New Zealanders have always had a strong tradition of helping each other and many of our new settlers have set up charitable trusts to help their own people, or to sustain and promote their culture.
It is a great way of providing an invaluable service to help your own community and, if you get good advice early on and set your trust up according to the rules, you would not have any problems. To make it easier for you, the Inland Revenue Department (IRD) has outlined some of the correct procedures you must follow.
A charitable organisation or a trust that carries out charitable activities or exists exclusively for charitable purposes, whether or not incorporated, is exempt from income tax. Individuals or companies who donate property to the charity are also given relief from gift duty.
For an organisation’s purposes to be charitable its activities or aims must be for public purposes and the benefit must be available to a large part of the community. This means it must not be carried on for the benefit or profit of any individual.
Any enterprise or activity intended to make a profit is classed as a business. Therefore, if an organisation runs a business, it must pay tax on all profits after expenses.
However, if a charity runs a business, it may not be liable for income tax on any profits that is uses for charitable purposes.
It is a good idea to attend our free taxation seminars and workshops, held regularly across the country. Please visit our website for details and registration.
Below are a few terms that may help you as you set up your own charitable trust.
Non-Business Income Tax Exemption: This is an exemption from income tax on non-business income. It includes interest and dividend and rental income not earned from carrying on a business.
As a charity registered under the Charities Act, you may qualify for this exemption because the requirements for registration as a charity and for the non-business income tax exemption are similar.
There is one exception. If you are a Council-Controlled Organisation or a local authority that receives its income from a Council-Controlled Organisation, you are not entitled to the non-business exemption.
Business Income Tax Exemption: Income from carrying out a business, which is used for charitable purposes in New Zealand, is tax-exempt.
Charities registered under the Charities Act should regularly check the following requirements and limitations to this exemption.
(a) It does not apply to a Council-Controlled Organisation or local authority that receives its income from a Council-Controlled Organisation (b) You must assess the extent of your charitable business in New Zealand. If you use business income for charitable purposes overseas, you must identify the funds applied in New Zealand and overseas. Only the New Zealand portion is exempt from income tax (c) Business income will not be exempt if anyone connected with the charitable organisation receives or is able to receive any benefit or income from the organisation (this does not include reimbursement of expenses, or payment for services provided, as long as the payments are reasonable and at market rates); if a person can influence any benefit or advantage that they might receive from the business (for example, a trustee cannot be involved in setting the amount of their remuneration); if a person involved in a commercial transaction that is not conducted at commercial rates (for example, a trustee loans money to the trust with interest set at greater than market rates).
Gift duty exemption: Gift duty no longer applies for gifts made on or after October 1, 2011. If your organisation needs information on the tax implications for gifts made before this date, please visit our website.
Donee status means that individuals who donate to your charity can claim a tax credit and companies and Maori authorities can claim a deduction. IRD must approve an organisation’s donee status. If you stated on your registration application as a charity that receives donations, we will treat this as an application for donee status and contact you. We will also confirm if you already have donee status.
Resident Withholding Tax (RWT) – Certificate of Exemption: Banks and other financial institutions that pay interest are required to deduct RWT from the interest. Charities are eligible for an exemption from RWT.
If you are eligible for income tax exemption, you may be entitled to a RWT Certificate of Exemption. If you are not already exempt, please complete an Application for Exemption from RWT on Interest and Dividends (IR 451) form.
Please visit our website or call us on 0800-257773. If approved, we will send you a Certificate of Exemption, which you must show to the interest payer. If you already have a current Certificate, you need not reapply.
IRD Numbers: All charities registered under the Charities Act will need an IRD number. If your organisation does not already have a number, we will contact you.
Employing Staff: If you employ staff, you must register as an employer, deduct and pay PAYE. For more information, see our First-time Employer’s Guide (IR 333).
Goods and Services Tax (GST)
If you are carrying out a taxable activity and your turnover is more than $60,000 in a twelve-month period, you must register for GST.
You must to keep business records. These include (a) maintaining all financial records for a period of seven years (b) keeping adequate records in English to show the sources of all donations and how you have used these funds (c) providing, when requested, a tax return showing all funds earned in any year with sufficient details of the source and application of those funds.
At some date in the future, we may select your charity for an audit and you must be able to show that you have complied with the relevant tax requirements.
Abdul Rafik is Inland Revenue’s Community Compliance Officer based in Auckland. He is happy to answer readers’ queries, which should be sent to firstname.lastname@example.org
Websites: www.ird.govt.nz; www.charities.govt.nz