The Charities Commission shows that it is watching

This article looks at the first case in which the Charities Commission successfully had a trust declared uncharitiable notwithstanding that the Commissioner of Inland Revenue had previously considered that it was charitable.

On 11 March 2010 Justice Ronald Young J issued his judgment in the case of Canterbury Development Corporation; Canterbury Development Trust and CEDF Trustee Limited v Charities Commission. This was the first case that the author is aware of in which the Charities Commission has litigated a rejected application for charitable status.

The Charities Act 2005 established the Charities Commission. One of its functions is to receive, consider and process applications for Charitable registration. Such registration is necessary in order for tax exemption to apply: see ss CW 41 to CW 43 of the Income Tax Act 2007. A tax charity is defined in s CW 41(5) as a trust, a society or an institution that is registered as a charitable entity under the Charities Act 2005.

When an entity wishes to register they have to supply certain information to the Commission under s 17 of the Act.  The Commission then considers the application and can grant or decline the application: s 18 and 19. That is what occurred here on 28 September 2009 where the Commission declined the applications for the entities listed above.

An entity who has had their application for registration declined has appeal rights. Pursuant to s 59 of the Charities Act the aggrieved entity can appeal to the High Court. This is exactly what these three entities did. The grounds for the appeal must be stipulated but pursuant to s 61 of the Act the High Court is rehearing the matter de novo: see paragraph [6] of the judgment.

Because the matter is being heard de novo the appellate court can give what weight it likes to the decision of the Commission: see for example Austin, Nichols & Co Inc v Stitching Lodestar [2007] NZSC 103 at [4] to [8].

The appeals here all raised the same issue which was whether "a community development purpose is a charitable purpose under New Zealand Law."

With respect to the Canterbury Development Corporation (CDC) it provides industry development assistance. It has criteria for deciding whether it will provide a project or company with assistance. Those criteria are whether the project is meaningfull, material, timely, enduring and exportable. The constitution of  CDC stated at clause 2.1 that at all times it will be limited to carrying on or doing any act or transaction which is exclusively charitable, namely the relief of poverty, the support of persons seeking employment, maintenance of places of learning, encouragement of skill, or another other charitable purpose.

***Clause 2.2 in the constitution provided that in furtherance of the charitable objectives as set out above it may pursue the expansion of employment by the creation and retention of employment, collaborate with local authorities, promote all kinds of efficient business, liaise with and encourage co-operation and co-ordination with other organisations, pay money to the objects which it had essentially defined as charitable, and do other incidental things.

Against this rather unpromising? background the CDC argued that it had charitable purposes, namely the relief of poverty, the advancement of education and the beneficial effect of the community: paragraph [20]. This submission was seeking to align the objectives of the CDC trust with what are the established heads of charitable purpose. The Charities Act 2005 provides statutory recognition of the four categories of charitable purpose articulated by Lord Macnaghten in Commissioners for Special Purposes of the Income Tax v Pemsel [1891] AC 531. It does this in s 5(1).

The Commission had euphemistically concluded that the wording of the trust deed at clauses 2.1 and 2.2 did not provide conclusive evidence that the applicant's purposes were in fact charitable: paragraph [22].

CDC's arguments were three-fold:

  • First that the objective was the relief of poverty.
  • Secondly a purpose was the advancement of education.
  • Thirdly, that the objects were broadly beneficial to the community.

With respect to the relief of poverty argument it was observed that the relief of poverty does not require relief for those who are destitute: DV Bryant Trust Board v Hamilton City Council [1997] 3 NZLR 342. Additionally, relief from unemployment can be a charitable purpose: IRC v Oldham Training and Enterprise Council (1996) 69 TC 231. The argument was to the effect that the work of CDC of creating jobs in Canterbury hence qualified as a charitable purpose. The creation of jobs was not direct but indirect by helping others create jobs.

Reading between the lines of the judgment one gets the impression that if the facts had lined up with the argument set out above, charitable purposes might have been established. What actually decided the case however was a finding that the purpose of the CDC was not to assist the unemployed and hence did not have a purpose of the relief of poverty: paragraph [28].

