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Charity need not be taxing

Cover Story

Cite as: April 2011 85(4) LIJ, p.32

Despite a recent finding in the High Court, charities must remain aware of their purpose and make sure any funding agreements they have do not lead them to stray from it.

By Derek Mortimer

The High Court handed down its decision in Aid/Watch Incorporated v Commissioner of Taxation1 (the Aid/Watch case) on 1 December 2010. The Court decided that “generation of public debate” was a charitable purpose. The decision applies directly to organisations that seek tax-exempt endorsement as charities under the Income Tax Assessment Act 1997 (ITAA 97).

Aid/Watch Incorporated is an organisation concerned with promoting the effectiveness of Australian aid programs and policies. It does not directly deliver aid, but produces research reports and publicity concerning aid.

Aid/Watch was initially endorsed as a charitable institution by the Australian Taxation Office (ATO) in 2000. The endorsement entitled Aid/Watch to exemption from income tax and to other tax concessions. The ATO decided to revoke endorsement in 2006.

It appears the ATO decision was based on its Tax Ruling TR 2005/21 (TR 2005/21) which states (at [102]) for example, that an institution is not considered charitable if its purpose is “advocating a political party or cause, attempting to change the law or government policy or propagating . . . a particular point of view”.

In July 2008 Aid/Watch sought review of the ATO’s decision in the Administrative Appeals Tribunal (AAT).2 The AAT determined that Aid/Watch was a charitable institution within the meaning of the ITAA 97 and ordered the decision of the ATO be set aside. The AAT, however, accepted as fact (at [4]) that Aid/Watch undertook “ . . . campaigning, very often against government . . . ”.

In March 2007 the ATO successfully appealed against the decision of the AAT in the Federal Court.3 The Federal Court considered attempts by Aid/Watch to persuade government to its point of view. The Court concluded (at 430-431 [37]) “that there can be little doubt that this is political activity and that behind this activity is a political purpose”.

Aid/Watch appealed to the High Court.

Majority judgment

The majority confirmed (at [13]) that the term “charitable” was not to be construed according to a popular meaning, but according to a technical meaning. The technical meaning as found in Pemsel4 establishes four “heads” of charity – “relief of poverty”, the “advancement of education”, the “advancement of religion” and “other purposes beneficial to the community”. It was this last head of charity that provided a basis for the majority’s decision.

The majority first accepted (at [20]) that a statute may employ a term the definition of which is provided by common law. Their Honours further noted (at [23]) “in the absence of a contrary indication in the statute, the statute speaks continuously to the present, and picks up the case law as it stands from time to time”.

Accordingly, it was to the contemporary common law of charity the Court had to turn to decide if Aid/Watch was entitled to endorsement as a charitable institution under the ITAA 97.

The majority reviewed the influential English judgment Bowman v Secular Society Ltd5 which said (at [442]) “a trust for the attainment of political objects has always been held invalid . . . because the Court has no means of judging whether a proposed change in the law will or will not be for the public benefit . . . ”.

Apparently the decision in Bowman was influenced by a passage in Tyssen’s The Law of Charitable Bequests, published in 1888. It appears the Court procured this now obscure text, which is noteworthy if only for the Court’s resourcefulness. According to the majority judgment at [30], Tyssen’s text stated “the law would stultify itself [if it was held that] it was for the public benefit that the law itself should be changed”.6

The majority next discussed (at [39]) the extent that Bowman had been accepted in Australia. In Royal North Shore Hospital of Sydney v Attorney-General (NSW)7 Dixon J, for example, appeared to hold a view consistent with Bowman when his Honour stated (at [426]): “A coherent system of law can scarcely admit that objects which are inconsistent with its own provisions are for the public welfare . . . ”.

His Honour went on to say: “Thus, when the main purpose of a trust is agitation for legislative or political changes, it is difficult for the law to find the necessary tendency to the public welfare, notwithstanding that the subject of the change may be religion, poor relief, or education”.

As counsel for Aid/Watch summarised during argument: “ . . . the courts have wrestled with this question [of public benefit] about whether or not that may . . . involve usurping the role of the legislature . . . ”.8

To address these concerns the majority considered previous decisions of the High Court with respect to communication on political matters.9 According to the majority (at [45]):

“The system of law which applies in Australia thus postulates for its operation the ‘very agitation’ for legislative and political changes [as may contribute to public welfare] of which Dixon J spoke in Royal North Shore Hospital”.

