Charitable purposes and political purposes – the High Court forges a new approach

By Legal Eagle

As I’ve explained in a previous post, for a trust with a purpose to be valid, it has to establish that it has a “charitable purpose”. But the whole charities issue is complicated by another factor. One of the very large perks of charitable status is that charities get tax benefits. This is an important factor influencing the decision of courts whether something is charitable or not.

By contrast, traditionally speaking, a trust with a “political purpose” has traditionally been held not to have charitable status (sometimes called the Bowman principle). In Bowman v Secular Society [1917] AC 406, Lord Parker said at 442:

a trust for the attainment of political objects has always been held invalid, not because it is illegal, for every one is at liberty to advocate or promote by any lawful means a change in the law, but because the Court has no means of judging whether a proposed change in the law will or will not be for the public benefit, and therefore cannot say that a gift to secure the change is a charitable gift.

Another such case in the UK was McGovern v Attorney-General [1982] Ch 321 which applied the Bowman principle to a trust for Amnesty International. Ultimately, certain aims of Amnesty International were held to be political rather than charitable because they sought a change in the law and potentially embarrassed the British government. Slade J in McGovern said that there were two reasons why courts refused to enforce a political purpose, particularly where a body was advocating a change in the law:

1.      Court have no sufficient means of judging as a matter of evidence whether proposed change will or will not be for the public benefit; and

2.      Even if the evidence suggests that a change in the law is desirable, the Court should not comment on this lest it usurp the functions of the legislature. A Court cannot say that the laws it applies are not good enough.

Australian courts have taken a more a broad-minded approach to the political purpose trust. In Public Trustee v Attorney General of NSW (1997) 42 NSWLR 600, Santow J said that courts will enforce trusts which call for a change in the law where the object is to introduce law consistent with the way in which the law is tending. As I explained in the Druidry post, the United Kingdom has now enacted a Charities Act to bring some order to charities law. However, this did not change the law with regard to political purposes. Thus, in a recent decision, Lewison J in Hanchett-Stamford v Attorney-General [2009] Ch 173 held at 181-2 that the 2006 Act does not change “the fundamental principle that if one of the objects or purposes of an organisation is to change the law, it cannot be charitable”.

By contrast, American courts have taken quite a different approach to political purpose trusts. As the High Court notes,  §28 of the Restatement (Third) of Trusts contains commentary (comment l to clause (f)) to the following effect:

A trust may be charitable although the accomplishment of the purpose for which the trust is created involves a change in the existing law. If the purpose of the trust is to bring about a change in the law by illegal means, however, such as by revolution, bribery, or illegal lobbying, or bringing improper pressure to bear upon members of the legislature, the purpose is not charitable. … The mere fact, however, that the purpose of a trust is to advocate and bring about a particular change of law does not prevent the purpose from being charitable. This is so whether the change is pursued indirectly through the education and persuasion of the electorate, so as to bring about a public sentiment favorable to the change, or through more direct but lawful influences, such as by proper lobbying and other persuasion brought to bear upon legislators. …

Although a trust to promote the success of a particular political party is not charitable, the development and dissemination of information advocating or seeking to improve understanding of a particular set of social, economic, or political views is charitable, whether because it is educational … or because it contributes to a market-place of ideas that is beneficial to the community.

Whither Australian law then?

The Australian High Court has just decided a case which turns the established principles about charitable/political trusts around: Aid/Watch Incorporated v Commissioner for Taxation [2010] HCA 42. An organisation called Aid/Watch was created in 1993. Aid/Watch’s aims were to conduct research in partnership with recipients of aid and NGO into the effectiveness of aid, to report on issues arising out of that research, and to campaign for changes in the way that aid was delivered. If you’ve ever read the chapter in Tim Harford’s The Undercover Economist on unsuccessful international aid programs in third world countries, you’d agree that this is probably a good idea. Aid/Watch argued that this was important because otherwise aid was ineffectual, and didn’t do the very things it was designed to achieve. In 2000, Aid/Watch was listed as a charitable organisation, and was thus exempt from income tax. From 2005, it was also listed as a charitable institution for the purposes of fringe benefits and GST exemption. However, in 2006, the Commissioner for Taxation revoked Aid/Watch’s charitable status. Aid/Watch objected to the revocation unsuccessfully, so then brought proceedings in the Administrative Appeals Tribunal. The AAT set aside the Commissioner’s determination and held that Aid/Watch was a charitable institution. The Commissioner successfully appealed to the Full Federal Court. So Aid/Watch then appealed to the High Court.

