleman in deals between the founder and other businesses.  The foundation also assisted one of the trustees in moving from one home to another.  The Inland Revenue claimed that the foundation was not charitable, that its purposes were not limited to New Zealand (which would mean that it was only entitled to partial exemption from income tax), and that the foundation’s business income is liable to income tax because the founder and the trustees had received benefits from the foundation.  The court held that:

  • the fact that an initial lack of funds and delays in obtaining licences had temporarily prevented the foundation from making distributions did not change the essential charitable character of the foundation’s purposes;
  • the payments to the Australian League of Rights were for charitable purposes in New Zealand;
  • for the purposes of section 61(27) of the Income Tax Act the definition of settlor included a person who was instrumental in establishing a charity and although the founder did not initially settle any property on the foundation he had been a settlor from the establishment of the foundation;
  • section 61 (27) applied if a settlor or trustee could receive income or benefit without being in breach of trust, and on the facts the trust deed enabled the trustees and settlor legally to receive income from the foundation and the settlor and one trustee had actually received income or benefits.

The court also stated that where a benefit or income has been provided to a trustee or settlor in breach of trust, the proper course was not to remove tax exemption but for the tax authority to consider making a report to the minister under section 89 Tax Administration Act 1994 that funds had been applied for other than a charitable purpose. PB

Re Crown Forestry Rental Trust; Latimer v Commissioner of Inland Revenue, CP 127/99 and CP 221/99, High Court, 7 August 2001, 4 ITELR 246.

The Crown Forest Assets Act 1989 provided for the establishment by deed of a forestry rental trust with the purpose of investing the income for the benefit of assisting various Maori claimants before the Waitangi Tribunal, which was established to hear claims for compensation or return of land owned by the Crown.  The trust was to be wound up after 80 years within the statutory perpetuity period under section 6 of the Perpetuities Act 1964, and any capital remaining was to be paid to the Crown.  Following the withdrawal of a ruling by the Inland Revenue that the trust could deduct payments to claimants in calculating its taxable income, the trust claimed that it was established for charitable purposes.  The court held that:

  • the fact that the trust was limited in time and that any unspent funds reverted to the Crown did not compromise the charitable nature of the trust, nor did the delay in claiming charitable status create any form of estoppel against the trust;
  • it was entitled to refer to the statutory setting in construing the purposes of the trust, which were twofold: the assistance of Maori claimants and the holding of rental income until it could be distributed to the confirmed beneficiary (either the party identified by the Tribunal or the Crown);
  • the first purpose was charitable as a purpose of providing public benefit, and not assistance in obtaining a private benefit, since the assistance in bringing claims before the Tribunal was analogous to the provision of legal aid and contributed to the resolution of historical grievances and the promotion of racial harmony; and
  • the latter purpose was not charitable, since the holding of capital was a distinct purpose of the trust and not so closely linked to the charitable purpose of assisting claimants that it was itself converted into a charitable purpose.

Accordingly, since the purposes of the trust were not exclusively charitable, the claim failed. PB