The decision of the Full Federal Court in Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171 has added a new dimension to the concept of charity. The main issue in the case was, to what extent charities can raise funds through commercial activity.
The respondent, Word Investments Ltd ("Word"), was a company limited by guarantee established in 1975 by Wycliffe Bible Translators Australia ("Wycliffe"). Wycliffe was an evangelical missionary organisation that sought to spread the Christian religion through literacy and translation work. Wycliffe was endorsed by the ATO as an Income Tax Exempt Charity under subdivision 50-B of the Income Tax Assessment Act 1997 ("the Act").
Word operated a funeral business, Bethel Funerals, from 1996-2002 as a fundraising activity for Wycliffe and other Christian organisations. The business described itself as a ‘unique Christian funeral company supporting the work of missions,’ and operated in much the same way as any funeral business. It sold its services to customers, derived revenue, incurred expenses and earned profits.
The ATO sought to deny Word the status of a ‘charitable institution’ under the Act because the activities of the business were commercial in nature, and were not merely incidental or ancillary to its charitable activities.
The starting point for the Federal Court was the organisation’s constitution or articles of association. One of the objects in Word’s memorandum of association was to carry on any business activity, but only such activities as ‘may seem to the company capable of being conveniently carried on in connection with the objects for which this company is established.’ In other words, it had to be a business activity capable of being conveniently carried on in connection with Word’s evangelical objects. Nothing in the objects detracted from the basic proposition that the purpose of the respondent was the advancement of religion.
The court found it unnecessary to decide the general question of whether a trading company, regardless of the nature of the activities it undertakes, is a charitable institution merely because, as a matter of practice, it distributes all its profits to charities. Instead the Court decided the question on the present facts.
The Court found that the nature of the business, and the terms in which the business was presented to potential customers, were in harmony with its general religious purposes. In the context of Word’s memorandum, its objects and its other activities, the fact that Bethel Funerals was a commercial business operating for reward did not disqualify Word from characterisation as a charitable institution.
A secondary issue was whether Word met another requirement of the Act (under s50-50(a)), being whether it pursued its objectives principally in Australia. It was argued that because Wycliffe pursued its charitable objectives principally overseas, and that Word pursued its charitable objectives principally by distributing its profits to Wycliffe, that it should be regarded as having pursued its objectives principally outside of Australia.
The Court found that the Act referred to a physical nexus. Considering everything Word did occurred in Australia (including the donation of the funds), it pursued its objectives within Australia and satisfied the section of the Act.
This decision is important for charities which may now operate sizeable commercial ventures without concern that their charitable status under the Act will be denied. Several factors, however, need to be considered:
- while the nature of the business does not have to be religious and can be commercial, the activities should be in harmony with the general charitable purposes of the organisation;
- the business must be operated for the clear and exclusive purpose of raising funds for charity;
- the business must be one that can be carried on in connection with the organisation’s constitution or articles of association; and
- to qualify under s50-50(a) of the Act, the activities and donations should occur exclusively in Australia.
For further information, or for advice on how to structure a commercial venture intended to benefit charity, please contact Leneen Forde on +61 3 9608 2243 or l.forde@cornwalls.com.au or Anna Smits on +61 3 9608 2103 or a.smits@cornwalls.com.au
