INTERPRETATION STATEMENT: IS 17/XX

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1 Deadline for comment: 30 November Please quote reference: PUB Notes for submitters This draft Interpretation Statement follows from an Issues Paper released in mid-2016 (IRRUIP9 Donee organisations clarifying when funds are applied wholly or mainly to specified purposes within New Zealand). We are interested in any feedback you have on this statement. The outcome of this statement, if finalised, will be that an organisation must apply 75% or more of its funds to charitable, benevolent, philanthropic, or cultural purposes within New Zealand if it is to meet the requirements of s LD 3(2)(a) to be a donee organisation. It is intended that the statement applies from the 2018/19 tax year. The key change is the Commissioner now considers the minimum percentage for the wholly or mainly test in s LD 3(2)(a) of the Income Tax Act 2007 is 75%. This is a reduction from the 90% figure proposed in IRRUIP9. If finalised, this statement will change the Commissioner s current practice that includes accepting the minimum percentage is a simple majority of more than 50%. If so, organisations may wish to contact the Department to discuss how this change may affect them. The statement includes a discussion on monitoring compliance with the 75% threshold, we are particularly interested in comments on the following: 1. The requirement for organisations to monitor on an annual basis their compliance with the wholly or mainly threshold of 75%. 2. The methods suggested for monitoring compliance. 3. Any alternative monitoring methods. INTERPRETATION STATEMENT: IS 17/XX INCOME TAX: DONEE ORGANISATIONS MEANING OF WHOLLY OR MAINLY APPLYING FUNDS TO SPECIFIED PURPOSES WITHIN NEW ZEALAND All legislative references are to the Income Tax Act 2007 unless otherwise stated. Relevant legislative provisions are reproduced in the appendix to this Interpretation Statement. Contents What this statement is about... 2 Summary... 2 Introduction... 5 The meaning of wholly or mainly... 5 Introduction... 5 The text... 6 Wholly... 6 Mainly... 6 Wholly or mainly... 7 Conclusions on the text: wholly, mainly and wholly or mainly Legislative context and purpose Section LD 3(2)... 14

2 The Part of the Act Other Parts of the Act The legislative history Conclusions on the meaning of wholly or mainly The meaning of funds Applying funds Funds spent on more than one purpose Funds held What is required to be within New Zealand? Monitoring compliance with the wholly or mainly threshold References Appendix Legislation What this statement is about 1. This statement is about organisations having donee organisation status under the Income Tax Act Having donee organisation status means that, subject to some limits, donors of monetary gifts to the organisation can obtain tax advantages. The tax advantage for natural persons is a refundable tax credit of 33 1 / 3 % of gifts of $5 or more. Companies and Māori authorities can qualify for a deduction for the gift. 2. There are two ways organisations can obtain donee organisation status. They can meet the requirements of s LD 3(2) or they can be added to the list of overseas donee organisations appearing in sch This statement concerns donee organisations under s LD 3(2)(a). It does not apply to donee status arising under the other paragraphs of s LD 3(2) or to overseas donee organisations listed in sch This statement applies from the income year commencing 1 April 2018 (or the first day of any income year commencing after this date where a non-standard balance date applies). Summary 5. The Commissioner is aware aspects of s LD 3(2)(a) have been subject to some uncertainty. To qualify under s LD 3(2)(a) an organisation must be: a society, institution, association, organisation, or trust that is not carried on for the private pecuniary profit of an individual, and whose funds are applied wholly or mainly to charitable, benevolent, philanthropic, or cultural purposes within New Zealand: 1 1 For simplicity, charitable, benevolent, philanthropic, or cultural purposes are referred to in this statement as specified purposes. Purposes not falling within specified purposes are referred to as other purposes (which includes overseas purposes ). Also, gifts eligible for tax advantages, defined in s LD 3(1) as charitable or other public benefit gifts, are referred to as gifts or donations. 2

