The viability of some charities could rest on how they’re taxed – we should be cautious about changing the rules

There have long been calls for New Zealand’s charity-linked businesses^[1] to lose their tax exemption status. Under the current rules, companies such as Sanitarium, which is wholly owned by the Seventh-day Adventist church^[2] pay no income tax.

This could all change very soon.

Inland Revenue recently opened consultation^[3] on rule changes that would include taxing business income unrelated to a charity’s charitable purpose. The consultation period runs until the end of this month.

But overhauling the tax rules could undermine the sustainability of some charities, making it harder for them to continue their work.

Our ongoing research^[4] looks into the economic contribution of the sector and, in particular, focuses on religious charities. The total value of the services provided by these charities in 2018 alone was NZ$6.1 billion – the equivalent of around 3% of annual government expenditure.

Other studies^[5] have shown the substantial contributions charities make to education, sports, the arts, the environment and other activities that don’t get enough support from the government.

Making a profit

There are more than 29,000 registered charities in New Zealand. To register as one, an entity must meet strict legal criteria entrenched in the Charities Act 2005^[6].

Charities have to fall within one of four legally-recognised charitable purposes: relief of poverty, advancement of education, advancement of religion, and any other purposes beneficial to the community.

The government recognises the high bar charities have to meet by giving some tax exemptions. This allows the charities to focus on providing benefits to communities rather than having to divert funds to the government. The exemptions are on both passive income (stocks, for example) as well as business income.

But the issue is not as simple as certain criticisms might imply.

Charities need to sustain themselves over time – particularly as donations fluctuate. Untaxed profits from charity-linked businesses allow them to do this, and changing the rules could undermine future cash flow for these groups.

This argument should not be overstated. Removing the exemption won’t completely wipe out a charity’s profits. But it takes a portion of income that would then need to be covered by an increase in donations.

The Inland Revenue discussion paper also only offers examples of businesses in the primary industry (farming, for example) and manufacturing sectors. But it is silent about the financial and services sectors. It appears charities’ income from interest or financial assets will still be exempt.

This is not necessarily a bad thing.

Holding assets such as a portfolio of stocks or bonds can improve charities’ ability to plan for the long term. But the tax rules should remain consistent between financial assets and non-financial assets, such as a farm or business.

Will the gains be worth the cost?

To better balance the contribution of charities to wider society with efforts to mak tax rules fair, there are a few points the government needs to consider.

• Firstly, society benefits from having a wide variety of charities. Allowing them to build a stable financial base allows them to grow and continue to do their work.

• There will always be gaps in what the government is able to provide. It’s arguably more efficient to address unmet need with charities than by leaving it to individuals to find donations themselves.

• Charities should be able to structure themselves in ways that make them less dependent on donations.

• The government needs to also consider what it would cost to overhaul the current tax rules when it comes to charities. Administrative costs for everyone could end up being greater than the revenue gained.

• Finally, the impact of the proposed changes would extend beyond religious organisations to include gaming trusts, universities and asset-holding charities that provide significant funding for sports, arts, cultural and welfare organisations.

Having public consultation on Inland Revenue’s proposed changes is a good start, but it is just that.

More needs to be done to understand the implications for communities should tax changes occur – and what could be lost if charities are substantially less sustainable. So, if the government delivers a plan, let’s read and evaluate the small print.

The authors thank Steven Moe, Partner at Parryfield Lawyers, for his significant help and mahi in contributing to this article.

References

1. ^{^} New Zealand’s charity-linked businesses (www.rnz.co.nz)
2. ^{^} wholly owned by the Seventh-day Adventist church (www.stuff.co.nz)
3. ^{^} recently opened consultation (www.taxpolicy.ird.govt.nz)
4. ^{^} ongoing research (advance.lexis.com)
5. ^{^} studies (www.tandfonline.com)
6. ^{^} Charities Act 2005 (www.legislation.govt.nz)
7. ^{^} Adam Constanza/Shutterstock (www.shutterstock.com)