FEDERAL COURT OF AUSTRALIA Tasmanian Electronic Commerce Centre Pty Ltd v Commissioner of Taxation [2005] FCA 439 INCOME TAX – appeal from Administrative Appeals Tribunal – company jointly owned by Tasmanian Government and University of Tasmania - formed to assist Tasmanian business and industry to adopt electronic commerce and to compete in the electronic market place - whether charitable institution - whether decision of Tribunal raised question of law WORDS AND PHRASES – "charitable institution" Income Tax Assessment Act 1997(Cth) s 50-5 item 1.1 Administrative Appeals Tribunal Act 1975 (Cth) s 44(1) Charitable Uses Act 1601 (Imp) Re Tasmanian Electronic Commerce Centre Pty Ltd and Commissioner of Taxation [2004] AATA 521 reversed Hope v Bathurst City Council (1980) 144 CLR 1 applied Vetter v Lake Macquarie City Council (2001) 202 CLR 439 distinguished Williams v Bill Williams Pty Ltd [1971] 1 NSWLR 547 cited Royal Choral Society v Inland Revenue Commissioners [1943] 2 All ER 101 followed Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 applied Federal Commissioner of Taxation v Broken Hill South Ltd (1941) 65 CLR 150 distinguished The Commissioners for Special Purposes of the Income Tax v Pemsel [1891] AC 531 applied Scottish Burial Reform and Cremation Society v Glasgow Corporation [1968] AC 138 cited Vancouver Regional FreeNet Association v Minister of National Revenue [1996] 3 FC 880 cited Commissioners of Inland Revenue v Yorkshire Agricultural Society [1928] 1 KB 611 followed In re Pleasants (1923) 39 TLR 675 followed Royal Agricultural Society of England v Wilson (1924) 9 Tax Cas. 62 followed Re Tennant [1996] 2 NZLR 633 followed Crystal Palace Trustees v Minister of Town and Country Planning [1950] 2 Ch D 857 followed In re Income Tax Acts (No 1) [1930] VLR 211 followed Thompson v Federal Commissioner of Taxation (1959) 102 CLR 315 cited Congregational Union of NSW v Thistlethwayte (1952) 87 CLR 375 followed Cronulla Sutherland Leagues Club Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4,215 followed Inland Revenue Commissioners v Oldham Training and Enterprise Council (1996) 69 TC 231 followed Barclay v De Lacy [1996] 2 Qd R 112 followed The Incorporated Council of Law Reporting of the State of Queensland v Federal Commissioner of Taxation (1967-1971)125 CLR 659 followed Brookton Cooperative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 followed Attorney-General v M'Carthy (1886) 12 VLR 535 cited TASMANIAN ELECTRONIC COMMERCE CENTRE PTY LTD V COMMISSIONER OF TAXATION TAD 20 of 2004 HEEREY J 18 APRIL 2005 MELBOURNE (HEARD IN HOBART) IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TAD20 OF 2004 On Appeal from the Administrative Appeals Tribunal BETWEEN: TASMANIAN ELECTRONIC COMMERCE CENTRE PTY LTD APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE OF ORDER: 18 APRIL 2005 WHERE MADE: MELBOURNE (HEARD IN HOBART) THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The order of the Tribunal made on 24 May 2004 be set aside and in lieu thereof it be ordered that the application for review in proceeding TT2003/5-7 be allowed. 3. The respondent pay the applicant's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TAD20 OF 2004 BETWEEN: TASMANIAN ELECTRONIC COMMERCE CENTRE PTY LTD APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE: 14 APRIL 2005 PLACE: HOBART REASONS FOR JUDGMENT 1 The applicant Tasmanian Electronic Commerce Centre Pty Ltd (TECC) sought review before the Administrative Appeals Tribunal of an objection decision by a delegate of the respondent the Commissioner of Taxation in respect of assessments for the 1998, 1999 and 2000 tax years. The delegate had decided that TECC was not a "charitable institution" within the meaning of item 1.1 of s 50-5 of the Income Tax Assessment Act 1997(Cth) (the Act) and so not exempt from income tax under subdiv 50-A of the Act. 2 The Tribunal affirmed that decision: Re Tasmanian Electronic Commerce Centre Pty Ltd and Commissioner of Taxation [2004] AATA 521. TECC now appeals to this Court. A question of law? 3 Counsel for the Commissioner submitted that there is no question of law arising so as to confer jurisdiction on this Court: Administrative Appeals Tribunal Act 1975 (Cth) s 44(1). He said the Tribunal applied the statutory expression "charitable institution" to primary facts in circumstances where reasonable minds may have differed as to the conclusion. It was open to the Tribunal to come to the decision it did. 4 The leading authority is Hope v Bathurst City Council (1980) 144 CLR 1. Recently in Vetter v Lake Macquarie City Council (2001) 202 CLR 439 at [25] Gleeson CJ, Gummow and Callinan JJ quoted the following passage from the judgment of Mason J in Hope (at 7) as "comprehensively … stat(ing) the law on this topic in this country" (citations omitted): "Many authorities can be found to sustain the proposition that the question whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law. One example is the judgment of Fullagar J in Hayes v Federal Commissioner of Taxation, where his Honour quoted the comment of Lord Parker of Waddington in Farmer v Cotton's Trustees, which was adopted by Latham CJ in Commissioner of Taxation v Miller, that where all the material facts are fully found, and the only question is whether the facts are such as to bring the case within the provisions properly construed of some statutory enactment, the question is one of law only. Fullagar J then said: '... this seems to me to be the only reasonable view. The distinction between the two classes of question is, I think, greatly simplified, if we bear in mind the distinction, so clearly drawn by Wigmore, between the factum probandum (the ultimate fact in issue) and facta probantia (the facts adduced to prove or disprove that ultimate fact). The "facts" referred to by Lord Parker ... are the facta probantia. Where the factum probandum involves a term used in a statute, the question whether the accepted facta probantia establish that factum probandum will generally - so far as I can see, always - be a question of law.' However, special considerations apply when we are confronted with a statute which on examination is found to use words according to their common understanding and the question is whether the facts as found fall within these words. Brutus v Cozens was just such a case. The only question raised was whether the appellant's behaviour was 'insulting'. As it was not unreasonable to hold that his behaviour was insulting, the question was one of fact." 5 Immediately after the passage in Hope referred to in Vetter, Mason J goes on to say (citations omitted): "The judgment of Kitto J. in N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation is illuminating. Kitto J. observed that the question whether certain operations answered the description 'mining operations upon a mining property' within the meaning of s. 122 of the Income Tax Assessment Act 1936, as amended, was a mixed question of law and fact. He went on to explain why this was so: 'First it is necessary to decide as a matter of law whether the Act uses the expressions 'mining operations' and 'mining property' in any other sense than that which they have in ordinary speech.' Having answered this question in the negative, he noted that the 'common understanding of the words has . . . to