New Zealand Law Students Journal
Last Updated: 12 November 2012
AT THE INTERERFACE:
A TRUST-BASED SOLUTION TO A TAXING DILEMMA
The final judgment in the long-running saga concerning the tax status of the
Crown Forestry Rental Trust has recently been delivered,
with the Privy
Council over-turning the Court of Appeal’s decision and deciding in
the trustees’ favour.1 Of considerable interest is the fact
that this decision was largely based not on the statutory exemption from
income tax, which
had been the focus of argument in all three courts, but on the
Board’s understanding of the Trust deed as constituting a
Quistclose2 trust. Here I will summarise the case
and the decisions reached at each level of judgment. Then I
consider the ramifications of the case and some possible criticisms of
The case has its genesis in the privatisation regime of the 1980s and the
government’s desire to sell off Crown-owned
assets under the State
Owned Enterprises Act 1986. These assets included the Crown’s commercial
forestry interests, and concerns
were expressed that the legislation would
prejudice Mäori claims to the assets in accordance with Waitangi
recommendations. Thus negotiations between the Crown and the
Mäori Council and Federation of Mäori Authorities Inc. were
into and an agreement was reached on 20 July 1989. This provided that the Crown
would grant fixed period licenses to third
party commercial licensees over
the land at issue. In return, the licensees would pay an annual rental.
The Crown was
to pay this money into the Crown Forestry Rental Trust, which it
settled for this purpose. The Trust then had two functions. First,
it was to
hold the license fees as the capital of the Trust, until the Waitangi
Tribunal determined whether the Mäori
claimants were entitled to the land.
If the Tribunal
* Candidate for LLB (Hons) BCom, University of Otago.
1 Latimer v Commissioner of Inland Revenue  2 NZLR 157 (Latimer).
2 Barclays Bank Ltd v Quistclose Investments Ltd  AC
44 The New Zealand Law Students’ Journal (2006) 1
decided that they were, the claimant would receive all license fees
relating to that land, and could resume possession on
the expiration of the
license. If the Tribunal decided against the claimant, the Crown was to receive
the license fees and ultimately
possession of the land. This was the
‘stakeholder’ function of the Trust. Its second function was to
invest the money
received from the license fees and make the interest earned
available to assist Mäori claimants in the
presentation and negotiation of claims before the
Waitangi Tribunal which involve, or could involve, Licensed Land”
(Clause. 9.2.2 of the Trust deed). This was known as the
‘assistance’ purpose. In doing so, the trustees were empowered
accumulate income and its application was at their sole discretion. Any income
left over when the trust was wound up was to be
paid to the Crown.
B: The Lower Courts
The case went to the High Court on the issue of whether the Trust came
within section 61(25) of the Income Tax Act 1976. Section
61(25) provides an
exemption from income tax for:
Income derived by trustees in trust for charitable purposes or
derived by any society or institution established exclusively
O’Regan J held that this required that a trust be established
exclusively for charitable purposes, and because the stakeholder
function is not a charitable purpose, the Section did not
apply. He did,
however, acknowledge that the assistance purpose was charitable.
This decision was appealed by the trustees, and the Commissioner of the
Inland Revenue cross-appealed on the finding that the
was a charitable purpose. The Court of Appeal, with Blanchard J
delivering the judgment
of the Court, dismissed both appeals. First, the
Court of Appeal rejected O’Regan J’s view that the trust had to
established for exclusively charitable purposes to come within section 61(25).