The majority concluded (at [47]) that Aid/Watch fell within the fourth head of charity: “ . . . the generation by lawful means of public debate [concerning the means to give effect to] the relief of poverty, itself is a purpose beneficial to the community”.

In essence the majority decided that “generation of public debate” on an issue of political controversy is itself a charitable purpose, provided that debate is directed towards charitable purposes identified in Pemsel. For example, there is no need for the generation of debate itself to actually relieve poverty.

In my opinion, the majority decision is an elegant solution to the concern that courts may need to decide on the merits of a law the subject of public debate by charities. The merit of a law subject to public debate is left to the legislature to determine.

Evidently, the majority considered Aid/Watch’s campaigning and advocacy activities as falling within the concept of “generating public debate”. Accordingly the majority upheld Aid/Watch’s appeal.

The majority also expressly held (at [48]) that there is no general doctrine which excludes “political objects” from charitable purposes. Accordingly, organisations should not be disentitled to charity endorsement merely because their constitution contains a political object. This aspect of the judgment in my opinion will be particularly reassuring for many charities.

Because of its conclusions the majority did not consider whether Aid/Watch would fit in with any of the other heads of charity identified in Pemsel.

In my opinion, the majority decision has not gone so far as Justice Holmes’ famous dissenting judgment on political communication that there should be a “free trade in ideas”.10 It may be said, however, that the majority decision has encouraged a “free trade in charitable ideas”.

Dissenting judgment

Heydon J analysed the phrase “generating debate” as used in the majority judgment. His Honour drew a distinction (at [58]) between “generating debate”, which stimulates others to contribute competing points of view, and activities that simply try to ensure that a particular point of view prevails.

His Honour considered (at [58]) that Aid/Watch’s activities were more aimed at influencing public opinion to agree to its own views: “[Aid/Watch] wanted obedience, not conversation”.

Heydon J’s judgment reflects argument by counsel for the ATO:

“There is a distinction between promoting public discussion and pushing one side in a debate . . . if one is to say that political debate is to be encouraged to the extent of extending the fourth category in Pemsel to cover it, it does not follow that . . . expression of a particular political point of view falls within that extension”.11

In my opinion, Heydon J is (at the least) stating the idea that one must respect the opinions of others if one wants to assert opinions of one’s own.

Implications: a choice of structures?

It is worth noting that TR 2005/21 (at [121]) permits political activities that are “incidental” to an organisation’s charitable purpose (for convenience “the incidental activities test”). “Incidental” activities exist “in aid of” a charity’s purpose.12 Such activities include private lobbying of government and promotion of a view on issues during an election.13 Incidental activities need not be minor in quantum with TR 2005/21 stating (at [155]) that the test “is not amenable to determination simply as a percentage, a level of activity . . . ”. The Word case14 extended the idea of incidental activities to include activities that “naturally and probably” lead to charitable consequences.

In my opinion, the Aid/Watch case majority judgment does not negate the incidental activities test. Rather the judgment gives charities a choice how to undertake political activities. A charity could carry out political activities as an activity “incidental” to its charitable purpose, or carry out political activities that fall under the purpose of “generating public debate”.

Arguably, the range of activities that may be carried out under the incidental activities test is wider than the activities that may be carried out under the purpose of generating public debate. For example, the term “generation of public debate” does not seem to admit private lobbying to government by charities. So despite the Aid/Watch case majority judgment, charities may still prefer to apply the incidental activities test to their political activities.

It is also worth noting the High Court’s statement in the Word case15 that the requirement to find a “paramount purpose” applies precisely to entities that have an objects clause. Arguably Aid/Watch’s difficulties in demonstrating its purpose were in part due to the collocation of aspirations found in its constitution’s objects.16 As the case history shows, decision-makers had difficulty pinpointing the purpose of Aid/Watch. I suggest that charities need to define their paramount purpose and clearly articulate this purpose in the “objects” section of their constitution.

Abuse of the principles?

It is tempting to think the Aid/Watch case heralds a new age of civil engagement by charities.17 But there is reason for legal practitioners and their charity clients to remain sceptical and vigilant.

First, there is the issue of the influence funding may have on the purpose of charities. Robert Fitzgerald, for example, has noted18 that there are benefits in community groups contracting with government agencies, but there are also risks: “[Community groups] may find their autonomy eroded, their capacity to respond flexibly to local needs . . . undermined, and their original purpose distorted”.