be determined' as 'a question of fact'. He continued: 'The next question must be whether the material before the Court reasonably admits of different conclusions as to whether the appellant's operations fall within the ordinary meaning of the words as so determined; and that is a question of law: see also per Isaacs and Rich JJ. in Australian Slate Quarries Ltd. v. Federal Commissioner of Taxation. If different conclusions are reasonably possible, it is necessary to decide which is the correct conclusion; and that is a question of fact: see per Williams J. in the Broken Hill South Case." 6 In the present case it is common ground that the expression "charitable institution" is used in the Act in a technical legal sense and not as the word "charitable" is understood in ordinary speech. Therefore we do not travel down the road trodden by Kitto J in Associated Blue-Metal or by the House of Lords in Brutus. Whether on the facts found by the Tribunal (being facts fully found; see Williams v Bill Williams Pty Ltd [1971] 1 NSWLR 547 at 557) the Tribunal was correct in holding that TECC was not a "charitable institution" in the statutory sense is a question of law. 7 The English Court of Appeal reached a like conclusion in Royal Choral Society v Inland Revenue Commissioners [1943] 2 All ER 101. The Special Commissioners found that the society was not a body "established for charitable purposes". The society appealed successfully to Macnaghten J. Upon an appeal to the Court of Appeal the Solicitor-General argued that the finding of the Special Commissioners was a finding of fact which was binding on the court. Lord Greene MR, with whom the other members of the Court of Appeal agreed, said (at 103): "It is the business of the Commissioners to find facts. It is a question of law whether, upon the facts so found, the particular body in question is a body established for charitable purposes. That is a question of law; and in no circumstances can it be turned into a matter of fact." This statement was cited with approval by Williams J in Royal Australasian College of Surgeons v Federal Commissioner of Taxation (1943) 68 CLR 436 at 451. 8 The present case is thus to be distinguished from those where an appellate court was concerned with a finding as to a statutory criterion expressed in ordinary language, like the word "journey" in Vetter (see per Hayne J at [108]), or the expression "mining operations" in Federal Commissioner of Taxation v Broken Hill South Ltd (1941) 65 CLR 150 at 155, or the word "business' in Hope (at 8) or the word "insulting" in Brutus. In these cases the question whether more than one meaning was reasonably open (a question of law) only arose because of the anterior affirmative answer to the question of law whether the word or phrase was used in the sense conveyed in ordinary speech. The Tribunal's findings of fact 9 The primary facts before the Tribunal were not relevantly in dispute. The Tribunal made detailed findings as follows. Regional Telecommunications Infrastructure Fund 10 As a result of the first partial sale of Telstra, the Federal Government established a Regional Telecommunications Infrastructure Fund (RTIF), comprising $250 million, called "Networking the Nation". RTIF was administered by the Regional Telecommunications Infrastructure Fund Board (RTIF Board). It was intended to provide "... funding for regional, rural and remote communities to identify their communications needs and develop projects that meet those needs". The objectives of Networking the Nation were: "... to assist the economic and social development of regional, rural and remote Australia by funding projects which: · enhance telecommunications infrastructure and services in regional, rural and remote areas; · increase access to, and promote use of, services available through telecommunications networks in regional, rural and remote areas; or · reduce disparities in access to such services and facilities between Australians in regional, rural or remote areas and those in urban areas." Examples of projects that would be considered by the RTIF Board included funding to establish infrastructure to improve the quality of telecommunications, trials of innovative technology, identifying community needs, establishing Internet hubs or removing the STD charge for rural and remote access to the Internet, and increasing awareness of, or creating demand for, online and related communications services and training. 11 The RTIF provided a total of $58 million to Tasmania over a five year period commencing in 1997. In April 1997 the Federal Government prepared a document entitled "Directions for Information Technology and Advanced Telecommunications", in which it described the directions as being to: "… · transform how Tasmanians work, live and learn; · make Tasmania a demonstration site showcasing the potential of the new technologies to transform the economic and social life of regional and more isolated communities; · expand trade in our high value products in new ways and to a much wider market; · improve investment outcomes; · build new service industries; · enhance the delivery of services to the community; and · increase education and training opportunities. " Seeking funds from the RTIF for Tasmania 12 In May 1997 a steering committee was established by the Tasmanian Government and the University of Tasmania to coordinate the establishment of an electronic commerce centre in Tasmania. On 7 May 1997 the Tasmanian Government made a submission to the RTIF Board for funds for, amongst other things, the establishment of the centre which was to become TECC. The objectives that TECC was to pursue during a three year establishment period were set out as: "… · Assist Tasmanian industries to establish themselves in the international electronic marketplace; · Research and develop information systems and business infrastructure to enable small to medium sized enterprises to enhance and transform business processes; · Accelerate the adoption of electronic commerce by Tasmanian industry; and · Become viable as a self-funding body. Outputs will include: · Business research and analysis; · Education, training and advisory services to raise awareness of the potential of electronic commerce; · System development; and · Prototyping." 13 By 18 June 1997 a Business Plan had been drafted for TECC. It envisaged that TECC's role would be: "... to assist industry sectors and enterprises to: - access new marketing, distribution and trading opportunities; - understand how the nature of their business will change in the advanced technology global environment; and - improve productivity and business agility; and to catalyse the formation of a viable, competitive electronic commerce service industry." 14 The Business Plan envisaged that there would be a three year establishment plan for TECC but that there would "...be sufficient demand for the Centre to then continue as a self-funding body". The Tasmanian Government and the University would sponsor TECC and the Government would apply to the RTIF Board to finance its establishment. As for other funding required to establish TECC, the Business Plan stated that: "... Other establishment resources will be provided by the University of Tasmania, and possibly private sector contributors. The Centre will also generate an income, aiming to become self-sufficient by the end of the establishment phase. The involvement of private sector enterprises will also be sought, particularly from the financial and telecommunications industries. Selected major companies from these sectors may be invited to become strategic investors in the Centre. Strategic investors would work with the Centre, sharing their industry knowledge and making a significant contribution to Centre costs." 