Charity case law update – Study and Prevention of Psychological Diseases Foundation v Commission for Taxation

The Federal Court has dismissed an appeal by Study and Prevention of Psychological Diseases Foundation (SPED) against an earlier finding of the Administrative Appeals Tribunal confirming a decision of the Commissioner of Taxation to revoke SPED’s endorsement for federal tax concessions as a health promotion charity.  

Whilst registration and regulation of charities is currently the role of the Australian Charities and Not-for-profit Commission, the Australian Taxation Office is responsible for determining the eligibility of charities for tax concessions such as income tax exemption, fringe benefits tax concessions and deductible gift recipient status.  If at any time the Commissioner of Taxation forms the view that an entity is not entitled to the endorsement it is receiving, he may revoke such entitlements.

 SPED was registered as a charity in 2005, with the object of ‘seeking to promote the prevention and control of psychological diseases in human beings and therefore setting out to ultimately create the ideal human environment’.  SPED set out to achieve this purpose by operating and funding a 24 hour 7 days a week research team, whose member’s reactions were observed in a variety of emotional, physical and social settings, environments and situations.  

Whilst SPED was open to accepting an unlimited number of members, in reality its members were limited to a small group of persons being friends or family of SPED’s promoter.  All members paid their salaries into SPED, and therefore avoided paying income tax.  Charity funds were then used to provide for the living expenses of the members including a trip to India, and the purchase of luxury cars. SPED argued that its activities were in line with its charitable purpose as all activities carried out by the members constituted ‘research’.

However, the Federal Court supported the AAT’s decision that the Foundation was operated not for the benefit of the public, but for the benefit of a small number of its members. According to the Federal Court, the ‘substance and reality’ of the activities performed by SPED were not consistent with its overall charitable purpose.  There was no evidence that the purported ‘research’ resulted in any publication, or final work product.   

The Federal Court confirmed that SPED’s status as a health promotion charity be revoked and the matter was remitted to the AAT for reconsideration of the particular date the revocation of the endorsements ought to be effective from. Revocation could be either prospective or retrospective, potentially exposing SPED to significant unpaid income tax liabilities as well as interest and penalties charges.

A spokesperson from the ATO praised the Federal Court for upholding their original decision, stating that it had helped protect the integrity of the charitable sector, by ensuring that only those eligible for the concessions were in receipt.

The decision highlights the importance of ensuring that the activities of a charitable organisation support and further its charitable purposes and also highlights the significant financial risks and liabilities that may result if charity status is revoked. All charities should undertake an annual risk review of their activities to assess their continuing entitlements to charity registration and federal tax cincessions.

If you are concerned about the charitable status, purposes or activities of your organisation, or would like further information about tax concessions that your charity may be eligible for, please contact our team for advice.

Ashleigh Wall
Senior Associate
T: 03 5226 8559
E:awall@harwoodandrews.com.au

Dianne Sisak Penjalov
Senior Associate
T: 03 5226 8582
E: diannes@harwoodandrews.com.au

Ella Vines
Lawyer
T: 03 5225 5216
E: evines@harwoodandrews.com.au