Pro Bono Alert - Federal Court expands the meaning of 'charity'

Increasingly charities are expected to do more with the same resources. This has led to an increasing number of charities undertaking business activities to generate the necessary income. On 14 November 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.

A rethink of the 'charitable activities' of a charity

In the recent case of Commissioner of Taxation v Word Investments Ltd [2007] FCAFC 171, the Full Court of the Federal Court of Australia considered whether an organisation, operating as a for-profit commercial entity, could be considered a charitable institution for charity endorsement purposes if its profits are given to another charitable body. In that case, from 1996 until 30 June 2002, Word Investments Limited (Word Investments), an evangelical missionary organisation, raised funds through the operation of a funeral business, Bethel Funerals.

Bethel Funerals operated in a normal commercial manner of deriving revenue, incurring expenses and earning profits. Its profits were applied predominantly to Wycliffe Bible Translators Australia (a tax exempt charity for whom Word Investments was established), but also to other Christian organisations. On 1 July 2002, Word Investments created a trust to hold and conduct Bethel Funerals, after which Word Investments itself was not beneficially engaged in that business.

When Word Investments applied to the Australian Taxation Office for endorsement as a charity pursuant to Subdivision 50-B of Division 50 of Part 2-15 of the Income Tax Assessment Act 1997 (Cth), endorsement was refused by the Commissioner.  The subsequent appeals and cross appeals to the Administrative Appeals Tribunal, Federal Court and the Full Court of the Federal Court of Australia all debated whether Word Investments should be granted endorsement as a charitable institution during the time when it operated Bethel Funerals, or even if at all.

The view of the Full Court of the Federal Court of Australia

As Allsop J stated in this case, the primary issue was 'whether or not a company, having an avowedly charitable purpose in the disposition of all its profits, is to be denied the character of a charitable institution because of the activities by which it gains its profit do not, of themselves, bear the character of charity.'

The Full Court of the Federal Court of Australia affirmed the view of the Federal Court judge that the true question to be asked is the purpose of making the profit, rather than the sole analysis of the nature of the activities of the business. In taking this approach, the Court rejected the Commissioner's submission that a charitable entity could only conduct commercial activities as incidental or ancillary to the entity’s charitable activities. The Court instead found that the proper task is an integrated and holistic enquiry to assess the true character of the entity by reference to its objects, purposes and activities.

The Full Court of the Federal Court of Australia concluded that although Word Investments was not a religious entity, it was incorporated for the object of charitable purposes for the clear purpose of raising funds for charitable use. This was considered sufficient to characterise Word Investments as charitable.

Implications for charities carrying on business activities

This case provides an important change from the previous view that the conduct of commercial 'non-charitable' activities will render the entity non-charitable. Rather, 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. The characterisation of an organisation will therefore be determined by an enquiry into the organisation's activities as set out in a constitution or memorandum and the legal constraint under which the directors work.

It is important for charities to note that the entity must have a clear charitable purpose, and the business activities should be in harmony with this purpose. In this case, Word Investments had objects in its own memorandum which demonstrated that its own purpose was the advancement of religion, and the company was bound by that memorandum to apply its profits to charitable purposes. It was also held to be important that the nature of its business, a funeral business, was in harmony with Word Investment's general religious purposes.

Conclusion

This case is reassuring for entrepreneurial charities as it recognises the increasing need of charities to expand beyond traditional fundraising methods. It clearly affirms that charities can undertake business activities while maintaining a tax exemption, and also provides clear requirements for such a charity. This is likely to prompt more charities to engage in an expansion of their current fundraising activities. It remains to be seen whether the Australian Taxation Office will appeal this decision.

For further information, please contact:

Nicolas Patrick, Pro Bono Director
Tel +61 2 9286 8378
nicolas.patrick@dlaphillipsfox.com