E LAW - MURDOCH UNIVERSITY ELECTRONIC JOURNAL OF LAW
VOLUME 1 NUMBER 4 (DECEMBER 1994)
Copyright E Law and/or authors

Review of Western Australian State Taxes 1994
Chapter 11 MORAL EXEMPTIONS

Introduction
Exemptions for Charities
Religious Institution Exemption
Educational Institution Exemption
Owner - Occupied Home Exemption
Conclusion
Bibliography

INTRODUCTION

This chapter will examine what might be called the "moral exemptions" that
exist in Western Australian taxation legislation. Although the term "moral"
has been adopted for the purposes of this discussion, it will become clear
that these exemptions may more aptly be described as "political"
exemptions.

As the nature of this discussion deals only with exemptions of a `moral'
calibre, large areas of tax expenditure such as the primary producer
exemption will not be discussed. It is intended here to look at the
underlying rationale and policy issues behind the exemptions for charitable
institutions, religious bodies, educational institutions and the owner
occupied family home.

During this analysis it is essential to recognise that moral exemptions do
not conform to the fundamental taxation principles of equity, efficiency
and simplicity. They narrow the tax base, are indirect in their impact and
add to the cost of administering taxation. Inequities arise when
organisations enjoying such exemptions are able to unfairly compete with
the private sector. Further, exemptions create distortion in resource
allocation and may encourage systematic avoidance practices. Moral
exemptions do conform to vertical equity, but only to the extent that they
genuinely relieve the disadvantaged.

On this basis, it is inappropriate to evaluate moral exemptions using the
equity, efficiency and simplicity criteria. To do so would accommodate only
economic theory, whereas moral exemptions are based on broader social and
political grounds. Accepting this, it remains arguable whether tax
expenditure is, in fact, the most appropriate method for assisting relevant
organisations, and direct grants will be explored as a possible
alternative.

EXEMPTIONS FOR CHARITIES

Public charitable and benevolent institutions are exempt from tax under the
majority of taxation statutes in Western Australia.[1]The services provided
by charitable institutions are merit goods which would be under-provided by
the market, if at all. Furthermore, government will only provide such goods
and services to the extent that poverty is relieved, namely the basic
amount provided by social security. The government is unlikely to offer the
community the personal element and individual care provided by these
institutions. It could be argued that the government's "moral" (or
otherwise) obligation ceases at basic economic assistance. What this fails
to recognise, however, is the fact that those in need sometimes require
more then mere financial assistance to meet basic human needs. This is
where the necessity for the existence of charities steps in. Charities
provide the missing human element of counselling, compassion and support.
Consequently tax exemptions for charitable institutions are important in
order to maximise the resources of these very necessary societal
institutions.

Is the present form of exemptions the most appropriate way to achieve the
provision of these merit goods? Arguably yes. Direct grants are not
preferable because, as has already been suggested, it is not the
government's role to fund these institutions directly. Decisions to
contribute to charities are normally based on personal consciousness and
altruism. Furthermore, it would be inappropriate for the state to be seen
to be choosing between charities in giving grants.

Tax legislation conferring the exemptions has however tried to minimise
these distortive effects and the inequities, by limiting exemptions to
goods used, and services and transactions carried out, in furtherance of
the institution's charitable purpose. The courts have defined the terms
"public charitable and benevolent institution" and "charitable and
benevolent purpose" strictly, in order to restrict exemptions from tax to
deserving institutions only.

In defining the above terms, the courts have highlighted the rationale
behind and the scope of these exemptions. "Charitable" under the tax
legislation is determined by reference to the four categories of charitable
trusts:

(i) trusts for the relief of poverty;

(ii) trusts for the advancement of education;

(iii) trusts for the advancement of religion;

(iv) trusts for other purposes beneficial to the community, not falling
under any of the preceding heads.[2]The first three categories are self
explanatory. The final category has been interpreted by the courts as
requiring the presence of two elements. Firstly, there must be some
element, quality or characteristic in respect of which relief ought in the
public interest to be given. Secondly, the charitable purpose must be for
the benefit of the community, or an appreciably important class of the
community.[3]A body which fails to satisfy the test for a religious or
educational institution may alternatively claim exemption as a "public
charitable or benevolent institution". A body is characterised as a "public
charitable institution" when its purpose and object is exclusively
charitable, and the institution exists to carry on, and is in fact carried
on, solely for charitable purposes.[4] An institution may still qualify where
it has other purposes which are merely ancillary or incidental to the main
charitable purpose.