How does one draw the line clearly between charitable and political? Suggestions for improving the ways in which aid is administered by various bodies is something which ought to be encouraged in our society. There is no use in charity if it does not effectively aid the people it seeks to help, or if it is indeed counterproductive in some way.

A majority of the High Court allowed Aid/Watch’s appeal, and held that it was a charitable institution. At [45] – [46], French CJ, Gummow, Hayne, Crennan and Bell JJ held as follows:

The system of law which applies in Australia thus postulates for its operation the very “agitation” for legislative and political changes of which Dixon J spoke in Royal North Shore Hospital. There is none of the “stultification” of which Tyssen wrote in 1888. Rather, it is the operation of these constitutional processes which contributes to the public welfare. A court administering a charitable trust for that purpose is not called upon to adjudicate the merits of any particular course of legislative or executive action or inaction which is the subject of advocacy or disputation within those processes.

It was with this understanding of the system of law that applies in Australia that Aid/Watch submitted that the generation by it of public debate as to the best methods for the relief of poverty by the provision of foreign aid has two characteristics indicative of its charitable status. The first is that its activities are apt to contribute to the public welfare, being for a purpose beneficial to the community within the fourth head identified in Pemsel. The second is that whatever else be the scope today in Australia for the exclusion of “political objects” as charitable, the purposes and activities of Aid/Watch do not fall within any area of disqualification for reasons of contrariety between the established system of government and the general public welfare.

Heydon J and Kiefel J dissented in separate judgments. Heydon J found the activist nature of Aid/Watch to be unacceptably political, saying that it was not merely generating debate, but to push a particular approach to aid. Kiefel J agreed with the approach of the Full Federal Court, namely that it was not possible to determine whether Aid/Watch’s purposes were for the public benefit as the Court was in no position to determine that the promotion of one particular view was for the public benefit.

Incidentally, the majority’s approach to charitable purposes accords with the approach taken in the Sheppard Report on reform to charities law suggested that a distinction should be made between trusts for political parties and trusts advocating a change to the law. It noted that often charitable bodies are asked by government to give advice on how a particular measure would affect the people they help, and that advocacy is a necessary part of the operation of many charities. Charities cannot really avoid having political purposes.

Naturally, many charities are delighted. I wonder if there will be a flood of lobby groups moving to claim charitable status in the wake of this decision? I wouldn’t be surprised.

I still rather hope that we have legislative reform of our charities law, however. As so many students noted in their exam this year, it seems ridiculous to base our definitions of what is charitable on a statute which was promulgated in 1601 (while Elizabeth I still ruled the UK). In addition, I think the public benefit aspect of charities should be emphasised, as it is in the UK legislation.

22 Comments

  1. Posted December 4, 2010 at 6:08 am | Permalink

    I’m looking forward to a group seeking charitable status, the group having the charitable aim to change regulations so that religions have to pay tax.

    Wonder if the tax commissioner would support the charitable status of such a group?

  2. Posted December 4, 2010 at 9:06 am | Permalink

    I’d love the case, the anti-religious tax group, arm in arm with tax commissioner and a swag of historians – against supposedly a challenge by third parties against the tax commissioner ruling … Could that objection happen? Does such a precedent apply in reverse? How much would it be worth Mr Taxman to covertly encourage formation of such a group (without material support).

  3. desipis
    Posted December 4, 2010 at 3:35 pm | Permalink

    I wonder how much this has led to splitting of organisations to have the charitable part with all the finances and the political wing used to do the things deemed not charitable. Working as an engineer there’s always fun and games going on trying to get as much as possible designated “R&D” to get the tax breaks; it wouldn’t surprise me if charities were doing the same.

    LE, do you know much about rulings/law that determine whether an organisation is a religion or not?

  4. Posted December 4, 2010 at 5:03 pm | Permalink

    I’m thinking that if the test for a religion was the logical “if you claim any proof of your claims, you are not a religion and lose on tax issues” there’d be big tossups in the head offices of woo incorporated: whether to ditch the silly claims for proof of miracles (or cop trade practices act/misleading advertising things) or whether to ditch the tax dodges.

    Either way… Win for sensible folk everywhere. Almost a Morton’s Fork for the modern era – immediately less annoying or deprived of cash that allows them to be annoying.

