THE SERVICEMEN’S GUIDES ASSOCIATION v. THE COMMISSIONER OF INLAND REVENUE

HCIA 1/2022 &
HCIA 2/2022
(Heard together)

[2023] HKCFI 82

HCIA 1/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 1 OF 2022

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AND

HCIA 2/2022

INLAND REVENUE APPEAL NO. 2 OF 2022

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(Heard together)

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D E C I S I O N

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A.  INTRODUCTION

1.  By summons of 23^rd May 2022, the Servicemen’s Guides Association (“the SGA”) applied for leave to appeal against the decision of the Inland Revenue Board of Review (“the Board”) dated 26^th April 2022 (“the Decision”). The Decision relates to an assessment for profits tax for the year of assessment 2013/14 issued to the SGA, regarding assessable profits of $2,745,867 and tax payable thereon of $443,068.

2.  By summons of 26^th May 2022, the Commissioner of Inland Revenue (“the Commissioner”) also applied for leave to appeal against the Decision.

B.  THE BACKGROUND

3.  There is no real dispute as to the facts, which the Board found at paragraphs 10 to 16 of the Decision. The relevant ones for present purposes are as follows.

4.  The SGA was incorporated in Hong Kong as a company limited by guarantee on 5^th May 1955.

5.  The SGA’s memorandum and articles of association states the objects of the SGA in clause 3 of the memorandum of association, as follows.

“(a) To acquire and take over any part or all of the assets and liabilities of the present unincorporated body known as the Servicemen’s Guides.

(b) To establish, maintain and conduct a fleet landing, premises and all other conveniences which the General Committee under its powers in the Articles and Bye-laws of the Association shall determine for the guidance and welfare of American Servicemen, as from time to time may be visiting Hong Kong.

(c) To establish, maintain and conduct any film or theatre or any other form of entertainment or sport and to organize or subscribe to advise upon and assist tours and excursions in Hong Kong or elsewhere for the benefit of American Servicemen and their legal dependents and friends.

(d) To establish, maintain and conduct laundry services, money exchanges, canteens, lounges, and giftshops of all kinds anywhere in Hong Kong for the benefit of American Servicemen.

…

(f) To acquire by purchase, lease or otherwise, lands and to maintain the same, and lease or let out buildings, offices, or premises not immediately required for use by the Association and to furnish, alter, enlarge, repair, uphold and maintain such buildings and premises, and generally to purchase, take on lease or in exchange, hire or otherwise acquire, property and any rights or privileges which the Association may think necessary or convenient for the purposes of the Association.

…

(m) To procure for the Association recognition by all proper authorities and by the public and generally to do all things necessary or desirable for the promotion of the welfare and guidance of American Servicemen in Hong Kong.

(n) To carry on or conduct any other business or proceedings which may seem to the Association capable of being conveniently carried on or conducted in connection with the objects herein, or calculated directly or indirectly to advance the objects herein or any of them, or to enhance the value of, or render profitable, any of the Association’s property or rights.”

6.  The Inland Revenue Department (“the IRD”) issued a letter dated 10^th August 1955 stating that the CIR agreed that the SGA, as a “charitable institution”, was exempt from liability to tax under s.88 of the Inland Revenue Ordinance (“the IRO”).

7.  The IRD issued a further letter dated 1^st April 1965 confirming that the SGA was exempt from tax under s.88 IRO by reason of being a charitable, ecclesiastical or education institution of a public character.

8.  Over the years, the IRD conducted periodic reviews of institutions for the purpose of considering whether they still qualified as being charitable for the purposes of s.88 IRO.

9.  In 2008, solicitors for the SGA wrote to the IRD asking for confirmation whether the letter of 1^st April 1965 was still valid. The IRD’s reply of 25^th July 2008 indicated that the SGA was a charitable institution exempt from tax under s.88 IRO.

10.  In 2016, the IRD conducted another periodic review of tax exempt institutions and trusts and sent a questionnaire to the SGA for this purpose. The review led to further correspondence asking for further information, documents and explanations in 2017, including a letter of 12^th July 2017 in which the IRD asked for an explanation as to how the SGA’s operations were exclusively charitable and for the public benefit. There were further queries in 2018. In a letter of 4^th April 2018, the IRD asked the SGA to explain in detail how its objects fell into one or more charitable purposes. The queries were pursued in the IRD’s letter of 7^th September 2018 and 4^th February 2019.

11.  On 18^th March 2020, the IRD wrote to the SGA stating the view that the SGA was not a charity at law and therefore could not be exempt from tax under s.88 IRO, setting out detailed reasons for the view taken.

