Are the assets of an incorporated charity held on trust for its purposes?

Background

If money or property is given to an incorporated charity for a specified charitable purpose, then the charity must hold that property on trust to pursue the purpose. In that instance, the charity must not apply the property for its general purposes. Lawyers tend to use the terminology that the recipient charity receives property with an imprest trust obligation in these circumstances. An order of the Court would be required for funds in the case of an imprest trust obligation to be applied to any other purpose.  This is technically referred to as a cy près order.

However, uncertainty still arises in the case of assets held by a charity for its general purposes as to how those assets can be applied i.e. is there a trust obligation or not.

The recent Supreme Court of New South Wales decision in the case of The Dombroski Foundation Ltd ^[1] (Foundation) had to look at this issue.  The case has significant implication for charity trust law.

Facts

Mr Dombroski and his sister lived in Balaclava, NSW. They owned a number of parcels of land in Balaclava and nearby Mittagong.

Prior to his death, Mr Dombroski established a foundation as a company limited by guarantee to hold property for a broad range of charitable purposes. These purposes amounted to ensuring properties were held for the good of the community by maintaining gardens, permaculture, providing access to an open range of artistic activities, spiritual and philosophical studies and providing residence for visitors. It was to be seen as a sanctuary and not for development.  The charitable purposes were expressed widely and included a social aspect and the development of a humanitarian presence within the community.

Mr Dombroski transferred property to the Foundation. Evidence led by Mr Dombroski’s solicitor at the case was that the parties assumed that when Mr Dombroski’s land was transferred to the Foundation that the land would be held by the Foundation subject to a charitable trust.

The land given to the Foundation was gifted; it was not sold to the Foundation.

The Foundation established a property known as the “Harmony Village” on one of the Mittagong properties and a harmony centre was subsequently built on the property. Its website promoted the fact that the Harmony Village was to be seen as a “meeting place dedicated to the visual, music, social and performing arts where the activities of the Foundation are cultivated“.

Over time the Foundation hosted events and offered its property for use by a “Christian Community” which was an independent Christian organisation being a movement for religious renewal founded in 1922. Some of the then directors of the Foundation had links with the Christian Community organisation.  The objects of the Foundation however had said nothing at all about religion or a link to the Christian Community.

The matter came before the Court because of a complaint that Foundation property was not being used in pursuit of the original charitable purposes of the Foundation. The Foundation argued that the original purposes had ceased to provide an effective method of using Foundation property.

Argument

The Foundation submitted to the Court that it was a charitable organisation and as such its property (including land) was held on a charitable trust for the charitable purposes set out in the constitution and that all income derived was trust property. As a consequence of that, because the original purposes of the charitable trust had ceased to provide a suitable and effective method of using trust property, the Court should order that trust property be applied cy près i.e. effectively to another purpose.

Decision

The Court accepted the Foundation’s submission that as a charity, all property held by the Foundation was held by it on a charitable trust i.e. for one or more of its charitable objects.

In so holding the Court acknowledged that a transfer to a charitable corporation was to be treated or presumed to have been made for the purposes of creating a trust rather than being treated as a gift to be applied for the charity’s general purposes.

Because the Court held that all property was held for charitable purposes on trust, a cy près order changing the objects of the trust was made.

Implications

The implications of the case are actually quite wide. What the case is saying is that if property is gifted to a charity, irrespective of its structure (i.e. whether a company limited by guarantee or trust) and even if made unconditionally, it is likely that the property will be treated as trust property and not held beneficially by the charity for its general purposes.  This means that a Court order is likely to be required for the application of property for any purpose other than the specific purposes identified in the charity’s constitution.  It means, in a practical sense, that charities have less room to manoeuvre the application of gifted property than they would probably like.

[1] The Dombroski Foundation Ltd -v- Attorney-General 2020 NSWSC 1276