High Court ruling on the business of charities

Posted January 22nd 2009

by DPS

The High Court has upheld a decision of the Federal Court which allows charities to run commercial activities and still maintain their income tax exemption.

In the case between the Australian Taxation Office and a Christian organisation called Word, the High Court upheld that not-for-profit (NFP) organisations could engage in large-scale commercial activity so long as the profits are used for a charitable purpose.

The court also ruled that the organisation receiving the tax exemption does not have to engage in the charitable activities itself.

In an online report in Australian Ageing Agendas, Joanne O’Brien, a Senior Associate with Brisbane law firm, Carne Reidy Herd, said this finding could have significant implications for charitable aged care organisations which conduct separate commercial activities.

Ms O’Brien said declining donations and the recent credit crunch were forcing many charities to diversify their funding options.

“It’s increasingly hard for charities to rely on donations and government payments to continue their work,” she said. “There are more imperatives than ever for them to operate on a commercial level and overseas there is precedent for that.”

However, Ms O’Brien acknowledged that the tax exemptions for charitable organisations remained a contentious public policy and were due to be subjected to further scrutiny.

“If charities can undertake commercial activities to undertake commercial activities, it reduces their reliance on the public purse,” she said. “But on other hand, it does give them significant advantages which other businesses don’t have.”

Exemptions for NFPs are one of the key considerations of the Henry Review into the nation’s future tax system, due to be delivered to the Treasurer in December 2009.

The Senate Economics Committee has also recommended greater levels of accountability for NFPs. In a December 2008 report, it suggested the establishment of an independent national regulator for charitable organisations which would oversee a compulsory register for NFPs.