12.  On 20^th March 2020, an assessment for profits tax for the year of assessment 2013/14 was issued to the SGA. The amount of assessable profits therein was subsequently revised, for reasons which do not arise in the current applications.

13.  The SGA has been operating premises at 1 Lung King Street, Wanchai, Hong Kong (widely known as “Fenwick Pier”). The SGA originally occupied the land at 1 Lung King Street under a Crown Land Licence. Subsequently, it held the land under a tenancy agreement for a term of five years from 1^st May 1992, and thereafter under a tenancy renewable on a quarterly basis until such time as the tenancy was terminated, at a rent of $1 per annum.

14.  In the Decision, the Board held that the SGA was not a charitable institution under s.88 of the IRO for the purpose of exemption from taxation for the year of assessment 2013/14. The Board considered that the SGA failed to meet the three conditions in Cheung Man Yu v Lau Yuen Ching & ors [2007] 4 HKC 314. The Board further expressed the view, obiter, in case it were found to have been wrong on this issue, that SGA would have satisfied the requirements of the proviso to s.88 IRO so as to claim an exemption from profits tax.

C.  THE PRINCIPLES

C1.  Leave to appeal against a decision of the Board

15.  An appeal against a decision of the Board of Review may be made only on a ground involving a question of law: s.69(1) IRO.

16.  An intending appellant must first obtain leave to appeal: s.69(2) IRO. Under s.69(3)(e), no leave will be granted unless the court is satisfied that:

16.1  a question of law is involved in the proposed appeal, and

16.2  the proposed appeal has a reasonable prospect of success, or that there is some other reason in the interests of justice why the proposed appeal should be heard.

C2.  Appealing against a decision of the Board

17.  The ways in which a decision of the Board may be challenged are limited, as explained in CIR v Inland Revenue Board of Review [1989] 2 HKLR 40 at 56F-H, 57F-H (Barnett J).

17.1  The decision may be challenged for misdirection in law.

17.2  An inference or the final conclusion of the Board may be attacked on the basis that the primary facts do not admit of an inference drawn from them, or that the primary facts or inferences, or a combination of them, do not admit of the final conclusion. Where the facts can reasonably admit of the Board’s conclusion, however, its decision should not be disturbed.

17.3  A finding of primary fact may be challenged on the basis that there was no evidence in support of the finding. Alternatively, it may be contended that the Board should have made findings of other relevant facts.

C3.  Tax exemption for charitable institutions under s.88 IRO

18.  Section 88 IRO provides as follows.

“Notwithstanding anything to the contrary in this Ordinance contained there shall be exempt and there shall be deemed always to have been exempt from tax any charitable institution or trust of a public character:

Provided that where a trade or business is carried on by any such institution or trust the profits derived from such trade or business shall be exempt and shall be deemed to have been exempt from tax only if such profits are applied solely for charitable purposes and are not expended substantially outside Hong Kong and either –

(a) the trade or business is exercised in the course of the actual carrying out of the expressed objects of such institution or trust; or

(b) the work in connection with the trade or business is mainly carried on by persons for whose benefit such institution or trust is established.”

19.  The parties agreed that the common law principles as to whether an institution is a charity should apply in determining whether SGA is a “charitable institution or trust of a public character” for the purposes of s.88 IRO. In order to qualify as a charity, three conditions must be satisfied:

19.1  the purposes of the institution must have charitable character, that is they must be within the spirit and intendment of the preamble to the Charitable Uses Act 1601 (“the Preamble”);

19.2  the institution must exist for the benefit of the public;

19.3  the institution must be exclusively charitable.

See Cheung Man Yu at [24] (Tang VP).

20.  As to the first condition (that the purposes of the institution must have charitable character), Lord Macnaghten in The Commissioners for Special Purposes of the Income Tax v John Frederick Pemsel [1891] AC 531 at 583 said:

“ “Charity” ” in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads.”

21.  In order to satisfy the second condition (that the institution must exist for the benefit of the public), the institution must be for the benefit of the community or an appreciably important section of the community. Two closely related questions must be considered to determine whether this requirement has been satisfied: first, whether the purposes of the institution confer a benefit on the public or a section of the public; and second, whether the class of persons eligible to benefit constitutes the public or a section of it. See Li Kim Sang Victor v Chen Chi Hsia [2016] 1 HKLRD 1153 at [74] (Au Yeung J).

