NFP tax exemption maintained…for now

The High Court has upheld a decision of the Federal Court which allows charities to run commercial activities and still maintain their income tax exemption.

In the case between the Australian Taxation Office and a Christian organisation called Word, the High court upheld that not-for-profit (NFP) organisations could engage in large-scale commercial activity so long as the profits are used for a charitable purpose.

The court also ruled that the organisation receiving the tax exemption does not have to engage in the charitable activities itself.

According to Joanne O’Brien, a Senior Associate with Brisbane law firm, Carne Reidy Herd, this finding could have significant implications for charitable aged care organisations which conduct separate commercial activities.

Ms O’Brien said declining donations and the recent credit crunch were forcing many charities to diversify their funding options.

“It’s increasingly hard for charities to rely on donations and government payments to continue their work,” she said. “There are more imperatives than ever for them to operate on a commercial level and overseas there is precedent for that.”

However Ms O’Brien acknowledged that the tax exemptions for charitable organisations remained a contentious public policy and are due to be subjected to further scrutiny.

“If charities can undertake commercial activities to undertake commercial activities, it reduces their reliance on the public purse,” she said. “But on other hand, it does give them significant advantages which other businesses don’t have.”

Exemptions for NFPs are one of the key considerations of the Henry Review into the nation’s future tax system, due to be delivered to the Treasurer in December this year.

“I don’t know that anyone will be rushing to do anything at the moment,” said Ms O’Brien. “The extent to which endorsed charities will be able to undertake commercial activities may still be called into question.”

The Senate Economics Committee has also recommended greater levels of accountability for NFPs.

In a December 2008 report, it suggested the establishment of an independent national regulator for charitable organisations which would oversee a compulsory register for NFPs.

For now, Ms O’Brien recommends that charitable groups review their endorsement regularly as the ATO has signalled it will be monitoring this area.