15 Funding was dealt with later in the Business Plan. It was said that the early projects would be fully subsidised by the RTIF seed funding and untied contributions from strategic investors. As the Centre became more established, it was envisaged that project-specific funding would be obtained: "… · directly from industry sectors wishing to work with the Centre; · indirectly from industry sectors through industry grants, for example from the Commonwealth Department of Industry and Technology; and · from investors wishing to sponsor particular projects." The Corporate Reports for 1999 and 2000 reveal very little, if any, private funding. 16 According to the Business Plan, TECC would pursue four objectives during the establishment phase, described as: "… · Assist Tasmanian industries to establish themselves in the international electronic marketplace; · Research and develop information systems and business infrastructure to enable small to medium sized enterprises to enhance and transform business processes; · Accelerate the adoption of electronic commerce in Tasmania; and · Become viable as a self-funding body." 17 The Business Plan envisaged that TECC would engage in two kinds of activity: "... Whole of industry activities will be aimed at increasing the awareness and understanding of electronic commerce possibilities, and building networks within industry. Industry-sector specific activities will involve the Centre working with a particular industry group or enterprise to develop an electronic commerce system, marketing approach, or idea, to proof-of-concept stage only. These activities will demonstrate the achievable business benefits of adopting electronic commerce. ... If only individual projects are funded, the knowledge gained could be lost, not shared across the business community. Through the Centre, it will be possible to build on the knowledge gained in each activity sponsored." 18 The outputs that the Business Plan expected would result from the pursuit of its objectives were: "… · prototypes of electronic trading systems, including marketing and electronic banking; · business research and analysis; · education, training and advisory services to raise awareness of the potential of electronic commerce; and · development of electronic systems." 19 The Business Plan also dealt with the intellectual property that would be generated in the course of the research activity associated with TECC. The Business Plan saw that intellectual property as vesting "... either in the University, the Centre, or the research students who engage in the research, depending on the principle [sic] investigators in each research project, and on any agreements which are made prior to the research being undertaken. The TECC will not routinely use non-disclosure agreements to restrict the publication of such research. Rather, the intention is that as much as possible of the research done in association with the Centre will be able be publically [sic] released through the normal academic and other channels. The third type of intellectual property will be the new knowledge gained from the development of electronic commerce systems. Some of this knowledge will be generic and will remain vested in the TECC, while some will be specific to individual projects and may be jointly owned with relevant industry groups. Agreements concerning ownership of intellectual property of this kind would be expected to from part of project agreements between stakeholders and the TECC, made at the beginning of projects." 20 In an application dated 7 July 1997 the steering committee applied to the RTIF for funding to establish TECC, $1.5 million for each of three years beginning on 1 August 1997. The proposed objectives were: "… - To promote the use of telecommunications services through accelerated uptake of electronic commerce techniques across the region of Tasmania; and - To reduce the disparity between Tasmania and metropolitan Australia in access to electronic commerce support and related telecommunications services and facilities." 21 The role of TECC would be: "… to assist industry sectors and enterprises to: - access new marketing, distribution and trading opportunities; - understand how the nature of their business will change in the advanced technology global environment; and - improve productivity and business agility; and - to catalyse the formation of a viable, competitive electronic commerce service industry." 22 The steering committee identified a number of benefits which TECC could provide including: "... it can support interstate and international export activity by dramatically enhancing enterprises' ability to operate remotely from their markets. ... ... it can assist small industry groupings, and small enterprises, by enabling them to work cooperatively with counterparts elsewhere in the State or in other States and countries, and to create joint systems and marketing identities. This virtual clustering could be particularly valuable for enterprises operating as niche providers within larger industries, allowing Tasmanian firms to piggyback on the success of larger industry groups in other States and overseas. These benefits are in addition to the substantial gains in productivity, efficiency, and business agility which are possible when business processes are transformed using electronic commerce techniques. ... ... The uptake of electronic commerce will create a niche for a new technical support industry, increase education and training opportunities, and provide business with new opportunities in rural and isolated settings. Business, government, and community service organisations will be presented with an opportunity to significantly enhance service delivery and customer service, to the particular advantage of people and businesses which are located outside urban areas, and people with family responsibilities or limited mobility." "... the boost to regional economy will be reflected in substantial social benefits, in a region whose geographic isolation hinders community development and wealth, as well as business success." Establishment of TECC 23 TECC was incorporated on 14 August 1997 as a company limited by shares. Its founding shareholders were the Crown in right of the State of Tasmania and the University. Through nominees each held one ordinary share. No further shares have been issued. TECC's principal objectives were set out in the Shareholders' Agreement dated 13 August 1997 and subsequently in its Memorandum of Association: "(a) to provide research and development facilities to help the Tasmanian business community to adopt electronic commerce and to compete in the international electronic marketplace; (b) to liaise with Federal, State and local government and statutory bodies in relation to the promotion, research and development of electronic commerce; (c) to collect, co-ordinate and disseminate information on the electronic commerce; (d) to raise and manage the funds and other assets associated with the promotion, research and development of facilities to assist the Tasmanian business community to adopt electronic commerce and to compete in the electronic marketplace." 