22.  Even if an institution satisfies all three conditions, where it carries on a trade or business, the profits derived therefrom will be exempt from tax only if the conditions in the proviso to s.88 are satisfied.

D.  THE SGA’S GROUNDS FOR APPLYING FOR LEAVE

23.  The SGA says[1] that the Board erred in concluding that the SGA was not a charitable institution, in particular, in finding that:

23.1  the objects of the SGA were not charitable, or did not have a charitable character, by analogy with the Preamble, as construed in the light of the specific socio-cultural context of contemporary Hong Kong;

23.2  the SGA did not exist for the benefit of the public in Hong Kong, or for an appreciably important section of the public in Hong Kong; and

23.3  to the extent that the Board could be said to have opined in this regard, that the SGA was not exclusively charitable.

24.  Mr Stefano Mariani of Messrs Deacons submitted on behalf of the SGA that whether or not an institution is charitable is necessarily a question of law, citing Sik Chiu Yuet v Secretary for Justice at [2017] 4 HKLRD 803 at [31] in which Lisa Wong J stated that the existence or otherwise of a charitable trust is a mixed question of law and fact.

25.  However, in considering whether there is a question of law on which leave should be given to appeal under s.69 IRO, it is necessary to consider also whether it is a proper question of law for this purpose. In this regard, the qualitative aspect of the proposed question needs to be considered: KWP Quarry Co Ltd v Inland Revenue Board of Review [2021] HKCA 1627 at [25], [30], [32] per Barma JA; China Mobile Hong Kong Co Ltd v Commissioner of Inland Revenue at [22], [27] (Chow J). This includes the question of the arguability of the question of law. This is quite aside from the requirement in s.69(3)(e)(ii)(A) IRO to show that the appeal has a reasonable prospect of success, although perhaps in the circumstances of the present case there is no real distinction to be drawn between the issue of arguability of the question of law and the issue of reasonable prospect of success.

D1.  Whether SGA exists for the benefit of the public

26.  I will first consider this condition as the relevant considerations arise in relation to all three conditions under Cheung Man Yu.

27.  In his oral submissions, Mr Mariani indicated that his main argument was that the Board disregarded the fact that Fenwick Pier had been let at a peppercorn rent. It was said that this was “weighty” evidence that the SGA was for public benefit, and that the Board had failed to give due consideration to this.[2] Mr Mariani described this as the Board’s “critical error”.

28.  I would first of all observe that the Board had, in fact, considered this argument, and had held that the attitude and actions of the Government over the years towards the SGA could not be a substitute for legal analysis as to whether the SGA was a charitable institution as a matter of law (Decision [68] to [70]). I would respectfully agree with the Board in this regard.

29.  It does not seem to me that the fact that Fenwick Pier had been let at a peppercorn rent could constitute evidence that the SGA exists for the public benefit. When it was put to Mr Mariani that there could have been all sorts of reasons as to why the rent had been set at $1, Mr Mariani submitted that there was no countervailing evidence from the Government, but then fairly accepted that there was in fact no evidence either way as to the reasons why the rent had been set at this level. In the circumstances, the fact of the peppercorn rent simply cannot constitute evidence that the SGA existed for the public benefit. This is particularly given that the SGA would have had the burden before the Board of showing that the profits tax assessment was wrong, so that it would have been incumbent on the SGA to adduce evidence as to how the claimed public benefit resulted in the level of the rent, if the latter were to be relied on as evidence of public benefit. The mere fact that the rent was $1 cannot, in itself, be probative of the fact that the SGA exists for the public benefit.

30.  In any event, the weight of a piece of evidence is a matter for the Board. The fact that an appellant would have preferred to place different weight on it does not disclose an error of law. See Commissioner of Inland Revenue v Right Margin Ltd [2017] 5 HKLRD 398 at [10].

31.  Mr Mariani indicated that his secondary argument was that the Board had construed the word “public” too narrowly, as it should have included not only the sailors from the naval vessels visiting Hong Kong, but also members of the public with whom the naval personnel interact. Accordingly, the Board was wrong to find that the SGA did not exist for the benefit of the public.

32.  However, it will be recalled that there are two relevant considerations identified in Li Kim Sang Victor. The first is whether the purposes of the institution confer a benefit on the public or a section of the public. In answering this question, the purposes of the SGA would have to be identified by looking at the objects of the SGA. As set out above, these expressly stated that the SGA was to benefit American Servicemen. I do not see how it could be said that the Board erred in law by having regard to the objects of the SGA in determining whether the purposes of the SGA confer a benefit on the public (Decision at [66]).

