Tax Office Continues to Test Boundaries for Taw Law for Not-for-Profit Organisations

Jonathan Casson, Partner, was published in the February issue of Keeping Good Companies, the journal of Chartered Secretaries Australia

Since this article was written, the Full Federal Court has affirmed the decision in favour of CBH. It did so on a narrower ground than at first instance. Significantly the Full Court found that where the objects of a non profit organisation are directed to broad community interests the fact that the benefit accrues to members does not preclude the tax exemption. It said: “that the activities of CBH enable the green industry in Western Australia as a whole… to flourish does not mean that it is carried on for the profit or gain of individual members”. This should be contrasted with circumstances where benefits accrue only to members not the wider community. The Court left open the possibility that in such cases exemption will be denied. The ATO has said it will not appeal this decision

Aidwatch is the latest in a line of cases between the Tax Commissioner and non-profit organisations inviting consideration of the State and Federal tax authorities attitude to a non-profit organisation’s eligibility for tax-exempt status over the last decade. Throughout the Tax Commissioner has sought to narrow the scope for eligibility while, to date, the High Court has continued to widen it. 

In Aid/Watch Incorporated v Commissioner of Taxation [2010] HCA 42, the High Court confirmed that Aid/Watch, an organisation concerned with promoting the effectiveness of foreign aid by way of advocacy and lobbying, was a charitable institution qualifying for tax exemption under the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”), Fringe Benefits Tax Assessment Act 1986 (Cth) (“the FBT Act”) and A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“the GST Act”). Certainly, two of the High Court judges and three of the Full Federal Court do not share the majority’s opinion. It is however, a refreshing example of the living nature of non-profit law and a reflection of how community attitudes shape the Court’s interpretation of how common law concepts apply to tax laws. 

It is the latest in a line of cases between the Tax Commissioner and non-profit organisations inviting consideration of the State and Federal tax authorities’ attitude to a non-profit organisation’s eligibility for tax-exempt status over the last decade. Notably, this is not limited to charitable bodies. 

In some cases the Commissioner has proactively tested conventionally held views on tax status matters, and in other cases it has resisted (generally unsuccessfully) the push from non-profit organisations to effectively liberalise such conventionally held views. This article reviews this push by reference to Coleamball12, Baysid34, Word5, Victorian Women's Lawyers’ Association6, Cooperative Bulk Handlin78 and concludes with Aid/Watch. 

Coleambally is a starting point only because it highlights that even the Commissioner’s attitudes favourable to tax exempt status for non-profit organisations may be wrong. Prior to this case, the tax office published guidelines requiring cooperatives or clubs to prohibit their organisation from making any distribution, in money or property or otherwise, to its members on dissolution if they wanted to benefit from the mutuality principle9. Though it seems that the attack on this provision may have been inadvertent, the Federal Court found that the mutuality principle was inconsistent with the presence of such a dissolution clause. Thus Coleambally was not entitled to the tax benefit that flowed from the mutuality principle. 

On leave to appeal to the High Court, Counsel pointed to the guidelines issued by the Commissioner. The High Court was constrained in following the primary judgment. As McHugh J stated during the proceedings "[the Cooperative] may have been led into this by the rulings of the Department, but you now have to face up to the law”.10 Ultimately, legislative intervention was required to restore the status quo. 

Two years later in the Victorian case of Central Bayside, the Commissioner sought to deny payroll exemption to Central Bayside on the basis that it was not a charitable body. The argument flowed from the principle in charity law that an arm of government may not be a charity. Thus, the High Court was called upon to adjudicate as to whether an organisation which received approximately 93% of its income from government grants was in fact a conduit government organisation whose main purpose was to implement government policy rather than an organisation whose purpose was to protect and advance the interests of its members. In the lower courts, the findings were essentially that Central Bayside acted for and on behalf of the government and was essentially a "creature and agent of government"11. 

In contrast, all High Court judges found that Central Bayside was a charitable body. The majority formed this view having regard to the independence of the board of the organisation and rejected the view that, having some objects which were aligned or similar to government policy did not, of itself, indicate Central Bayside was not independent of government. Kirby J. took a broader view regarding the concept of charity, when he said "For judges, no longer subject to the authority of Imperial or English courts, to maintain obedience to conceptions of ‘charity’ and ‘charitable bodies’, expressed in such different times, seems on the face of things an irrational surrender to the pull of history over contemporary understandings of language used in modern Australian statute.1213 Though Kirby J did not press his point regarding the definition of "charity", his comments signal the willingness of the High Court to be more interventionist in considering a modern application of concepts of charity in taxation statutes. 

Another pointer to the attitude of the High Court came from a 2008 Federal Court decision in Victorian Women Lawyers’ Association. Here the Federal Court was required to consider the objects of the VWL as stated in its constitution and whether the activities of the VWL were in accordance with its objects. In particular, the Court was required to consider whether the objects of VWL, which focused on gender-based discrimination and was “laden with political overtones”, disqualified VWL as ‘charitable’. 