To be characterised as a "public benevolent institution", the institution
must satisfy five criteria:[5](i) it must have as its dominant or principle
object, the relief of poverty, sickness, suffering, distress, misfortune,
destitution or helplessness;(ii) it must be carried on without the purpose
of private gain for particular persons;(iii) it must be established for the
benefit of a section or class of the public;(iv) relief must be available
without discrimination to every member of the public which the organisation
aims to benefit; and

(v) it must provide and administer immediate and direct relief.[6]Charitable
exemptions should not be expected to comply with the equity, efficiency or
simplicity criteria of public finance theory. They are based on political,
moral and social grounds. Since direct government grants are an
inappropriate form of relief, the better alternative is to minimise the
discriminatory effect of the exemptions so that they are applied in
equitable circumstances. This is the direction both the legislature[7] and
the common law is heading towards.

RELIGIOUS INSTITUTION EXEMPTIONS

The rationale for the religious institutions exemption[8] fails dismally
according to the limited economic tax criterion of equity, efficiency and
simplicity. Exemptions, which aim to give some financial and other
advantage to a certain part of the community, are problematic according to
economic theory as they narrow the tax base, and are indirect in their
application.

But taxation as a technology of government cannot claim to operate in an
economic vacuum. It is a system which determines how the public manages its
fortunes (or life choices), an area which is not restricted to financial
situations. Hence, the validity of exemptions to religious institutions
needs to be considered in accordance with tax policy notions which include
social and political considerations rather than merely economic notions.

According to economics, subsidisations are more effective through direct
grants than indirect exemptions. Direct grants generally save money as they
avoid bureaucratic paper movement, and the money is given straight to those
entities that the government intends to support.

Direct grants to religious institutions would be devastating politically
due to the constitutional guarantee of religious freedom (s.116). Grants
would be subject to subjective notions of religion within bureaucratic
institutions. Furthermore, economic gain would be minimal as there is no
substantial financial gain in encouraging religious conviction. Religious
status within the human psyche and Western culture is dismissed in economic
discourse. We must concern ourselves with the political reasons for the
marginalisation of religion in the bureaucratic distribution of funds.

If a system of direct grants to religions would violate the guarantee of
freedom from state intervention in the religious beliefs of the population,
perhaps exemptions which indirectly subsidise and support religion are
sufficiently indirect to achieve a goal of encouraging religion generally
without setting the state in the position of sponsoring any particular
creed

But before accepting such a proposition we must first ask why the state
would want to support religion in the first place. According to Foucault,
power does not come from a particular member of society but is diffused
down to the individual who is engaged in the disciplining and policing of
themselves. Spirituality aids this process of internal discipline and
policing of the individual as it emphasises self-discipline and obedience.

Therefore, the state's ability to govern is promoted by its encouragement
of relationships between individuals and religious institutions.
Furthermore, religious institutions tend to act as an arm of the state,
ensuring that individuals comply with social obligations.

