Endorsement is the new approval process for charities that wish to gain or maintain income tax exempt status. Charitable institutions and charitable funds have different endorsement requirements. Among standard pre-requisites such as applying for an Australian Business Number and having a physical presence in Australia, one of the important requirements is the correct application of trust monies.
A charitable fund can only be endorsed if it is being used for the purposes for which it was established. If it is being used for other purposes it is not entitled to endorsement. In a recent case, it was found that the trustees ofthe Kalos Metron Charitable Trust Fund had willfully misapplied the trust monies. The trust funds were therefore not being correctly applied for the purposes for which the trust was initially established. This resulted in a loss of endorsement for the Fund.
Three years after the Fund was first established, the trustees had applied for an endorsement for income tax exemption. The basis of this endorsement was for public charitable purposes. This endorsement was short lived as the Tax Commissioner revoked the Fund’s endorsement.
He found that the trustees had deposited the Fund money into their personal accounts. The trustees had attempted to reduce their liability for a personal loan by doing so. Moreover, one of the trustees had paid money which was owed to the Fund, into the trust account of one of the trustees’ father’s accounting firm. The father of the trustee was subsequently entitled to the income from this account.
The matter reached the Administrative Appeals Tribunal (TACT v FCT[2008] AATA 275), which first ruled in favour of the trustees. However, on further appeal to the Federal Court, the Commissioner succeeded in his argument– namely, that the misapplication of the trust money failed to meet the endorsement requirement as the money was not applied for the purposes for which the Fund was established.
Edmonds J overruled the Tribunal’s decision and found that the trustees had intentionally applied the Fund monies for a different purpose, thus having breached the trust. Additionally, the misapplication involved here was of a significant sum. The Tribunal on the other hand had found that ‘very small’ sums as well as a genuine transaction were involved between the trustees and the father.
His Honour emphasized that the opportunity of an endorsement for an income tax exemption was a privileged one. This in turn demanded ‘strict adherence’ which was not to be taken lightly. The severe approach here implied that the trustees could not be pardoned for a lack of their failure to notice that the monies were being misapplied. More so, compensation by the third party of the misapplied monies to the Fund was not enough to rectify the breaches or forgive the trustees.
Cases such as this have triggered the Commissioner’s closer scrutiny of such funds. Trustees have been warned that they need to follow the requirements of endorsement rules with due diligence and conscientiously apply the trust funds for the purposes for which they were established.
Courts will view each case based on its facts and circumstances but will pay close attention to isolated instances and breaches, particularly if the breach was intentional and significant. The ATO and legal practitioners are trying to play an instrumental role in cultivating awareness amongst trustees to realize the difference in the purposes of setting up a charitable trust fund and using its money for personal investment purposes.