Church superannuation scheme not charitable

Summary

The tax payers' appeal was unsuccessful. The superannuation scheme was not exempt from tax pursuant to section CB 4(1)(c) of the Income Tax Act 1994. The correctness of the Presbyterian Church Fund case was doubted.

Facts

Introduction

This case was an appeal of a decision of O'Regan J reported as Hester & Ors v CIR (2004) 21 NZTC 18,421. In that decision the High Court held that a superannuation scheme was not exempt from income tax pursuant to s CB 4(1)(c) of the Income Tax Act 1994 (which exempts income derived by trustees for charitable purposes).

Background

The appellants are the trustees of the Church of Jesus Christ of Latter-day Saints ("the Church") Deseret Benefit Plan ("the Plan"). The Plan is a defined benefit and contributory superannuation scheme providing retirement income to employees of the Church. The appellants claimed the Plan was a "trust for charitable purposes" and therefore exempt from income tax.

The Plan is for employees of the Church. The Church does not have paid ministers, but has a system of "callings" whereby Church members perform ecclesiastical functions. The Church itself has charitable status. The salaries received by the members of the Plan related to their temporal job, not their calling.

The Church's employees were employed at the Church's Administration Centre in Takapuna, the Church Temple in Hamilton and the Church College also in Hamilton. There was also provision for admission to the Plan of an "associated employer" though none in fact had been admitted.

The Administration Centre was, during the relevant time, the centre of the overall operation of the Church's operations in New Zealand. Members of the Plan at the Administration Centre included managers, human resources staff, IT staff, secretarial and clerical staff, and accounting staff. Church College is a private secondary school which is run and financed by the Church. It teaches the national curriculum as well as providing religious education to students. All staff members (apart from one) belonged to the Church. Members of the Plan at the College include teachers, secretarial and administrative staff, and catering and security staff. The Temple is the most sacred place the Church has in New Zealand. Members of the Plan at the Temple include managers, gardeners, security guards, clerical workers, and clothing and cafeteria workers.

The High Court decision

In the High Court the appellants argued that their situation was indistinguishable from the existing case law, particularly the Presbyterian Church Fund case (discussed further below). The Commissioner argued that their situation was distinguishable, and the High Court agreed and found for the Commissioner. The High Court also dismissed an argument that the Commissioner was acting in a discriminatory way in relation to the Plan.

Decision

The main judgment was given by William Young J. His Honour set out the factual background to the dispute and summarised the legislation. Section CB 4(1)(c) of the Income Tax 1994 was discussed and it was concluded that the words "established exclusively for charitable purposes" did not apply to "trusts for charitable purposes".

The Judge then discussed in detail the two leading authorities: Presbyterian Church of New Zealand Beneficiary Fund v CIR [1994] 3 NZLR 363 and Baptist Union of Ireland (Northern) Corporation Ltd v Commissioners of Inland Revenue (1945) 26 TC 335 ("Presbyterian Church Fund" and "Baptist Union").

The Baptist Union case concerned the Baptist Union of Ireland Annuity Fund, the object of which was to provide annuities for its members and their widows and orphans. The Presbyterian Church Fund case dealt with a superannuation fund that was primarily for the benefit of retired ministers of the Presbyterian Church and their dependants.

William Young J noted that the arguments originally presented before the Court of Appeal were relatively narrow. The appellants sought to apply the Presbyterian Church Fund case while the Commissioner supported O'Regan J's decision in the High Court and did not seek to challenge the correctness of the Presbyterian Church Fund case. However, during the course of argument the members of the Court of Appeal became concerned whether the Presbyterian Church Fund case was correctly decided and invited further submissions on that point. The Commissioner then asserted that that case had been incorrectly decided while the appellants supported it.

In considering the Commissioner's submissions that the Presbyterian Church Fund case was wrongly decided William Young J noted that there was some strength in the Commissioner's submission that the cases where gifts for the benefit of clergy were held to be charitable involved outside bounty (including in the Baptist Union case). However, in the Presbyterian Church Fund case a very significant proportion of the funds of that superannuation scheme came from members.

