A recent case determined by the Administrative Appeals Tribunal of Australia has charities asking why they place so much importance on the wording of the objects of the organisation in their constituent documents to the exclusion of other factors.
Bicycle Victoria Inc (BVI) v Commissioner of Taxation was determined by the AAT in June this year. In this case, BVI sought an endorsement as an income tax exempt charity under section 50-110 of the Income Tax Assessment Act 1997 (ITAA97) on the basis that it is a charitable institution as described in Item 1.1 of the table in section 50-5 of ITAA97. It also sought endorsement as a health promotion charity under section 123D of the Fringe Benefits Tax Assessment Act 1986 (FBTA Act) and as a charitable institution under section 176-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
The AAT found that BVI was a charitable institution and was entitled to be endorsed as an income tax exempt charity on the basis that it was a charitable institution under item 1.1 of the table in section 50-5 of ITAA97and that it was a charitable institution under section 176-1 of the GST Act but that it was not entitled to be endorsed as a health promotion charity under section 123D of the FBTA Act.
In announcing that BVI was a charitable institution under both Acts, the AAT found that while the primary purpose for which BVI (under its former name) was established in 1976, was to encourage people to use the bicycle as a means of transport and as a means of getting together for fun, sport and recreation, the reason for encouraging people to use bicycles was not articulated in the earlier literature of the entity. Later literature referred to the social side of cycling. Even later editions (seemingly from about 2005) focused on health, culminating in changes being made to its Constitution in 2009 which were consistent with its later emphasis on health. However, the AAT described the promotion of fitness as being an ad hoc purpose early on, later becoming more defined as an overall strategy. Ultimately, the AAT found that:
“The fact that cycling may be a sport in some instances and a leisure activity in another does not characterise Bicycle Victoria’s purpose of being for sporting purposes or for recreational purposes as such. It is for the purpose of promoting cycling in all its forms and for the overall purpose of promoting fitness. That is a purpose that has been recognised as charitable. Therefore I am satisfied that Bicycle Victoria is a charitable institution.“
On the other hand, section 123D of the FBTA Act, requires that a health promotion charity have, as its principal activity, the promotion of the prevention or control of diseases in human beings. On this ground, the AAT stated that while the prevention and control of disease is a consequence of the principal activity of BVI (which is for the promotion of cycling and physical fitness), the promotion of prevention and control of disease in human beings is not its principal activity. This decision was made despite the fact that the “prevention of control and disease” was listed as an object of the company in its constituent documentation.
The consequence of this case is that it reemphasises the importance of identifying the principal activity of a Not-For-Profit organisation. It is also important to determine whether the promotion, prevention or control of diseases in human beings is the principal activity of the Not-For-Profit organisation or just a consequence of its principal activity.
The decision clearly emphasises that it is not enough to include in the drafted objects in an organisation’s Constitution or rules, the goal of “the prevention and control of disease”, as BVI had done so in vain. Not-For-Profit organisations are reminded that it is not only their objects in their constituent documents but their activities that determine their status with the ATO and that they should examine the principal purpose of their organisation based on all the evidence before approaching the Tax Office for endorsement.