The Government has overturned the High Court's decision in Federal Commissioner of Taxation v Word Investments as part of its Federal Budget announcement.
In what was described as "an interim response", the Government has overruled the High Court's earlier ruling in order to prevent charities and other income tax exempt entities from directing funds to overseas projects outside the current restrictions.
The Government will amend the "in Australia" requirements 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".
A reassessment of the court's approach to the definition of charitable status for mixed purpose organisations was also flagged, but any such reforms to the chartable sector are now pending 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.
The High Court's decision in the Word Investments case was handed down on 3 December 2008, with the majority ruling in favour of the tax exempt status of Word Investments, a company set up as an avenue of fund raising for its parent Wycliffe Bible Translators (International).
One of the issues raised in the case was whether Word Investments had a physical presence in Australia pursuant to Section 50-50(a) of the Income Tax Assessment Act 1997. The majority concluded that Word was compliant with section 50, having incurred its expenditure and pursued its objectives principally in Australia.
Practitioners who advise clients in the not-for-profit sector and executives working in the sector will be have an opportunity to comment on the proposed changes, which are still subject to public consultation.
- Laura MacIntyre