A recent Federal Court of Appeal (FCA)
decision, Commissioner of Taxation v Hunger Project
Australia [2014] FCAFC 69 has dismissed the
Commissioner of Taxation's (Commissioner) appeal
against the primary judge's decision, settling the law concerning
the meaning of the words 'public benevolent institution'
(PBI) and the requirement for a charity to
directly provide relief in order to be endorsed by the ATO as a PBI
and receive a range of tax benefits.
An Alert regarding the prior decision can be viewed
here.
Background
The respondent, Hunger Project Australia (HPA),
is a company that operates various member entities worldwide. While
its exclusive objective is the relief of poverty, sickness,
suffering, destitution and helplessness, its most substantial
activity is fundraising. Funds raised are disseminated to member
entities and expended on hunger relief programs in developing
countries. The Commissioner rejected HPA's application for
endorsement as a PBI on the grounds that it was not involved in the
'direct provision of relief'.
Adopting the ordinary meaning of the expression 'public
benevolent institution', the primary judge found that there was no
reason why an institution would not be a PBI because it did not
directly provide relief.
Appeal
The issue for the FCA to consider was whether, in order to be
classified as a PBI, an entity must directly provide
relief to those in need.
The Commissioner advanced the following arguments, which were
rejected unanimously by the court:
- The ordinary meaning of 'public benevolent institution' is an
institution that gives or provides relief directly to
those in need. The Commissioner placed significant reliance on the
judgment of McTiernan J in Perpetual Trustee Co Ltd v Federal
Commissioner of Taxation
[1] (Perpetual). The Commissioner argued that
a fundraising entity does not 'give relief' and therefore does not
satisfy the ordinary meaning of the word. For a number of reasons,
the court did not accept that the Perpetual judgment gives any
indication of what the ordinary meaning of the expression is. Read
in context, the judgment actually emphasised that there did not
appear to be any definite understanding of what the expression
means. Further, even if the judgment did support this definition of
the ordinary meaning of the expression, it was made in 1931, and
the judges noted that the common understanding of an expression is
likely to change over the course of 80 years.
- The Commissioner claimed that numerous statutes explicitly deal
with fundraising entities and PBIs together, clearly indicating
that the two entities should be treated in an identical way. The
Commissioner argued that, therefore, it would have been easy for
parliament to provide for an analogous extension in the Fringe
Benefits Tax Assessment Act (FBTAA) if it intended
for the two types of entities to be treated the same under this
scheme. The judges described this argument as 'at best unpersuasive
and at worst misconceived'.
[2] They found it difficult to see how the terms of a
completely different act could assist in determining the ordinary
meaning of a term in the FBTAA.
-
The Commissioner argued that the primary judge erred in
considering Federal Commissioner of Taxation v Word Investments
[3] (Word Investments) because it considered a different
statutory expression contained in different legislation. The
Commissioner argued that the words 'charitable institution' have a
technical legal meaning but that PBI does not and should therefore
be given its ordinary meaning. The Commissioner also contended that
the facts in Word Investments are far removed from the facts of
this case, so it should not have been relied upon. The court
rejected this argument and found that, in Word Investments, the
primary judge did not equate the different meanings of charitable
institution and public benevolent institution, but construed the
expression used in the FBTAA in accordance with its ordinary
meaning.
[4]
Implications
The significant consequence of this case is the establishment of
a precedent that identifies a clear understanding of the ordinary
meaning of the words 'public benevolent institution'. At every
opportunity, the court rejected the argument that an entity that
focuses on fundraising should not be classified as a PBI. By making
this decision, the court has indicated that the direct relief
requirement that the ATO has been applying in its assessment of
charitable entities as a matter of course need no longer be
applied. This means that a charitable organisation will be
permitted to divide its operations into entities that separately
operate the fundraising and direct provision of charity operations
of the organisation, without risking the fundraising entity losing
PBI status (even if these entities operate across different
countries). It is important to note, however, that the entity to
which the funds are dispersed must provide charitable relief.
Author: Victoria Moffat
[1] (1931) 45 CLR 224
[2] Commissioner of Taxation v Hunger Project
Australia [2014] FCAFC 69 at para 40
[3] (2008) 236 CLR 204
[4] Commissioner of Taxation v Hunger Project Australia [2014]
FCAFC 69 at para 65.