Commissioner of Taxation v Word Investments Ltd [2006] FCA 1414 | Case summary

36 While these cases are of assistance to Word, they do not entirely answer the question. The proposition for which they stand is that where an organisation engages in an activity that has a charitable purpose, that purpose will not be lost where a profit is made in conducting that activity, provided that the profit is not distributed to members and is used exclusively (save for allowable incidental purposes) for charitable purposes. They do not address the question whether an activity that is not in itself charitable, but that is conducted for the purpose of producing income to be used for a charitable purpose, may itself be charitable. 37 Nonetheless, I think it is clear from the above passages that the making of a profit through trade or business is not necessarily inconsistent with a charitable purpose and that the true question to be asked is the purpose of the making of the profit. If the purpose is commercial then the exclusive purpose of the organisation is not charitable; if the purpose is selfless then it may be.Prior to 1996, the sole profit-making activity engaged in by Word was the investment of moneys provided by public investors who shared Word's beliefs and aims. The profits thereby made were then provided to Wycliffe and similar organisations. If, consistent with my understanding of the passages cited above, the true focus of the enquiry is on the purpose and not the manner of the profit-making, then it is clear that Word's purposes were, up to 1996 and subject to the second matter which I will come to shortly, charitable. 38 Some assistance may be found in the rating cases. Statutes imposing rates on property are frequently subject to exemptions for property used exclusively for charitable purposes. In Ryde Municipal Council v Macquarie University (1978) 139 CLR 633, the High Court by majority of 3-2 held that a 'market' at Macquarie University consisting of retail and business premises let out to banks and shops for the benefit of students and staff was entitled to rating exemption under the relevant statute. The reason was that the enterprises run at the market were desirable for the functioning of the university and a use of the site for the purposes of the university: see (1978) 139 CLR 633 at 643-644 per Gibbs ACJ and at 650 per Stephen J (with whom Murphy J concurred). 39 Where the commercial activity is not a purpose of the university but is merely incidental to the carrying out of the purpose, the land on which it is conducted will still be used exclusively for charitable purposes. So in Salvation Army (Victoria) Property Trust v Fern Tree Gully Corporation (1952) 85 CLR 159, the sale for profit of produce grown at a facility for delinquent boys, an activity which the High Court held to be merely incidental to the charitable purpose of the occupier of the land, did not preclude the property from being exempt from the rating statute. 40 However, where the commercial activity is neither part of the charitable purpose of the occupier nor merely incidental to that purpose, and is used only to generate income, the land will not qualify for a 'sole use' exemption because the land will not have been 'used' by the occupier: Commissioners of Taxation v Trustees of St Mark's Glebe [1902] AC 416; Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 at 643-4 per Gibbs ACJ. 41 The difficulty with the rating cases is that they direct attention not to the activities of the organisation, but to the use to which certain property is put. They therefore fragment the activities of the organisation in a way that is not done by Division 50 of Part 2-15 of the Act. The true comparison with the rating cases would be if the Act provided that each 'division' of an organisation (including, relevantly in this case, the Bethel Funerals division of Word) must be charitable in order for it to qualify for endorsement. It stands to reason that the lower the level of abstraction at which one examines an organisation, the more likely it is that a particular part of the organisation (or of its property) is found to be of a different character from that of the organisation viewed as a whole at a higher level of abstraction. 42 There is a large body of law on this question in the United States: see D E Buckner, 'Property Used as Dining Rooms or Restaurants as within Tax Exemptions Extended to Property of Religious, Educational, Charitable, or Hospital Organizations' 72 ALR 2d 521. Some decisions favour the taxpayer and others favour the authorities. In some cases, the different results can be explained by differences in the wording of the relevant statutes or the degree to which the property of disputed use is integrated into the remainder of the property of the organisation. The leading textbook on trusts in the United States, Scott on Trusts, cites the decision of the Supreme Court of Illinois in School of Domestic Arts and Science v Carr 322 Ill 562, 153 NE 669 (1926) and concludes that where a charitable organisation applies any profits