High Court clarifies when payments made in support of overseas mission services qualify for tax credits

Summary

As part of its overseas mission programme, the Church of Jesus Christ of Latter-Day Saints ("the Church") expects applicants to commit to raising a "standard amount" to go towards supporting the Church's missionary work. The Trust Board of the Church of Jesus Christ of Latter-Day Saints ("the Trust") is the Church's New Zealand-based entity which receives the "standard amount" payments for New Zealand resident applications and provides the donors (including the plaintiff in the second proceeding, Mr Coward) with deduction receipts. 
The High Court had to consider whether the "standard amount" payments qualified as "gifts" under s LD 1 of the Income Tax Act 2007 ("the Act") and therefore whether tax credits could be claimed for such payments.  The Court held that payments made to the Trust by a missionary, their parents, and/or grandparents were not "gifts", while payments by other relatives and friends were.

Impact

This is an important judgment that clarifies the scope of s LD 1 of the Act.  The principles set out by the judge for determining whether a payment is a gift will be applicable in future cases.

Facts

The judgment addresses two proceedings, which were heard together, both involving the Commissioner of Inland Revenue ("the Commissioner") as defendant.  The plaintiff in the first proceeding is the Trust. The plaintiff in the second proceeding is Mr Coward, a New Zealand tax resident and member of the Church, whose daughter was a missionary.

The Church itself is based in Salt Lake City, Utah, but has a worldwide presence, including in New Zealand. Under the Church's missionary programme, young members can apply to take part in an 18 – 24 month mission service overseas. As part of their application, a missionary is expected to commit to raising a "standard amount" to go towards supporting the Church's missionary work. This "standard amount" is not paid towards their mission overseas, but rather towards funding the expenses of other missionaries in New Zealand. The missionaries sent overseas from New Zealand have their expenses paid by the relevant Church-related entity in the country where their mission takes place.

At the time of Mr Coward's daughter's application, the "standard amount" for New Zealand was $475 per month or $5,700 per annum. At issue in Mr Coward's tax challenge were his contributions directed towards this annual amount.

Decision

The plaintiffs argued that the payments were gifts because they were gratuitous payments made by Church members to the Trust to support the Church's charitable work and were, therefore, dispositions of property without consideration.

 The Commissioner argued that the payments were made to meet the essential personal expenses of the specific missionary while on a mission and not gratuitously made to the Trust.  As such, the payments were not gifts.

What is a "gift"?

After having considered relevant cases from Australia, Canada, United States, and New Zealand, Hinton J adopted the following principles for determining whether a payment qualifies as a "gift":

1. For there to be a gift, there must be a voluntary transfer of property owned by the donor to the donee.
2. There can be no material benefit flowing to the donor as a result of the donation.
3. However, a minor benefit or consideration will likely not be sufficient to vitiate the gift.  Neither will a "purely moral" benefit.

In examining whether the donor receives a benefit, the following considerations are relevant:

1. The benefit to the donor need not arise as a result of meeting a legal obligation.
2. Anticipation of a benefit may be sufficient to deny a gift.
3. There must be a connection or link between the donor's payment and the benefit.

The donor does not have to directly benefit from the donation, it is enough that the benefit is indirect, albeit it must be more than a pure moral benefit. For example, there will be a material benefit for a parent or grandparent in ensuring one's children are educated, or if one receives a contractual right to insist on the donee's performance, as a result of the payment.

Benefit or consideration to the donor

Hinton J considered that the payments were all voluntary and, as such, the case turned on whether there was any resulting benefit or consideration to the different categories of donor.  To determine whether there was any benefit or consideration, Hinton J asked: 

1. Was there a sufficient link between the standard payments and the payment of a missionary's essential expenses?
2. If so, was there a benefit to the different categories of donor as a result of the payment of those expenses?

There was a sufficient link

Hinton J considered that there was a clear link between the payments made as part of the application to be a missionary, and receipt by the missionary from the Church overseas of their essential expenses. Donors knew and anticipated that their payments to the Trust would enable the missionary (on behalf of whom they were paying) to go on their mission, and correspondingly to have their expenses paid by the Church. 

Was there material benefit to each category of donor?

While Hinton J accepted that the missionary work is rigorous and conducted in very restricted conditions and circumstances, she accepted the Commissioner's argument that Ms Coward, and any other individual missionary, benefited from having their essential expenses paid.

As such, the Judge held that payments by a missionary to the Trust were not "gifts" under s LD 1.

Hinton J then considered whether payments made to the Trust by a parent (such as the payments made by Mr Coward for his daughter's application) or a grandparent were "gifts" under s LD 1. She held that because such payments provide a benefit to the child, they will generally also benefit the parent and grandparent donors who benefit by seeing their child engage in life education, being able to travel, live overseas, and experience being a missionary abroad.

As such, the Judge held that payments by parents and grandparents to the Trust were not "gifts" under s LD 1.

Hinton J considered, however, that payments made to the Trust by other relatives (including siblings, cousins, aunts, uncles, and more distant relations), as well as friends of the missionary and other members of the Church, fell into the category of pure generosity and were therefore gifts. This was because these other relatives and friends do not generally feel the same sense of obligation to assist a missionary applicant or to ensure their needs are met, and any benefit to these people is minor or immaterial and is a "pure moral benefit". 

Summary of result

Hinton J held that the payments to the Trust in support of a missionary's application to participate in an overseas mission service, by the following classes of people, were not gifts under s LD 1 and, as such, the Trust was not permitted to issue donation receipts in respect of them and Mr Coward was not entitled to tax credits:

1. missionaries called to serve the Church;
2. a parent or legal guardian of a missionary; and
3. a grandparent of a missionary.

However, such payments made by the following classes of people did qualify as gifts and, as such, the Trust was permitted to issue donation receipts in respect of them:

1. a sibling of a missionary;
2. a more distant relative of a missionary, such as a cousin, uncle or aunt; and
3. a Church member unrelated to the missionary, such as a friend of a missionary or a member from the missionary's local ward.