3 6. Section LD 3(2)(a) uses the phrase wholly or mainly to set the extent to which funds must be applied to specified purposes within New Zealand. The phrase effectively determines the extent to which an organisation can apply funds to other purposes (such as overseas purposes) and remain a donee organisation under the provision. 7. Before this statement, the Commissioner had from time to time accepted it was possible for an organisation to apply up to 49% of its funds to other purposes. That is, before this statement, there was the view that the phrase wholly or mainly could mean a bare majority or 50% or more. 8. However, this statement concludes that the extent to which donee organisations can apply funds to other purposes is less than the Commissioner has previously found acceptable. This statement concludes wholly or mainly sets a higher threshold of 75% or more. 9. What this means is that from the year ended 31 March 2019 onwards the Commissioner will expect donee organisations to apply no less than 75% of their funds to specified purposes within New Zealand. Existing donee organisations need to consider whether they are affected by this statement s conclusions and, if so, what their options are. If concerned, they should discuss the matter with Inland Revenue (see the contact details at the end of this statement). 10. The 75% threshold conclusion is reached after considering the following: The ordinary meaning of wholly is entirely or fully. Mainly can have more than one ordinary meaning, as in: a bare majority (ie, more than 50%); or a higher figure. The highest threshold set by mainly is usually a result of the word being used with other words such as wholly in a context indicating it is appropriate to restrictively interpret mainly as coloured by the other word. There is support in the context of the Act for a higher threshold than a bare majority due to a legislative bias toward specified purposes being achieved within New Zealand as revealed by: the other paragraphs of s LD 3(2) that require specified purposes to be achieved exclusively within New Zealand; sch 32 which applies to organisations whose purposes are achieved principally overseas. The bias toward achieving specified purposes within New Zealand is also supported by the history of the legislation. The history shows that by providing the tax credit Parliament considered it would encourage community self-help. Also, the credit would help relieve the Government of the burden of expenditure that it would otherwise incur to achieve domestic social outcomes. On balance, the Commissioner considers mainly in s LD 3(2)(a) is read restrictively indicating a higher threshold than a bare majority. The threshold figure of 75% was suggested in Radio Authority, ex p Bull [1997] 2 All ER 561 (CA). In that case the court simply adopted it as a mid-way point between the possible meanings of mainly ranging from 51% to 99%. The Commissioner considers this is also a reasonable and pragmatic boundary to apply in the context of s LD 3(2)(a). 3

4 11. While concluding the phrase sets a particular threshold of 75%, the imprecision of the term wholly or mainly means flexibility exists to consider an organisation s general history of compliance. A gauge of compliance history with this threshold could be gained by considering an organisation s application of funds averaged over several years (ie, a rolling average). The threshold also allows the possibility to accept an organisation may fall below the 75% figure in a particular year due to specific events (eg, applying funds overseas as part of a response to an overseas natural disaster). 12. Other conclusions reached in this statement are as follows: The meaning of funds is imprecise but the Commissioner considers it can be reasonably interpreted as a reference to all receipts of an organisation, regardless of their character (ie, whether capital or revenue). Funds are applied to specified purposes within New Zealand when receipts for a period are spent on those purposes. It will be a matter of fact and degree to determine in each case whether there is sufficient connection between the spending and the specified purposes within New Zealand. If funds have been spent on specified purposes within New Zealand and other purposes at the same time, there may be a need to use some reasonable basis to apportion the spending between the purposes if it is likely to be critical to determining whether an organisation is complying with the wholly or mainly requirement. Funds will be applied if held rather than spent and they comprise: amounts clearly set aside or invested for spending on particular purposes in the future; small sums set aside for the ongoing operation of the organisation; amounts invested for the purposes of generating income to further the general operations of the organisation; or in the case of a donee organisation that is a trust, funds comprising the corpus of the trust. Funds held for more than one purpose, including specified purposes within New Zealand, may need to be apportioned on some reasonable basis similar to where funds have been spent for more than one purpose. It is the specified purposes that are required to be within New Zealand not the application of funds. This means the location where funds are spent is not relevant. In any assessment of compliance with the wholly or mainly threshold, the object is to come to an overall determination of the purposes to which the organisation is applying its funds. Organisations concerned that they may not consistently apply 75% or more of their funds to specified purposes within New Zealand, may wish to adopt some method of monitoring their compliance with the requirement. Whatever method is adopted, it will ultimately be up to the donee organisation to show that they are wholly or mainly applying funds (both spent and held), for specified purposes within New Zealand. 4

5 Introduction 13. As mentioned, the Commissioner is aware of a lack of clarity and consistency about aspects of the requirements for donee organisation status under s LD 3(2)(a). Unfortunately, there is little judicial guidance on interpreting this provision. A former version of the provision was considered in Molloy v CIR [1981] 1 NZLR 688 (CA). The Court of Appeal noted (at 690) the legislation raised problems, but it was not required to resolve these problems. The problems the court identified were: when purposes are within New Zealand ; whether funds refers to the whole or the principal part of an entity's funds or just income; whether applying funds refers to an income year or a longer period; whether holding funds is applying them. 14. To this list can be added the issue of the extent an organisation must apply its funds to specified purposes within New Zealand to meet the requirement the funds are wholly or mainly applied to those purposes. 15. Accordingly, this statement considers the following issues: the meaning of wholly or mainly ; the meaning of funds ; what it means to apply funds; what is required to be within New Zealand. The meaning of wholly or mainly Introduction 16. The object of determining what the words wholly or mainly mean in s LD 3(2)(a) is to find the minimum value they set for the extent to which a donee organisation must apply funds to specified purposes within New Zealand. This is an exercise in statutory interpretation. Section 5(1) of the Interpretation Act 1999 guides the approach to statutory interpretation by requiring the meaning of an enactment to be determined by its text and in the light of its purpose. 17. The approach is outlined by Justice Glazebrook in Statutory interpretation, tax avoidance and the Supreme Court (New Zealand Institute of Chartered Accountants 2013 Tax Conference Paper, 7 November 2013: 10 11): The aim is to interpret... the specific provisions... in light of their purpose, in the context of the legislation as a whole and, to the extent relevant, against the background of the legislative history and other related legislation. 18. The Supreme Court supported this purposive approach to statutory interpretation in Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36 (SC) (at [22] [24]). Tipping J noted (at [22]) that even if the meaning appears plain, it should always be cross-checked against purpose. This includes crosschecking against the immediate and general legislative context and any social, commercial or other objective of the relevant Act. 19. While Fonterra was not a tax case, the Supreme Court has confirmed the same approach applies for revenue statutes (see Stiassny v CIR (No 2) [2012] NZSC 5