made by it to its charitable purposes, it will not thereby lose its charitable status: A Scott & W Fratcher, The Law of Trusts, 4th edn, Little, Brown & Company, 1989) s376. The School of Domestic Arts case was concerned with a tax on the property occupied by the School. The School conducted a restaurant located within its premises. The Court said at 322 Ill 562 at 569-570, 153 NE 669 at 672: "In the case at bar the school is supported by pay students, the proceeds from the public restaurant, and gifts from various people. The facts alleged and admitted are that no profit whatever is made; that a deficit exists each year and is paid by gifts from benevolent women; that every cent of revenue goes toward the operation of the school … It cannot be questioned that such teaching in all its several branches is a benefit to the students, makes it possible for some of them to earn a living, and indirectly benefits the public and improves the happiness of man. The premises at No 6 North Michigan Avenue comprise the entire fifth floor of the Tower building and are primarily used as a school; 699 students receiving instruction when the bill was filed. Though the restaurant is also operated upon the same premises it is used in connection with the school and as an outlet for food cooked by the students, some of whom act in the capacity of waitresses. The restaurant also furnishes practical training for some of the students studying that branch of work. No part of any of the property was used for any purpose except in connection with and for the benefit and advancement of the school. We are of opinion appellant is a charitable organization and the property here involved is actually and exclusively used for the charitable purpose for which appellant was organized and is therefore exempt from taxation …" To the same effect is Decatur Sports Foundation v Department of Revenue 177 Ill App 3d 696, 532 NE 2d 576 (Il Ap Ct, 4th Dist, 1988). As will have been apparent, I agree with this approach. It accords with the thrust of the decisions I have cited at [33]-[35]. 43 The Commissioner argued that, consistently with the judgment of Dixon J in Roman Catholic Archbishop of Melbourne v Lawlor (1934) 51 CLR 1, it is necessary to draw a distinction between purposes of religion and things conducive to the good of religion. He characterised the generation of funds and distribution of those funds to Wycliffe as possibly being conducive to the good of religion, but as not being for the purposes of religion. The distinction is derived from the decision of the Privy Council in Dunne v Byrne [1912] AC 407, where it was held that an activity may be conducive to the good of religion but not itself be charitable. An example, taken from the judgment of Griffith CJ in the High Court in the same case ((1910) 11 CLR 637), is of advances made to government bodies for the purposes of obtaining funding to be used for religious purposes. Such advances would not themselves be for the purpose of religion although they might be conducive to the good of religion. 44 I do not think the distinction referred to by Dixon J in Lawlor assists the Commissioner. It is clearly directed at the difference between activities that have a direct religious purpose and other activities that are incidental and beneficial to the religious purpose but are not themselves directly religious in purpose. The distinction that the Commissioner really calls for is one between an activity that is clearly religious in purpose and that, on the one hand, is conducted by the taxpayer itself and, on the other hand, is conducted through an intermediary such as Word. That is a wholly artificial distinction. The charitable purpose of an activity cannot depend on whether it is conducted from start to finish by one entity or whether two or more entities with different skills join together to jointly conduct it. The Commissioner's argument is inconsistent with the corporate structure of many contemporary charities which are complex and involve the use of separate legal entities to perform separate functions. Where they are all working together to pursue a common, charitable purpose it is artificial to consider the purpose of each entity separately. 45 The final question of law which the Commissioner contends was wrongly answered by the Tribunal in the paragraph cited above at [29] concerns the place where Word conducted its business. It will be remembered that s 50-50 of the Act requires a charitable institution to satisfy one of four alternative tests, one of which (paragraph (a)) is that the institution "has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia". The Tribunal held that Word satisfied this test. It is not suggested that Word could satisfy any of the other tests in s 50-50. 