24 The Shareholders' Agreement provided that the University would provide certain facilities free of rent and free network access to a specified level. In addition, it would contribute expertise in research, education and electronic commerce, in-kind support of TECC at its Launceston and Hobart campuses and encouragement of academic and research personnel to undertake works for, or in association with, TECC. The Tasmanian Government would contribute industry development links and expertise together with expertise in economic and business analysis. In addition, selected agencies would act as demonstration clients for TECC in order to demonstrate examples of potential benefits. As to funding, the Shareholders' Agreement provided that: "10. The Crown will use its best endeavours to obtain financing from the Regional Telecommunications Infrastructure Fund Board to finance the establishment of the Company for the First three years. 10.2 Each Shareholder shall use their best endeavours to obtain private sector funding and participation in the Company." 25 A Grant Deed was signed between the Commonwealth of Australia and TECC on 14 October 1997 and $3 million was paid on that date. 26 In December 1997 Mr John McCann was appointed Chief Executive Officer of TECC. At that stage TECC had not commenced its operations and did not do so until the following April. Its work is directed by a Board of Directors comprising shareholder and industry representatives and is supported by a secretariat. Staffing has risen from one part time employee when Mr McCann was appointed to 14 permanent staff. Consultants are regularly engaged on various projects. 27 At the outset of its Corporate Report 1999 TECC made the following statement: "The TECC is the focal point for work to accelerate the effective use of electronic commerce by Tasmanian business and industry. This is urgent and important work – the technology of commerce is undergoing its biggest change since the Industrial Revolution. To take best advantage of this change, Tasmania must become a player in the information economy while it is in its initial growth phase. The TECC is helping Tasmanian business and industry to take up the challenge NOW – so that Tasmania can gain long-term economic advantage by extending the strengths of traditional industries, and establishing new information based industries. The TECC is ensuring that Tasmania enjoys the benefits of the global online economy." Establishment of Tasmanian Business Online 28 On 1 June 1999 the RTIF Board announced that funding of $1.8 million had been allocated to the Tasmania Business Online (TBO) project. That funding would provide a framework to support and encourage Tasmanian business operators to use the internet as a business resource tool. TECC announced that TBO was: "... designed to locate infrastructure to support the online trading capacity of Tasmanian businesses (e-commerce).... The TBO 'portal' will provide resources ranging from pre-trading information through to a directory of Tasmanian businesses, assistance for businesses to develop their own Web presence, product catalogues, and eventually trading capability." 29 On 30 November 1999 the Commonwealth and TECC signed a Grant Deed in relation to a grant for TECC and TBO. The Grant Deed acknowledged that $3 million of the grant moneys had previously been paid for TECC and stated that a further $1.5 million would be paid within 28 days of the date of the deed. The project fell into two parts: TECC and the TBO. A separate grant of $1.805 million was paid for TBO. Moneys paid had to be accounted for in Progress Reports. TBO's objectives were to: "... develop a single electronic gateway or portal for Tasmanian business and industry, incorporating community-based infrastructure for managing trading opportunities and business communications support to overcome regional inequities in access to support services and information." 30 TBO Pty Ltd was subsequently incorporated as a wholly owned subsidiary of ECEnable Pty Ltd (ECEnable). TECC has a 35.45 per cent holding in ECEnable, the balance being held by: KPMG 35.45 M2M 25.1 ARIBA 4.0 TBO commenced on 3 May 2000. Subsequently on 1 October 2001 ECEnable (as to 35 per cent) and TECC (as to 65 per cent) entered into the TECC TBO Joint Venture. The Corporate Report 2000 said that the alliance of these companies provided: "... regional Australia with the opportunity to access world class e-commerce services cost-effectively, supported by the trading community development programs to assist in the task of enabling a business to move from a paper-based environment to online trading." TBO, it was said in the report, heralded: "... a breakthrough for Tasmanian business by providing assistance to market products and services globally and reducing costs through online processing of business transactions". 31 There were two components of TBO: the Trading Hub and the Business Community Centre. The Trading Hub would be used by suppliers to reduce the process costs associated with supply, improve customer service and gain access to new markets in a cost effective manner. The Business Community Centre would provide links to various sources of government and industry information services relevant to Tasmanian businesses. TBO charges fees to businesses using its services. Those services are divided into its Web Portal, TBO eLogistics, eTrading, Enablement and Training and Consulting. Projects 32 On the evidence of Mr McCann the Tribunal found that the manner in which TECC has pursued its objectives include: · designing a website to showcase TECC and to demonstrate a variety of features as part of the e-commerce awareness raising process; · raising the awareness of business in relation to opportunities in e-commerce through media releases, speaking engagements, boardroom briefings and business publications; · providing financial support and speakers at the Online Access Centre Association of Tasmania's annual conferences in 2000, 2001 and 2002; · working with Mr Richard Harvey to assist online access centres in the southern region of Tasmania to become sustainable and to move towards commercialisation and to assist small businesses. Mr Harvey had received funding through the RTIF to achieve these objectives. TECC was a member of the formation management committee for the Burnie Online Access Centre; · giving public presentations at Smithton, Devonport, Exeter and Ulverstone in 1999; · chairing a committee in 2000 which prepared the Riana Online Access Centre application for funding; · providing assistance in 2002 to the Online Gamers Club at the Burnie Online Access Centre; · providing assistance to students of the Riana Primary School on web presence and bandwidth requirements, project and general information to students of the University of Tasmania School of Information Systems and general material to HSC students at the Hutchins School; · stimulating interaction between secondary and tertiary students and small and medium enterprises