6 106 (SC) at [22] and Terminals (NZ) Ltd v Comptroller of Customs [2013] NZSC 139 (SC) at [39]). 20. Accordingly, the interpretative exercise requires looking at the text and purpose of the Act as a whole. The text 21. The interpretative approach is to consider the actual words of the Act, in this case: wholly and mainly individually and as a phrase wholly or mainly. In Stiassny the court stated the words of the legislation should be read in their most natural sense (at [23]). Also, the terms wholly and mainly and the phrase wholly or mainly are not defined in the Act. Accordingly, the ordinary meanings of wholly and of mainly are relevant. Wholly 22. Wholly is defined in the Shorter Oxford English Dictionary on Historical Principles (6th ed, Oxford University Press, New York, 2007) as follows: wholly 1 As a whole, in its entirety, in full. 2 Completely, entirely; without limitation or diminution. 3 Exclusively, solely, only. 23. In FCT v FH Faulding & Co Ltd [1950] HCA 42 (FCA) the High Court of Australia considered the phrase wholly or principally. Latham J stated (at 596): [T]he word wholly necessarily requires the application of a quantitative standard. A quantitative measure is one capable of being measured. 24. Accordingly, there seems little doubt that wholly, as used in the context of s LD 3(2)(a), requires that all of an entity s funds are measurably applied to specified purposes within New Zealand. Mainly 25. Mainly is relevantly defined in the Shorter Oxford English Dictionary on Historical Principles as follows: mainly 3 For the most part; in the main; as the chief thing, chiefly, principally. 26. The dictionary definition of mainly indicates that something less than all of an entity s funds could be applied to specified purposes within New Zealand. However, the definition does not indicate how much less. As noted by Burrows and Carter in Statute Law in New Zealand (5 th ed, LexisNexis New Zealand, 2015) not many words of the English language have only one ordinary meaning (at 309). Mainly is not a word with a single meaning. This can be borne out by looking at case law where the courts have considered mainly and adopted various meanings. 27. For instance, in Fawcett Properties Ltd v Buckingham County Council [1960] 3 All ER 503 (HL), the House of Lords considered whether a local authority s planning consent for a housing development was invalid because of a condition placed on who could occupy the houses. Amongst other things, the condition was for the houses occupation to be limited to persons whose employment... was in... an industry mainly dependent upon agriculture.... Lord Morton of Henryton stated [t]he word mainly at once gives rise to difficulties and it probably means more than half (at 512). 6

7 28. In contrast, in the Australian Federal Court case of Davis v FCT; Sirise Pty Ltd v FCT 2000 ATC 4,201 (FCA) the court rejected a statutorily defined meaning for mainly of more than half. The case concerned a sales tax exemption which would apply to two yachts provided they were mainly used for long-term leasing. Mainly was legislatively defined as to the extent of more than 50%, unless a contrary intention existed. The Commissioner argued a contrary intention did exist as the legislative history supported a view Parliament did not intend for the defined meaning to apply to that particular use of mainly in the legislation. The legislation formerly required the use to be exclusively or principally for long-term leasing. It had been amended to refer to mainly without any intended change in meaning. The court agreed the context suggested the defined meaning of mainly did not apply. Instead, it interpreted mainly as setting a higher threshold of principal or preponderant use rather than use just greater than 50%. However, in the case the court did not need to decide what percentage would be appropriate. 29. In further contrast, in Franklin v Gramophone Co Ltd [1948] 1 All ER 353 (CA), the United Kingdom Court of Appeal (at 358) considered an argument whether mainly could simply refer to something greater than anything else considered singly. For example, a person spending two hours a day at a task may be considered mainly engaged in the task if during the rest of the day they are involved in eight other tasks for an hour. In that example, mainly could refer to something as small as 20% or more. While Somervall LJ did not consider mainly had such a meaning in the context of the case, he accepted [t]he word mainly may, in some contexts, have such a meaning, Accordingly, the Commissioner considers the cases show mainly does not have a single ordinary meaning. While mainly may often mean more than 50%, in some contexts it indicates a higher or lower threshold. The cases are consistent in considering that words cannot be read in isolation and they take their meaning from the context in which they are used. This is the same approach to statutory interpretation explained in para 17 above. 31. Finally, there is also some authority suggesting the ordinary meaning of mainly may be quantitative in nature. For instance, in the House of Lords decision of Waugh v British Railways Board [1979] 2 All ER 1169 (HL) the court was considering the appropriate test for applying legal privilege to documents containing legal advice where the documents were not created solely for that purpose. Various terms, including wholly or mainly, had been used by the courts to describe the extent to which the legal advice purpose was required before privilege would apply to a document. When reviewing these various terms, Lord Simon of Gaisdale expressed a preference for legal advice to be the dominant purpose because [i]t seems to be less quantitative than mainly (at 1178). Wholly or mainly 32. The phrase wholly or mainly presents a choice between two alternatives. Wholly removes any doubt whether mainly overlaps with wholly. Aldous LJ confirmed this in Radio Authority where he stated (at 575) that the words are not coterminous in meaning (ie, they do not have the same boundaries). 33. Despite presenting a choice between two alternatives, the meaning of mainly can be affected by, or coloured by, its use in conjunction with the word wholly. This is consistent with the interpretative approach of reading words in the 7