  5. ken n
    Posted December 5, 2010 at 7:53 am | Permalink

    Yeah, I was a thoroughly irritating and precocious child.

    But you are quite different now you have grown up.

  6. Ken Nielsen
    Posted December 5, 2010 at 9:55 am | Permalink

    I have no doubt of it LE.
    And thanks for a post that reminded me of stuff I used to know. I agree that it makes little sense in an area where policy should rule to rely on a very old piece of law. Still, the legal archaeologist in me enjoys the need to go digging to decide the law in the 21st century.

  7. Posted December 5, 2010 at 10:33 am | Permalink

    [email protected]: Given the intolerance in the Paulean epistles, the bits so beloved of today’s bigots, homophobes and misogynists, if I was the deity, I’d consider damascene freeway seizures to be a failed experiment, as it obviously couldn’t change the test subject to a nice person. Ditto burning bushes and tablets inscribed by lightning… Didn’t stop the test subject from committing murder and then religious genocide of calf-worshippers.

  8. Patrick
    Posted December 6, 2010 at 8:27 am | Permalink

    LE, you are right about Sanitarium.

    The last significant High Court case on point, which laid the little stones out for this one, was in fact FCT v Word Investments [2008] HCA 55 (3 December 2008) in which the High Court obliterated the Commissioner’s standing requirement that ‘profit-making activities’ of a charity be sectioned off from the ‘core’ activities and be treated as subject to tax.

    Word Investments was basically an investment company which was Constitutionally bound to pay all its profits to charities. The High Court held that this was a legitimate charitable purpose, in short, even if the direct purpose was making money.

  9. Catching up
    Posted December 6, 2010 at 9:41 am | Permalink

    Maybe we should look at removing the exemptions for religion institutions. The religion institutions should be allowed to claim tax exemptions for the charity work they do.

  10. Henry2
    Posted December 7, 2010 at 7:05 am | Permalink

    Gday All,

    LE I am about to commit the unforgiveable. ie. to ask a legal question on the site. The saving graces are that its on topic, its in your field, its not personal advice and is for a non profit charity organisation.
    1. ‘The mural’ was donated by the school to the council in 1988 as a bicentennial project.
    2.It was placed on a library wall.
    3. Council needed to upgrade the building for disabled access.
    4.The builders said they couldnt save the wall.
    5. Other builders said they could save the wall, but it would cost a lot more.
    6 Council said if the community raised $25000 in a week the other builders would be engaged.
    7. Im president of the organisaton that raised $25000 in a week.
    8. The wall was shifted successfully.
    9. Council does not have a DGR fund.
    10. The mural was on a library wall that was moved to make way for a public art hanging space (gallery).
    11. The moved wall is now a piece of art in the street not in or as part of any gallery.
    12.There is a question from some donors about whether those donations may be tax deductible.
    13. When at first glance you would think such donations should be tax deductible, on reading the criteria they seem not to.

    LE Im sorry to throw this at you but would be very interested to hear your response.

    Regards,

    Frank

  11. Patrick
    Posted December 7, 2010 at 7:44 am | Permalink

    I don’t think that is LE’s area of the law, Frank. Happily, the answer is relatively straightforward: no, unless the school has a building fund registered as a deductible gift recipient with the ATO.

  12. Tim Quilty
    Posted December 8, 2010 at 10:24 am | Permalink

    Re: Henry 2 scenario – Or if the money was moved through a foundation with DGR. I don’t think that would be too difficult to arrange, there are plenty of them around.

  13. Henry2
    Posted December 8, 2010 at 11:26 am | Permalink

    Thank you all very much.

    Regards,

    Frank

  14. Tim Quilty
    Posted December 8, 2010 at 4:29 pm | Permalink

    If you can’t put your hands on a local charitable foundation easily, have a word to your nearest Bendigo community bank, they have the Bendigo Community Foundation that they use to put money through to make it deductible. They should be able to hook you up.

  15. Posted December 8, 2010 at 7:48 pm | Permalink

    “As so many students noted in their exam this year” [re it being odd that the law of charity should still be linked to a centuries-old case].

    Are you sure you didn’t say something like this to them, LE? If so, then those students were just telling you back, and I trust you gave them a big tick. That, after all, is one of the pleasures of marking.

    On the other hand, if they are just saying that old cases are quaint but junk (surely not, but with [mostly] young ppl you never know), I’m a bit with Ken N on the archaeological aspects of the law.

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