Church of Jesus Christ of Latter Day Saints & anor v CIR [2020] NZCA 143

The Court of Appeal has decided that donations to the appellant Trust Board ("the Church") are charitable gifts that qualify for a tax credit. In a note on the High Court’s decision in this case, this author stated that the case had been wrongly decided and hoped that the Court of Appeal would reconsider the matter with a clear eye on the legal rights and obligations of donor and done, and on the purpose for which payments were made, not the motivation for them. The Court has done just that and has come to the right result.

The case concerned donations made to the general funds of the Church in New Zealand by relatives and friends of young people who served overseas as missionaries for the Mormon Church. None of that money went to the missionaries themselves, who were supported by the Church in the country of their mission, with help if necessary from the Church’s “Head Office” in Salt Lake City. Inland Revenue argued that payments made by close members of the missionary’s family in NZ were not gifts because they received consideration or personal benefit from the Church. For the most part that seems to have been the kudos of having been chosen to serve as a missionary, a matter of some considerable prestige in the Church. The nub of the IR’s theory of the case was that close relatives and the missionaries themselves made payments to the Church either in anticipation of being supported as a missionary or because of them having been appointed to a mission and being overseas undertaking it.

As a fact however, the Court held that the payments made to the Church in NZ were voluntary and not refundable, were applied at the discretion of the Church to its activities in NZ and not overseas, and were not applied directly or indirectly to the missionary’s work overseas. The Court examined what it saw as an association between the payments made to the Church in NZ and financial support to a missionary overseas but did not regard that as relevant in the end.

The appellant Church argued that the legal arrangements relating to payment had to be analysed with due regard to the context in which the relevant transaction occurred. Considering these factors, the payments went to the Church to be applied as it saw fit in advancing its charitable purposes. None went to missionaries overseas so the payments were not for services.

The Commissioner’s case was that one had to look beyond the simple form of the arrangements. She argued that the payments were clearly connected to the financial assistance that missionaries received overseas and that the travel, food and accommodation missionaries received were material benefits. Relatives of missionaries making payments to the Church did so knowing that their young people would be supported by the Church. Counsel for the Commissioner went as far as to argue that a donor in NZ would be able to sue the Church here if his or her relative on an overseas mission was not supported by the church in the country of mission or from Salt Lake City.

In resolving the case, the Court held that the required approach was well settled. The case was not one of sham or tax avoidance and so a predominantly substance-based approach was not warranted. Instead the orthodox approach to determining the true legal character of a transaction applied: consider the legal arrangement in context and in light of the relevant legislation. Key to that was whether a material benefit accrued to the donor taxpayers.

The Court described the Commissioner’s approach as exhibiting an “element of superficiality.” It held that any benefits to missionary relatives of the donors did not arise from payments by the donors, which were applied to the purposes of the NZ Church. Secondly, the Court said that the basic costs paid for a missionary were to facilitate missionary service. Thirdly, there was no material benefit to a donor in their relative serving overseas because that service was charitable. Fourthly, the real benefit to missionaries serving overseas was spiritual and moral satisfaction, the antithesis of a material benefit. In making this comment the Court construed Material as meaning tangible as opposed to an intangible benefit of moral satisfaction.

It held, however, that even if missionaries and their relatives received more than spiritual or moral satisfaction, there was insufficient connection between payments to the NZ Church and any such benefit. No legal connection existed between payments made in NZ and support that might come to a missionary from the wider Church. The Court concluded that it is difficult to see how a relative of a missionary could sue the NZ Church if support was not forthcoming in the country of mission or from the Church’s HQ.

At least one commentator has suggested that the decision may lead to what is essentially private expenditure (such as donations to schools) receiving tax support. This author doubts that will occur because the connection between a school donation and material benefit to the donor is much clearer: pay the donation and Little Johnnie gets to go to school camp. The greater significance in the decision is that it stands as a reminder that outside the extreme cases of sham and tax avoidance, there is no legal mandate for IR interpreting tax law with a broad “in substance” approach. Instead the correct approach is to decide what the legal rights and obligations of the parties are, having regard to all the circumstances. That means that you do not stop at what has been written between the parties: a sensible eye should be cast over what they do. But the correct approach does not allow connections to be assumed or rights and obligations to be conjured, when there are none.

Inland Revenue has sought leave to appeal the decision to the Supreme Court. It is apparently concerned that the decision creates a risk that private expenditure can receive a tax subsidy if it is routed through a charity. Note also that, since 1 April 2019, section GB55 of the Income Tax Act allows IR to reduce charitable tax credits if claimed as the result of an arrangement  having the purpose or effect of defeating the intent and application of the tax credit provision in section LD1. This section did not apply in the years dealt with in the case but IR might well have run an avoidance argument using section GB55 had that not been so. That is not to say however that such an argument could or should have been upheld on the facts of the case.

© 2020, G D Clews


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