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26 May 09 Commercial activities of charitable institution - Word Investments

On 26 May 2009 the ATO released a decision impact statement on the High Court decision in FCT v Word Investments Ltd [2008] HCA 55. Word Investments Ltd was a company limited by guarantee set up to raise funds for Wycliffe Bible Translators Australia, an endorsed charitable institution which primarily carries out overseas missionary and bible translating activities. Word initially raised funds from investment activities. From 1996 to 2002, Word also operated a business of conducting funerals. The High Court held, by majority, that Word was a charitable institution, as its objects were confined to advancing religious charitable purposes. Word endeavoured to make a profit only in aid of its charitable purposes - to isolate the goal of profit as the relevant purpose is to create a false dichotomy between characterisation of an institution as commercial or charitable. Although the commercial fundraising activities of Word were not intrinsically charitable they were charitable in character because they were carried out in furtherance of a charitable purpose.

The court also found that Word satisfied the special condition in s 50-50(a) ITAA 1997. Once the court had accepted that Word's charitable purposes could be fulfilled by it making payments to other charitable institutions, the clear conclusion was that Word pursued its objectives in Australia by making payments to those institutions in Australia. Accordingly, Word was entitled to endorsement as an income tax exempt institution under Subdiv 50-B ITAA 1997.

The ATO accepts that the principles considered by the High Court have equal application to the possible characterisation of an entity as a religious institution, a scientific institution or a public educational institution. The decision in this case will be considered in determining the status of any entity claiming exemption as a charitable, religious, scientific or public educational institution. However, the outcome in each case will depend on an examination of the objects of each entity and the effectuation of those objects in the activities of the entity.

The ATO recognises that some of the views expressed in Taxation Rulings TR 2005/21 and 2005/22 are contrary to the views expressed by the High Court in this decision. Both rulings will be amended in the light of the guidance provided by the court. There are also a number of associated ATO documents which will be reviewed. Taxation Ruling TR 2000/11 will be amended to include a discussion of the court's views: Decision Impact Statement DIS M 41/3008 (26 May 2009).

For a copy of the statement go here.

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