William Young J concluded (at paragraphs [85] and [86]):

It is hard to see the Presbyterian Church Fund as having the "altruistic" features which in the end moved MacDermott J to hold that the Baptist Union Fund was a trust for charitable purposes.

On that basis, it is well open to question whether the decision of Heron J in the Presbyterian Church Fund was correctly decided.

The Judge then set out some history relating to the taxation of superannuation schemes and noted the long-standing view that superannuation schemes for the benefit of ministers of religion were charitable. Because of these factors the Court of Appeal declined to overrule the Presbyterian Church Fund case (at paragraph [93]):

Given the history to which we have referred, the fact that the Commissioner did not appeal the Presbyterian Church Fund case and the extent to which it has been acted on in ways which would now be hard to unpick, we think it would be wrong to overrule the decision ...

William Young J then considered whether O'Regan J was right to distinguish the Presbyterian Church Fund case. The appellants argued that the benefits provided to the employees under the Plan were as closely associated as the advancement of religion as in the Presbyterian Church Fund case. The Commissioner argued that there were many grounds of factual difference. The Judge considered some sections in the New Zealand Bill of Rights Act and the Human Rights Act noting that the appellants' submissions on discrimination had some force. It was accepted that the tax system should not operate in a way that provides preference for "mainstream churches" (a term used in the Presbyterian Church Fund case) and it was noted that the Court of Appeal had "given anxious consideration to whether it is possible to maintain the distinction drawn by O'Regan J between the circumstances affecting the Plan and those which applied in the Presbyterian Church Fund case." (at paragraph [102])

The Court of Appeal concluded that the Presbyterian Church Fund case should not be extended to the situation of appellants. At paragraph [106] William Young J stated:

If the Plan is accorded charitable status, the implications are likely to be serious. Amongst the employees covered by the Plan are teachers employed by Church College. If the provision of superannuation benefits for them by means of a contributory scheme is charitable because they are working for the Church, similar plans for school teachers employed by other church schools would also be charitable. Indeed, given that the advancement of education is a charitable purpose, presumably plans for the benefit of anyone working in the education field would likewise be entitled to charitable status. Arguably the same would apply to plans for doctors and nurses and ancillary staff (whose work is addressed to relief for the "impotent") and for social workers (who work with "the poor"). Similar status would be likely to be claimed for plans associated with the many other occupations associated with public service. In that context, allowing the appeal is likely to start a ball rolling which, unchecked, would have the potential to dent the income tax system severely.

The Court of Appeal therefore found for the Commissioner on the main issue.

In relation to a secondary issue the Commissioner's argument also was considered favourably by the Court of Appeal, though it did not make a definitive finding on it. The Plan's deed allowed employees of "associated employers" to join the Plan. The Commissioner submitted that a trust that permits the application of income for purposes that are not charitable cannot, itself, be charitable. It was irrelevant that there were no associated employers in the year in question. The Court of Appeal stated at paragraph [115]:

It is not entirely unknown for trusts to be set up for what ostensibly are charitable purposes, but for other purposes (or beneficiaries) to be able to be introduced at the will of a person associated with the trust. It would be unsatisfactory if such a trust was able to operate with the benefit of charitable status associated with the charitable purposes ostensibly provided for but then for the purposes and beneficiaries to be changed to permit distribution to or for a non-charitable purpose or beneficiary.

Hammond J also gave a short concurring judgment. His Honour noted that the Presbyterian Church Fund case as being "very much at the outermost limits of the existing doctrine" but noted that he "would not be minded to overrule that decision, even if it were procedurally appropriate to do so, by a side wind as it were." Hammond J concluded by stating (at paragraph [14]):

It follows that, in my view, the scheme under consideration is well beyond the existing doctrine for an allowable religious charitable trust - it is too broadly conceived as to the persons who can come within it - and on that basis alone the present appeal should be dismissed.