33.  Furthermore, whilst Mr Mariani presented the issue as one of construction of the word “public”, it seems to me that the substance of the challenge is to the Board’s finding of fact that it was naval personnel (rather than members of the Hong Kong public) who benefitted from the SGA’s existence (Decision at [66]). This is apparent from paragraph 32e of SGA’s skeleton, which complains that the Board “did not give due consideration to the benefit that the Board accepted inured to Hong Kong in reputational and economic terms from the [SGA’s] operations”. It went on to refer to evidence given on its behalf before the Board by a witness who had said that one of the SGA’s missions was to benefit the Hong Kong public through the economic benefits of naval visits (in that naval personnel would spend money in restaurants and shops). However, the weight of any particular piece of evidence is a matter for the Board, not the court: Commissioner of Inland Revenue v Right Margin Ltd at [10]. The complaint therefore does not raise any question of law.

34.  In any event, given the evidence before the Board, I do not consider that it could be reasonably argued that the Board erred in its view that the purposes of the SGA were to confer a benefit on naval personnel rather the Hong Kong public:

34.1  whilst the Board took into account the evidence given by SGA’s witness, it also made a general observation that the witness was not reliable (Decision at [62]);

34.2  in direct contraction to this evidence, in evidence before the Board was correspondence from the SGA to the IRD which stated that its sole purpose was to provide services to visiting naval personnel (Decision at [55(1)]). I note that the correspondence was relatively recent and written in response to the IRD’s specific queries as to how the SGA was a charitable organisation;[3]

34.3  as Mr Mariani accepted, there was no evidence before the Board as to the level of interaction between naval personnel and the Hong Kong public, or the extent to which such personnel visited restaurants and shops. In other words, there was no evidence as to the level of social or economic benefit which naval personnel supposedly conferred on the Hong Kong public. At best, Mr Mariani submitted that it could be inferred from the guidebook published by the SGA that there would have been some interaction with the local public.

35.  Given this evidence, it cannot be said that the Board’s finding that the purposes of the SGA were to benefit naval personnel rather the Hong Kong public is one that is unsupported by evidence.

36.  As to the second consideration identified in Li Kim Sang Victor (whether the class of persons eligible to benefit constitutes the public or a section of it), the Board considered that visiting naval personnel do not constitute an appreciably important section of the Hong Kong community, given that they are temporary visitors and not Hong Kong residents (Decision at [66]). In SGA’s skeleton, there was an argument, not developed orally, that the Board failed to recognise that an appreciably important section of the public could be constituted by transient communities. Thus, it was said, “a charity to for the benefit of illegal immigrants or foreign domestic helpers should in principle be charitable”. This does not raise any question of law.

36.1  Whether or not an institution that benefits other groups of transient communities may be charitable sheds no light on whether the SGA is charitable.

36.2  The Board’s finding that naval personnel did not constitute an appreciably important section of the public is a finding of fact. It is not even being said that there was no evidence on which this finding could have been based. The attempt to challenge the finding is therefore a non-starter.

37.  Accordingly, I do not see how it could be said that the Board erred in law in holding that the second condition under Cheung Man Yu was not met.

D2.  Whether SGA’s objects charitable

38.  Before the Board, the SGA sought to argue that it was a charitable institution within the fourth of Lord Macnaghten’s categories, that is, that it was a trust “for other purposes beneficial to the community, not falling under any of the preceding heads”.

39.  Mr Mariani argued that although the Board acknowledged that the charitable objects or purposes in the Preamble had to be construed in the light of contemporary circumstances, it took an unduly narrow approach in construing the Preamble when it held that it was unable to analogise, infer or identify new social needs to accommodate the SGA’s contended purposes within the spirit and intendment of the Preamble.

40.  Mr Mariani submitted that a purpose that was of demonstrable public utility or was beneficial to the community would be held to be charitable unless there was some reason to hold it not to be within the spirit and intendment of the Preamble, citing the judgment of Russell LJ in Incorporated Council of Law Reporting for England and Wales v AG and others [1972] Ch 73.

41.  Mr Law submitted that on the contrary, the approach that should be taken was that in the earlier cases of Attorney General v National Provincial & Union Bank of England [1924] AC 262 at 265 and Williams Trustees v Inland Revenue Commissioners [1947] AC 447 at 455. To come within the fourth of Lord Macnaghten’s categories, it was not enough to say that an institution was for public purposes beneficial to the community or for the public welfare; it was also necessary to show it to be a charitable trust.

