Commissioner loses appeal
2005 case note - Wellington Regional Stadium Trust was held not to be a Council Controlled Trading Organisation.
Income Tax Act 1994, Local Government Act 2002
The Wellington Regional Stadium Trust was held not to be a Council Controlled Trading Organisation.
In August 1993 the need for a new sports stadium in the Wellington region was identified and the Wellington Regional Council (WRC) arranged a meeting. Subsequently, various preliminary studies were undertaken. In September 1994, the Wellington Regional Stadium Trust (WRST) steering group was established on the initiative of the Wellington City Council (WCC). In November 1995, the Wellington Regional Stadium Development Trust (Trust) was established. The Trust obtained a commitment for funding from WCC. In August 1995, WRC also agreed to provide funding, subject to the passage of special legislation to allow WRC to provide the funding and to allow the appropriate management of the project and to the risks of the project being appropriately managed. Special legislation was promoted and a local Act, the Wellington Regional Council (Stadium Empowering) Act 1996 (the Empowering Act) was passed on 2 September 1996.
- enabled WRC to lend up to $25 million to the WRST, on such terms and conditions as WRC thinks fit, and
- provided that the trust was to be registered under the Charitable Trust Act 1957
- the trust deed had to contain provisions in sections 225F to 225J of the Local Government Act 1974 ("LGA 1974").
On 19 November 1997 the WRST was established pursuant to a trust deed in December 1997 and was registered under the Charitable Trusts Act 1957. Funding of $40 million, out of a total of $131 million total funding required to build the stadium was provided by WCC ($15 million) and WRC ($25 million) by way of interest-free, subordinate, limited-recourse loans. A $33 million loan on commercial terms was also made by ANZ Bank to the Trust. Sales of corporate boxes, membership, naming rights, signage, sponsorships and grants from the Lottery Board and the Community Trust of Wellington provided the remaining funding.
In January 2002 the Commissioner informed the WRST that its charitable status had ceased on 31 March 1999 as a result of changes to LGA 1974 and to the Income Tax Act 1994. The WRST issued these proceedings to clarify its status.
The Empowering Act
The Court of Appeal considered that the regime of the WRST set up by the Empowering Act is modelled on the Community Trust regime in the LGA 1974 and the Empowering Act imports that regime to the extent it is not inconsistent with the Empowering Act itself. As the community trust regime is separately provided for in the LGA 1974 and the LGA 2002 with its own accountability regime, it is clear in the Court's view that the CCO and CCTO regime is not intended to apply to community trusts. As it is the community trust regime that was imported into the Empowering Act, the Court did not consider that the Empowering Act envisages the WRST being subject to the CCO and CCTO provisions either.
The Court accepted that provisions of the Empowering Act were a code.
In addition, the Court did not accept that it was possible to treat entities that are clearly outside the CCTO regime as nevertheless coming within the income tax provisions that were specifically designed for that CCTO regime.
The CCTO definition
The Court of Appeal held that the High Court was correct to hold that the WRST does not operate a trading operation for the purpose of making a profit.
The Court of Appeal considered that:
- Plimmer and Walker were not overruled by National Distributors or by Holden and Hunter. The distinction between "intention" and "purpose" is important in the income tax context, as well as in other contexts, including GST and competition law.
- The omission of the word "intention" from LGA 2002 clarifies the definition.
- The purpose of the WRST's promoters, as provided for in the legislation, the Trust Deed and the Funding Deed, cannot be sensibly be separated from the purpose of the Trust itself. The legislation and the Trust Deed form the foundation of the WRST and have an ongoing effect.
- Once the Stadium was built, the statutory purpose of the WRST was limited to the ownership, operation and maintenance of the Stadium as a multi-purpose sporting and cultural venue - see section 6(2)(a) of the Empowering Act. Any additional functions must be exercised for the benefit of the public of the Wellington region and are ancillary to the functions set out in section 6(2)(a) and section 6(2)(b) of the Empowering Act which means as held by the High Court that clause 3.1(c) of the Trust Deed is subordinated to clause 3.1(a) and (b).
- The Court of Appeal agreed with the High Court that the fact that the WRST had an operating surplus and that it operated in a businesslike manner are insufficient in themselves to mean that its purpose must be profit-making.
- The evidence and the nature of the funding arrangements themselves reinforced the view that the WRST's purpose is not profit-making. While there is no doubt that the WRST makes operating surpluses, this is only possible because of the totally non-commercial funding terms. The funding is interest free and limited recourse and the evidence was that the WCC and WRC regard the possibility even of a return of capital as distant.
Was the WRST a LATE?
Though the question "Whether or not the Trust was a local authority trading enterprise (LATE) under LGA 1974" was not before the Court it was decided that it should briefly be dealt with. The main aim of the introduction of the LATE regime was to put commercial enterprises undertaken by local authorities on a competitively neutral basis with the private sector and the taxation of LATEs was a vital part of that strategy.
The Court of Appeal agreed with the High Court that the WRST was within the class of organisation that the amended definition of LATE in LGA 1974 was meant to exclude.
The Court did not consider that the mere intention to make operating surpluses is sufficient for a trading undertaking to be operating with the intention or purpose of making a profit in terms of the LGA 1974. The WRST could never operate on proper commercial terms, it only makes operating surpluses because of funding on non-commercial terms, it cannot distribute its profits, it is charitable and not competing in any meaningful sense with any private sector organisation. The Court accepted that the WRST did not come within the definition of the LATE in the LGA 1974 as it was amended in 1999.
The Commissioner's appeal was dismissed.