8 legislation in the context of the other words of the section in which they appear. The rule is sometimes referred to by the Latin term noscitur a sociis ( words derive colour from those which surround them per Stamp J Bourne v Norwich Crematorium Ltd [1967] 2 All ER 576 (HC) at 578)). As Stamp J continued to state: Sentences are not mere collections of words to be taken out of the sentence, defined separately by reference to the dictionary or decided cases, and then put back into the sentences with the meaning which you have assigned to them as separate words. 34. The effect of this rule of interpretation can be seen in In re Hatschek s patents, ex p Zerenner [1909] 2 Ch 68 (HC). The case concerned a challenge to the Comptroller General s decision to revoke a patent. The legislation at issue provided that any person could apply to the Comptroller for another person s patent to be revoked if the patented article or process was manufactured or carried on exclusively or mainly outside the United Kingdom. Parker J stated (at 82 84): The first question is this: What is the state of circumstances the existence of which imposes this serious liability on a patentee? In the words of sub-s. 1, it is whenever the patented article or process is manufactured or carried on exclusively or mainly outside the United Kingdom. There is no difficulty in the use of the word exclusively, but the use of the word mainly gives rise to difficulty. The sub-section may, and it was argued that it did, include every case in which the patented, article or process is manufactured or carried on to a greater extent outside than inside the United Kingdom. If this be its true meaning, then in every case in which more than 50 per cent, of the patented articles manufactured anywhere are manufactured abroad, the patentee can be called upon to justify the use he has made of his monopoly and defend his patent rights. I cannot think that this is the true meaning of the subsection.... The word mainly is used in the sub-section in close connection with and as an alternative to exclusively, and, having regard to this fact, I do not think that a process or article can be said to be mainly carried on or manufactured abroad merely because it is carried on or manufactured abroad to a somewhat greater extent than within the United Kingdom. For example, if the total manufacture in the United Kingdom were 1200 and the total manufacture elsewhere 1250, giving a total of 2450 in all, I do not think it could be said that the manufacture was mainly abroad within the meaning of the section; to come within the sub-section the disparity must, in my opinion, be greater than a mere small percentage, and, indeed, if the article be manufactured or the process be carried on within the United Kingdom, not only to a substantial extent, but to an extent as substantial as may reasonably be expected having regard to what is done abroad, I do not think the state of circumstances is that contemplated by sub-s. 1. [Emphasis added] 35. Parker J rejected the argument mainly meant simply more than 50 percent. He considered that if this was the word s meaning then the difference between the activities carried on inside the United Kingdom and the activities carried on outside the United Kingdom could be small in some cases (2% in his example). Parker J concluded that in the context of the relevant legislation, Parliament must have intended for an outcome where the difference was greater than a small percentage. That is, mainly has a meaning greater than a bare majority. Parker J concluded this because mainly was used with exclusively. 36. This rule was applied in a New Zealand context by the former Supreme Court (now the High Court) in Fairmaid v Otago District Land Registrar [1952] NZLR 782 (HC). The case concerned registering a property under the Joint Family Homes 8

