Commissioner of Taxation v Word Investments Ltd

• Jurisdiction: Australia Federal only
• Judge: Gummow,Hayne,Heydon,Crennan JJ.,Kirby J.
• Judgment Date: 03 December 2008
• Neutral Citation: [2008] HCA 55,2008-1203 HCA A
• Court: High Court
• Docket Number: M41/2008
• Date: 03 December 2008

Commissioner of Taxation of The Commonwealth of Australia

Appellant

and

Word Investments Limited

Respondent

[2008] HCA 55

Gummow, Kirby, Hayne, Heydon and Crennan JJ

M41/2008

HIGH COURT OF AUSTRALIA

Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd

Taxation — Income tax — Charities — Entity engaged in investment business and funeral business — Profits distributed to religious organisations — Whether entity exempt from income tax as ‘charitable institution’ — Income Tax Assessment Act 1997 (Cth), ss 50–1, 50–5, 50–50, 50–52.

Taxation — Income tax — ‘Charitable institution’ — Whether sufficient for entity to have solely charitable purposes — Whether necessary for entity to engage in charitable activities directly — Whether necessary that distributed profits applied for charitable purposes.

Taxation — Income tax — ‘Charitable institution’ — Whether entity's objects in fact confined to charitable purposes.

Taxation — Income Tax — Special condition for ‘charitable institution’ income tax exemption — Income Tax Assessment Act 1997 (Cth), s 50–50(a) — Whether entity has physical presence in Australia — Whether entity ‘incurs its expenditure and pursues its objectives principally in Australia’.

Words and phrases — ‘charitable institution’, ‘incurs its expenditure and pursues its objectives principally in Australia’, ‘institution’.

Income Tax Assessment Act 1936 (Cth), s 23(e), (j).

Income Tax Assessment Act 1997 (Cth), ss 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.

Representation

R Merkel QC with R A Brett QC and D M Harding for the appellant (instructed by Australian Government Solicitor)

J J Batrouney SC with M T Flynn for the respondent (instructed by Moores Legal)

ORDER

Appeal dismissed with costs.

1 Gummow, Hayne, Heydon and Crennan JJ. The Commissioner of Taxation of the Commonwealth of Australia (‘the Commissioner’) refused to endorse Word Investments Ltd (‘Word’) as an income tax exempt charity. That decision was set aside by a senior member of the Administrative Appeals Tribunal (Mr B H Pascoe) in relation to the period from 1 July 2002 1. An appeal by the Commissioner to the Federal Court of Australia (Sundberg J) was dismissed; a cross-appeal by Word was allowed, so that Word's status as an income tax exempt charity was extended back to 1 July 2000 2. An appeal by the Commissioner from those orders to the Full Court of the Federal Court of Australia (Stone, Allsop and Jessup JJ) was also dismissed 3. The Commissioner has now appealed to this Court. That appeal, too, must be dismissed for the following reasons.

Factual background

2 The role of Wycliffe. Wycliffe Bible Translators (International) is a missionary organisation. It seeks to spread the Christian religion through missionaries. It is particularly active in developing countries, and among sections of the population who have no written language. The missionaries learn the local language, teach people to read and write that language, translate the Bible into that language, and then teach the people how to read the Bible. It has about 5,300 workers and 56 members. One of the members is Wycliffe Bible Translators Australia (‘Wycliffe’). From 1 July 2000 Wycliffe has been endorsed by the Australian Taxation Office as an income tax exempt charity under subdiv 50-B of the Income Tax Assessment Act 1997 (Cth) (‘the 1997 Act’). Word was founded by members closely associated with Wycliffe who wanted to use Word to raise money within Australia and give it to Wycliffe for the carrying out of its purposes, which, at least to some degree, are fulfilled overseas.

3 The issues in the appeal centre on the fact that although Word has paid Wycliffe to carry out Bible translation on its behalf, Word does not itself directly carry out the training or dispatching of missionaries overseas, the publishing of the Bible or the preaching of the gospel, but gives its profits (less sums retained

by it 4) to Wycliffe, and other similar Christian organisations, to enable them to perform these activities.

