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Background

The Full Court of the Federal court in Melbourne recently handed down its decision in Commissioner of Taxation -v- Word Investments Limited. This is a landmark charity case decision - perhaps the most significant charity case we have seen in Australia in the last 30 years.

The decision was concerned with the central issue of whether a company which operates a normal commercial business for profit, but which is not charitable in its own right, can be regarded as a charitable institution if, as a matter of purpose and practice, its profits are wholly distributed to other bodies which are charitable.

In a nutshell, the Court has held that a company in this situation will be charitable institution and therefore entitled to the various tax concessions afforded to charitable institutions.

The ATO’s view

The ATO has long held the view that, in working out whether a company is exempt form income tax in circumstances where it has a relationship with another entity which is itself exempt, the company itself must be able to stand on its own 2 feet in terms of satisfying the tax exemption requirements of division 50 of the Tax Act. In other words, the ATO takes the view that it is not possible to merely attribute the characteristics and purposes of an exempt entity to a different company or to simply “look through” the company to the exempt entity.

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