9 Act The homeowner was a partner in a law firm who had purchased the property because it was close to his law offices. The homeowner also used a small room at the back of the property as an office. To be registered, the property had to be exclusively or principally used as a home and the Registrar General argued this requirement was not met. The Registrar General cited the noscitur a sociis rule of interpretation arguing this limited the meaning of the word principally so it was interpreted more narrowly than if it stood alone. In support, counsel cited Hatschek s patents. North J agreed with this view (at 785): [Counsel for the Registrar General] very properly, in my opinion, contented himself with submitting that the association of the three words exclusively or principally should cause the Court to interpret the last word rather more narrowly that if it had stood alone. 37. The rule has also been applied in a New Zealand tax context in Taxation Review Authority Case E79 (1982) 5 NZTC 59,416. This case concerned whether a panel van was a motorcar where that term was defined as a vehicle designed exclusively or principally for the carriage of passengers. Barber DJ considered the van was not a motorcar because it was designed principally for the carriage of goods. Barber DJ accepted, on authority of Fairmaid, the association of the word exclusively with the word principally should cause the Tribunal to interpret principally more narrowly than if it been used alone. 38. Consistent with this rule of interpretation, a threshold greater than a bare majority applies for mainly where the context suggests wholly or mainly should be interpreted restrictively. For instance, in Radio Authority the United Kingdom Court of Appeal considered whether Amnesty International (British Section) was a body whose objects were wholly or mainly of a political nature. If so, it could not advertise on the radio. Lord Woolf MR stated (at 570): Wholly or mainly is a phrase the meaning of which is not free from ambiguity. Clearly it requires a proportion which is more than half. But how much more? 51% or 99% and anything in between are candidates. The same phrase appears elsewhere in the Act in a different context (see s 2 [of the Broadcasting Act 1990] where it is not directly concerned with freedom of communication). Here it has to be construed as a part of a provision which restricts the ability of [Amnesty International (British Section)] to promote itself on the media by advertising. This constitutes a restriction on freedom of communication.... The issue is not whether the restriction... is justifiable but how the restriction should be construed having regard to its blanket or discriminative effect in relation to a political body. In view of this restriction the ambiguous words wholly or mainly should be construed restrictively. By that I mean they should be construed in a way in which limits the application of the restriction to bodies whose objects are substantially or primarily political. This corresponds with the Shorter Oxford English Dictionary meaning of mainly as being For the most part; chiefly, principally. Certainly a body to fall within the provision must be at least midway between the two percentages I have identified ie more than 75%. [Emphasis added] 39. When interpreting wholly or mainly, the court considered regard should be taken of the context in which the phrase was being used. In this case, imposing a statutory restraint on the freedom of speech. Once it discerned something more than a bare majority was intended, the court decided a mid-point between the possible boundaries of 51% to 99% for the meaning of mainly, or a minimum of 75%, would reflect the drafters intention. 9

10 40. A yet higher threshold for the meaning of wholly or mainly was applied in British Association of Leisure Parks, Piers & Attractions Ltd [2011] TC [UKFTT]. This case involved the issue of whether an association s membership subscriptions should be exempt from Value Added Tax (VAT). The exemption applied if the association s membership was restricted wholly or mainly to individuals or corporate bodies connected to the association s purposes. With 69% of its members connected to its purposes, the association argued it met the relevant test because mainly meant more than 50%. In finding against the taxpayer, Sir Stephen Oliver QC (Chair) considered the meaning of wholly or mainly (at [39]): The Association s reading of mainly is, I think, incorrect. The word cannot be read in isolation. It is part of the compound phrase wholly or mainly. In that connection it must, I think, mean all or substantially all, e.g. 100% or a near percentage, rather than simply a bare majority. [Emphasis added] 41. However, the tribunal s conclusions were not supported by authority or analysis. In the context of the VAT legislation, a high threshold for wholly or mainly limited an exemption from tax applying and this may have made it appropriate. The tribunal s decision was criticised in several areas when it was unsuccessfully appealed by the taxpayer (but not on the meaning of wholly or mainly ) (see British Association of Leisure Parks, Piers and Attractions Ltd v Revenue and Customs Commissioners [2013] UKUT 130 (TCC)). 42. In other cases, the courts have not been as clear about the threshold it considers appropriate. For instance, in Houston v Poingdestre [1950] NZLR 966 (HC), the former Supreme Court (now the High Court) considered a landlord s action for possession brought under the Tenancy Act No order for possession could be made if the property in question was an urban property as defined. The definition excluded properties used exclusively or principally for agricultural purposes. Findlay J stated at :... [I]t does seem clear that the Legislature intended to leave all land used exclusively or principally for agricultural purposes outside the ambit of the Act... The consequential conclusion seems to follow that the Legislature intended all land not used for agricultural purposes to the high degree conveyed by the words exclusively or principally to come within the scope of the Act.... For several reasons, but principally for three in particular, I think the Legislature did not intend to exclude premises used primarily as a home from the definition of urban property. I think so, first, because the phrase exclusively or principally in the definition envisages some, if not some substantial, use for agricultural purposes, so that it becomes a question of the degree of that use which determines whether a property is urban property or not. That degree has to be determined in relation to the use being made of it for some other purpose. [Emphasis added] 43. While Findlay J considered that for land to be used exclusively or principally for agricultural purposes the use had to be to a high degree or substantially, there is no indication what extent of use in numerical terms would satisfy these terms. This is because, on the facts of the case, Findlay J determined the land was not used for agricultural purposes. 44. In contrast to the cases above, it is also clear that in many contexts the courts consider mainly (or synonyms of it) is not coloured by its use with other words such as wholly or exclusively. This occurred in CIR v Mitchell (1986) 8 NZTC 10

