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Edited version of private ruling
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Ruling
Subject: Endorsement status - Impact of new activity on endorsement status
Relevant facts
The entity is currently endorsed as a tax concession charity. The entity's objects are listed in its constitution.
Pursuant to its objects, the entity would be engaging in activities of a commercial nature.
Its primary reason in undertaking this role is to earn sufficient income to fund its other activities.
The entity is awaiting advice from the Tax Office on the impact this role is likely to have on its endorsement status as a tax concession charity.
Question
Will the commercial activity the entity proposes to undertake affect its endorsement as a tax concession charity under section 50-5 of the Income Tax Assessment Act 1997?
Answer
No
Assumptions:
None
Relevant legislative provisions:
Income Tax Assessment Act 1997 section 50-5
Reasons for decision:
Taxation Ruling TR 2005/21 contains the Tax Office view on charities.
Paragraph 7 of TR 2005/21 states that a charity is an entity established and maintained for purposes that are charitable in the technical legal sense.
The entity has been endorsed by the Tax Office as a tax concession charity.
Paragraph 153 of TR 2005/21 states that a tax concession charity can have purposes which, when viewed in isolation would be non-charitable, but which are only for the sake of, or in aid of, or in furtherance of, its charitable purposes. Such purposes are wholly incidental or ancillary to fulfilling or furthering its charitable purpose, and so are, in reality, only aspects of the charitable purposes.
The proposed new activities that the entity wishes to engage in will be of a commercial nature as the service is performed for a fee.
Although this activity is an extension of its objects, it would not normally be viewed as charitable.
However, in the decision handed down in Federal Commissioner of Taxation v. Word Investments Limited (2008) HCA 55, (Word) the High Court has recognised that an entity can be a 'charitable institution' under item 1.1 of the table in section 50-5, even if it does not carry out charitable activities but gives its profits from its commercial operations to institutions that do.
Whether, in any particular case, an entity that conducts an investment, trading or other commercial activity for profit, can be characterised as a charitable institution, requires an examination of 'the objects, and the purported effectuation of those objects in the activities, of the institution in question. In examining the objects, it is necessary to see whether it's main or predominant or dominant objects, as distinct from its concomitant or incidental or ancillary objects, are charitable.'
A reading of the stated objects of the institution must lead to the conclusion that it has only charitable purposes. Any stated objects which are not obviously charitable by themselves, must be able to be read as being within the charitable purposes; they must only be able to be carried out in furtherance of the charitable purposes. It must be the case that the institution has purposes which are solely charitable and the commercial business is carried on as a practical means for accomplishing those charitable purposes (ie; to 'effectuate' those purposes).
The entity has stated in its application that all proceeds from its commercial activity will be applied in the pursuit of its charitable objects.
In applying the High Court's decision in Word, we accept that in its new role, the entity will be conducting its commercial activities as a means of giving effect to those purposes, would continue to be a tax concession charity.
Accordingly, the entity will retain its charitable status as its commercial activity is considered to be carried out in furtherance of its charitable purpose.