In their opinion, the plain language of the section
incorporates two separate
The first limb, ‘income derived in trust for charitable
purposes’ does not require that the trust be established exclusively
A Trust-Based Solution to a Taxing Dilemma 45
as distinct from societies and institutions which are dealt with in the
second limb. Therefore, as the stakeholder function dealt
only with the capital
of the Trust, this would not exclude the Trust from coming within the
exemption. The second question
the Court of Appeal dealt with was whether
the Trust’s income was derived for exclusively charitable
purposes. In doing so, they had to traverse the inarguably confused and
as to what constitutes a charitable purpose. In the end, however,
they agreed with O’Regan J’s conclusion that the assistance
However, they went on to conclude that the assistance function was not
the only purpose for which income was derived. Clause 9.4 of the Trust
deed stated that any surplus income would, at the end of the
Trust’s life, be paid to the Crown. The Court held that there was a real
possibility that a surplus would exist, and
that the payment of the
surplus to the Crown was not merely incidental to the assistance
function, being a separate
purpose in itself.
The Court of Appeal was clearly swayed by the evident potential for private
settlers to abuse section 61(25) if the Court were to
uphold a tax exemption
for income of a trust that could be accumulated from year to year and
ultimately paid over for a
non-charitable purpose. The Court also
rejected an argument that the gift to the Crown contained an implicit limitation
effect that it could only be used for charitable purposes3 or
that all the Crown’s purposes are charitable.
C: The Privy Council Decision: Lord Millett
The finding in the Court of Appeal (and the High Court) that the
assistance function was a charitable purpose was not
challenged by the
Commissioner on appeal. This left two main issues for the Board:
whether section 61(25) requires
trusts to be established for
exclusively charitable purposes; and whether, on the facts, the income
was so derived, despite the residual payment
3 See Re Smith  1 Ch 153.
1. The statutory interpretation question
The Commissioner maintained his argument that, to qualify for the
section 61(25) exemption, a trust must be established for exclusively
charitable purposes. However, the Privy Council approved the Court of
Appeal’s approach in emphasising the
difference between charities in
the form of trusts and charities in the form of societies or other
The difference was considered to be justified in that,
whereas trusts are often established for multiple purposes, societies
institutions usually have just one. Therefore, the Board held that
section 61(25) will apply if the trust’s income
is applicable for
charitable purposes, irrespective of whether the trust is established
exclusively for charitable purposes. They concluded that the stakeholder
function of holding the capital of the trust for
purposes did not exclude the Trust from the exemption.
2. Income derived exclusively for charitable purposes
The trustees appealed against the Court of Appeal’s decision that the income of the Trust was not derived exclusively for charitable purposes, as a result of the surplus being paid to the Crown. The Board pointed out that this requirement does not exclude a charitable trust from co-existing either “vertically or horizontally” with a private trust.4
They cited Re Sir Robert Peel’s School at Tamworth5
as an example of the former. There, the income was to be applied on
mandatory trust for the maintenance of a school, subject to a
revocation. It was held that, until the power was exercised, the trust was
charitable. In the same vein, their Lordships
stated that had the Trust required
the trustees to apply all of the income (minus expenses) for the assistance
purpose, the Trust
would have come within section 61(25).
However, the Trust deed allowed the trustees to accumulate the income and
apply it in later years, and any surplus income was ultimately
to be paid to the
Crown. Therefore, ‘it cannot be said of any sum of income in the hands
of the trustees that it will
be applied for
4 Latimer, supra n. 1, para. .
5 (1868) 2 Ch App 543 (Peel’s Case).
purposes; it may be retained and ultimately become payable to the
Thus, the income could not be seen to be derived exclusively for
charitable purposes unless either the trust in the Crown’s
simply incidental to the assistance function, or the Crown is itself a
charity or holds the surplus income on
a charitable trust.
The Board cited as an example of an incidental, ancillary function the
ability of trustees to charge a trust for their fees and expenses.
function cannot, according to the Privy Council, be regarded as a
purpose of the trust. Instead it only facilitates
its purpose. Importantly, Lord
Millett went on to state the following principle:
“The distinction is between ends, means and consequences. The ends must be exclusively charitable. But if the non-charitable benefits are merely the means or the incidental consequences of carrying out the charitable purposes and are not ends in themselves,
charitable status is not lost.”7
However, the fact that the surplus income was to be held on trust for the
Crown was considered by the Board to be ‘neither a
means of furthering the
Trust’s charitable purpose nor an incidental consequence of carrying out
that purpose.’8 It was a purpose in its own right.