11 5,181 (HC). The High Court considered whether a taxpayer s dining room was used wholly or principally in connection with employment. The employment use of the dining room was between 55% and 59% and this use was found to be sufficient. The court expressly rejected the proposition principally meant greater than 85 %. Davison CJ stated (at 5,183): Issue 1. Meaning of principally I agree that the word must be used in its context. The dictionary definition of the word as used in the context of cl 7 is, in my view, synonymous with mainly which is an expression well understood by ordinary people.... Mr Aspey submitted that principally connotes so great a use that a use for any other purpose or purposes must be relatively insignificant. He went on to suggest that in order to satisfy cl 7, the work related use should be above 85%. I do not agree.... In Fawcett Properties Ltd v Buckingham County Council [1961] AC 636, 669, Lord Morton of Henryton expressed the view that the word mainly probably means more than half. Such is consistent with the definition of mainly in the Shorter Oxford English Dictionary for the most part, chiefly, principally. [Emphasis added] 45. Davison CJ considered mainly as synonymous with principally. Davison CJ also referred to Fawcett (a case where mainly was used solely) as authority for the view mainly probably meant more than half. 46. In Minister of Agriculture, Fisheries and Food v Mason [1968] 3 All ER 76 (HC) the United Kingdom High Court also considered mainly meant a bare majority where the word was used in conjunction with wholly. The issue was whether a gardener was employed wholly or mainly in a commercial activity where they spent 10 15% of their time carrying out those activities. The court found it is quite clear that in order to qualify the gardener must devote more than 50% of their time to the commercial side and not to the ordinary private garden. However, given the facts of such a low figure of 10 15% and only two competing activities (commercial versus private), the court was not required to consider whether mainly could set a higher threshold. 47. Similarly, in Imperial Chemical Industries plc v Colmer [1999] BTC 440 (HL) the House of Lords accepted the view of the parties that mainly simply meant a bare majority. This was in the context of a definition of holding company which was defined as a company the business of which consists wholly or mainly in the holding of shares or securities of companies which are its 90% subsidiaries. The issue was whether the reference to subsidiary companies in the definition applied only to those companies resident in the United Kingdom. The taxpayer company had 23 subsidiary companies of which four (or around 17%) were resident in the United Kingdom. Lord Nolan referred to the meaning of wholly or mainly (at 442): It was accepted by the parties and by your Lordships that for the purposes of the present case though not as a universal proposition the wholly or mainly requirement should be judged on the basis of a simple head count of the subsidiaries, so that if all or a majority of the subsidiaries satisfied the UK residence condition Holdings would qualify, but otherwise not. On this basis, of course, Holdings clearly failed to qualify. 48. However, as in Mason, the facts of Imperial Chemical Industries were unlikely to test the boundaries of mainly given the taxpayer had only 17% of its 11

12 subsidiaries resident in the United Kingdom. Importantly, Lord Nolan s decision was qualified by stating that adopting a bare majority did not establish a universal proposition for the meaning of wholly or mainly. 49. The more than 50% threshold was applied in another United Kingdom case, Kenya Aid Programme v Sheffield City Council [2013] EWHC 54 (Admin) (HC). This case concerned rating legislation that provided rebates for properties occupied by charities used wholly or mainly for charitable purposes. The lower court accepted a more than 50% threshold for the meaning of wholly or mainly was appropriate in the context. The issues on appeal concerned the relevance of some of the factors considered by the lower court when applying the threshold (eg, the most efficient use of the warehouse units as opposed to the charity s actual use). The High Court referred the matter back to the District Court to determine taking into account actual use. The District Court subsequently found against the charity because evidence from witnesses and photographs would support use of the units not exceeding 50%. 50. In the Australian case, On Call Interpreters and Translators Agency Pty Ltd v FCT 2011 ATC (FCA) the question arose whether certain persons were employees under contracts that were wholly or principally for providing labour. The Federal Court stated (at 12,391): The contract in question must be wholly or principally for the labour of that person.... In that respect, I see no reason why the word principally ought not be given its ordinary meaning, that is, chiefly or mainly : Macquarie Dictionary (5th ed, 2009). It is of some assistance to observe that the Explanatory Memorandum to the Bill that became the Taxation Laws Amendment Act (No 4) 1993 (Cth) shed some light on what Parliament had in mind in relation to a contract wholly or principally for labour. Section 81 of the amending Act amended the Superannuation Guarantee Act by inserting s 11(1)(ba). The Explanatory Memorandum explained that by that amendment the Superannuation Guarantee Act will specifically include salary or wages payments made to contractors for their labour under a contract that is wholly or principally for the person s labour. In that context, the Explanatory Memorandum stated (at 13.21): A contract is considered to be wholly or principally for labour if more than half of the value of the contract is for labour. [Emphasis added] 51. The court considered the meaning of wholly or principally meant 50% or more. However, its conclusions were helped by clear extrinsic material about Parliament s intention for how the threshold was to apply in the context of the legislation. 52. As mentioned at para 44, in many cases the courts consider mainly (or synonyms of it) is not coloured by its use with other words such as wholly or exclusively. Mitchell, Mason, Imperial Chemical Industries, Kenya Aid Programme and On Call Interpreters appear to be examples. 53. Where mainly is coloured by its use in conjunction with wholly, the quantitative nature of the test set by wholly reinforces the view that mainly and the phrase wholly or mainly, set a quantitative test. This was mentioned at para 23 above about the FH Faulding case. This case concerned the question of whether certain fruit cordial drinks were exempt from Australian sales tax due to their consisting wholly or principally of juices of Australian fruits. The Australian fruit juices in the cordials in question ranged from 11% to 29%. Despite these figures, the lower court accepted the cordials consisted wholly or principally of Australian fruit juice. This was because, when considered from a qualitative 12