in relation to the adoption of e-commerce and the adoption of information communication technology tools and technologies. This has been a project conducted in conjunction with the University and Intellinc and is more broadly intended to stimulate business development in Tasmania while helping to secure jobs for school leavers and graduates. Stimulation is achieved by offering six Business Plan Awards, each worth $3,000; · supporting, since July 2002, the Community of Practice project launched by TAFE Tasmania and Dr Marcus Bowles and coordinating all vocational training in the north east of Tasmania to meet the needs of industry; · making presentations to various RSL, sports and Rotary clubs as well as to other agricultural and special interest groups; · making presentations at various public fora; · sponsoring the design of the de Bono flag and emblem for the week and coordinating a number of introductions and functions during Thinking Week; · chairing the business development panel of the joint venture between the Edward de Bono Institute in Melbourne and the Allen foundation; and · chairing and providing resources to the Launceston Digital Development Forum which facilitates and coordinates the dissemination of e-commerce news to the community; and · providing funds to particular projects as described in the following paragraph. 33 Examples of projects that have been funded by TECC are: - Blundstones Pty Ltd (Blundstones) is Australasia's largest manufacturer of heavy duty work and protective safety footwear. It services markets in Australia, New Zealand, South Pacific, Asia, Europe and North America. It manufactures some 5,000 pairs of footwear each day and employs some 300 employees. Blundstones has a website showing its products and contact details for its registered distributors, a secure online, interactive ordering and account facility for its distributors and a secure document management system for use by its staff. TECC gave Blundstones $30,000 to assist it to develop its online interactive ordering and account facility for its distributors. That facility has been developed by ICS Multimedia. It benefits Blundstones by enabling orders to be received and entered directly into the manufacturing system 24 hours a day and, as a consequence, enabling the company to know the amount of raw material it requires in advance. Invoices are automatically generated when a distributor's order has been filled and despatched so that the risk of misdescribing the goods is eradicated. Distributors can pay for their goods electronically and so improve Blundstones' cash flow. Distributors are advantaged by being able to place and track the progress of their orders and manage their account details at any hour of the day. Details of their orders are maintained on Blundstones' database so enabling them, if they wish, to do away with the need to maintain their own files to keep track of stock to be introduced or replaced. - Botanical Resources Australia Pty Ltd (BRA) grows, processes, manufactures and exports pyrethrum products. It supplies world markets with natural pyrethrum products for use as the key ingredient of domestic and industrial pest control formulations. Approximately 200 mixed cropping agribusinesses are contracted to grow pyrethrum for BRA. TECC provided funds to enable BRA and 75 participating growers to install computers and software together with modems and Internet access through Tasmanian Internet Service Providers for such things as email, electronic newsletters and product information. It did so because the project demonstrated how a network of rurally-based agribusiness operators could be formed and use electronic commerce in their businesses. The benefits to the growers has been an increase in their skills and an opportunity to source and order agricultural products over the Internet, use Internet banking and learn about the benefits of farm financial and management software. The benefits for BRA have included their having a more efficient grower base, improved communication between its staff and growers, improved computer skills of its field staff and a website to promote its products. - Regal Craft Cards (Regal) has been selling quality craft cards, quilling paper and other accessories for making gift cards for over 20 years. It is based in Launceston and has sold its craft products locally and throughout the world using a mail order catalogue for a number of years. It then began to market its products electronically by designing and publishing its own website. Regal sought professional assistance to develop the software and infrastructure that would expand the market it could enter. TECC provided support towards the costs of the development. Regal Craft Cards online was launched in February, 2000. The benefit to its customers have included speedier access to its range of products and that access can be gained from all parts of the world. Those customers can see the product on the screen. They can submit their orders as soon as they have registered their details on the electronic order form at the website. The cost of those orders is shown in the local currency of the country from which the order was sent and the customers can track the progress of their orders using their own logins. Regal is able to achieve cost efficiencies and to increase its direct sales throughout the world. Orders are paid for in advance by credit card and this alleviates cash flow problems. Using the internet, Regal has been able to target other businesses operating in the craft field and to search worldwide for new stock that it is then able to offer to its customers. The internet has improved its stock controls. Every item is bar coded so enabling the company to identify the products it sells quickly. There is a consequent reduction in labour and increase in cost efficiencies. Profit or loss? 34 TECC's accounts showed a small profit in 1998 and 1999 and a small loss in 2000. Since its incorporation, its operations have produced an income stream from some of its clients. It has continued to be reliant on RTIF funding. The legal concept of charity 35 As already mentioned, the parties accepted that the term "charitable" is used in the Act in its technical legal sense. Also there was no dispute that TECC is an "institution". The Tribunal's discussion of the law is not the subject of substantial challenge. It will be convenient to summarise the relevant principles at this stage. 36 The effect of the preamble to the Charitable Uses Act 1601 (Imp) (the Statute of Elizabeth) was stated by Lord Macnaghten in The Commissioners for Special Purposes of the Income Tax v Pemsel [1891] AC 531 at 583 as follows: "...'Charity' in its legal sense comprises four principal divisions: trusts for the relief of poverty, trusts for the advancement of education, trusts for the advancement of religion, and trusts for other purposes beneficial to the community not falling under any of the preceding heads. The trusts last referred to are not the less charitable in the eye of the law because incidentally they benefit the rich as well as the poor, as indeed every charity that deserves the name must do, either directly or indirectly." His Lordship had earlier pointed out (at 581) that the concept of charitable uses or trusts was well established before the Statute of Elizabeth and quite independently of that Act. Of particular importance was the exemption of charitable trusts from the rule against perpetuities. The object of the Statute was merely to provide new machinery for the reformation of abuses in regard to charities. But by a "singular construction" the Statute was held to authorise certain gifts to charities which would otherwise have been void. Lord Macnaghten continued: "And (the Statute) contained in the preamble a list of charities so varied and comprehensive that it became the practice of the Court to refer to it as a sort of index or chart. At the same time it has never been forgotten that the 'objects there enumerated', as Lord Chancellor Cranworth observes, 'are not to be taken as the only objects of charity but are given as instances'." 