Not-for-profit organisations may not want to criticise government agencies because they believe “dissenting voices risk having their funding cut”.19

There is also the phenomenon known as “astroturfing”. Astroturfing, according to the Public Relations Institute of Australia (PRIA), is “the artificial expression of grassroots efforts”.20 As the PRIA notes, “ . . . political and corporate economic campaigns often subsidise or even manufacture the appearance of grassroots activity to advance particular interests”.

Accordingly, there is a danger that charities entitled to generate political debate act, perhaps inadvertently, as the mouthpieces of commercial or governmental vested interests. This can lead to a focus on political or commercial allies at the expense of a charity’s supporters and beneficiaries.21

Unlike, for example, the commercial radio sector, which has a regulatory authority to monitor misleading “cash for comment”, the Australian charitable sector has little to protect and to regulate the influence of funding agreements on charities’ public statements.22 Charities and their legal advisers, I respectfully suggest, need to ensure any “generation of public debate” is not unduly influenced by funding agreements and that such agreements are not likely to encourage a charity to make misleading or false representations to the public.


In my opinion the Aid/Watch case gives charities a firm platform under the fourth head of charity to engage in public debate on controversial, political issues. Practitioners and their charity clients do not need to apply the incidental activities test to “naturally and probably” link that public debate to another charitable purpose.

Practitioners and their charity clients also need not worry that “political objects” in a constitution will automatically disentitle the charity from endorsement under the ITAA 97.

Despite the decision in the Aid/Watch case, however, some charities may elect to keep as their primary charitable purpose one of the other three heads of charity described in Pemsel. In my view then, the incidental activities test regarding political activities will still usefully apply.

Regardless of which Pemsel head they choose, charities will need to remain mindful of their purpose and remain vigilant that any funding agreements they have do not lead them to stray from that purpose. The integrity of charities to comment publicly and impartially on political controversies is at stake.

DEREK MORTIMER is principal of DF Mortimer & Associates Pty Ltd, and practises entirely in not-for-profit and charity law. He is a member of the LIV Commercial Law Executive Committee. The numbers in square brackets in the text refer to paragraph numbers in the relevant judgment or tax ruling.

1. (2010) 85 ALJR 154.

2. Re Aid/Watch Inc and Federal Commissioner of Taxation 2008 71 ATR 386.

3. Federal Commissioner of Taxation v Aid/Watch Inc (2009) 178 FCR 423.

4. Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531.

5. [1917] AC 406 (Bowman).

6. Lord Simonds in National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31 stated (at [62]) that Bowman propounded a “familiar doctrine” which was “nowhere better stated” than in Tyssen’s text.

7. (1938) 60 CLR 396 (Royal North Shore Hospital).

8. Transcript of proceedings, [2010] HCA Trans 154, David Williams, 15 June 2010, [220].

9. For example, Lange v Australian Broadcasting Corporation (1997) 189 CLR 520.

10. Abrams v US 250 US 616 (1919).

11. Transcript of proceedings, [2010] HCA Trans 154, David Bennett, 15 June 2010, [3030-3035].

12. TR 2005/21, [155].

13. TR 2005/21, [127] and footnotes.

14. Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd (2008) 236 CLR 204; see also my comments in “A word about charity” (2010) 84(4) LIJ 50-53 at 52.

15. (2008) 236 CLR 204, [18].

16. Described by counsel for the ATO as “a grab bag of motherhood causes”: Transcript of proceedings, [2010] HCA Trans 154, David Bennett, 15 June 2010, [2330].

17. See Aid/Watch media release 1 December 2010, “High Court decision a win for charities’ freedom of speech”: at 9 January 2010 which states the decision “resolves” the issue of charities’ unwillingness to speak out.

18. Keynote address to 1997 National Landcare Conference, extract reprinted in Victorian Landcare (6th edn) (1997), 6; see also Robert Meier, “The darker side of non-profits: when charities and social welfare groups become political slush funds” (1999) 147(4) University of Pennsylvania Law Review 971-1008.

19. Gemma Edgar, Agreeing to disagree; maintaining dissent in the NGO sector, The Australia Institute, Discussion Paper 100, August 2008, p16.

20. Public Relations Institute Australia, “Lobbying in New South Wales” (2010) (submission to Independent Commission Against Corruption, 30 June 2010), Appendix C, 20.

21. See Jonathan Garton, “The future of civil society organisations: towards a theory of regulation for organised civil society” in Myles McGregor-Lowndes and Kerry O’Halloran (eds), Modernising Charity Law (2010), p207.

22. Exceptions include industry self-regulation such as the Fundraising Institute of Australia Code of Acceptance and Refusal of Donations, and statutes such as the Competition and Consumer Act 2010.


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