HIGH COURT CONFIRMS TAX EXEMPTION FOR CHARITIES THAT RUN BUSINESSES

19 December 2008

In a case highly anticipated by charities in Australia, the High Court has ruled that an organisation established to run a business and to give its profits to other charities with similar objects, is a charitable institution which is exempt from income tax.

On 3 December 2008 the High Court delivered its judgment in Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd [2008] HCA 55. The decision is relevant to all charities that conduct commercial enterprises to fund their activities and objects.

The case involved an application by Word Investments Ltd for endorsement as an income tax exempt charitable institution. To qualify, an entity must be an institution, must be carried on for charitable purposes, must have a physical presence in Australia and, to that extent, must incur its expenditure and pursue its objects principally in Australia.

The Commissioner rejected the company's application on the basis that it was formed to run an investment scheme and a funeral business, rather than to conduct charitable works. The Commissioner argued that it did not matter that the company was established to fund the religious works of associated charities using profits from those commercial activities.

Gummow, Hayne, Heydon and Crennan JJ issued a joint majority judgment in favour of the company which dismissed the Commissioner's submissions and entitled it to be endorsed as an exempt institution. In deciding the case, they made the following key points:

The company was charitable because its objects, when construed as a whole, were charitable. To point to the goal of profit and isolate it as the relevant purpose is to create a false dichotomy between the characterisation of an institution as commercial and the characterisation of an institution as charitable. In this case the company was not simply doing commercial work within the limitations of religious principles, but was doing commercial work to advance charitable purposes.
The company did not need to conduct charitable activities in order to have a charitable purpose. It was enough for the company to pursue its expressed objects by giving its profits to charities with similar objects. There is no reason why the company should be treated differently to a charity which both conducts commercial activities as a means of fundraising and which spends the profits of those activities on its own charitable projects.
In this case the facts showed that the donees were obliged not to spend the profits on purposes other than the purpose of translating Christian Scriptures. Accordingly, there was no basis for the Commissioner's argument that the company should be disqualified because the donees were not confined in the way they could use the money.
The company incurred its expenditure and pursued its objectives 'principally in Australia' because the decisions to pay were made in Australia, the payments were made in Australia, the payments were made to Australian organisations, and the objects of the company included giving financial assistance to those organisations. The law does not require the donees to spend the profits gifted to them within Australia.

Kirby J dissented from the majority judgment because he considered that the charitable purposes pursued by the company (namely Bible translation and missionary work) were principally overseas. He considered that the purposes of the company in Australia were investment and commercial funeral business activities. Kirby J did not accept that the company was not involved in tax avoidance. In his opinion the business activities of the company were not merely ancillary to its purposes, but were significant and unrelated to those purposes except as a means of raising income. He considered the company's principal purpose to be to carry on a commercial enterprise rather than to raise funds for other charities.

This is the first case in which the High Court has considered whether commercial activities can disqualify a charity from being endorsed as an income tax exempt body. The High Court's majority judgment now confirms that:

the Court will look at all of an organisation's objects, and will not necessarily differentiate between them, in order to determine whether it is charitable;
an organisation that runs a business can be a charity, even if it does not conduct charitable activities but exists simply to give its profits to other charities with similar objects; and
an organisation that exists to raise and pay funds this way will be regarded as incurring its expenditure and pursuing its objects principally within Australia if the decisions to pay and the payments themselves are made in Australia – it does not matter that the funds are ultimately expended by the donees overseas.

This case will give relief to many existing charities that have until now feared losing their exempt status because they conduct commercial activities. Such activities can be wide-ranging and can include running small and large businesses, sporting and cultural events, and even school fetes. Churches, welfare organisations, religious schools and other charities can now rest assured that they are entitled to continue to engage in and rely upon entrepreneurial activity to support their fundraising efforts and to advance their charitable objects.

For further information about this case or for advice about your particular activities, please contact:

Stuart O’Neill | Partner

Mullins Lawyers

t +61 7 3224 0275

f +61 7 3224 0333

soneill@mullinslaw.com.au