37 What is for the benefit of the public may change according as new social needs arise or old ones become obsolete or satisfied: Scottish Burial Reform and Cremation Society v Glasgow Corporation [1968] AC 138 at 154 per Lord Wilberforce; Vancouver Regional FreeNet Association v Minister of National Revenue [1996] 3 FC 880 (Canadian Federal Court of Appeal). 38 An institution the objects of which are to promote a particular form of industry or commerce, either generally or within a particular locality, may be charitable within the fourth Pemsel category: Commissioners of Inland Revenue v Yorkshire Agricultural Society [1928] 1 KB 611; In re Pleasants (1923) 39 TLR 675; Royal Agricultural Society of England v Wilson (1924) 9 Tax Cas. 62; Re Tennant [1996] 2 NZLR 633, as may be the promotion of industry and commerce in general: Crystal Palace Trustees v Minister of Town and Country Planning [1950] 2 Ch D 857 at 859 per Danckwerts J. 39 A mere benevolent purpose is not necessarily a purpose beneficial to the community: Yorkshire at 622. Where the purpose of an association is for the members themselves rather than a wider aim there will not be a purpose beneficial to the community in the necessary sense: Yorkshire, ibid. 40 The requirement of benefit to the community or the public may be satisfied where that benefit is enjoyed by a section of the public such as persons who have a common calling, or adhere to a particular religion, or reside in a particular geographical area. This is because there is no bar to any member of the public joining such a grouping. On the other side of the line are bodies like clubs or trade unions, which have power to admit or exclude members of the community: In re Income Tax Acts (No 1) [1930] VLR 211 at 222 per Lowe J, cited with approval by Dixon CJ in Thompson v Federal Commissioner of Taxation (1959) 102 CLR 315 at 323. 41 The main object of the institution must be shown to be charitable. There may be objects that are incidental or ancillary to the main object, but an object that is not charitable, and not incidental or ancillary, will disqualify the institution as a charity. Once the main object is established, it must be shown to be beneficial to the community, or to a part of the community and not merely to individuals, although the pursuit of the main object may benefit them indirectly: Surgeons at 444, 447 and 449; Congregational Union of NSW v Thistlethwayte (1952) 87 CLR 375 at 442; Cronulla Sutherland Leagues Club Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4,215 at 4,225 and 4,227; Inland Revenue Commissioners v Oldham Training and Enterprise Council (1996) 69 TC 231 per Lightman J at 250; Barclay v De Lacy [1996] 2 Qd R 112. 42 A charitable institution may make a profit: The Incorporated Council of Law Reporting of the State of Queensland v Federal Commissioner of Taxation (1967-1971)125 CLR 659 at 670; Crystal Palace at 858-859; Tennant at 640. 43 The material facts and circumstances that should be examined to characterise the main purpose of the body in question include its constitution, its activities, its history and its control. It is not sufficient merely to examine its objects at the time of formation: Barclay at 117; Oldham TEC at 251; Brookton Cooperative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 at 450-451; Crystal Palace at 858; Cronulla at 4,255. The Tribunal's decision 44 The Tribunal made the following important findings: "75. Although it is expressed in different ways throughout the documentary and oral evidence, I find that the main object of TECC is to assist Tasmanian business and industry to adopt electronic commerce and to compete in the electronic market place. The means by which this will be achieved will be by promoting the use of telecommunications services across Tasmania. This will have several outcomes. Among them, it will reduce the disparity between Tasmania and metropolitan mainland Australia. It will give Tasmanian business and industry the opportunity to gain access to new marketing, distribution and trading opportunities and so improve their productivity and their management processes. The need to support business and industry engaged in electronic commerce will lead to the formation of a service industry to support electronic commerce. Each of these is an object that is dependent upon TECC's achieving its main object. 76. There were several ways in which it was intended that TECC would achieve its object and so its outcomes. Among those was the collection, co-ordination and dissemination of information on electronic commerce and the raising of funds and acquisition of other assets associated with the promotion, research and development of facilities to assist the Tasmanian business community to adopt electronic commerce, are ancillary to that main object. Some of these activities, such as the development of prototypes of electronic trading systems, including marketing and electronic banking, would be directed at all businesses and industries. Others, such as the development of an individual project with a particular business, would be directed at a specific participant in Tasmanian business or industry. 77. An examination of the activities undertaken by TECC shows that it has conducted activities consistent with those that it foresaw in the documents leading to its establishment. It has been involved in assisting individual businesses and industries, speaking at public events and to community based organisations as well as schools reflect those objects and the balance between its main and ancillary objects." 