Nor did the Privy Council accept the alternative argument that the
Crown is a charity or holds its money for exclusively
purposes. They did acknowledge that a gift to a non-charitable entity can be
‘impressed’ with an implied
trust, restricting the recipient so that
they can only use the property for charitable purposes.9 But, like
the Court of Appeal, they did not consider this to be the situation here. The
Board thought that this was because
there was no gift to the Crown
– the Crown is simply ‘resuming its own property’ and it
6 Latimer, supra n. 1, para. .
7 Ibid., para. .
9 As per Re Smith  1 Ch 153.
be ‘unrealistic’ to see them as limiting their use of the money
after it is no longer required for the charitable purpose.10
However, unlike the Court of Appeal, the Privy Council did not consider this to be the end of the matter. Instead, following on from this last point, they concluded that the Trust deed was really ‘an elaborate mechanism which serves much the same purpose as a Quistclose trust.’11 This was because, through it, the Crown was able to provide financial support for one specific purpose and so far as the money was not used for that purpose, to retain ownership of that property throughout. Whether income tax is payable or not depends on
‘the status for tax purposes of the person beneficially entitled to
the income in question’.12 Here, this was the Crown,
and the Crown is exempt from income tax. Therefore, the Board concluded that,
so far as the income
was used for the assistance function, it was applied for
charitable purposes and exempt under section 61(25), and so far as it was
it remained the tax-exempt income of the Crown. Thus the Board allowed the
1. The importance of the decision
According to Matthew Conaglen,13 the case is important in two ways. First, he suggests that it is quite possible that similar arrangements will be entered into in the future to deal with other Mäori claims to land. Therefore it is necessary that parties to such agreements have a full understanding of the consequences of this particular structure.14 Note though that this view can be contrasted with the equally true point that
‘the decision will have limited application to other charitable
trusts given that it turns on the specific terms of
the trust deed in
10 Latimer, supra n. 1, para. .
11 Ibid., para. .
12 Ibid., para. .
13 Matthew Conaglen, ‘A Legislative Definition of “Charitable Purpose”’  NZ Law
14 Ibid., p. 449.
15 Adrian Sawyer and Charmaine Edward ‘$40 Million and the
Meaning of “Charitable” – The Final Statement’
New Zealand Journal of Taxation Law and Policy 5, p. 10.
However, Conaglen also argues that the case is important in that it
applies and/or establishes some important legal principles
with regard to
charities, trust and tax law.16 Thus, even though the ultimate
decision may be quite context-specific, the judgment has wider significance. One
is that the Privy Council definitively answers the
statutory interpretation question, upholding the Court of Appeal’s
that a trust need not be established exclusively for charitable purposes to
qualify for the section 61(25) tax exemption. Moreover,
they acknowledged the
agreement by all that this section is “materially identical”
to the equivalent provision
in s CB4(1)(c) of the Income Tax Act 1994. This
conclusion has in effect been codified by s CW(1) of the Income Tax Act 2004,
applies from the 2005–2006 tax year.
Secondly, the Board also applied the principle that, to be charitable, a
trust’s income must be derived for exclusively
charitable purposes — a requirement that has been read into the
statutory language, and derives from the general principle
of charities law that
a charitable trust must be for exclusively charitable purposes.17
The Board then elaborated on what this means. As stated above, they
accepted that a charitable trust could co-exist with a private
trust and cited
Peel’s Case18 as an example of vertical
However, it is arguable that they did not sufficiently stress just what the
difference is between vertical co-existence and a trust
with two simultaneously
existing purposes. For example, in the subsequent case Hester v Commissioner
of Inland Revenue, the trust at issue allowed income to be applied for
non-charitable entities.19 The trustees argued that as income was
not applied to these entities in the income year in question, this did not
affect the charitable
status of the trust.