4 Word's memorandum. Word was incorporated under the Companies Act 1961 (Vic) on 8 August 1975, as a company limited by guarantee. The parties are agreed that at least some of the objects are charitable; Word contends that they all are. Clause 4 of the memorandum of association prohibits the payment of any of Word's income and property to members, save in return for services rendered or goods supplied. Clause 7 provides that on a winding up or dissolution any surplus is not to be given to the members, but only to some institution or institutions having objects similar to those of Word and having restrictions on distributions to members at least as great as those in Word's memorandum.

5 Word's activities. From about 1986 Word began to accept deposits from members of the public. The depositors received little or no interest from Word, but Word invested the money at commercial rates of interest. In the period 1996–2002, Word operated a business of conducting funerals, not all of Christians, for profit. The profits generated from the investment business and the funeral business were used to support Christian activities in the form of Bible translation and missionary work largely carried out by Wycliffe and other bodies to whom the non-retained profits were given. The parties accepted that although the Administrative Appeals Tribunal had seen the operation of the funeral business as depriving Word of its status as a charitable institution, nothing turned on the different sources of profit for the purposes of the arguments in this Court.

6 Endorsement of tax exempt entities. This appeal arises in relation to Divs 50 and 50-B of Pt 2–15 of the 1997 Act 5. Word claims to be a ‘charitable institution’, which is an ‘entity’ covered by item 1.1 of the table set out in s 50–5 of that Act 6. Section 50–52 provides that an entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax

under subdiv 50-B 7. In subdiv 50-B there appeared at the relevant time s 50–115, which provided that an entity might apply to the Commissioner for endorsement as exempt from income tax. Section 50–105 obliges the Commissioner to endorse an entity which has applied for endorsement as exempt from income tax if it is entitled to be so endorsed. Section 50–110(1) provides that the entitlement of an entity to be endorsed depends on meeting the requirements of s 50–110. Section 50–110(2) provides that one requirement is that the entity be a ‘charitable institution’ as described in item 1.1 of the table set out in s 50–5. Section 50-110(5)(a) provides that another requirement for an entity in the circumstances of Word is that the entity meet the conditions referred to in the column headed ‘Special Conditions’ against item 1.1 of the table. One of those special conditions, created by s 50–50(a), is that the entity be one which ‘has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia’.

7 Word's application to the Commissioner. Word applied to the Commissioner for endorsement as exempt from income tax. The Commissioner refused that application by letter of 2 May 2001. The letter said:

‘Commercial enterprise entities are not considered to be charities. This is the case irrespective of whether charitable consequences flow from the entity's activities.’

On 16 March 2002 Word made a further application for endorsement in relation to the period from 1 July 2000. On 13 May 2002 the Commissioner rejected that application on the ground that Word was ‘not an organisation instituted to advance or promote charitable purposes.’ On 18 July 2002 Word objected to that refusal, but by letter of 24 February 2003 the Commissioner disallowed the objection. That letter said:

‘In your circumstances, your main activities are to provide financial planning advice and to carry out investment activities for the investors. You receive income from the investment of the funds of investors. You then distribute your available funds to other organisations to enable them to carry out evangel [sic] activities to benefit of [sic] a wide range of indigenous people.

We consider that the money generating purposes are not incidental to the religious purposes. The money generating purposes represent independent purposes which are a mean [sic] to fulfill your religious purposes.’

The issues

8 Although the Commissioner conceded that Word had not set up a tax avoidance scheme, he posed four issues in the path of Word's claim to be endorsed as exempt from income tax.

9 The first issue posed by the Commissioner is whether Word is prevented from being a ‘charitable institution’ by reason of the fact that its objects are not confined to charitable purposes.

10 On the assumption that the first issue were to be resolved in Word's favour, the second issue posed by the Commissioner is 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 because it was established for the purpose of distributing, and distributes, its profits, wholly or mainly to charitable institutions.’

11 Assuming that the second issue were to be decided in Word's favour, the third issue is whether Word is prevented from being a ‘charitable institution’ by reason of the fact that the institutions to which it gave its profits ‘were not confined as to the use to which they may put the funds distributed to them’.

12 Assuming that the third issue, too, were to be resolved in favour of Word, the fourth issue posed by...