13 perspective, it was the fruit juice content of the cordials that gave them their essential properties. The Australian High Court overturned this finding, applying a quantitative measure instead. Fullagher J stated (at 602): The natural meaning of the words consist... principally is emphasised... by the presence of the words wholly or. The reference must be to quantity. And, if we read the words in the Schedule in a quantitative sense, the proportions of sugar and water were such as to make it impossible to say that it was proved that the respondent s products consisted principally of the juices of Australian fruit. Conclusions on the text: wholly, mainly and wholly or mainly 54. Wholly, as used in the context of s LD 3(2)(a), requires all of an entity s funds to be applied to specified purposes within New Zealand. However, mainly means something less than 100% is also acceptable. That is, the phrase wholly or mainly presents a choice between the two alternatives with wholly removing any doubt about whether mainly includes 100%. 55. Used together, wholly or mainly sets a quantitative test, meaning under s LD 3(2)(a) the extent to which funds are applied to specified purposes within New Zealand must be measurable (see FH Faulding and Waugh). 56. While mainly may often mean more than 50%, in some contexts it indicates a higher or lower threshold (see Fawcett, Davis, and Franklin Gramophone). 57. Where mainly has been paired with wholly or exclusively and the courts have considered mainly cannot be read in isolation (ie, it is coloured by its use with these other words), then they have rejected the proposition mainly sets a threshold of a bare majority. Where this has occurred the courts have considered mainly means: something significantly greater than 50% (Hatschek s patents); 75% or more (Radio Authority); all or substantially all (British Association of Leisure Parks [UKFTT]). 58. Cases where mainly has been read in isolation and a meaning of more than 50% has been adopted include Mitchell, Mason, Imperial Chemical Industries, Kenya Aid Programme and On Call Interpreters. 59. The Commissioner considers one factor that may have been influential in determining the approach of the court in some of those cases was whether the facts in each case compelled the court to consider the nature of the phrase. For example, in Mason and Imperial Chemical Industries, the taxpayers clearly failed to come close to the lowest possible threshold for mainly given the figures involved in those cases were 10 15% and just over 17% respectively. 60. As mentioned, the distinguishing feature between these two lines of cases appears to be whether mainly is read in isolation. Consistent with the accepted approach to statutory interpretation, it is the purpose and context in which wholly or mainly appears in the relevant legislation that determines whether one approach is to be preferred over the other. 13

14 Legislative context and purpose Section LD 3(2) 61. Wholly or mainly in the context of s LD 3(2)(a) concerns the ratio between applying funds to specified purposes within New Zealand and all other possible application of funds. Because funds can only be applied to one or the other of these, there are only two relevant meanings for mainly : a bare majority (ie, more than 50%); or something greater than a bare majority. 62. The third possible meaning of mainly of more than anything else (as suggested in Franklin Gramophone), does not need to be considered further as it is not applicable when there are only two options (eg, funds applied to specified purposes within New Zealand and those applied to other purposes). 63. Also, s LD 3(2)(a) uses wholly or mainly to qualify the extent to which an organisation needs to apply funds to specified purposes. Funds refers to the organisation s financial resources. Financial resources are usually expressed in numerical terms in units of currency. This further reinforces the view wholly or mainly sets a quantitative test requiring some measurement of the extent to which an organisation applies its funds to certain purposes. 64. The language used in other paragraphs of s LD 3(2) is also relevant. These other paragraphs form part of the context in which paragraph (a) must be interpreted and must have some influence interpretatively on paragraph (a). The relevant paragraphs are (b), (c) and (d): (b)... (c) (d) a public institution maintained exclusively for any 1 or more of the purposes within New Zealand set out in paragraph (a): a fund established and maintained exclusively for the purpose of providing money for any 1 or more of the purposes within New Zealand set out in paragraph (a), by a society, institution, association, organisation, or trust that is not carried on for the private pecuniary profit of an individual: a public fund established and maintained exclusively for the purpose of providing money for any 1 or more of the purposes within New Zealand set out in paragraph (a). [Emphasis added] 65. These other paragraphs have a theme of funds being applied wholly within New Zealand. This may indicate Parliament only intended some minor relaxation of this standard when it used wholly or mainly in s LD 3(2)(a) (ie, mainly sets a high threshold more than a bare majority). Or, it may indicate no more than a different test was intended to apply for these other paragraphs. 66. Additionally, is that under s LD3(2)(a), funds not applied by a donee organisation to specified purposes within New Zealand can be applied to any purpose (arguably, both within or outside the objects of an organisation). These purposes may not necessarily be ones Parliament would wish to support through the tax system. 67. On balance, the Commissioner considers the use of exclusively and wholly or mainly show Parliament was concerned with what purposes organisations achieved and where. Except for sch 32 (where Parliament retains case-by-case 14