The Court of Appeal (in obiter) preferred the
Commissioner’s argument that it was irrelevant that no income
applied to non- charitable purposes in the year in question. This was
because they thought it “unsatisfactory”
to allow a trust to
claim charitable status
16 Conaglen, supra n. 13, p. 449.
17 See Morice v Bishop of Durnham  EWHC Ch J80; (1805) 10 Ves 522, pp. 541–543; Attorney-General for New
Zealand v Brown  AC 393.
18 (1868) 2 Ch App 543.
19 (2005) 22 NZTC 19,007.
where non-charitable purposes could be introduced ‘at the will
of a person associated with the trust’.20
In my view, the important factor is that the income was applicable to the
non-charitable entities ‘at the will’
of an associated
person. Likewise, the Trust in Latimer was not an example of
vertical co- existence because, at the trustees’ sole discretion, they
could accumulate the income
and carry it forward, so that it ultimately formed
part of the surplus income paid to the Crown.
This can be contrasted with the situation in Peel’s Case
where the income was held on a mandatory trust for the charitable
purpose until the power of revocation was exercised, and thus the income
derived until the revocation,
was fully and definitely applicable only to that
purpose. This point is clearly implicated in Lord Millett’s judgment, but,
in my view, this crucial difference should have been emphasised more strongly,
so that the issue is clear in future cases, such
as Hester v Commissioner of
The Privy Council did, however, give clear guidance with regard to the issue
of when a purpose can be considered to be ancillary and
thus not relevant to
the charitable status of the trust. Here they distinguished between ends,
means and consequences (see above),
positing a test that Conaglen describes as
‘illuminating’.21 The case is also clear authority for
the general proposition in tax law that liability to income tax is
dependent on the
tax status of the person beneficially entitled to the
income, and is a New Zealand example of a Quistclose trust, as defined by
the House of Lords in Twinsectra Ltd v Yardley.22
2. The reasoning
One commentator has described the approach that the Privy Council adopted
in this case as ‘logical and difficult
with’,23 and certainly the result of the case seems to be
welcome. However, there have been criticisms levelled against the reasoning
20 Ibid., para. 
21 Conaglen, supra n. 13, p. 452
22  UKHL 12;  2 AC 164 (‘Twinsectra’)
23 Sawyer and Edward, supra n. 15, p. 10
Despite ultimately finding for the trustees, the Board nonetheless
largely upheld the Court of Appeal’s reasoning
in finding that
the income of the Trust was being derived for more than one purpose, one of
which was non-charitable. Thus,
the criticisms that David Brown levels
at the Court of Appeal’s judgment are arguably relevant with regard
decision of the Board as well.24
Brown considered that the reasoning portrayed ‘an unnecessarily narrow point of construction in relation to a relatively insignificant part of the Trust deed’, and that the result of the reasoning was avoidable.25
Firstly, he cites the ‘benign construction’ principle whereby the charitable status of a trust is to be sustained if at all possible. However, Matthew Conaglen also discusses this principle26 and reveals that it only applies where the trust has only one purpose which is either ambiguous or may be implemented in a charitable or non-charitable way27 — not when there are in fact two purposes,28 as was the case here. At this point Brown also criticises the factual finding that the payment of the surplus to the Crown was a purpose in its own right.29
He contends that it was merely incidental and just a reflection of the
reality that the surplus had to go somewhere when the Trust
wound up. This
latter point is, of course, true, but it arguably fails to place enough
importance on the trustees’ ability
to accumulate the income and thus
that the surplus may be sizeable and not just what was left over in the year
during which the assistance
purpose was entirely fulfilled.
Therefore, as the Privy Council emphasised, any amount of income in the hands
of the trustees could just as easily be applicable to
the surplus function as it
could the assistance purpose, and so the former was held to be a substantial
purpose in itself.
