The Israeli High Court of Justice ruled recently that section 46 of the Income Tax Ordinance does not authorize the Knesset Finance Committee to exercise broad discretion in recognizing NPOs and in fact the Committee’s approval is limited solely to that related to its supervisory role.
The granting of recognition to an NPO is currently comprised of two main stages:
- recognition of the public purpose of the NPO or the PBC by the Israel Tax Authority (‘public purpose” is defined in the Income Tax Ordinance as a purpose concerned with religion, culture, education, the encouragement of settlement, science, health, social welfare or sport and any other purpose approved by the Minister of Finance as a public purpose); and
- receipt of the Finance Committee’s approval (usually after two years of operation).
For the most part, the success of NPOs and PBCs in fulfilling the purposes for which they were founded substantially depends on donations that they succeed in raising and, of course, on tax incentives granted to their potential donors. Since these NPOs promote important public purposes, the legislature defined a unique benefit to be granted to donors to such institutions in the form of a tax credit, which is commonly known as an “approval under section 46.”
In the case at bar, the High Court of Justice deliberated the question of the Finance Committee’s authority to accept or reject the Israel Tax Authority’s decision to grant an “approval under section 46.”
The petitioner, Yachad Ramat HaSharon, is an NPO identified with a Messianic Jewish congregation in Israel that was recognized years ago by the Israel Tax Authority as a public institution due to its public purposes.
At the stage when the petitioner needed to obtain the Finance Committee’s approval, the Committee rejected its application on the grounds that “the NPO’s purpose and activities arouse deep public controversy.” In light of the Finance Committee’s refusal, the petitioner appealed to the High Court of Justice with the plea that the Finance Committee had acted ultra vires and its exercise of broad discretion overstepped its supervisory role.
In its judgment, the High Court ruled that the Finance Committee is not empowered to exercise extensive substantive, content-related discretion when deciding whether to approve tax benefits for donors to NPOs and that its approval is required only in relation to its supervisory role. The ruling also emphasized that non-recognition of an institution dedicated to a public purpose on the grounds of suggested “public policy” may only be done with considerable care, and solely in extreme cases, which this case was not
The High Court found that in light of the political nature of the Finance Committee, its authority should be interpreted narrowly in this context. The ruling also held that the Finance Committee had reached its decision based on feelings, beliefs and opinions and not on a substantive factual foundation as is required according to the principles of administrative law, and that this alone was sufficient to overturn its decision. The High Court of Justice also stated that the issue of “religion” is a public purpose and that the reason why the law also includes “religion” in the list of “public purposes” is to ensure the advancement of diverse pluralistic religious activities.
The Finance Committee’s argument that it is entitled to exercise substantive discretion when reaching a decision with regard to “approvals under section 46” was rejected by the High Court, as was its argument that accepting the petitioner’s position would turn the Finance Committee into a “rubber stamp” of the Israel Tax Authority and would virtually strip it of its authority.
The High Court of Justice ruled that the principles of public law serve to prevent any unequal and discriminatory division of public funds that are other than according to objective criteria, and that this type of exercise of substantive, content-related discretion should not be allowed, since the entire issue of tax benefits and the division of public funds must be according to objective criteria in order to ensure equality and non-discrimination based on religious beliefs.
This is a significant judgment that limits the Knesset Finance Committee’s authority and rules that the exercise of broad discretion in relation to granting “approvals under section 46” to NPOs and PBCs contradicts the principles of public administration and the constitutional principles of equality.