The Kalos Metron Charitable Trust was established by the father of Mrs Bargwanna, who together with her husband, were the trustees of the trust. The trustees applied to the Australian Tax Office for income tax exempt status for the trust on the grounds it was a charitable trust. If endorsed it would have qualified the trust as an entity exempt from income tax, within the operation of Div 50 of Pt 2‑15 of the Act. The exemption from income tax would only apply if ‘the fund is applied for the purposes for which it was established’: s 50-60 of the Act. The court considered whether the Commissioner was wrong to deny the trust income exempt status on the basis that the funds had not been duly administered for a charitable purpose having consideration both to the deeds of the trust and the application of the funds.
Administration of a charitable trust is the same as for a private trust. A key difference is that a trust for charitable purposes lacks the individual beneficiaries who commonly hold the beneficial interest in the trust assets. Although individuals may benefit from any distributions from the trust they do not (and cannot) have an enforceable right to a distribution.
It should be noted that the law makes a distinction between the purpose as deeded in the trust and the actual application of the trust funds. This is not to say that the trust purpose must be met each tax year, as the Commissioner accepts that a fund may be ‘applied’ for charitable purposes without immediate expenditure of income as it is derived; or that accumulation does not negate charitable purpose. However in Bargwanna, the trustees mingled the trust monies with personal monies including using the trust as an offset against their personal mortgage to reduce interest on the latter.
This admixture of other funds caused it to lose its distinct identity; moreover benefits were derived personally by the trustees. This created an intersection between the concept of breach of trust and the revenue law exemption requirements. However even if the trustees obtained absolution under s 85 of the Trustee Act 1925 (NSW) as having acted honestly and reasonably, this cannot be used to ‘cure’ the requirements under s 50-60 for the distinct fund to be applied for the charitable purpose. The requirement cannot be read down to ‘substantially applied’ or ‘one the whole applied’, especially since the maladministration led to personal benefits for the trustees and were not in the furtherance of the public charitable purpose of the trust.
Therefore any organisation or persons using a trust to hold assets and income for the furtherance of their charitable purpose should take care the trustees maintain a separate, identifiable fund for the trust and that there is no intermingling of monies or derivation of personal benefit for the trustees. Failure to do so not only puts the trustees at risk of breaching trust duties but also risks the income tax exempt status of the charitable trust.
ELEN SEYMOUR teaches Taxation Law and Financial Services at the University of Western Sydney.