The ATO has finally released a Decision Impact Statement in response to the controversial Word Investments decision which was handed down by the High Court nearly six months ago. The Decision Impact Statement confirms that the ATO accepts the High Court’s view that an entity conducting a business to raise funds for a charity may also have a charitable purpose and hence obtain tax exempt status. This is contrary to their view expressed in TR 2005/21 and TR 2005/22 which will be rewritten as a consequence of the high court decision.

This provides great opportunities for Universities to obtain tax exempt status for subsidiary entities which are conducting commercial activities. These entities may also have the opportunity to seek a refund for tax paid in prior years.

According to the ATO, the decision in Word Investments will be considered in determining the status of any entity claiming exemption as a public educational institution. However, the outcome in each case will depend on an examination of the objects of each entity and whether its dominant objects, as opposed to its incidental objects are charitable. Entities who are unsure of whether they would qualify for the exemption may apply for a private ruling or endorsement as a tax exempt charity.

The ATO further supports the high court’s view that the special condition in section 50-50(a) of the ITAA 1997 which requires an entity to pursue its objectives in Australia would be satisfied if an entity distributes its profits to charities in Australia even if those charities ultimately expend those funds outside Australia. In the 2010 Federal Budget, the government announced that the ‘in Australia’ requirement in Division 50 of ITAA 1997 will be amended to “ensure that Parliament retains the ability to fully scrutinise those organisations seeking to pass money to overseas charities and other entities”.

The Government announced, in the 2009 Budget, that they will await the outcome of the Henry review of the charitable sector before determining whether a legislative response is required to the Word Investments case. 

Click here to view the decision impact statement on the ATO website

Moore Stephens encourages Universities to take up this opportunity to obtain tax exempt status for their subsidiary entities.  We can assist in reviewing the constitution/deeds of the subsidiary entities to assess whether the entity may be eligible for tax exempt status and apply for either a private ruling or tax exempt endorsement to obtain certainty. 

If you would like further details surrounding this case or assistance in obtaining tax exempt status, please contact Stephen O’Flynn on (03) 9614 4444.