46 Paragraph (a) of s 50-50 is curiously drafted. It requires three tests to be met: (a) that the institution has a physical presence in Australia; (b) that the institution incurs its expenditure principally in Australia; and (c) that the institution pursues its objectives principally in Australia. Each of these tests is, of itself, relatively straightforward to apply. The difficulty is the words "to that extent" that connect requirement (a) to requirements (b) and (c). The words appear to cover the situation of an institution that has a presence both in Australia and elsewhere. In such a case, it seems that the institution is only required to incur its Australian expenditure principally in Australia and pursue its Australian objectives principally in Australia. In other words, were an institution to have an office in Australia and a similar office in New Zealand, and the expenditure of the Australian office was incurred principally in Australia and the objectives of the Australian office were pursued principally in Australia, then the fact that the New Zealand office may incur expenditure and pursue objectives principally in a place that is not Australia, does not disqualify the institution from satisfying the paragraph. 47 This is not the position of Word. It is not disputed that Word has a physical presence in Australia and therefore satisfies requirement (a). There was no evidence before the Tribunal that Word has any physical presence outside Australia. It follows that the words "to that extent", which might otherwise qualify requirements (b) and (c) do not have such an effect in the case of Word. 48 It seems to me to be equally clear that requirement (b) is met. Word's principal expenditure is the provision of funds to Wycliffe. This it does exclusively in Australia. It should be remembered that while Wycliffe Bible Translators (International) is a worldwide organisation, Wycliffe itself is an Australian entity. It would, I think, be wrong to say that because Word knows that the money it passes to Wycliffe will be expended principally outside of Australia, its expenditure is thereby incurred overseas. 49 Requirement (c) is more difficult. On the one hand, Word must argue that Wycliffe's activities, including their location, are relevant to whether Word has a charitable purpose, since without reference to them, Word's activities consist of no more than making payments to an empty shell organisation. But on the other hand, in order to satisfy requirement (c), Word must say that even though it knows that the funds it provides to Wycliffe are used predominantly overseas, this is not relevant to the enquiry under paragraph (a) of s 50-50. 50 It is clear from the passages from the Incorporated Council of Law Reporting case and the Scottish Burial case that the key to determining charitable status is motive. An investigation of motive cannot be conducted without considering the ultimate object of an organisation's activities. It follows that Word is right to argue that Wycliffe's activities are relevant to whether Word is entitled to charitable status. I also accept the corollary, namely that the location of Wycliffe's activities is also relevant. 51 It is not disputed that Wycliffe's activities are conducted principally outside of Australia. Wycliffe apparently had a small presence in Darwin, but this has diminished over time. Other than this, the evidence was that Wycliffe's activities were conducted principally in the third world. If the motivation behind the requirement that a charity's objects be pursued principally in Australia is that 'charity begins at home', does this not mean, as the Commissioner contends, that Word's objects are not pursued principally in Australia? 52 The answer to this is that paragraph (a) of section 50-50 addresses a fundamentally different question from that asked in an enquiry as to the charitable nature of an organisation. Whether an organisation is charitable depends in large part on the motivation of the organisation - it is a question about the mental state of the organisation and so cannot be answered without a consideration of the knowledge (including knowledge of the destination of funds raised) informing that motive. On the other hand, paragraph (a) of section 50-50 asks a physical question, a nexus question. Viewed in this light there can be no doubt that Word's nexus is exclusively with Australia. What it does, namely handing money to Wycliffe, it does in Australia. There is nothing it does that has any connection to any other country. 53 It follows that, for the period prior to 1996, Word satisfied the requirements of paragraph (a) of s 50-50 of the Act and was a charitable organisation. The effect of the funeral business 54 By its Notice of Cross-Appeal, Word appeals against the finding of the Tribunal that it is not entitled to endorsement for the period from 1996 to 2002. It does so broadly on two grounds. Firstly, it says that it is a charitable institution under item 1.1 in the table at s 50-5. The fact that it conducted a funeral business does not change the essential character of Word, namely an institution committed to raising funds for provision to Wycliffe and other similar organisations for the advancement of the Christian religion. Secondly, Word says that the Tribunal erred in finding that its memorandum and articles of association did not constitute an instrument of trust. Properly characterised, Word is a fund established for public charitable purposes. 