The High Court, in Commissioner of Taxation of the Commonwealth of Australia v Word Investments Limited  HCA 55, has upheld a decision of the Full Court of the Federal Court of Australia that found a charitable organisation can conduct non-inherently charitable activities so long as the clear and exclusive purpose is to raise funds to deploy in ways that are charitable.
On 13 December 2007, the Full Court of the Federal Court of Australia affirmed that a charity raising money through a business venture can still be considered a charity for tax purposes, as long as the only purpose for making a profit is a charitable purpose. Please refer to our December 2007 Alert for more details.
The Commissioner of Taxation subsequently applied to the High Court for special leave to appeal the decision and leave was granted. The High Court handed down its decision on the appeal on 3 December 2008.
The High Court's decision
The High Court dismissed the appeal. In doing so, the majority of the Court rejected the arguments of the Commissioner of Taxation that the Commissioner had relied on to deny the respondent of the income tax exemption available to charitable institutions under Subdivision 50-B of Division 50 of Part 2-15 of the Income Tax Assessment Act 1997 (Cth).
Implications for charitable institutions carrying on business activities
The Court's decision has important ramifications for charities. The majority concluded that the fact that an organisation makes a profit does not necessarily preclude it from being classified as a charitable institution. Although the organisation in this case made a profit through engaging in investment and commercial activities, this did not detract from the fact that its sole objectives were charitable and that the organisation's activities were carried out for charitable purposes. As such, the Court affirmed that the organisation should be classified as a charitable institution for income tax purposes.
For a charity to be so classified, it is important that the objects as stated in the institution's constitution are truly and solely for advancing charitable purposes. This can be the case even where some objects, when read in isolation, do not on their face reveal a charitable character. If the objects, when read as a whole, reveal a solely charitable purpose, and the purpose of raising profit is for these objectives, the institution can conduct business operations and still be classified as a charitable institution. It would not however be sufficient for the stated purpose of the organisation to be charitable if in fact the institution ceased carrying out that purpose.
The majority also affirmed that an institution can still be classified as charitable in circumstances where the institution itself does not engage in charitable activities beyond making profits. As was the situation in this case, it is permissible for an institution to make profits that are directed to other charitable institutions which engage directly in charitable activities if that is the stated purpose of the giving institution.
As a result of this decision, charitable organisations can seek to expand their fundraising activities beyond traditional methods. Importantly, this case demonstrates that charitable institutions can maintain beneficial tax treatment whilst engaging in profitable business activities, provided such profits are directed towards solely charitable purposes. This opportunity presents exciting new possibilities to charities exploring innovative fundraising activities.
DLA Phillips Fox acts for more than 100 charities every year. In anticipation of the High Court's judgment, DLA Phillips Fox has been assisting a number of entrepreneurial charities to establish commercial initiatives to raise funds for charitable purposes.
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