The objects of VWL included, not only providing a common meeting ground for women lawyers, but also, the promotion of law reform, justice and equality for all women. In deciding whether gender equality was a suitable object qualifying as charitable, and also, whether the political advocacy activities of the VWL were incidental or ancillary to its charitable purpose, French J. considered the history of charitable law in Australia and found that the notion of what constituted ‘charitable’ is fluid and adapts to changing circumstances and that the object of gender equality was indeed a purpose beneficial to the community and therefore charitable. Subsequent to this case French J. was appointed Chief Justice of the High Court. This case marks a shift in the boundary of what might be “beneficial to the community” and indicated the path that the French High Court might take. 

In the same year the High Court in Word tackled the question of commercial activities conducted by charitable organisations or their subsidiaries. Word is illustrative of the Court’s turning its mind to the destination of the income, rather than the specific activities or legal structure chosen to generate it. 

Word is a non-profit company limited by guarantee founded by members associated with Wycliffe, a registered religious charity. Word’s activities were unashamedly commercial however profits were used to support activities carried out by Wycliffe. The question was whether "an entity, which does not itself engage in any significant charitable activities, but, rather, is established to conduct, and conducts, an investment, trading or other commercial activity for profit (albeit not for distribution to its members) is a charitable institution even though it was established for the purpose of distributing, and distributes, its profits, wholly or mainly to charitable institutions."14 

The High Court found that Word was a charitable organisation entitled to tax exempt status even though Word itself was engaged almost solely in commercial activities. This was because all profits generated by Word were distributed to a charitable organisation. Once again the Commissioner’s attempt to limit tax concessions was defeated by the High Court’s interpretation of the 1997 Act and common law rules. The question remains whether this decision will extend beyond charitable bodies. 

In 2010, the Commissioner tested the boundaries again in two cases. The first was in Cooperative Bulk Handlin15 

While the Commissioner adopted the conventional approach that non-profit status is tested not only by reference to its constitution and relevant legislation, but also its activities; what makes this case interesting is the Commissioner’s argument as to how “gain” might be interpreted. The Commissioner's subsidiary argument to exclude CBH’s entitlement to tax-exempt status was that it did not meet the special condition in item 8.2 of section 50 – 40 of the 1997 Act in that the activity must not be “carried on the profit or gain of its individual members1617 He submitted that the word "gain" may be distinguished from quantifiable distribution of profits and it can mean "benefit and advancement and other means of obtaining value1819. 

If successful, this interpretation would reduce the ambit of tax exemption where the organisation’s activities and investments had progressively become commercial. The Commissioner contended that it does not follow in law, or fact, that, just because an organisation is subject to non-distribution requirements, it is not carried on for the profit or gain of its members. 

In pointing to CBH’s commercial activities as cross-subsiding charges to members, the Commissioner took the view that CBH might be said to be carrying on business for the profit or gain of its members. That is, the cross-subsidy amounted to a defacto distribution of profits. 

The Federal Court rejected the Commissioner’s argument. In particular the Court thought benefits derived by a member, whether in the capacity as a member or in some other capacity, does not of itself render the organisation as operating for the individual member’s profit or gain. It noted that, "if the principle or predominant purpose is made out, it matters not that, as subsidiary and incidental to that purpose, CBH’s members derive some personal benefit2021. The Commissioner has appealed this case to the High Court. For many non-profit organisations, the Commissioner’s argument is startling, and the outcome of the approach to the High Court is closely anticipated. 

As noted above, the most recent case is Aid/Watch. By majority, the High Court confirmed that Aid/Watch, an organisation concerned with promoting effectiveness in foreign aid by way of political advocacy and lobbying was a charitable institution qualifying for tax exemption. This decision itself represents the latest step in the argument regarding not only what constitutes political activity, but also whether political activity of itself disentitles a non-profit to charitable status. The case has significance beyond charities, as it expressly makes the point that the Australian Constitution protects the rights of organisations to engage in public debate, and that freedom of political advocacy and communication “is an indispensible incident”22 of a system of representative and accountable government. 

The last decade has seen remarkable interpretative changes in tax law for non-profits and the cases highlighted do not cover the field. There have been some “false dawns” also23. VWL and Aid/Watch, in particular, illustrate the merit in challenging the status quo in changing times. One outcome is that the Tax Commissioner is obliged now to rewrite its tax rulings on Charities to property reflect the law as declared by the High Court. 

These changes have come at a time when non-profit organisations have been under sustained attack as to their tax status. Some of the uncertainty has been removed, but it is an evolving process. 

Jonathan Casson 

Partner Holman Webb Lawyers 

T: +61 2 9390 8316 

E: jonathan.casson@holmanwebb.com.au

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