The Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced tonight the Government's interim response to the High Court of Australia's decision in Federal Commissioner of Taxation v Word Investments.
The High Court handed down its decision on 3 December 2008. Two issues were resolved in favour of the taxpayer and contrary to longstanding ATO tax rulings:
- commercial businesses with charitable objects that direct their profits to charities are eligible for endorsement by the ATO as tax concession charities and therefore have access to a number of tax concessions; and
- charities are considered to be pursuing their objectives principally 'in Australia' if they merely pass funds within Australia to another charity that conducts its activities overseas.
Passing funds to overseas charities
The Government will amend the 'in Australia' requirements in Division 50 of the Income Tax Assessment Act 1997 to ensure that Parliament retains the ability to fully scrutinise those organisations seeking to pass money to overseas charities and other entities. This measure will have effect from the date of Royal Assent of the amending legislation.
The measure will reverse the decision that charities and other income tax exempt entities can direct funds to overseas projects outside the current restrictions. The measure will reinstate the principles underlying the current integrity rules.
The proposed changes will be subject to public consultation.
Commercial activities of charities
The Government notes the competitive neutrality issues that the Court's decision may raise and the differing approaches of other countries in dealing with those issues.
The Government intends to await the outcome of the Henry Review into Australia's future tax system and the Productivity Commission's inquiry into the contribution of the not‑for‑profit sector before further responding to the Court's decision.
The Government recognises that it would be pre-emptive for it determine the best reform for the charitable sector while specialised reviews are expected to examine the issue in detail and obtain community views.
Whilst the Government awaits the reports of the reviews, it has asked Treasury and the Tax Office to monitor the sector and advise it immediately should any adverse implications arise. The Government is prepared to act sooner should any adverse implications arise.