In my view, this finding was definitely open on the
facts, and appropriately reflects the terms of the Trust
24 David Brown, ‘Charity, the Crown and the Treaty’  NZLJ 65, p. 70.
25 Ibid., p. 68.
26 Conaglen, supra n. 13, p. 452.
27 See Charles v Barzey  1 WLR 457, para. .
28 See Funnell v Stewart  1 WLR 288, pp.
Brown also argues the Court was “unduly” influenced by the
possibility of abuse of section 61(25) by private settlers.30
This is because the precedental effect could be confined to the context
in which the Crown is the settler. However, section
61(25) and the meaning of
‘charitable purpose’ are widely applicable and the principle via
which the Crown is distinguishable
from other taxpayers is unclear. Here Brown
contends that the Court of Appeal (and so the Privy Council) was too dismissive
arguments to the effect that all of the Crown’s functions
are charitable and/or that the gift of the surplus
to the Crown was
impressed with a limitation such that it could only be used for
Regarding the former, Brown argues that, as ‘the less the
Crown does...the more charity has left to do’, the
must be automatically charitable.32 Moreover, he states that
it is difficult to pinpoint any function of the Crown which would not come
within the common law definition
of ‘charitable’, and that, in any
practical sense, it really does not matter as a gift to the Crown
the same function (of funding Crown activities) as taxes
The Privy Council rejected this contention for the simple reason that it is not true that all public purposes are charitable purposes. They pointed to the special Crown exemption from income tax as indicative of this
— if all Crown purposes were charitable, this exemption would
be otiose.34 Moreover, with respect, the practical consequence
that the money is going to the same over-all body (the Crown) does not answer
the legal question.
With regard to the argument based on Re Smith,35 Brown
pointed to cases where gifts had been held to be implicitly charitable
simply because their recipient was
a public authority.36
In addition, he contends that it was relevant that the gift was made in
the context of a
31 Ibid., citing Re Smith  1 Ch 153.
32 Ibid., p. 70.
34 Latimer, supra n. 1, para. .
35  1 Ch 153.
trust which was otherwise clearly for charitable purposes.37
Here, however, the Privy Council emphasised that there was no gift to
the Crown — and indeed it seems awkward to look
at it as the Crown
gifting itself. Even if it was accepted that it was a gift to the Crown, that
the Crown was implicitly limiting
itself in the use of the returned
property is, in my view and as stated by Lord Millett,
Therefore, I posit that the criticisms levelled by Brown against the
reasoning employed by the Court of Appeal and affirmed by the
Privy Council, are
not, in the final analysis, able to stand their ground. This is especially so
if Brown’s comments are
seen in the light of his clear dissatisfaction
with the Court of Appeal’s conclusion. The Board ultimately
the arguably desirable conclusion on other grounds, in that it
recognised the ‘beneficial role played by the [Trust] in
process and the wider benefit of the Waitangi Tribunal for resolving
historical grievances’.39 Therefore, it may be seen to be
less necessary to attempt to squeeze the Trust into the mould of deriving its
income for exclusively
charitable purposes, either by downplaying the surplus
income function or by manipulating the status of the Crown or the gift.
However, the Privy Council’s finding of a Quistclose trust has
also been criticised. Jan James points out that section 61(25) is still
open for abuse by private settlers
in that they can settle a trust for
charitable purposes that they do not intend to discharge and
incorporate a residual
reversionary right actionable at the end of a fixed
Thus they can contend that they still retain beneficial ownership of the
property not used for the charitable purposes and the charitable
status of the
trust will not be lost. They will still have to pay tax on the
income when the trust’s term expires,
but they gain the significant
advantage of deferring this for the life of the trust. To avoid this, James
states that the implication
of the case must be that the income used for the
charitable purposes and the income ‘retained’ by the settler must be
38 Latimer, supra n. 1, para. .
39 Brown, supra n. 24, p. 70.
40 Jan James, ‘Charity and Reversion’  NZLJ 68, p. 72.
In my view, an annual determination would be consistent with the
principle that liability for income tax is dependent on
the tax status of the
person beneficially entitled to the money. If the settler retains
beneficial ownership, their tax
status is the pertinent factor. This, of
course, was not an issue in Latimer as neither the settler nor the Trust
was liable to pay income tax. It might be arguable that this would
weaken the position
of true charitable trusts classifiable as
Quistclose trusts, in that all income not applied in the current year
would be liable for income tax. However, the Privy Council specifically
that, had the ultimate trust been in favour of a private individual, in terms of
the section 61(25) exemption, the Trust would
have been indisputably
taxable.42 Therefore, such trusts will be no worse off.