As with any preferential treatment by the state, religious status will tend
to be confined and limited by those interpreting and applying it, namely
the judiciary and executive. However, the financial advantage that
exemptions confer on institutions must not be discriminatory in
application. Religious exemptions differ from exemptions for charities in
that the scope of the exemption cannot be confined to those deemed
deserving of the exemption. The field of immunity ought not to be limited
to subjective notions of real as compared to hoax religions. Justice Murphy
expressed this point in The Church of New Faith v. The Commissioner of
Pay-roll Tax (Vic):[9]Administrators and Judges must resist the temptation to
hold that groups or institutions are not religious because claimed
religious beliefs or practices seem absurd, fraudulent, evil or novel; or
because the group or institution is new, the number of adherents small, the
leaders hypocrites, or because they seek to obtain the financial and other
privileges which come with religious status. In the eyes of the law,
religions are equal.It is important to note that even if the definition of
religion has been left open, the states have confined the scope for the
immunity by excluding those institutions involved in commercial activities.
This avoids large scale inequities occurring.

EDUCATIONAL INSTITUTION EXEMPTION

Educational institutions have a long tradition of concessional treatment by
legislators that has seen them placed alongside charities and religions for
tax purposes. The rationales for this appear to be so far entrenched in
history that most contemporary observers have lost sight of them. Whether
such considerations still apply today and whether exemptions are the most
appropriate measure to achieve this remains problematic.

Courts have traditionally adopted a wide test in applying exemptions for
educational institutions. The High Court in 1910 held that gifts to
educational institutions for the advancement of scientific research
generally constituted charitable gifts (and were therefore not subject to
tax).[10] A monetary gift for establishing a rose garden which would be
conducive to better studies by students also qualified as a charitable
gift.[11] In a recent Western Australian Supreme Court decision it was held
that investment properties purchased for commercial purposes using funds
derived from the sale of land previously endowed to the institution were
acquired for university purposes and therefore exempt.[12]Few could deny that
education is a public good. Due to the externalities involved with
providing the "service" of education, it is likely that it would be
under-provided if left substantially to the private sector. The value of
education to an investor will never be commensurate with its social value.
Accepting then that education should continue to be substantially a
government initiative; are the current forms of exemptions from taxation
the most appropriate mechanism?

Accepting that exemptions infringe the principles of equity, efficiency and
simplicity, why not replace them with a new regime of cash grants or
subsidies? This would enable deserving institutions to be far more
effectively targeted by introducing means testing based on criteria such as
enrolment numbers. The government could then favour "poor" institutions in
preference to "rich" ones. At present, wealthier institutions benefit more
from exemptions as it is these which engage in commercial activity and
possess large land holdings.

A change to a system of financial subsidies or cash grants in preference to
exemptions is a move that would be likely to be strongly supported by the
Western Australian Treasury. Doing so would not only allow far better
"targeting" of needy institutions, as previously discussed, but it would
also be easier to cost. This would allow more accurate control. At present,
no effective costing of exemptions is maintained at all in Western
Australia, and for this reason the precise cost of exemptions to the state
is unascertainable.

Previous changes to exemptions for educational institutions now mean the
residual value of those remaining is probably not substantial in the
overall scheme of things. A previous loophole in respect of land tax was
closed in 1976, rendering commercial land deals by educational institutions
liable to full tax rates. This cured an inequity that was recognised by the
then government. The Premier, Sir Charles Court, stated that

"It can be conceded past and present governments had been generous [to
educational institutions] and turned a blind eye....sometimes to the
detriment of the community"[13]Furthermore, the Minister has declined to
exercise his discretion in respect of exempting tertiary institutions from
pay-roll tax. This decision was taken in view of the fact that tertiary
institutions are funded primarily by the Commonwealth government, and the
liability to pay-roll tax has a federal rather than state impact.

Given the relatively small residual value of the relevant exemptions, is an
upheaval of the present system, in preference to subsidies or rebates,
desirable? Particularly since the political reality is that exemptions are
more attractive. Like the family home, to be discussed below, schools
constitute one of the "sacred cows" of Australian culture. Any attempt to
interfere with present exemptions, even in favour of a more equitable,
efficient and simple system, would invariably be difficult to market.

OWNER-OCCUPIED HOME EXEMPTION

The exemption for the owner-occupied home in West Australian taxation
legislation exists primarily in the Land Tax Assessment Act[14] of W.A. There
are rebates available for Stamp duty in the Stamp Act 1921[15] however the
beneficial scope of these is largely limited as they only apply to houses
under the value of $85 000.