55 Word does not need to succeed on both of these bases since the itemised list at s 50-5 comprises alternatives. If Word is a charitable institution it need not also be a fund established for public charitable purposes. 56 The Tribunal found that "it is difficult to consider a commercial funeral business as having an objective of the advancement of religion" and that "the business was a commercial operation for the purpose of making a commercial profit". The Tribunal relied on the decision of Priestley JA (with whom McHugh JA agreed) in Glebe Administration Board v Commissioner of Pay-roll Tax (1987) 10 NSWLR 352, where his Honour said, at 365: "In my opinion the Board was not at any relevant time a religious institution. It was a statutory corporation doing commercial work within limitations fixed by reference to religious principles. It was staffed by persons who wished to observe the religious principles giving rise to the limitations on the Board's commercial activities. The property in its ownership both increased in value and gave rise to revenue. Capital was held for the benefit of a religious institution and large amounts of revenue were handed over to that institution. To my mind all these matters result in it being accurate to describe the Board as a legal entity working in a commercial area, guiding its commercial conduct by the principles of a religious institution and, in ordinary language, working for that religious institution. I do not think that this legal entity can either by an ordinary or a technical use of language be accurately called a religious institution." 57 This case does not aid the Commissioner. Its facts are distinguishable from the present case. It concerned a statutory body exercising property ownership and investment powers given to it by statute. The Board was required by statute to hold and invest church property and to deal with any proceeds. Its purposes were thus defined by statute. This is to be contrasted with Word, which is an independent organisation which has chosen to apply funds that it raises to Wycliffe and other religious bodies. The Board's manner of operation was also different from Word's. It lent money for short terms at commercial interest rates and applied funds for church activities generally, rather than the specific activities supported by Word. Finally, the Board claimed to be a religious institution not, as in the present case, a charitable institution. Word concedes that it cannot be a religious institution. 58 In my view, in concluding that the running of a funeral business could not advance religion, the Tribunal fell into two errors. The first was to consider the funeral business in isolation from the remainder of Word's operations. There was no evidence to suggest that, from the commencement of Bethel Funerals, Word ceased receiving money from investors. The entity claiming to be a charitable organisation is Word, not the Bethel Funerals operations of Word. Word's activities as a whole must be considered when determining whether its purposes were charitable. 59 When such a consideration is undertaken, the second error becomes clear. Word's purposes as a whole were to raise money for provision to Wycliffe and similar organisations. This was true both before and after the establishment of Bethel Funerals. It was only the manner of raising the money that changed; the purpose for doing it remained the same. The Tribunal's error appears to have involved drawing an unwarranted distinction between active and passive investment. It seems to have assumed that it may be charitable for an organisation to receive funds from investors who may or may not have been encouraged to support its goals and ideals, but that it cannot be charitable for the organisation to actively establish a business to derive similar income. 60 The Tribunal's distinction is at odds with the practice of contemporary charitable organisations. With the decline of the welfare state, charitable organisations are expected to do more with the same resources. Reliance on donations alone will, in many cases, be insufficient. Hence many charitable organisations have established business ventures to generate the income necessary to support their activities. There may appear to be a vast difference between selling lamingtons at a church fête and selling funeral services, but where the object of raising the funds is the same, I can no see no reason to draw a legal distinction between the two. I again refer in this connection to the cases referred to at [33]‑[35]. 