High Court decision provides an opportunity for subsidiaries of charities to conduct commercial activities without losing their charitable status.

The Australian Taxation Office (“ATO”) will need to re-write Taxation Ruling 2005/22 (“TR 2005/22”) as a result of the High Court’s decision last week to uphold the Full Federal Court’s decision in Commissioner of Taxation v Word Investments Ltd. The decision confirms that an entity conducting a business to raise funds for a charity may also have a charitable purpose and is contrary to the ATO’s view in TR 2005/22. It will bring relief to charities, churches, welfare organisations and educational institutions who may have been concerned that fund-raising activities would impact their tax-exempt status.

By way of background, the structure of the organisation was as follows:

Wycliffe Bible, a missionary organisation seeking to spread the Christian religion through literacy and translation work, set up Word Investments Ltd as a means of financial and fund-raising support to Wycliffe Bible. In 2002, World Investments Ltd invested in Bethel Funerals, with the profits derived distributed to two main ministry organisations, one of which was Wycliffe Bible. Whilst the ATO’s view in TR 2005/22 is that a charitable institution could only conduct commercial activities that were ancillary and incidental to the entity’s charitable activities, the majority judgment of the Court said that “Word endeavoured to make a profit, but only in aid of its charitable purposes. To point to the goal of profit and isolate it as the relevant purpose is to create a false dichotomy between characterisation of an institution as commercial and characterisation of it as charitable”.

This decision provides a precedent for treating all subsidiary entities of charities that are set up to raise funds for the charity through trading a commercial business to be treated as a charity.

It will be interesting to see:
- the ATO’s and the Governments response. Will they look to amend the law to ensure that the ATO’s view in TR 2005/22 is retained?; and / or
- whether all subsidiaries of charities will apply for endorsement as tax exempt charities or whether changes in the constitution of the subsidiary entity will be required to obtain tax exempt status.

For further information contact Allan Mortel on 61 2 8236 7725.