The general principle is that, to be charitable, all of a trust’s
income must be applied for charitable purposes.
James also argues that,
to maintain the ‘integrity’ of this rule, in the case of a
Quistclose trust the income cannot be settled on the trust until
it is applied for the charitable purpose.43 This, she avers,
is not what the facts of this situation suggest. Thus, in effect, she
is arguing against the Board’s
understanding of the terms of the Trust
as constituting a Quistclose trust. Of interest here, therefore, is the
fact that neither the lower courts nor counsel for either side considered this
as a possible
analysis. It has been suggested that this was due to
the confusion which abounded concerning the nature of Quistclose
trusts up until the decision of the House of Lords in
Twinsectra,44 which occurred shortly before oral argument in
the Court of Appeal for the present case.45
Alternatively, it could simply have been because of the general difficulty
that exists in distinguishing Quistclose trusts from other types of
arrangements.46 The Privy Council decided that the
Trust here constituted a Quistclose trust, but, in light of the
difficulty averred to, it is unsurprising that others might have different
views. However, this does not
undermine the legitimacy of the factual
finding that the Board reached.
42 Latimer, supra n. 1 .
43 James, supra n. 40, p. 72.
44  UKHL 12;  2 AC 164.
45 Conaglen, supra n. 13, p. 453.
46 Ibid., citing Lord Millett, ‘Foreword’ in William Swadling (ed), The Quistclose Trust (2004)
i, vii for this general proposition.
Lastly, although not a criticism of the actual judgment, it is perhaps
unfortunate that the decision regarding the charitable
nature of the assistance
purpose was not challenged before the Board. This is not because of any
dissatisfaction with the
finding, but simply that it might have been a good
opportunity for our (then) highest court to clarify the test as to what
constitutes a ‘charitable purpose’. Of particular
uncertainty is whether CIR v Medical Council of New Zealand47
can be used as authority for the proposition that ‘a purpose which
is beneficial to the public is prima facie charitable unless
good reason is put
forward for holding otherwise’.48 It was considered
unnecessary to decide this in the Court of Appeal (as the case could be decided
by analogy) and thus the proper
approach to the issue ‘remains
unsettled’.49 Any statement on the point would probably
have been obiter (in that analogies applied), but it would have been a
Another major site of uncertainty was whether the majority House of Lords
decision in Oppenheim v Tobacco Securities Trust Co Ltd,50
that blood link is fatal to charitable status, was still good law.
This latter issue, however, has since been definitively
settled in the
negative by section OB3B(1) of the Income Tax Act 1994, effective from March
The actual result of the case is almost indubitably the favourable one – as Brown stated, it would have been ‘deeply ironic [if] the Trust became liable for millions of dollars of tax because of a residual possibility that surplus moneys might go to the Crown, to whom the tax is payable’.52
Moreover, I would argue that the Board’s reasoning in reaching
this conclusion stands up against the criticisms levelled
at it. It will be
interesting to see whether this analysis will be picked up by privately
settled trusts looking to evade
income tax liability and thus whether
annual determination will be considered a necessary requirement. Moreover, the
the law concerning the definition of ‘charitable
47  2 NZLR 297.
48 Brown, supra n. 24, p. 66.
49 Conaglen, supra n. 13, p. 451.
50  UKHL 2;  AC 297.
51 James, supra n. 40, p. 68.
52 Brown, supra n. 24, p. 68.
purpose’ clearly needs to be considered further. However, on the whole, and in the author’s opinion, the case has been satisfactorily resolved.