‘Word Investments Ltd’ High Court Decision – Case Note

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4 December 2008

The High Court of Australia handed down its decision in the Word Investments case (Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd [2008] HCA 55) on 3 December 2008.  This decision dramatically changes the existing interpretation of the Australian Taxation Office (ATO) regarding the entitlement of entities to endorsement as Tax Concession Charities (previously Income Tax Exempt Charities).  As a result, it is prudent for non-profit entities to re-consider their structuring arrangements, and to take professional advice regarding these arrangements.

The History of the Word Investments case

Wycliffe Bible Translators Australia (“Wycliffe”) is Christian missionary organisation which engaged in various religious activities.  From 1 July 2000, Wycliffe has been endorsed as an Income Tax Exempt Charity (now known as Tax Concession Charity status).

Word Investments Ltd (Word) was founded by members closely associated with Wycliffe, with the intention of using Word to raise money within Australia (through various business ventures, including an investment scheme and funeral home), and give that money to Wycliffe for the carrying out of Wycliffe’s purposes.

However, Word did not itself carry out the religious activities of Wycliffe.  It only gave its profits (less sums retained by it to cover administrative costs) to Wycliffe and other similar Christian organisations, to enable them to perform these activities.

The ATO refused to endorse Word as an Income Tax Exempt Charity.  The ATO argued that commercial enterprise entities are not charities, irrespective of whether the enterprise gives its income to charitable institutions.  The ATO submitted that where an institution’s profit generating activity goes beyond what is incidental or ancillary to the exempt purposes, the institution loses its charitable character.

The Majority decision in the High Court, in rejecting the ATO’s argument, distilled four separate issues for resolution.

Issue 1:  Were Word’s Objects confined to “charitable” purposes?

The constitution for Word contained a large number of “Objects”.  The ATO submitted that a number of these Objects were not charitable in character (and therefore, Word was not a “charitable institution”).

Objects which caused concern for the ATO included:

  • to subscribe and make payments to any fund for religious, charitable or benevolent objects of any description;
  • to set aside out of the profits of Word such sums as the Board thinks proper, for maintaining investments, meeting contingencies or for any other purposes connected with the business of Word, and to reinvest such sums in the business of Word or in such securities as the Board decides;
  • to subscribe or guarantee money for charitable or benevolent objects or for any exhibition, or any public, general or useful objects.

The Majority concluded that these were not actually Objects of Word, but were really “Powers” (i.e. how the company would go about achieving its Objects).  Put another way, the Court rejected that Word had as an Object that it would engage in commercial activities.   Engaging in commercial activities was an exercise of its Powers, which it did only in aid of its charitable Objects.

The Majority noted that the funds paid out by Word Investments were paid to bodies fulfilling charitable purposes.  Therefore, whilst the activities of Word in raising funds by commercial means were not intrinsically charitable, they were still charitable in character because they were carried out in furtherance of a charitable purpose.

As a caveat however, the Majority noted that merely reciting charitable Objects or purposes in a constitution will be insufficient if the institution fails to carry out that purpose.  For the year of income in question, consideration must be given to the purpose for which the institution was established and to the purpose for which it is currently conducted.

Whilst the “Objects Clause” of a constitution should relevantly establish the charitable purpose of the institution, a Court may look to other matters to determine whether or not the institution has a charitable purpose, including:

  • circumstances of the institution’s formation;
  • the activities of the institution.

Issue 2:  Can an institution be charitable where its only activity is to engage in commercial activities and direct the profit from those activities to other charitable institutions which do engage in charitable activities?

The ATO argued that, whilst it was an object of Word to proclaim the Christian Religion, Word did not do this.  All it did was raise money from commercial activities and hand it to other bodies so that they could proclaim the Christian Religion.  The ATO submitted that there was no nexus between the profit and the charitable purpose.

The Majority noted that the ATO’s argument would lead to the following difficulties:

  • Where an institution with charitable objects organises itself into two divisions, one to make profit, the other to spend the profit in achieving the charitable objects,  then this entity would be a charitable institution.
  • Where an institution has the same charitable objects and makes the same profits, but decides to only give the money to other organisations to spend on charitable purposes, then this entity would not be a charitable institution.

The Majority considered that a distinction of this nature should not be made.  Instead, what is important is to consider the natural and probable consequences of the institution’s purposes and activities.  In this case, the natural and probable consequence of Word’s purposes and activities was that the profit would be spent in achieving religious (or charitable) purposes.

Issue 3:  Were the institutions which received Word’s payments confined in the use to which they put them?

The ATO submitted that, if Word was a charitable institution, it needed to ensure that the distributions it made were utilised by the recipients for the advancement of religion, and Word needed to make appropriate inquiries to satisfy itself of this.

The Majority noted that the entities which received the income from Word had an obligation to use that income to fulfil their Objects.  Word was aware that these entities had those Objects.  It was therefore entitled to assume that the money would be applied for charitable purposes.  The only exclusion to this would be if Word knew, or ought to have known, that the money was going to be misapplied by the recipient.

Issue 4:  Does the entity have a physical presence in Australia and incur its expenditure and pursue its objectives in Australia?

Section 50-50(a) of the Income Tax Assessment Act 1997 required Word to have both a physical presence in Australia and incur its expenditure and pursue its objectives in Australia.  The ATO argued that this was necessary in order to ensure that an entity is compliant with the Taxation legislation (in that the ATO would face great difficulty in monitoring the use of funds where those funds are paid to organisations that pursued their objectives outside of Australia).

The Majority concluded that Word did have a physical presence in Australia and to that extent incurs its expenditure and pursue its objectives principally in Australia.  The decisions to pay were made in Australia, the payments were made in Australia, the payments were made to Australian organisatons, and the Objects of Word included giving financial assistance to these organisations.  Therefore, Word was compliant with section 50-50.  As a result, Word was able to be subject to appropriate scrutiny and compliance action by the ATO.

Implications of the Decision

The Court’s decision has significant implications for many charitable institutions.  Institutions may decide to pursue “asset protection” strategies, by incorporating separate entities to raise funds for their charitable purposes.

Specific legal advice should be taken in all circumstances, as the provisions of an entity’s constituent documents (particularly to ensure the “Objects Clause” appropriately establishes the institution’s charitable purpose) and the manner in which it performs its activities, will still be of importance.  We can provide you with this advice and assistance.

Additionally organisations that may have previously been denied endorsement as an Income Tax Exempt Charity (now called Tax Concession Charity) may want to consider re-applying for that endorsement, but only after review of the Objects clause of the Constitution of that organisation.  See us for advice and assistance in this regard.

In saying this, it is important to not lose sight of the possibility that taxation legislation will be amended to, in effect, reverse the High Court decision.

Read the decision: Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd [2008] HCA 55

If you have a query regarding the Word Investments case, contact us

Our Brisbane Not for Profit & Charity lawyers can assist you with your queries, contact us on (07) 3252 0011 and book an appointment through our Business Development Officers today.