As mentioned in the discussion of educational institutions, the relatively
favoured position of the family home in taxation legislation has led to the
owner occupied home being considered "sacred", and taxes on it are usually
(politically) taboo. A possible reason for this is the unique position that
the "Great Australian Dream" embodies in our collective consciousness.

Home ownership, to Australians, is a concept which is a significant part of
our cultural heritage. The term, "The Great Australian Dream" owes much to
the post-war period when the Commonwealth government introduced widespread
incentives for home builders through low interest rates and Commonwealth
grants of land. As a result of this, home ownership became a viable
possibility for many more Australians than in any previous period in our
history. This era was characterised by the phenomenon of the owner-builder;
the home was constructed by the very hands of the family which no doubt
contributed to making its significance even more profound. Many families
were given the opportunity to realise this "dream", however it was only
possible after enduring great hardship and personal sacrifice.

That state of affairs is a sharp contrast to the home ownership situation
in the nineties. However, it still remains within living memory of many
Australians and forms a significant element of our underlying psychology
about home ownership which is clearly reflected in the Commonwealth and
State taxation legislation's favoured treatment of the subject.

Interestingly, however, there also exists a plethora of public finance
theory arguments which maintain that the favoured position of the family
home in taxation policy is unsustainable.[16] The economic arguments suggest
that there is no rational basis for the existence of a preference for this
area of the economy as opposed to other areas. It is conceded here that
from that perspective, these arguments are flawless. The effects that
exemptions have on the potential land tax base have been widely
canvassed.[17] Among other things, the removal of the exemption would result
in revenue raised in excess of $37m annually.[18] The owner-occupier
exemption effectively shields 83% of residential land holdings in West
Australia.[19] This has severe implications for the efficiency objectives of
broad based taxation. Removal of the exemption would achieve significant
horizontal equity as the economic incidence of the tax would be incurred by
both tenants and owner-occupiers. This would act to rectify the previously
discriminatory treatment of tenants. Currently, tenants bear the ultimate
economic burden of the tax by virtue of it being passed on in rent by
landlords.

The implications from a tax policy perspective clearly favour removing the
exemption. However, this seems a balanced and reasonable conclusion only
for so long as one views it from a purely economic value viewpoint. Its
qualities change when looked at from a different ideological perspective.

Economists have grand plans for the Australian tradition of the family
home. They suggest that this thoroughly unproductive use of our resources
could be encouraged into other directions. By introducing a tax on the
imputed rental income20 accruing to home owners, (i.e - the "rent" or
"income" that owner occupiers are perceived to receive the benefit of), the
economists feel people will be encouraged to move to smaller homes. The
suggested ultimate effect being that homes will eventually be reduced to
the status of "living cells" for the "economic units" that inhabit them,
thus freeing up their resources for more productive economic use.

Were we to accept and assimilate to the economic theorist's view of life,
we would be accepting the deconstruction of our value of the psychic income
that the quarter acre block, home and garden have to offer. Economists
would have us living in efficiently smaller and smaller homes without
"unnecessary" features such as "unproductive" flower gardens. This would
free up our resources for more productive uses such as buying shares,
investing in business, and a variety of other methods ultimately designed
to stimulate the GDP. The "great Australian dream" would rapidly give way
to the little suburban nightmare.

The quality that the die-hard economic theorists cannot comprehend here is
that which makes us essentially human. The theory of economics is a perfect
science, and humanity, in all its charming imperfection is always the fatal
flaw in the perfect economic equation.

The early 19th Century economist and cultural historian, John Ruskin,[21] was
one of the few in his field to recognise this -...if [only the human
person]..were an engine of which the motive power was steam, magnetism,
gravitation, or any other agent of calculable force: But he being, on the
contrary, an engine whose motive power is a soul, the force of this very
peculiar agent, as an unknown quantity, enters into all the...economist's
equations, without his knowledge, and falsifies every one of their results.

