‘Sham’ foundation worth $2 million pays out nothing in 30 years

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As part of the Institute of Community Directors’ commitment to good governance, this ongoing series of articles dubbed “Case Watch” highlight court disputes that offer lessons for other not-for-profits. This one was compiled by Our Community's thinker-in-residence Chris Borthwick.

Several years ago in Queensland, Mr Borman (aged 76) and Ms Hunter (aged 91) split up their de facto relationship and headed to the Family Court to divide their assets.

One part of the arguments centred on the J Foundation (as anonymised in the judgement), a not-for-profit charitable foundation registered with both the Australian Tax Office (ATO) and the Australian Not-for-profits and Charities Commission (ACNC). The J Foundation had been established in 1990 for the advancement of education in general and assistance to libraries in particular, the idea being that the Foundation would buy books and DVDs for them. In pursuit of this admirable goal it had accumulated some $2 million, largely, for some reason, in gold, platinum and silver bullion. Both Mr Borman and Ms Hunter were trustees of the Foundation.

Ms Hunter put it to the court that the Foundation was a sham. It had been set up for tax minimisation purposes, and no money had ever gone out of it. In 30 years of operation it had not given a single public library as much as a second-hand copy of The Da Vinci Code.

On closer examination, this was not specifically in breach of the Foundation’s Trust Deed, which said expansively that (bold text added for emphasis)

  1. the Trustees of the Foundation may apply the income and capital of the Foundation at their discretion, provided that such income and capital shall be applied solely towards the promotion of the purpose and object of the Foundation prescribed in Clause 4.1 of the same; and
  2. the Trustees are not required to pay or apply income of the Foundation in the year of its receipt and may, in their absolute discretion, pay or apply the income at any time or times or hold or carry the income forward for subsequent payment or application; and
  3. every discretion, power and authority conferred on the Trustees by the Deed shall be exercisable by them in their absolute discretion.
Gold bars
The foundation owned an estimated $2 million in gold, silver and platinum. Picture: Andrzej Barabasz, WikiCommons

Mr Berman’s position, apparently, was that when advancing education it was important not to be too hasty, and that any day now he might well happen across a volume that met his exacting standards for purchase and distribution. A detached observer might well conclude, nonetheless, that education had not, over those 30 years, been particularly advanced, and that Ms Hunter knew whereof she spoke.

In what might be described as chutzpah Ms Hunter suggested that having participated willingly in this sham for so long she should be rewarded by having the Foundation declared void and the gold, platinum and silver bars divided between her and Mr Berman.

The judge, with almost miraculous restraint, confined herself to the observation that in the light of the facts of the case neither Ms Hunter nor Ms Berman could be regarded as suitable trustees and ruled that the governance of the Foundation should be placed in safer hands.

One can expect, then, that those gold, platinum and silver bars will soon be converted into library books at the rate of about $3,700 per municipal facility Australia-wide, a handy supplement. Does this mean, then, that all’s well that ends well? Hardly.

We are, after all, talking about a situation that went undiscovered for 30 years, and that emerged only when the principals fell out amongst themselves.

Myles McGregor-Lowndes and Frances Hannah, in their invaluable commentary for the Australian Centre for Philanthropy and Nonprofit Studies, said

It is a seeming failure of our charity regulatory system that a foundation could be established over 30 years ago and be largely dormant. The matter appears still not [to] have been addressed with the arrival of the ACNC and publication of foundation financial documents for public and ACNC scrutiny. The ACNC does not appear to have played any part in the proceedings and the heavy lifting left to the Queensland Attorney General to represent the Crown as parens patriae to act as the protector of the charity.

It would interesting for the ACNC to conduct a search through the online accounts of its charities to determine how many of them have shown no activity for, say, five years. Is it really only one?