The judge found that in fact the objective of CDC was to assist businesses to prosper, which it in turn considered would help the economic wellbeing of Canterbury generally. The judge's reasons for rejecting the claim that CDC had an objective of helping the unemployed were as follows:

  • There was no direct activity focused on creating jobs.
  • The objective is the lifting of general economic wellbeing.
  • The possibility of helping someone who is unemployed was too remote.

With respect to the advancement of education head, the argument was put on the provision of business training. The business training included financial, marketing and technical counselling. This argument was also rejected by the Court. The Court's reasoning being that the advancement of education as intended by the Act must be provided to a broad section of the public. It was not the subject matter of the education that was the problem but that the criteria for entitlement for the education was too narrowly prescribed: [33]. The criteria were focused on project requirements, not the needs of people. Thus an entitlement to education arose if the project was meaningfull, material, timely, enduring and exportable. Additionally, the substance of this "education" was provided to business owners in the form of financial management and marketing support. That too was contrary to the intention of the advancement of education.

With respect to the third argument, that the CDC had the charitable purpose of being beneficial to the community, beneficial to the community means for the public benefit: [35]. The claimed public benefit here was the generalised benefit of increasing the area's economic wellbeing and the fact that an individual business might benefit from the trust's benevolence did not mean that there was not a public benefit: see Education Fees Protection Society Inc v CIR [1992] 2 NZLR 115 andTasmanian Electronic Commerce Centre PTY Limited v C of T [2005] FCA 439.

There are two tests that must be passed for an entity seeking to establish charitable status under this public benefit test. They are:

  • That the actual activities fall within the spirit and intention of the Statute of Elisabeth. The reference to the Statute of Elizabeth is to the preamble to the Elizabethan Statue of Charitable uses 1601.
  • The meeting of the public benefit requirement.

With respect to the first of these tests the purpose (or spirit or intent) of the whole charitable exception is to assist the community by assuaging need: paragraph [42]. Thus in the context of an economically disadvantaged area a trust established to build a school say or a public hall can easily be seen as assuaging need. In this case no argument was made that Canterbury was an area in economic deprivation.  While the judge considered that the objectives of CDC, which was to assist fledging businesses, was laudable, that did not necessarily mean that the intent was within the spirit of the Elizabethan Statute.

With respect to the public benefit aspect there was not sufficiently direct benefit to the community. The benefit need not be for everyone but it needs to be for a sufficiently large part of the community. At this point an analogous case became important. In Oppenheim v Tobacco Securities Trust Co Limited [1951] AC 297 the relevant trust promoted vocational training and retraining of the general public in an area as well as assessing businesses strengths and providing business training assistance. Those benefits were not seen as charitable, however.

The Commission made the argument that this case was analogous to that case and should therefore not be considered charitable. The judge accepted that argument. A closer analogy, however, might be with the Australian case of C of T v The Triton Foundation [2005] FCA 1319. That case concerned a foundation set up to promote a culture of innovation and entrepreneurship in Australia. It did that by helping individual innovators commercialise their ideas. The judge distinguished the case on the basis that the foundation had an overriding objective of promoting a particular culture in Australia whereas CDC had as its overriding objective the development of individual businesses. This meant that the public benefit was seen in the case of CDC as being too remote.

Very similar reasoning was deployed by the Judge to conclude that the other two entities with which the litigation was concerned were not charitable either.

Finally, there are two important general aspects to this judgment. The first is that as a general proposition just because an entity says that its objectives are charitable it does not follow that the entity is charitable: paragraph [56].

The second is the judge's remarks as to the operation of s 61B or the "blue pencil" provision. That section allows for the potential deletion of the non-charitable content, leaving only the charitable purposes. The provision uses the word "trust" and it had been considered that as a consequence the "blue pencil" approach could only be used in the case of trusts, not charitable companies or societies. The judge found that s 61B applies to all charitable organisations irrespective of their legal nature. Even though s 61B was held to potentially apply to all charitable entities it will only be available in the case of simple deletion and that would not be possible on the facts of these cases.

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