15 control on donee organisation status), Parliament intended specified purposes to be generally achieved within New Zealand rather than overseas. That is, the context of s LD 3(2) shows some bias toward specified purposes being achieved within New Zealand. The Part of the Act 68. As mentioned, the tax credits for charitable gifts are part of calculating a taxpayer s tax liability. This is the context of Part L of the Act, which collates in one part various credits affecting the calculation. 69. Tax credits are significant because they can be used to satisfy a taxpayer s tax liability or refunded to them in cash. Credits usually recognise tax already paid elsewhere or are used to promote social objectives, in this case, the object of encouraging charitable and public benefit giving. This suggests s LD 3(2)(a) is concessionary in nature in its application to donee organisations which include charities. This is consistent with the Act s treatment of charities generally, such as providing income exemptions for the income of charities. 70. However, the tax credits in this case accrue to donors and not to the organisations receiving the gifts. Despite this, it could be argued a lower threshold for wholly or mainly is consistent with a concessionary approach to charities. This is because it could permit more organisations to be eligible for donee organisation status, (ie, those that undertake activities outside New Zealand but not extensively enough to meet schedule 32 listing requirements). A lower threshold could have a positive effect for donors by widening their choice of eligible organisations. 71. The Commissioner does not consider such an argument to be sustainable. The linkages between cause and effect in this argument are weak. It may not necessarily follow that more donee organisations would exist if the threshold was lower rather than higher. Also, even if donors had more choice, this may not encourage more giving as opposed to simply causing the redirection of existing donations. 72. Also, the presence of sch 32 in the Act (discussed next) and the history of the legislation (discussed from para 85 below) would weigh against such an argument. Other Parts of the Act Schedule As mentioned in para 2, there are two ways organisations can obtain donee organisation status. They can meet the requirements of s LD 3(2) or they can be added to the list of overseas donee organisations appearing in sch 32. The history of sch 32 is that individually named organisations approved as overseas donee organisations were not originally listed in a schedule. Instead, they were listed in the Act itself as part of what is now s LD 3(2). A separate schedule did not exist until the enactment of the Income Tax Act In either case, listing in the legislation or in the schedule relies on the scrutiny and approval of Cabinet. Cabinet listing criteria have existed since 1978 (CM 78/14/7 refers). The Cabinet criteria state: The basic criteria for adding an organisation to the list of approved overseas charities: 15

16 (i) the funds of the charity should be principally applied towards: the relief of poverty, hunger, sickness or the ravages of war or natural disaster; or the economy of developing countries*; or raising educational standards of a developing country*; (ii) charities formed for the principal purpose of fostering or administering any religion, cult or political creed should not qualify; * developing countries recognised by the United Nations. 74. The eligible purposes set out in the Cabinet criteria are narrower than the common law meaning of charity, the meaning of charitable purpose in s 5 of the Charities Act 2005 and the specified purposes in s LD 3(2)(a). While the criteria determining how organisations may be added to sch 32 are not interpretatively relevant, those organisations already listed and forming part of the legislation are relevant. 75. It is possible to look at those listed organisations and discern a common characteristic that they all focus on achieving purposes outside New Zealand. However, s LD 3(2)(a) and the schedule are not concerned with the same purposes. They do not simply sit at opposite ends of a line depending on where these purposes are achieved geographically. Schedule 32 criteria are limited to charitable purposes whereas specified purposes for s LD 3(2)(a) include, but are not limited to, charitable purposes. Further, sch 32 charitable criteria are limited to a subset of charitable purposes and include only certain charitable purposes achieved in certain foreign countries. This limits the extent to which inferences can be drawn on the meaning of wholly or mainly in s LD 3(2)(a). 76. Despite this, the presence of sch 32 can help inform the interpretation of s LD 3(2)(a) and, in particular, the meaning of wholly or mainly. The overseas focus of those organisations currently listed in sch 32 together with the wording of the various paragraphs of LD 3(2), where purposes are either exclusively or wholly or mainly related to New Zealand, suggests Parliament has some concerns over where purposes are being achieved in geographical terms. 77. The Commissioner considers it shows Parliament intended different rules to apply depending on whether purposes were being achieved to some degree within or outside New Zealand. Where purposes are being achieved outside New Zealand, Parliament controls donee organisation status through the cabinet criteria and the need for legislative amendment to sch 32 to add further organisations. 78. A higher threshold meaning for wholly or mainly would be consistent with this intention. A low threshold would undermine Parliament s concern with where purposes were being achieved because it would result in the domestic rules applying to situations where more funds were being applied outside New Zealand without the degree of scrutiny required for sch 32 listing. Other uses of wholly or mainly 79. Other uses of the phrase wholly or mainly in the Act could be relevant to determining the meaning of wholly or mainly in s LD 3(2)(a). For example, s DC 3(2) refers to a partnership that is engaged wholly or mainly in investing money.... Also, an exemption in s CW 59 applies to a New Zealand company deriving income wholly or mainly from Niue. There are other examples. However, none of the other uses of wholly or mainly in the Act specifically define the meaning of the phrase. 16