An entity must be a charity to be eligible for various tax exemptions and concessions and endorsement as a deductible gift recipient. (Charity is defined in section 5 of the Charities Act 2013).
For a long time it was thought that there was a rigid distinction between charitable and commercial organisations so that an organisation which carried on commercial activities could not be a charity, except where the commercial activities were incidental to the charitable purposes of the organisation. (See, for example, ATO tax ruling TR 2005/21).
This changed with the decision of the High Court in Commissioner of Taxation v Word Investments Limited [2008] HCA 55 and subsequent cases such as Commissioner of Taxation v Hunger Project Australia [2014] FCAFC 69 and YWCA Australia v Chief Commissioner of State Revenue [2020] NSWSC 1798.
Based on these decisions, an organisation whose only activities are commercial activities may still qualify as a charity provided it has only charitable objects, and the commercial activities are carried on to fund those objects.
The Australian Charities and Not-for-profits Commission considers that a charity can undertake commercial activities in the following scenarios:
- A charity can undertake commercial activity with the purpose of generating profit to fund its work towards its charitable purpose, which is what was decided in Word Investments.
- A charity can undertake commercial activity where the activity directly contributes towards its charitable purpose. For example, a charity might have the purpose of providing employment to people living with disability. To achieve this purpose, the charity could operate a retail store and provide employment and training to people living with disabilities.
- A charity can undertake commercial activity where the activity is only incidental to the purpose of the charity. For example, a charity that operates a home for neglected boys could provide training to the boys through farming activities.
It is unnecessary to have separate entities to carry on the charitable activities and the commercial activities, although some organisations do adopt this structure.
This is particularly the case where the charity was not set up to conduct commercial activities, but later decides to expand into commercial activities.
A common approach in these circumstances is for the charity to form a new entity to carry on the commercial activities so it is clear that the charity’s status is not jeopardised.
If the new entity is a proprietary limited company with the charity as the sole member, the net position should be that no income tax is paid on profits that are paid by the new entity to the charity as franked dividends. Although the subsidiary is subject to income tax, the charity will be exempt from income tax and will not pay any income tax on the franked dividends. Subject to certain anti-avoidance provisions not applying, the franking credits received by the charity will generate tax offsets which are refundable to the charity.
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This is commentary published by Polygon Holdings Pty Limited trading as Gavel Law for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Gavel Law, Australia 2024.