45 The Tribunal then observed that ownership by the University and the Tasmanian Government "does not resolve the issue" because not all activities engaged in by those bodies need necessarily be properly classified as charitable. The fact that it was intended to be self-funding did not assist one way or the other. A charitable object can be fulfilled by a self-funded body. 46 In fact, funding for TECC had come from the public purse in the form of the RTIF and it was envisaged that, after the initial three year period when TECC would exist on funds from RTIF, there would be sufficient demand for TECC to continue as a self-funding body. In a passage that became the subject of argument on the appeal, the Tribunal then said: "78…Public funding does not take resolution of whether TECC is a charitable institution further one way or the other. In saying this, I appreciate that the Full Court of the Supreme Court of Victoria said in Attorney-General v McCarthy (1886) 12 VLR 535 that public funding: '... clearly shows that the public were the principal subscribers to the institution originally. That is in itself very strong evidence that this institution was regarded by Parliament, which granted the money, as an institution of public utility, not necessarily directly benefiting the whole of the public, but certainly benefiting it indirectly by means of a wise policy which would produce, or which was expected to produce beneficial public results; and the decisions appear to show conclusively that a public purpose constitutes an institution a charitable trust. ...' (at 536) It must be remembered, however, that the Full Court was considering whether or not an inebriates' retreat, to which inebriates were admitted but charged admission fees, was a charitable trust. The public funding was simply one of the factors. The admission fees and the nature of the retreat were others and the case shows that the object cannot be overlooked. It cannot be regarded as authority for a proposition that public funding is determinative of the issue for otherwise every publicly funded agency would be regarded as charitable." 47 The Tribunal then turned to TECC's part ownership of ECEnable and its consequential interest in TBO. It found that ECEnable and TBO provided services support to assist business and industry to move from a paper-based environment to online trading. They were involved in supporting TECC to carry out its main object and in doing so were charging for its services. Its activities were not analogous to that of an agricultural show or to those of the trustees of the Crystal Palace and Park where it was said that agriculture in one and business and commerce in the other were promoted in a general way for the benefit of the community. TBO was not showcasing the available services as it were and so making them known to the community but rather providing, on payment of a fee determined by the level provided, a service to enable communication on the internet. 48 The Tribunal then posed the question: how does TECC's main object benefit the community or the public or a part of it? 49 The Tribunal first looked at those whom it found were directly benefited by TECC and its activities, namely business and industry in Tasmania. It found that business and industry were open to all. There might be hurdles such as lack of talent or capital, but these were not set by members of the existing group. Therefore business and industry may be regarded as part of the community in the sense discussed in authorities such as Thompson (see [40] above). At the same time, persons engaged in business or industry were "individuals who are identifiable by reference to the activities that they carry on and who may benefit from TECC's activities". 50 The Tribunal then proceeded to consider whether benefiting "that part [which I take to mean Tasmanian business and industry] was capable of being regarded as a public benefit such that TECC should be regarded as a charitable institution". The public benefit in question was identified by the Tribunal as "assisting Tasmanian business and industry to adopt electronic commerce and to compete in the electronic marketplace". In other words, the Tribunal accepted that TECC provided a public benefit of the kind described; it was both a benefit and sufficiently "public". The issue was whether the benefit was of a charitable nature, in the legal sense of that term. 51 The Tribunal resolved the issue in this way. It accepted that TECC considered it important that Tasmania "gain long-term economic advantage by extending the strengths of its traditional industries and establishing new information based industries". TECC, the Tribunal said, wants Tasmania to enjoy the benefits of global online economy. However, in the Tribunal's view that was not enough. It said: "That may bring benefits to Tasmania's economy but there is no evidence in this case that indicates how long-term economic advantage to Tasmania translates to a benefit to the public rather than simply to a benefit to the individuals who are engaged in the business or industry that enjoys the benefits of the global online economy." 52 The Tribunal, in support of this conclusion, referred to the issue of employment. It said: "85. There is no evidence, for example, that the assistance given by TECC is directed to achieving improved employment opportunities for members of the public or is directed to assisting members of the public to establish a business of some sort. Businesses and industries that will grow and provide employment opportunities are not treated favourably over those that will not. Indeed, at least one of the businesses who has benefited from TECC's activities, Regal Craft Cards, has used the benefit it has gained as "the new technology has taken the labour out of ... [the] process, resulting in cost efficiencies" (T documents, page 432). In that example, the benefit has flowed to the business proprietor for his personal advantage. When measured against the benefit to the public and its members, there is on that example a very real question whether detriment has in fact flowed to the community in the form of reduced labour requirements. Any broadly based economic benefit to Tasmania is too remote to be felt by those who form its community. Some of TECC's activities have been directed to giving information to school students and others to giving it to community groups and service clubs. Among those students, groups and clubs may be people who will begin a business or in industry or better their position in life in some way. Having regard to TECC's objects and its activities, however, the fact that such people may do so is incidental to the betterment of business and industry for its own sake. It is not TECC's main purpose to seek out such people and not an integral part of its main aim." 53 The Tribunal asked itself whether there had been any other benefit which could be described as being for the benefit of the public. It accepted that greater efficiencies and an extended market may lead to increased profits and so to an increased benefit for the individual proprietor. Increased profits may lead to payment of increased taxes, but that was, in the Tribunal's view, too indirect to be regarded as a benefit to the public resulting from the activities of TECC. The Tribunal said: "Assisting persons, be they corporate or otherwise, to improve their position without regard to their existing circumstances is too broad to be regarded as coming within the spirit and intendment of the Statute of Elizabeth." 54 The Tribunal finally asked itself whether there was any benefit to the public in the development of intellectual property "to which (the public) may have access". The Tribunal found that any intellectual property would be vested either in the University, TECC, research students or, "if developed as a result of projects between TECC and an individual business or industry, jointly between TECC and that business and industry". (Presumably the Tribunal had in mind an individual or firm operating in a particular business or industry.) TECC saw itself as not generally preventing the publication of research "vesting in the University or research students". However, the public would have no access to research developed between TECC and individuals or firms "unless they chose to make it available either with or without payment". 