Human motivations and aspirations are not always quantifiable in economic
terms, they are rarely considered "rational" when looked at from purely
economic viewpoints. Humans are notorious for their tendency to enjoy
making very economically inefficient and unproductive uses of their time
and resources.

Politicians recognise this idiosyncrasy will cost votes if legislation goes
against the basic value and belief systems we construct. Hence, the
economic dilemma is further perpetuated politically.

Public Finance Theory, with efficiency as its main guiding principle, sits
here at an uneasy compromise with allowances, in the form of exemptions,
for economically irrational human concerns and values embedded in the
hearts and minds of people at the expense of dollar values.

The tax favoured position of the family home offers us an interesting
insight into how our imperfect human value systems can be accorded enough
weight to successfully infiltrate and displace perfect economic theory.

CONCLUSION

An economist has been defined as "the person who knows the price of
everything but the value of nothing".[22] And here it could be likewise
suggested that the rationale behind inclusion of the moral exemptions is
that there are some values in human life which certainly do not have a part
to play in the efficient economic picture, and to which a price should not
be accorded. Their "sacredness", as constructed by our unique value system,
ensures that they are relatively safe from measurement by the yardstick
calibrated by the tax dollar.

The taxation utopia that it is argued would be created through removal of
the exemptions is certainly viable, and its dollar value is highly
seductive. However, one may well be inspired to ask what price are we
willing to pay? Isn't a sacrifice in humanity in favour of efficiency
simply too high?

BIBLIOGRAPHY

AUSTRALIAN TAX OFFICE "ST(NS) 3002: sales tax subitem 81(1): Goods for use
by certain hospitals" (1990) in 25 Taxation in Australia 414. [Useful for
definition of "public benevolent institution".]

BURCHELL, I. The Foucault Effect: Studies in Governmentality, 1991,
Harvester Wheatsheaf, London. [Useful for a discussion of the role of
government and power within society. Applied in relation to taxation policy
and the role of religion.]

COUGHLIN, R.M. (ed) Morality, Rationality and Efficiency: New Perspectives
on Socio-Economics 1991 M.E Sharpe Inc. New York. [Generally, but
particulary article by Amitai Etzioni at 375 discussing the moral and
social value dimension in policy analysis requiring a separate mode of
analysis above and beyond the evaluation of efficiency.]

GARLAND, J. Economic Aspects of Australian Land Taxation 1934 Melbourne
University Press. [Good discussion of original rationale behind Land
taxation.]

MEYERS, M.L. The soul of Modern Economic Man: ideas of self interest;
Thomas Hobbes to Adam Smith 1983 University of Chicago Press. [Interesting
discussion of "Economic man", particularly at pg25 when looking at Ruskin's
ideas about supporters of "Economic Man" being completely unaware of "The
true science of wealth" by ignoring the human element.]

NSW TAX TASK FORCE, Tax Reform and NSW Economic Development: Review of the
State Tax System, Aug 1988. [General discussion and recomendations relating
to exemptions under land tax legislation.]

OKUN, A.M. Equality and Efficiency: The Big Tradeoff The Brookings
Institute Washington 1975. [Good discussion of how "values must be
protected from the tyrannt of the dollar yardstick" - generally.]

PETERS, B.G. The Politics of Taxation: a comparitive perspective Blackwell,
Oxford, 1991. [Of general use in consideration of political and social
considerations in taxation.]

PHILLIPS, J.T. and BULLIVAT, R.A. "The 1980's Tax Policy and Higher
Education" Vol 6. Acron Tax Journal at 45. [Useful for analysing
alternatives to exemptions.]

RUSKIN, J. Unto This Last: Four Essays on the First Principles of Political
Economy London Smith, Elder and Co. 1862. (Gandhi's favourite economist
according to Satin.) 19th Century Economist who recognised that "Economics,
being a science of wealth, must [also] be a science respecting human
capacities, dispositions...and moral considerations". [Generally, but
particularly pages 1O-11, 5O-55, 112-114, 119 - 121, 167-169.]

