In this case before the Administrative Appeals Tribunal, Home Health Pty Ltd (Home Health) seeks a review of the Commissioner’s objection decision which disallowed in full Home Health’s objection against the Commissioner’s decision to refuse to endorse Home Health as a “public benevolent institution” (and, therefore, a “charitable institution”) under item 1.1 of the table in s 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on the basis that Home Health is not an “institution”, with the consequence that it is not “entitled to be endorsed” (s 50-110 of the ITAA 1997) by the Commissioner (under s 50-105 of the ITAA 1997) as an income tax exempt entity.

Facts

• Home Health is a proprietary limited company that was incorporated on 9 June 1997, and trades under the name “Tender Care”.
• Mr Lloyd Achard is presently the sole director, and company secretary and a shareholder of Home Health
  • The organisation has a fulltime director, an administration assistant and 12 recovery assistants. All staff are permanent. The organisation’s service provides one-to-one support to over 160 persons per year.
• In the period 1 July 2004 to 28 August 2012, Home Health had two members, being Mr Achard and his wife, Mrs Barbara Achard. In that period, Mr and Mrs Achard each held 100 ordinary shares in the issued capital of Home Health.
• Mrs Achard was a co-director of Home Health with Mr Achard until 18 July 2007. However, Mr Achard has been the sole director of Home Health since 19 July 2007
• Until 6 January 2011, Home Health had a relatively standard “Constitution” for a proprietary limited company
  • Its “Memorandum of Association” (dated 9 June 1997) did not limit the objects of the company; and
  • its “Articles of Association” (dated 9 June 1997) provided for:
    • The declaration of dividends (Articles 90 and 91);
    • Capitalisation of profits (Article 98);
    • Division of property on a winding up (Article 101); and
    • Certain rights of ordinary shareholders, including the right to receive dividends in common with other ordinary shareholders and the right to share pari passu in Home Health’s surplus assets (if any) on a winding up (Article 104).
• On 6 January 2011, Home Health’s “Constitution” was amended by “Special Resolution, and its “Articles of Association” were modified by the insertion of the following three additional clauses:
  • Non-profit clause – Organisation’s assets and income were to be applied solely for furtherance of its objects.
  • Dissolution clause – if the organisation is dissolved, amounts that remain after the dissolution and satisfaction of debts and liabilities are to be transferred to another organisation with similar purposes which is not carried on for profit or gain of its individual members.
  • Objects clause – The objects or purpose of this organisation is to alleviate the mental health problems of Australian citizens, particularly the vulnerable and disadvantaged members of our community
• The Commissioner assessed Home Health on the requirements of a public benevolent institution when determining whether it constituted an income tax exempt entity under Division 50 of the ITAA 1997.

Issue

Whether Home Health, a mental health services provider, is an “institution” and, therefore, a “public benevolent institution” (and “charitable institution”) for the purposes of Division 50 of the ITAA 1997.

Held

The AAT determined that Home Health was a not a ‘public benevolent institution’ (and a ‘charitable institution’) for the purposes of endorsement as an income tax exempt entity under Div 50 of the ITAA 1997.

• The expressions “public benevolent institution” and “charitable institution”, under s 123C(1) of the Fringe Benefits Assessment Act 1986 (FBTAA) and s 176(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) respectively, encompass the concept of an “institution”. Thus it logically follows that an entity can be neither a “public benevolent institution” nor a “charitable institution” unless it is first an “institution”.
• The High Court of Australia in Maughan v Federal Commissioner of Taxation [1942] HCA 32, determined that the meaning of the term “public benevolent institution” governed by the context in which it is found.
• In Perpetual Trustee Co Ltd v Federal Commissioner of Taxation, the High Court describe “public benevolent institution” as follows:
  • …..a ‘public benevolent institution’ means, in my opinion, an institution organized for the relief of poverty, sickness, destitution, or helplessness” ([1931] HCA 20 at 232 per Starke J).
  • I am unable to place upon the expression ‘public benevolent institution’ in the exemption a meaning wide enough to include organizations which do not promote the relief of poverty, suffering, distress or misfortune” ([1931] HCA 20 at 233-234 per Dixon J).
  • [Bodies that] have one thing in common: they give relief freely to those who are in need of it and who are unable to care for themselves.
• While these definitions are not rigid or inflexible, they convey a general notion of what constitutes the essential attribute of a public benevolent institution.
  • A public institution whose services were predominantly the treatment of mental conditions or disability by psychotherapy has been held to be a “public benevolent institution” (Commissioner of Payroll Tax v Cairmillar Institute [1992] VicRp 97)
• As the High Court has recognised “public benevolent institution” to be a composite expression (Perpetual Trustee), in order to constitute a “public benevolent institution” an organisation must be: (i) public; (ii) benevolent; and (iii) an “institution”.
• Meaning of public:
  • The main criterion is the extensiveness of the class it is the object of the organisation to benefit – i.e. whether the benevolence is directed to the public at large or a substantial sector of it (Maughan).
  • Ultimately is not the ‘source’ of the funds, but the “use to which the funds are put” which is determinative of whether an institution is “public” in nature.
• Meaning of benevolent
  • It is a fundamental requirement that the institution not be conducted for the individual profit or gain of its members
  • Its operations must be carried on for the community, or an appreciably important class of the community, and not for private gain but for the public good.
• Meaning of institution
  • The fact that an organisation is a body corporate by virtue of incorporation does not mean that as a corporation it is also an “institution”
  • In Federal Commissioner of Taxation v Word Investments Ltd [2008] HCA 55, a majority of the HCA endorsed the following definition of “institution”:
    • ‘….an establishment, organisation, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc’ … ‘an undertaking formed to promote some defined purpose …’ or ‘the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle’
  • However, this should not be considered as a limiting definition – the meaning of “institution” must always depend upon the context in which it is found.
• Conclusions:
  • Home Health satisfies the “non-profit” requirement of a “public benevolent institution” as a consequence of its Constitution (Articles of Association) being amended by “Special Resolution” on 6 January 2011 by the insertion of Articles 114 to 116 (being a “Non-profit clause”, “Dissolution clause” and “Objects clause”, respectively);
  • Home Health is “benevolent” within the meaning of the expression “public benevolent institution” (and for the purposes of Division 50 of the ITAA 1997), broadly because Home Health gives relief to persons in the community who suffer from serious and persistent mental illness; and
  • Home Health’s benevolence is “public” within the meaning of the expression “public benevolent institution” (and for the purposes of Division 50 of the ITAA 1997), as the relief provided by Home Health to those suffering mental illness is directed to a sufficiently large sector of the community
  • Home Health is not an “institution” for the following reasons:
    • The only members of Home Health are Mr Achard and his wife. Following the reasoning of Beaumont and Lee JJ in Pamas Foundation [1992] FCA 154, this cannot be described as anything other than a “small and exclusive membership”. Home Health’s membership is even a smaller and more exclusive membership than that which existed in the case of Pamas Foundation (where the membership comprised eight members in total).
    • Home Health cannot be described as an organisation “greater than a structure controlled and operated by family members” (Pamas Foundation). While Mr Achard has approximately thirteen staff working for him and the scale of Home Health’s activities cannot be described as “small” (at least compared to the activities of the foundation in Pamas Foundation); Mr Achard is nevertheless the sole director (and company secretary) of Home Health and is Home Health’s controlling mind. Mr Achard has unilateral control over Home Health.