In brief - A charity can carry on commercial activities without jeopardising its status as a charity.

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 as an entity that:

  • is a not-for-profit entity, which means that it must not operate for the profit, personal gain or other benefit of a limited group of people such as the members of the entity;

  • has only charitable purposes for the public benefit;

  • does not have a disqualifying purpose, which is a purpose that is unlawful, contrary to public policy or political; and

  • is not an individual, political party or government entity.

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. For example in TR 2005/21:

20. A purpose of carrying on a business or commercial enterprise as such is not charitable. This is the case even if the entity carrying on the enterprise is controlled by a charitable institution or its profits are ultimately applied for charitable purposes. However, a business or commercial enterprise that is merely incidental to the carrying out of a purpose that is otherwise charitable does not by itself prevent that purpose being charitable.

This changed with the decision of the High Court in Commissioner of Taxation v Word Investments Limited [2008] HCA 55.

Word Investments Limited (Word) was established to raise funds for an organisation called Wycliffe Bible Translators (Wycliffe). Wycliffe was a religious charitable institution whose activities included Bible translation and missionary work. The founders of Word were closely associated with Wycliffe.

Word's objects were to advance the Christian religion but it only undertook commercial activities, including investing money and operating a funeral business. The profits generated from those activities were used to support the religious activities of Wycliffe and other organisations.

The High Court found that:

  • while Word tried to make a profit, it did so only in aid of its charitable purposes

  • while the activities of Word were not intrinsically charitable, they were charitable in character because they were carried out in furtherance of Word's purposes which were solely charitable

  • distinctions should not be made based on how an organisation is structured - there should be no distinction between a case where a company with religious charitable objects organised itself into two divisions, one which used the company's assets to make profits, and the other which spent the profits on those objects, and a case where a company had the same objects and made the same profits, but gave the profits to other organisations which spent them on those objects

  • the constitution of Word did not allow it to make payments to institutions to spend on non-charitable purposes, and the evidence did not establish that the recipients applied payments for non-charitable purposes.

Word Investments has been applied in subsequent cases such as Commissioner of Taxation v Hunger Project Australia [2014] FCAFC 69 where an organisation that raised money to allow an associated organisation to dispense aid to relieve hunger was found to be a public benevolent institution, and YWCA Australia v Chief Commissioner of State Revenue [2020] NSWSC 1798 where an organisation whose activities included a hotel business was found to be an exempt charitable or benevolent body.

When and how may a charity undertake commercial activities?

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. 

This is commentary published by Colin Biggers & Paisley 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. © Colin Biggers & Paisley, Australia 2022.

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