Businesses competing with charitable institutions may face tougher competition, after yesterday’s court ruling that money raised by a charity through commercial practices is tax-exempt.
The full court of the Federal Court upheld a decision made by its Justice Ross Sundberg last November that a charity could raise money through business without paying company tax, as long as the charitable purpose is its only motive for making profit.
The decision undermines a tax ruling which the Australian Tax Office has applied since 2005.
Tax experts say the decision was a win for charities, but it may be a blow for for-profit businesses that do pay tax competing with charitable institutions.
A senior tax specialist at the Taxation Institute of Australia, Dr Michael Durkis, says that, theoretically, money for charitable purposes should be tax-exempt, regardless of how charities raise it, and that businesses should not complain.
“You can say competing businesses might be disadvantaged, but there’s the societal balance that has to taken into account,” he says.
Durkis also says charitable funds should be tax-free, regardless of the nature of the charity. “Affiliation doesn’t come into it. The issue is the extent they are carrying out their task.”
The court decision involved a religious charity, Wycliffe Bible Translators, which set up Word Investments to raise funds for its evangelical mission overseas and bible translating activities.
The tax office alleged Word’s fund-raising operations – which included land developing in the 1980s and a profitable funeral business from 1996 – were not those of a charity. It argued, in its initial 2005 case, that a charity could only conduct tax-exempt commercial activities incidental or ancillary to its charitable activities.
In yesterday’s decision Justice James Allsop said the motivation of the organisation was the crux of whether an organisation was charitable, and therefore tax-exempt.
Justice Christopher Jessup concluded that where a charity operated a commercial arm, it didn’t have to pay tax as long as its profits were applied to the charity.
The tax office’s failed appeal means it could face claims from charities that have been paying tax unnecessarily.