Sanctity Aura
Quote:
Increases Holy damage done by party members within 30 yards by 10%. Players may only have one Aura on them per Paladin at any one time.
Improved Sanctity Aura: Rank 2
Quote:
The amount of damage caused by targets affected by Sanctity Aura is increased by 2%.
Correct me someone if I am wrong as I've never had this in my build. Sanctity Aura increases only Holy damage. Paladin spells are Holy damage, so they are increased. Priest Holy spells would also be increased (Smite, Holy Fire). I believe if a character affected by Sanctity aura were to have an enchant or something that dealt Holy damage (Darkmoon Card: Vengeance, that sort of thing), then that also would be increased. So to answer your first question a character that does not normally do Holy damage, nor has an enchant/item that deals Holy damage would get no benefit from Sanctity Aura.
I believe the Improved Sanctity Aura increases all damage by 2% for the affected party members, not just a further 2% increase to Holy damage.
For a DPS Paladin Sanctity Aura is a great source of additional damage. For helping a group though, unless you have a Paladin tank, it really does very little. The extra damage a Paly tank will do is great for holding aggro, just gotta make sure that the Ret Paly gets a Salvation buff or he'll pull mobs off the tank and die.