SATIN. M.I. New Age Politics: Healing Self and Society; the Emerging New
Alternative to Marxism and liberalism, 1978 Fairweather Press. [Of general
interest, but particularly chapter on "New Age Economic Theory" which
discusses the idea of GDP failing to measure `real value' - psychic
`income' as opposed to traditional `income'.]

TAXATION POLICY ELECTIVE, Murdoch University School of Law 1993 Review of
Western Australian State Taxes. [Good discussion in Land Tax chapter of
economic arguments in favour of removing the owner - occupier exemption.]

The Australian Digest. 3rd & 4th edition. [Compilation of case law with
respect to charities.]

WOOD, G.A. Taxation and Housing 1991 National Housing strategy publication.
[General discussion of taxation of housing- major areas of concern. Also
discussion of taxation of "Imputed Rent".]

Notes:

[1] Land Tax Assessment Act 1976, schedule 1; Stamp Act 1921, ss75AA, 80A,
90A; Debit Tax Assessment Act, under definition of "excluded debit";
Pay-roll Tax Assessment Act 1971, s10.

[2] Commissioner of Special Purposes of Income Tax v Pemsel [1891] AC 531 at
583.

[3] Pro-Compo Ltd v Commissioner of Land Tax (NSW) (1981) 12 ATR 26; NSW
Nursing Service and Welfare Association for Christian Scientists v
Willoughby Municipal Council [1968] 2 N.S.W.R 791.

[4] Pro-Compo Ltd v Commissioner of Land Tax (NSW) (1981) 12 ATR 26; Re
Godfrey [1952] VLR 353.

[5] Commissioner of Payroll Tax (Vic) v The Cairnmillar Institute (1992) 92
ATC 4307; Tax Determination 92/197 and TD 93/11.

[6] The distinction may be clarified by reference to Australian Council of
Social Service & Anor v Commissioner of Payroll Tax (1985) 1 N.S.W.L.R 567,
where the court held that an institution which provided information and
advice to its member organisations engaged in social welfare work was not a
public benevolent institution because it did not provide direct relief to
those in need.

[7] The amendments in 1976 with respect to the exemptions in the Land tax
Assessment Act attempted to minimise their discriminatory effect.

[8] Land tax Assessment Act 1976, schedule 1; Stamp Act 1921, s11; Debit tax
Assessment Act, under definition of "excluded debit"; Payroll Assessment
Act 1971.

[9] 83 ATC 4652 at 4666.

[10] Taylor v Taylor (1910) CLR 218.

[11] McGrath v Cohen [1978] 1 N.S.W.L.R 621.

[12] University of Western Australia v Commissioner for State Taxation (W.A)
19 ATR 728.

[13] Second reading speech in Legislative assembly, 4th May, 1976.

[14] Land Tax Assessment Act 1976, s21 and Part 1 of the Schedule.

[15] Stamp Act 1921, s75AE (1) b.

[16] Musgrave,R.A and Musgrave,P.B Public Finance in Theory and Practice 5th
ed, McGraw-Hill Book Co., 1989. Chapter 12 in Taxation Policy Elective 1993
Review of Western Australian State Taxes, Murdoch University, 1993, pages
20 - 23.

[17] Ibid.

[18] Ibid p 21, Calculation arrived at by using the total tax assessed for the
current and broad tax bases :

Broad tax base: 98,806,000
Current Tax base: 61,532,000 (-)
__________
= $37,274,000 - potential revenue

[19] Ibid, p 21.

[20] Wood, G.A. Taxation and Housing. Background paper for the Commonwealth
National Housing Strategy. Canberra, 1991. Chapter 1.

[21] Ruskin, J. Unto This Last: Four Essays on the First Principles of
Political Economy Smith, Elder and Co. London, 1862.

[22] Adapted from Oscar Wilde in Okun, A.M Equality and Efficiency: the Big
Tradeoff The Brookings Institute, Washington, 1975.