42.  It seems to me that, as Lloyd LJ analysed in Helena Partnerships Ltd v Revenue and Customs Commissioners [2012] 4 All ER 111 at [59] to [62], the judgment of Russell LJ in Incorporated Council of Law Reporting for England and Wales was not intended to depart from the traditional approach and analysis in Williams Trustees of asking whether the purpose in question was within the spirit and intendment of the Preamble.

43.  It might be said that the issue of the approach to be taken to the construction of the Preamble raises a question of law and could be open to argument. Taken theoretically and in a vacuum, I would agree. However, in his oral submissions in reply, Mr Mariani submitted that as applied to s.88 IRO, Incorporated Council of Law Reporting for England and Wales meant that all that a taxpayer had to show was a prima facie case that it was an institution was for the public good, and then it would fall onto the Commissioner to give a reason as to why it was not, in fact, a charity. But even Russell LJ did not suggest that so long as an institution had a purpose for the public good, it should be held to be charitable unless there is a good reason to hold otherwise (cf. Helena Partnerships Ltd at [62]). In my view, the approach contended for by Mr Mariani is not reasonably arguable and does not raise any question of law.

44.  Furthermore, the context of this issue must not be forgotten. As clarified by Mr Mariani at the hearing, the public good that is said to have been the purpose of the SGA is, in fact, the very purpose considered in the preceding section above, namely, the benefit to the Hong Kong public. As I have held, the Board’s findings on this issue are not open to challenge. It must follow that the SGA cannot rely on the same purpose to argue that it had purposes of charitable character.

45.  It was also argued at the hearing that the SGA provided a public benefit in that had the SGA not done what it did, the cost of dealing with disembarked naval personnel – described as the negative effects of large numbers of young foreign sailors descending on Hong Kong with no understanding of the local culture – would have fallen to the Government. However, there was no evidence as to what this supposed cost was. Even if there had been, that could not make the SGA’s purpose charitable in nature. A similar argument was roundly rejected in Helena Partnerships Ltd at [67] to [71]. As Lloyd LJ observed, even if the Government is required by law to do something which is, in a general sense, for the public benefit, this not mean that undertaking the task is a charitable purpose. The Government has varied and diverse functions, some of which may be within the scope of the Preamble, but some of which may not be.

46.  Accordingly, I do not see how it could be said that the Board erred in law in holding that the first condition under Cheung Man Yu was not met.

D3.  Whether SGA exclusively charitable

47.  As Mr Mariani accepted, SGA’s case on the third condition under Cheung Man Yu stands or falls with its case on the first condition.

D4.  No question of law; no reasonable prospect of success

48.  I therefore do not consider that any proper question of law has been raised by SGA for the proposed appeal, or that the proposed appeal would have a reasonable prospect of success. It has not been suggested that there should be any other reason why the proposed appeal should nevertheless be heard.

E.  THE COMMISSIONER’S APPLICATION

49.  The Commissioner’s stance is that even if SGA was a “charitable institution” within the meaning of s.88 IRO for the year of assessment in question, the criteria for the application of the proviso to s.88 did not apply, so that the SGA’s profits were not exempt from tax.

50.  At the hearing, counsel for the Commissioner Mr Ryan Law confirmed that the Commissioner’s application does not arise if the SGA is not granted leave to appeal, as the question of whether the proviso to s.88 IRO applies would only arise if the SGA could be considered to be a charitable institution under s.88 IRO in the first place. In the light of my views as to SGA’s application, the Commissioner’s application does not arise for consideration.

F.  DISPOSITION

51.  I dismiss both the SGA’s summons and the Commissioner’s summons.

52.  I further make a costs order nisi that the SGA should pay the costs of and occasioned by the SGA’s summons, to be taxed if not agreed. At the hearing, Mr Mariani had indicated that the SGA might be contemplating a submission that the fact that the Commissioner had for many years accepted the SGA’s charitable status might justify a different costs order. I have considered this, but note that the IRD’s letter of 18^th March 2020 had already set out in detail the reasons why the IRD considered that the SGA did not qualify as a charitable institution which should be exempt from tax under s.88 IRO. The Decision of 26^th April 2022 also provided the SGA with a ruling on the matter. In such circumstances, the fact that the IRD had in earlier years taken a different view (and indeed the fact that the SGA has enjoyed the consequence of this view for many years) ought not to affect the incidence of costs.

53.  I further order, on a nisi basis, that there be no order as to costs in relation to the Commissioner’s summons, as it has not been necessary to consider the merits of the application.