55 The Tribunal concluded that the activities of TECC were not directed to an object or objects that will benefit the public, or a part of it, within the meaning of the preamble to the Statute of Elizabeth. Conclusion on the appeal 56 Once it is accepted that assistance to business and industry can provide a public benefit of the kind which the law recognises as charitable, a proposition which does not seem to be in dispute in the present case, I do not see how the fact that individual businesses may benefit can be a disqualifying factor. On the contrary, if business in general is assisted, it seems inevitable that some firms at least will become profitable, or more profitable, as a result of that assistance. There would be no point in the exercise if this were not the case. It would be an odd result if an institution established to benefit business could only qualify as a charity if the recipients of its benefits made losses or did no more than break even. 57 Presumably some farmers in Yorkshire were able to make, or increase, profits as a consequence of the work of the Yorkshire Agricultural Society, but there was no suggestion that this militated against classification of the Society as a charity. Indeed it was common ground that the promotion of agriculture generally would be charitable (see counsel's argument at 617 and per Lord Hanworth at 623); the issue in the case was whether the fact that members of the Society received benefits would lead to a different result. In the present case it was not put that the members of TECC, the Tasmanian Government and the University, receive any benefit. 58 It seems to me self-evident that benefits to Tasmania's economy resulting in long-term economic advantage to Tasmania will be a benefit to the Tasmanian public, and indeed to the wider national public. In a capitalist economy like Australia's, a prosperous and productive private sector generates profits and creates employment which in turn raises incomes which individuals can either spend, creating demand, or save, creating capital for further investment. Either way, people can make a better life for themselves and their families. In a prosperous economy, more money can be raised by taxes to improve education, health and other essential public services. 59 As has been seen, the genesis of TECC was the provision of large amounts of federal funding to assist "regional, rural and remote communities", a current euphemism for those parts of Australia which are economically disadvantaged or, put more bluntly, poor, compared with the rest of the nation. In this regard Australia has something in common with many developed countries. People in regions like the north of England, the Canadian Maritimes or the Italian Mezzogiorno are, or have become, deprived of much of the opportunity available to their fellow citizens in more prosperous parts of the country. 60 Tasmania is a particular case in point. The combination of small population and long distances from markets and raw materials meant that conventional manufacturing industry was always to be at a disadvantage. For the best part of a century, there was hope that cheap hydro-electric power would overcome these handicaps and turn Tasmania into a "Ruhr of the South". This proved to be illusory. Tasmania suffered net population decline. In basic economic criteria such as employment and income levels it trailed the nation. Although Tasmania received via the Grants Commission federal grants much in excess of the income tax raised in the State, the prohibition on discriminatory rates of tax between States (Constitution s 51(ii)) shut off one possible means of promoting development in Tasmania. 61 As already noted, TECC's view is that the developments of the 1990s and subsequently have meant that the technology of commerce is undergoing its biggest change since the Industrial Revolution. This may well be true, notwithstanding some spectacular collapses as a result of over-exuberant investment (a phenomenon not entirely absent in the Industrial Revolution itself). The detailed evidence in this case shows how modern information technology can give a competitive edge to firms both large (by Tasmanian standards), like Blundstones, and small, like Regal. Thus the focus of TECC is in an area where there is potential for business to develop unhindered by the restraints which in the past have made Tasmania a poor relation of the rest of the nation. TECC's objects, and the way in which those objects have been implemented in the years in question, seem clearly to be for the direct benefit of the public. 62 As to employment, discussed by the Tribunal in the passage quoted in [52] above, a finding of the requisite element of public benefit does not turn on the narrow issue of employment levels for particular firms. It may be that a particular firm, like Regal for example, becomes more efficient because it can reduce labour in a part of its operations. This by no means in itself denies the element of public benefit. By becoming more efficient, Regal may be able to undercut its competitors, win more sales (locally and overseas), increase production (thus reducing its unit costs), make more profits (which its owners can spend or invest, to the corresponding benefit of other businesses) and take on more staff. 63 I do not agree that the element of public funding is essentially irrelevant, as the Tribunal appeared to hold in the passage quoted in [46] above. The Full Court of the Supreme Court of Victoria in Attorney-General v M'Carthy (1886) 12 VLR 535 held that an institution established very largely from funds voted by Parliament was, essentially for that reason, an "institution of public utility" and consequently a charity within the meaning of the Statute of Elizabeth. Public funding may not be determinative of the question: charity or not? but it is certainly relevant, and is particularly so in the present case. 64 Finally, there is the issue of intellectual property (see [54] above). If that took the form of a patent, the public would have access in the sense that the invention would be disclosed and those interested could negotiate for a license or other form of exploitation agreeable to the patentee. But generally speaking, intellectual property is a form of property to which firms benefited by TECC would have the same rights as they would in respect of land or any other property they owned. I do not see how this particular consequence prevents TECC being a charitable institution. Orders 65 It was not suggested that if the appeal should succeed that the matter should be remitted to the Tribunal. There will be orders that the appeal be allowed, that the order of the Tribunal made on 24 May 2004 be set aside and in lieu thereof it be ordered that the application for review in proceeding TT2003/5-7 be allowed. The Commissioner must pay TECC's costs of the appeal. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 15 April 2005 Counsel for the Applicant: A J Abbott Solicitor for the Applicant: Simmons Wolfhagen Counsel for the Respondent: M F O'Farrell Solicitor for the Respondent: ATO Legal Services Date of Hearing: 5 April 2005 Date of Judgment: 18 April 2004