61 It follows that, for the period from 1 July 2000 to 1 July 2002, Word was a charitable institution under item 1.1 of the table at s 50-5 of the Act and is entitled to endorsement accordingly. The cross-appeal is therefore allowed. Word's alternative argument - that its articles and memorandum of association created an instrument of trust - need not be considered. The period from 1 July 2002 62 As set out above at [16], Word established the Foundation from 1 July 2002 to carry on the business of Bethel Funerals. This effected a significant change from the position prior to that date, when Bethel Funerals was merely a part of Word rather than run through a separate legal entity. The Tribunal held that "the activities after 1 July 2002, being the same as those prior to 1996, entitle [Word] to endorsement as a charitable institution from that date." 63 The Commissioner challenges this finding on three grounds. First, he says that even assuming the factual finding is correct, Word was not entitled to endorsement prior to 1996 and so cannot be entitled to endorsement from 1 July 2002. I have already set out my reasons for concluding that Word was a charitable organisation prior to 1996. The Commissioner's first submission therefore fails. 64 Secondly, the Commissioner says that the period from 1 July 2002 was not, as a matter of law, properly before the Tribunal. The difficulty arises because Word applied for endorsement prior to the establishment of the Foundation. The Commissioner's decision not to endorse Word was therefore made on the basis that Bethel Funerals was a part of Word, and was not run separately by the Foundation. Consequently, according to the Commissioner, argument and evidence in the Tribunal was directed to this situation. The decision on appeal was the decision that, at the time that Bethel Funerals was part of Word, Word was not entitled to endorsement as a charitable entity. 65 This argument must be rejected. A decision to endorse (or not to endorse) an entity as charitable under the Act is not for a limited period. It operates until such time as the Commissioner decides that circumstances have changed or the taxpayer applies to have a different decision made. In this case, the Commissioner made one decision. Namely, that Word was not entitled to endorsement under sub-division 50-B of the Act. This decision, were it to stand, would have continued operation until Word re-applied for endorsement. The appeal brought by Word in the Tribunal was against the decision at large, not merely against the decision as it operated up until 30 June 2002. 66 Section 43 of the Administrative Appeals Tribunal Act 1975 provides that, for the purposes of reviewing an administrative decision, the Tribunal may exercise all the powers and discretions that are conferred on the original decision-maker. In Fletcher v Commissioner of Taxation (1988) 19 FCR 442 at 453, Lockhart, Wilcox and Burchett JJ said, referring to s 43: "In exercising those powers and discretions the Tribunal was bound to consider the facts as they were proved in evidence before the Tribunal, making the decision which, upon that evidence and at that time, was the correct or preferable decision to be made in considering the objection. The Tribunal was not confined either to the material which was before the Commissioner, as primary decision-maker, or the events which had occurred up to that time …" 67 It follows that not only was the period from 1 July 2002 before the Tribunal, but indeed the Tribunal was obliged to consider that period. 68 Thirdly, the Commissioner says that the evidence before the Tribunal was insufficient to establish the finding that the activities of Word from 1 July 2002 were the same as those prior to 1996. The Commissioner points to the relative paucity of material in evidence for the period from 1 July 2002. I accept that if the only question for the Tribunal had been Word's operations from 1 July 2002 and there had been no evidence of its operations prior to then, the Tribunal would have had difficulty reaching a view on whether Word qualified for charitable status. However, this was not the situation. Word's case was that the only significant change in its operations from the period immediately prior to the establishment of Bethel Funerals in 1996 to the termination of its activities in 2005 was the existence and operations of Bethel Funerals. A taxpayer that seeks to establish that it is a charity is not required to prove that status on every single day in the period for which it claims that status. Once it has established that it is a charity at a particular time, it is entitled to rely on that finding until such time as it is proved that its activities have changed to the extent that it is no longer charitable. The Commissioner has not pointed to any additional changes to Word's operations from 1 July 2002. He did not seek to cross-examine Word's witnesses on its activities from 1 July 2002. In these circumstances, there was evidence before the Tribunal that entitled it to find that Word's operations from 1 July 2002 were the same as those prior to 1996. 69 It follows that the appeal must be dismissed. The Court was informed that the Commissioner has agreed to fund Word's legal costs under his test case program. In those circumstances, I will make no order as to costs. I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

Commissioner of Taxation v Word Investments Ltd

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