Decision impact statement

Commissioner of Taxation v Word Investments Ltd

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Venue: High Court
Venue Reference No: M 41/3008
Judge Name: Gummow, Kirby, Hayne, Heydon, Crennan JJ
Judgment date: 3 December 2008
Appeals on foot:

Impacted Advice

Relevant Rulings/Determinations:

• TR 2005/21
• TR 2005/22

Subject References:
income tax exemption
endorsement as a tax exempt entity
charitable institution
advancement of religion

Précis

Outlines the Tax Office response to this case which concerned whether a company that ran a funeral business and paid all its profits to charitable institutions was entitled, itself, to be endorsed as a charitable institution.

Decision Outcome:

Adverse

Brief summary of facts

Word Investments Ltd (Word) is a company limited by guarantee set up in 1986 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.

Word has objects in its memorandum of association which advance religious purposes, and other objects which aid those purposes, such as carrying on any business or activity, taking money on deposit at interest or otherwise, and subscribing and making payments to any fund for religious, charitable or benevolent objects of any description.

Word applied for endorsement as an income tax exempt charitable institution under sub-division 50-B of the Income Tax Assessment Act 1997 (ITAA97). Endorsement was refused on the basis that its commercial activities were not charitable, and that it did not meet the requirement of paragraph 50-50(a) of the ITAA97 that it pursues its objectives principally in Australia.

The Administrative Appeals Tribunal [2005] AATA 941 decided that Word was not a charitable institution whilst operating the funeral business, but was entitled to endorsement as a charitable institution from 1 July 2002 when it reverted to its investment activities. The Tribunal also accepted that Word had pursued its objectives solely in Australia from 1 July 2002.

On appeal by the Commissioner, and cross appeal by the taxpayer, to the Federal Court [2006] FCA 1414, Sundberg J held that Word was a charitable institution for the whole period from 1986 and that, by providing funds to Wycliffe in Australia, it satisfied the requirements of paragraph 50-50(a).

The Commissioner's appeal was dismissed by the Full Federal Court (2007) 164 FCR 184. The Court concluded that there was no error in the approach of Sundberg J in characterising Word as a charitable institution. The Court also concluded that Word pursued its objectives principally in Australia by donating funds in Australia to other organisations in accordance with its charitable purposes.

The High Court granted the Commissioner special leave to appeal from the decision of the Full Court.

Issues decided by the court

The majority of the High Court (Gummow, Hayne, Heydon and Crennan JJ, Kirby J dissenting) found that Word was a charitable institution, as its objects were confined to advancing religious charitable purposes (paragraphs 19 and 20). 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 (paragraph 24).

In that regard, 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 (paragraph 26).

The majority also held that Word satisfied the special condition in paragraph 50-50(a). Once the Court had accepted that Word's charitable purposes can 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 (paragraph 73).

Accordingly, Word was entitled to endorsement as an income tax exempt institution under sub-division 50-B ITAA97.

Relevant Legislation

Tax Office view of Decision

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 directly carry out charitable activities, but gives its profits 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 its main or predominant or dominant objects, as distinct from its concomitant or incidental or ancillary objects, are charitable.'

The Tax Office accepts that the principles considered by the High Court have equal application to the possible characterisation of an entity as a religious institution (Item 1.2), a scientific institution (Item 1.3) or a public educational institution (Item 1.4).

The High Court has stated that, if a charitable institution pursues its charitable objectives in Australia by paying its profits to other charitable institutions in Australia, it 'pursues its objectives principally in Australia', for the purposes of paragraph 50-50(a), even if the other institutions ultimately expend those funds outside Australia.

Administrative Treatment

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, as noted above, 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.

Entities who are uncertain about whether their particular circumstances qualify for exemption and require greater certainty may apply for a private ruling. Entities are reminded that charitable institutions must apply for exemption and be endorsed by the Commissioner in order to become exempt.

Implications on current Public Rulings & Determinations

TR 2005/21 was withdrawn on 11 May 2011 and replaced by TR 2011/4 on 12 October 2011 and reflects the Commissioner's views following recent significant decisions of the High Court and Federal Court including Word Investments Ltd and Aid / Watch Incorporated v FC of T [2010] HCA 42; 2010 ATC 20 227; (2010) 77 ATR 195. To the extent that the views in TR 2005/21 still apply, they have been incorporated into TR 2011/4.

TR 2005/22 was amended to reflect the High Court decision in Word Investments Ltd.

TR 2000/11 was withdrawn on 19 August 2015.

Implications on Law Administration Practice Statements

None

Amendment history

Court citation:
[2008] HCA 55
(2008) 236 CLR 204
251 ALR 206
70 ATR 225
2008 ATC 20-072

Legislative References:
Income Tax Assessment Act 1936
23(e)
23(j)

Income Tax Assessment Act 1997
50-1
50-5
50-50
50-52
50-55
50-57
50-60
50-65
50-105
50-110
50-115
50-140
50-145
50-155

Case References:
H A Stephenson & Son Ltd (In Liq) v Gillanders, Arbuthnot & Co
[1931] HCA 47
45 CLR 476

Roman Catholic Archbishop of Melbourne v Lawlor
[1934] HCA 14
51 CLR 1
[1934] ALR 202

Royal Australasian College of Surgeons v FCT
[1943] HCA 34
68 CLR 436
[1943] ALR 377

Baptist Union of Ireland (Northern) Corporation Ltd v Commissioner of Inland Revenue
(1945) 26 TC 335

Salvation Army (Victoria) Property Trust v Shire of Fern Tree Gully
[1952] HCA 4
85 CLR 159
[1952] ALR 85

R v The Assessors of the Town of Sunny Brae
[1952] 2 SCR 76
[1952] 2 DLR 386

In re Smith (Deceased)
[1954] 1 SASR 151

Commissioner of Inland Revenue v Carey's (Petone and Miramar)
[1963] NZLR 450

Christian Enterprises Ltd v Commissioner of Land Tax
(1968) 72 SR (NSW) 90
[1968] 2 NSWR 99

Scottish Burial Reform and Cremation Society Ltd v Glasgow City Corporation
[1968] AC 138
[1967] 3 All ER 215

Stratton v Simpson
[1970] HCA 45
125 CLR 138
[1971] ALR 117

The Incorporated Council of Law Reporting of the State of Queensland v Commissioner of Taxation
[1971] HCA 44
125 CLR 659
2 ATR 515
71 ATC 4206

Inland Revenue Commissioners v Helen Slater Charitable Trust Ltd
[1982] Ch 49
[1981] 3 WLR 377

Glebe Administration Board v Commissioner of Pay-Roll Tax
10 NSWLR 352
19 ATR 297
87 ATC 4825